FORM 10-K
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, 1996
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 $613,647,104 on February 28, 1997, based upon the
last price of the Common Stock on that date reported in the NASDAQ National
Market System. On February 28, 1997 there were 64,695,122 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. ___
DOCUMENTS INCORPORATED BY REFERENCE
Part of Form 10-K into
Document which incorporated
-------- ----------------------
Portions of 1996 Annual Report to Shareholders Parts I, II and IV
Portions of the 1997 Proxy Statement Part III
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PART I
ITEM 1. BUSINESS
This Form 10-K contains forward-looking statements that involve risks and
uncertainties. Actual results may differ materially from the forward-looking
statements. Factors that could cause or contribute to such differences include,
but are not limited to, those set forth under the caption "Factors That May
Affect Future Results and Financial Condition" under "Management's Discussion
and Analysis of Results of Operations and Financial Condition" in the Company's
1996 Annual Report to Shareholders, which is incorporated by reference in this
Form 10-K.
General
Mentor Graphics Corporation manufactures, markets and supports software and
hardware Electronic Design Automation ("EDA") products and provides related
services which enable engineers to design, analyze, place and route, and test
the components of electronic systems. Mentor Graphics has recently expanded its
product offerings beyond traditional EDA to include (1) intellectual property
("IP") products and services intended to increase design efficiency by
delivering standard, reusable functions for the design of hardware components
and (2) embedded software development and system verification tools intended to
shorten product time to market by allowing for simultaneous development and
testing of hardware and embedded software. Mentor Graphics markets its products
primarily to large companies in the communications, computer, semiconductor,
consumer electronics, aerospace and transportation industries. Customers use
Mentor Graphics' software in the design of such diverse products as
supercomputers, automotive electronics, telephone switching systems, cellular
base stations and handsets, computer network hubs and routers, signal processors
and personal computers. Mentor Graphics sells and licenses its products
primarily through its direct sales force in North America, Europe and Asia, and
through distributors in territories where the volume of business does not
warrant a direct sales presence. Mentor Graphics was incorporated in Oregon in
1981 and its common stock is traded in the NASDAQ National Market System under
the symbol MENT. Mentor Graphics' executive offices are located at 8005 S.W.
Boeckman Road, Wilsonville, Oregon 97070-7777. The telephone number at that
address is (503) 685-7000.
Products
EDA Products
Mentor Graphics' EDA products support the development of integrated circuits
("ICs"), application specific integrated circuits ("ASICs"), field programmable
gate arrays ("FPGAs"), printed circuit boards ("PCBs") and multichip modules
("MCMs").
Mentor Graphics' IC design products allow designers to specify an IC design, add
structures for testing the design to remove errors, "layout" the electrical
components of the design in a way that balances IC performance and the size of
the IC used, and finally, create output which is used to direct the
manufacturing and testing of the IC. "ICs" are high performance circuits with
customized logic layers. Mentor Graphics products within the IC design flow
include IC design and layout tools such as MS Analyzer, Cell Builder, GDT, IC
Station, MicroRoute, QuickHDL, FastScan, FlexTest, and SimExpress, as well as
power management and analog and analog/mixed signal design solutions. Mentor
Graphics is able to link its ASIC/FPGA and MCM/PCB design products with its IC
design products to create a continuum of automation from the individual
component level up to the fully-integrated end-product.
Mentor Graphics' ASIC/FPGA design products allow designers to create and verify
designs to ensure that they possess the required performance and functionality
and to create output which will allow the design to be manufactured and tested.
"ASICs" are special integrated circuits with
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standard logic layers which are customized by interconnect layers. The standard
logic layers allow ASICs to be designed faster and manufactured at a lower cost
for smaller unit volumes than traditional ICs. "FPGAs" are circuits that can be
programmed to include different functionality at the point of manufacturing or
during system startup. Mentor Graphics' ASIC/FPGA products include Renoir,
QuickHDL, BSD Architect, DFTAdvisor, FastScan, FlexTest, Leonardo, Galileo,
SimExpress, FPGA Station and Idea Station.
Mentor Graphics' PCB/MCM design tools allow designers to select from a library
of parts to be included in the PCB/MCM, to simulate and test the performance of
the PCB/MCM, to test for manufacturability, to analyze thermal and signal
integrity, and to output data which will allow the PCB/MCM to be manufactured.
"PCBs", a common way of packaging electronic circuits, are epoxy type "boards"
upon which ICs, ASICs and discrete components such as resistors and capacitors
are mounted. "MCMs" may be thought of as several ICs or ASICs mounted together
in a single package. Products within the MCM and PCB design flows include Board
Station, MCM Station, Interconnect Synthesis, AutoTherm MCM, Logical Cable,
Physical Test Manager: SITE, Manufacturing Advisor/PCB and EngineerView.
Intellectual Property and Embedded Software Development Products
Mentor Graphics believes that the demand for tools to develop increasingly
complex electronic systems cannot be entirely satisfied with traditional EDA
tools. Under its Integrated System Design (ISD) strategy, Mentor Graphics
supplements its EDA products with products and services which address the rapid
development of complex systems through design re-use and the integration of
hardware and embedded software development.
Mentor Graphics' IP products and services are intended to increase engineering
productivity through the use of predefined, and preverified "building blocks" of
frequently used circuit functions for the design of hardware components. This
so-called "design reuse" frees designers to focus on optimizing system
architecture and developing proprietary functionality. Mentor Graphics believes
that companies which integrate IP into their design methodology can expect
better quality products at lower costs and faster time-to-market. IP now
available from Mentor Graphics includes a wide variety of functions key to the
design of consumer, computer and communications products. These include foundry
libraries, memories, datapath elements, processors, Universal Serial Bus (USB),
Viterbi and Reed-Solomon error correction decoders, MPEG-2, T1/E1 and Ethernet.
Embedded software development tools are provided by Mentor Graphics' Microtec
subsidiary. Embedded software controls the function of hardware components
dedicated to specialized tasks of such common consumer products as VCRs,
telephones and fax machines. Embedded software is used in a wide range of other
products in the aerospace, communications, medical instrumentation,
transportation, computer, industrial and consumer markets. Microtec's embedded
software development tools include the VRTX real-time operating system, the XRAY
family of debugger products and other software development tools including
compilers, assemblers, linkers and simulators.
Mentor Graphics' co-verification tools provide a means to verify the hardware
and embedded software comprising an electronic system against each other without
having to build a hardware prototype. Mentor Graphics believes this improves the
efficiency of its customers' product development cycle by giving customers more
time to fix software bugs and resolve hardware-software interface errors and
reduce the risk that a design problem will cause a significant delay in the
project schedule. The Company's co-verification products are marketed as the
Seamless Co-Verification Environment family of products.
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Platforms
Mentor Graphics' software products run primarily on UNIX workstations in a broad
range of price and performance levels, including workstations manufactured by
Hewlett-Packard Company and Sun Microsystems, Inc. These computer manufacturers
have a substantial installed base of workstations, and make frequent
introductions of new products. Mentor Graphics introduced four families of
products for Windows NT on personal computers in 1996.
Marketing and Customers
Mentor Graphics' marketing emphasizes its ISD strategy for the integration of
both hardware and software development for electronic systems, its IP tools, a
direct sales force and large corporate account penetration in the
communications, computer, consumer electronics, semiconductor, aerospace, and
transportation industries.
Mentor Graphics sells and licenses its products primarily through its direct
sales force in North America, Europe and Asia. Mentor Graphics also licenses its
products through distributors in territories where the volume of business is not
sufficient to warrant a direct sales presence. During the years ending December
31, 1996 and 1995, sales outside of North America accounted for 46 and 48
percent, respectively, of total sales. Additional information relating to
foreign and domestic operations is contained in Note 14 of Notes to Consolidated
Financial Statements on page 37 of the 1996 Annual Report to Shareholders and is
incorporated by this reference.
No material portion of Mentor Graphics' business is dependent on a single
customer. Mentor Graphics has traditionally experienced some seasonal
fluctuations in receipts of orders, which are typically stronger in the second
and fourth quarters of the year. As is typical of many other companies in the
electronics industry, Mentor Graphics generally ships its products to customers
within 180 days after receipt of an order, and a substantial portion of
quarterly shipments tend to be made in the last month of each quarter.
Mentor Graphics' backlog of firm orders was approximately $74.0 million on
December 31, 1996 as compared to $53.9 million on December 31, 1995. This
backlog includes products not shipped and unfulfilled professional services and
training. Mentor Graphics does not track backlog for support services. Support
services are typically delivered under annual contracts which are accounted for
on a prorata basis over the twelve month term of each contract. Substantially
all of the December 31, 1996 backlog of orders is expected to ship during 1997.
Mentor Graphics generally sells and licenses its products and some third party
products pursuant to purchase and license agreements. Mentor Graphics schedules
deliveries only after receipt of purchase orders under these agreements.
Manufacturing Operations
Mentor Graphics' manufacturing operations primarily consist of reproduction of
Mentor Graphics' software and documentation. In North America, manufacturing is
substantially outsourced, with distribution to Western Hemisphere customers
occurring from major west coast sites. Distribution centers in The Netherlands,
Japan and Singapore serve their respective regions. Mentor Graphics' SimExpress
line of accelerated verification products, which is comprised of both hardware
and software, is currently manufactured in France. The Company anticipates that
it will also manufacture this product line in the United States in 1997.
Product Development
Mentor Graphics' research and development is focused on continued improvement of
its existing products and the development of new products. During the years
ended December 31, 1996, 1995
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and 1994, Mentor Graphics expensed approximately $92,905,000, $86,782,000 and
$81,231,000 respectively, and capitalized approximately $5,691,000, $8,129,000
and $5,718,000, respectively, related to product research and development.
Mentor Graphics also seeks to expand existing product offerings and pursue new
lines of business through acquisitions. Acquisitions accommodate Mentor
Graphics' focused strategic requirements including filling gaps in existing
products or technologies, eliminating dependencies on third parties and
providing Mentor Graphics with an avenue into new lines of business. Mentor
Graphics' future success depends on its ability to develop or acquire
competitive new products which satisfy customer requirements.
Suppliers
Mentor Graphics seeks to provide its customers with software and IP that
addresses customers' electronic system design processes. Supplier products fill
gaps in Mentor Graphics' existing product lines and allow it to offer products
which are needed by customers but which are not central to Mentor Graphics'
business. Supplier agreements are also used by Mentor Graphics to explore
possible new lines of business. Although Mentor Graphics has supplier agreements
with several large customers who do not wish to develop a specific internal
technology into a commercial product, Mentor Graphics' suppliers are typically
small niche companies which do not have adequate distribution channels for their
products. Mentor Graphics maintains three different types of supplier
relationships: (i) a simple remarketing relationship where the supplier's
product is added to Mentor Graphics' price list and drop shipped to the customer
directly from the supplier; (ii) a partial integration relationship where the
supplier's object code is packaged and shipped with other Mentor Graphics'
products to the customer; and (iii) a fully integrated relationship where Mentor
Graphics modifies or enhances the supplier's product before packaging and
delivering it to the customer.
Supplier agreements are typically multi-year agreements with royalty payments
based on a percentage of product revenue. The agreements generally require an
escrow of the supplier's source code. Customer support for supplier products is
usually provided by Mentor Graphics with the supplier providing backup support
and research and development in the event of a problem with the product itself.
Customer Support and Consulting
Mentor Graphics has a worldwide organization to meet its customers' needs for
software support; the Company offers support contracts providing software
updates and support. Most of Mentor Graphics' customers have entered into
software support contracts.
Mentor Graphics believes that consulting services is an expanding segment of its
business. The Company's consulting group was established in 1987. Its mission is
to team with customers' design groups to increase productivity and reduce costs
by assisting customers with methodology and process changes, tool refinements,
design implementation and integration services. Mentor Graphics has a worldwide
team of consulting professionals available for on-site customer consultation
providing software and services for design data management, electronic parts
data creation, process automation, technology adoption, and ASIC, IC, MCM and
PCB design implementation.
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Competition
The markets for Mentor Graphics' products are competitive and have been
characterized by rapid technological advances in application software, operating
systems and hardware. Mentor Graphics' principal EDA competitors are Cadence
Design Systems Inc., Synopsys Inc., Avant! Corporation, Viewlogic Systems Inc.,
Zuken-Redac, Quickturn Design Systems, Inc. and numerous small companies. Mentor
Graphics' principal competitors for embedded software development tools are Wind
River Systems Inc., and Integrated Systems Inc.
Some of Mentor Graphics' competitors may have greater financial and marketing
resources than Mentor Graphics. However, Mentor Graphics believes the main
competitive factors affecting its business are breadth and quality of
application software, product integration, ability to respond to technological
change, quality of a company's sales force, price, size of the installed base,
level of customer support and professional services. Mentor Graphics believes
that it generally competes favorably in these areas. Mentor Graphics can give no
assurance, however, that it will have financial resources, marketing,
distribution and service capability, depth of key personnel or technological
knowledge to compete successfully in its markets.
Employees
Mentor Graphics and its subsidiaries employed approximately 2,500 persons full
time as of December 31, 1996. Mentor Graphics' success will depend in part on
its ability to attract and retain employees who are in great demand. Mentor
Graphics continues to enjoy good employee relations.
Patents and Licenses
Mentor Graphics owns numerous United States and foreign patents covering
portions of its technology. Mentor Graphics is currently seeking to patent more
of the inventive technology which Mentor Graphics believes gives it a
competitive advantage. Mentor Graphics presently has patent applications pending
and intends to file additional patent applications in the future. While Mentor
Graphics believes the pending applications relate to patentable devices, there
can be no assurance that any patent will be issued or that any patent can be
successfully defended. Although Mentor Graphics believes that patents are less
significant to the success of its business than technical competence, management
ability, marketing capability and customer support, Mentor Graphics believes
that software patents are becoming increasingly important in the software
industry.
Mentor Graphics regards its application software as proprietary and attempts to
protect it with copyrights, trade secret laws, and internal non-disclosure
safeguards, as well as patents, when appropriate, as noted above. Mentor
Graphics typically incorporates restrictions on disclosure, usage and
transferability into its agreements with customers and other third parties.
ITEM 2. PROPERTIES
Mentor Graphics' Wilsonville, Oregon facilities are located in six owned
buildings on about 90 acres and take up approximately 390,000 square feet. All
corporate functions, as well as a majority of research and development and
domestic activities, operate from this site.
Mentor Graphics leases additional space in San Jose, California, and in various
locations throughout the United States and in other countries, primarily for
sales and customer service operations. Mentor Graphics believes that it will be
able to renew or replace its existing leases as they expire and that its current
facilities will be adequate through at least 1997.
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ITEM 3. LEGAL PROCEEDINGS
During 1995, Mentor Graphics filed suit in U.S. Federal District Court against
Quickturn Design Systems, Inc. (Competitor) for a declarative judgment on
non-infringement, invalidity and unenforceability of three of Competitor's
patents as these patents relate to products of Meta System SRL (Meta), a French
company acquired by Mentor Graphics in 1996 which manufactures and sells
computers used for accelerated verification of hardware designs. In connection
with this litigation, Competitor filed an administrative complaint with the U.S.
International Trade Commission (ITC) in 1996 seeking to hinder the distribution
of Meta accelerated verification products, marketed by Mentor Graphics as
SimExpress, in the United States. The ITC has since issued a temporary ruling
allowing the importation of Meta accelerated verification products to the U.S.,
provided Mentor Graphics posts a bond for each sale. Mentor Graphics believes
that the ultimate resolution of its disputes with Competitor will not have a
material adverse impact on the Company's financial position or results of
operation.
Mentor Graphics is also a party to other legal actions arising out of the normal
course of business, none of which are expected to have a material effect on the
Company's financial position or results of operation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders of the Company
during the fourth quarter of the fiscal year ended December 31, 1996.
Executive Officers of Registrant
The following are the executive officers of the Company:
<TABLE>
<CAPTION>
Has Served As An
Executive Officer
Name Position Age of Company Since
---- -------- --- -----------------
<S> <C> <C> <C>
Walden C. Rhines President, Chief Executive Officer 50 1993
and Director
Gregory K. Hinckley Executive Vice President, Chief 50 1997
Operating Officer and Chief
Financial Officer
G. M. "Ken" Bado Senior Vice President, World Trade 42 1996
Glenn D. House, Sr. Senior Vice President, Strategy and 35 1996
Product Operations
Dean Freed Vice President, General Counsel 38 1995
and Secretary
Richard Trebing Corporate Controller and Chief 37 1996
Accounting Officer
</TABLE>
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The executive officers are elected by the Board of Directors of the Company at
its annual meeting. Officers hold their positions until they resign, are
terminated or their successors are elected. There are no arrangements or
understandings between the officers or any other person pursuant to which
officers were elected and none of the officers are related.
Dr. Rhines has served as Director, President and Chief Executive Officer of
Mentor Graphics since October 1993. From 1972 to 1993, Dr. Rhines was employed
by Texas Instruments Incorporated, a manufacturer of electrical and electronics
products, where he held a variety of technical and management positions and was
most recently Executive Vice President of Texas Instruments Semiconductor Group.
Dr. Rhines is currently a director of Cirrus Logic, Inc., and Triquint
Semiconductor, Inc., both semiconductor manufacturers.
Mr. Hinckley has served as Executive Vice President, Chief Operating
Officer and Chief Financial Officer since joining the Company in January 1997.
From November 1995 until December 1996 he held the position of Senior Vice
President with VLSI Technology, Inc. (VLSI), a manufacturer of complex ASICs.
From August 1992 until December 1996, Mr. Hinckley held the position of Vice
President, Finance and Chief Financial Officer with VLSI. From December 1991
until August 1992, he was an independent consultant. Mr. Hinckley is a director
of OEC Medical Systems, Inc., a manufacturer of medical imaging equipment.
Mr. Bado has served as Senior Vice President, World Trade since December
1997. From April 1994 to December 1996 he held the position of Vice President of
the Americas and was the Southern Area General Manager from January 1991 to
April 1994. Mr. Bado has been employed by Mentor Graphics since February 1990.
Mr. House has served as Senior Vice President, Strategy and Product
Operations since December 1996. From November 1995 to December 1996, he served
as the Vice President and General Manager of the Silicon Systems Division and
from June 1995 until November 1995 as Vice President and General Manager of the
IC and Mixed Signal Division. From August 1992 until June 1995, Mr. House held
the position of Engineering Director with the ASIC, Programmable Logic and Test
Division. He has been employed by Mentor Graphics since March 1990.
Mr. Freed has served as Vice President, General Counsel and Secretary of
Mentor Graphics since July 1995. Mr. Freed served as Deputy General Counsel and
Assistant Secretary of Mentor Graphics from April 1994 to July 1995, and was
Associate General Counsel and Assistant Secretary from 1990 to April 1994. He
has been employed by Mentor Graphics since January 1989.
Mr. Trebing has served as Corporate Controller and Chief Accounting Officer
since February 1996. Mr. Trebing served as Financial Planning and Reporting
Manager from January 1995 to February 1996 and as a Divisional Controller from
January 1994 to January 1995. From February 1992 to January 1994, Mr. Trebing
served as a Finance Manager and from October 1989 to February 1992, as a
Planning and Analysis Manager. Mr. Trebing has been employed by Mentor Graphics
since October 1989.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company does not intend to pay dividends in the foreseeable future.
Additional information required by this item is included under "Quarterly
Financial Information" on page 38 and under the shareholder information included
on page 40 of the Company's 1996 Annual Report to Shareholders.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is included under "Selected Consolidated
Financial Data" on page 13 of the Company's 1996 Annual Report to Shareholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by this item is included under "Management's Discussion
and Analysis of Results of Operations and Financial Condition" on pages 14-23 of
the Company's 1996 Annual Report to Shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements are included in the Company's 1996 Annual Report to
Shareholders on pages 24-37 and are indexed here under Item 14(a)(1). The
supplementary data required by this item is included under "Quarterly Financial
Information" on page 38 of the Company's 1996 Annual Report to Shareholders. See
also the financial statement schedule appearing here as indexed under Item
14(a)(2).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The information required by this item concerning the Company's Directors is
included under "Election of Directors" in the Company's 1997 Proxy Statement and
is incorporated herein by reference. The information concerning the Company's
Executive Officers is included herein on page 7-8 under the caption "Executive
Officers of the Registrant." The information required by Item 405 of Regulation
S-K is included under "Section 16(a) Beneficial Ownership Reporting Compliance"
in the Company's 1997 Proxy Statement and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included under "Compensation of
Directors," and "Information Regarding Executive Officer Compensation" in the
Company's 1997 Proxy Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included under "Election of Directors"
and "Information Regarding Beneficial Ownership of Principal Shareholders and
Management" in the Company's 1997 Proxy Statement and is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is not applicable to the Company.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The documents listed are included on pages indicated in the Company's 1996
Annual Report to Shareholders:
Page
(1) Financial Statements ----
Consolidated Statements of Operations 24
Consolidated Balance Sheets 25
Consolidated Statements of Cash Flows 26
Consolidated Statements of Stockholders' Equity 27
Notes to Consolidated Financial Statements 28-37
Independent Auditors' Report 39
(2) Financial Statement Schedules
The schedule and report listed below are filed as part of this report
on the pages indicated:
Schedule Page
-------- ----
II Valuation and Qualifying Accounts 14
Independent Auditors' Report on Financial Statement Schedule 15
All other financial statement schedules have been omitted since they are not
required, not applicable or the information is included in the Consolidated
Financial Statements or Notes.
(3) Exhibits
3. A. 1987 Restated Articles of Incorporation. Incorporated by
reference to Exhibit 4A to the Company's Registration Statement on
Form S-3 (Registration No. 33-23024).
B. Bylaws of the Company. Incorporated by reference to Exhibit 4B
to the Company's Registration Statement on Form S-3 (Registration
No. 33-56759).
10. *A. 1982 Stock Option Plan. Incorporated by reference to Exhibit
10.A to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1994 (1994 10-K).
*B. Nonqualified Stock Option Plan. Incorporated by reference to
Exhibit 10.C to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1989 (1989 10-K).
*C. 1986 Stock Plan. Incorporated by reference to Exhibit 10.D to
the Company's 1989 10-K.
*D. 1987 Non-Employee Directors' Stock Option Plan. Incorporated
by reference to Exhibit 10.D to the Company's 1994 10-K.
*E. Form of Indemnity Agreement entered into between the
Registrant and each of its officers and directors. Incorporated by
reference to Exhibit B to the Company's 1987 Proxy Statement.
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F. Lease dated November 20, 1991, for 999 Ridder Park Drive and
1051 Ridder Park Drive, San Jose, California. Incorporated by
reference to Exhibit 10.M to the Company's Form SE dated March 25,
1992.
G. Amended and Restated Loan Agreement between Mentor Graphics
Corporation and First Interstate Bank of Oregon, N.A. dated
December 31, 1992 as amended. Incorporated by reference to Exhibit
10.J to the Company's Form SE dated March 25, 1993.
*H. Special Incentive Bonus Plan. Incorporated by reference to
Exhibit 10.H to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995.
13. Portions of the 1996 Annual Report to Shareholders that are
incorporated herein by reference.
21. List of Subsidiaries of the Company.
23. Consent of Accountants.
- --------------
* Management contract or compensatory plan or arrangement
(b) No reports on Form 8-K were filed by the Company during the last quarter of
1996.
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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 28, 1997.
MENTOR GRAPHICS CORPORATION
By WALDEN C. RHINES
--------------------------------------
Walden C. Rhines
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant on March
28, 1997 in the capacities indicated.
Signature Title
(1) Principal Executive Officer:
WALDEN C. RHINES President, Chief Executive Officer
--------------------------------- and Director
Walden C. Rhines
(2) Principal Financial Officer:
GREGORY K. HINCKLEY Executive Vice President, Chief
--------------------------------- Operating Officer and Chief
Gregory K. Hinckley Financial Officer
(3) Principal Accounting Officer:
RICHARD TREBING Corporate Controller and Chief
--------------------------------- Accounting Officer
Richard Trebing
(4) Directors:
JON A. SHIRLEY Chairman of the Board
---------------------------------
Jon A. Shirley
MARSHA B. CONGDON Director
---------------------------------
Marsha B. Congdon
JAMES R. FIEBIGER Director
---------------------------------
James R. Fiebiger
DAVID A. HODGES Director
---------------------------------
David A. Hodges
FONTAINE K. RICHARDSON Director
---------------------------------
Fontaine K. Richardson
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SCHEDULE II
MENTOR GRAPHICS CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
Additions
Charged to
Beginning Cost & Ending
Description Balance Expenses Deductions Balance
- ----------- --------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Year ended December 31, 1994:
Allowance for doubtful accounts<F1> $4,484 $629 $1,559 $3,554
Allowance for obsolete inventory<F2> $8,014 $0 $7,155 $859
Year ended December 31, 1995
Allowance for doubtful accounts<F1> $3,554 $308 $571 $3,291
Allowance for obsolete inventory<F2> $859 $26 $496 $389
Year ended December 31, 1996
Allowance for doubtful accounts<F1> $3,291 $1,168 $1,296 $3,163
Allowance for obsolete inventory<F2> $389 $308 $292 $405
<FN>
<F1> Deductions primarily represent accounts written off during the period.
<F2> Deductions represent inventory scrapped during each period and
reclassification of demonstration equipment from inventory to property
plant and equipment in 1994.
</FN>
</TABLE>
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Independent Auditors' Report
- ----------------------------
The Board of Directors and Stockholders
Mentor Graphics Corporation:
Under date of January 30, 1997, except for note 8, which is as of February 11,
1997, we reported on the consolidated balance sheets of Mentor Graphics
Corporation and subsidiaries as of December 31, 1996 and 1995, 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, 1996, which are
included in the 1996 annual report to stockholders. These consolidated financial
statements and our report thereon are incorporated by reference in the annual
report on Form 10-K for the year 1996. In connection with our audits of the
aforementioned consolidated financial statements, we also have audited the
related consolidated financial statement schedule as listed in the accompanying
index. This financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
As discussed in note 1 to the consolidated financial statements, the Company
adopted the provisions of the Financial Accounting Standards Board's Statement
of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities", in 1994.
KPMG PEAT MARWICK LLP
Portland, Oregon
January 30, 1997, except for note 8,
which is as of February 11, 1997
15
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL DATA
Year ended December 31, 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------
In thousands, except per share data and percentages
Statement of Operations Data
<S> <C> <C> <C> <C> <C>
Total revenues $ 447,886 $ 432,517 $ 390,119 $ 367,703 $ 373,392
- -----------------------------------------------------------------------------------------------------------------------
Research and development $ 92,905 $ 86,782 $ 81,231 $ 84,579 $ 80,578
- -----------------------------------------------------------------------------------------------------------------------
Operating income (loss) $ (9,849) $ 52,554 $ 30,980 $ (46,365) $ (40,538)
- -----------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (4,978) $ 50,506 $ 30,453 $ (48,367) $ (50,980)
- -----------------------------------------------------------------------------------------------------------------------
Gross margin percent 70% 73% 73% 67% 58%
- -----------------------------------------------------------------------------------------------------------------------
Operating income (loss)
as a percent of total revenues (2%) 12% 8% (13%) (11%)
- -----------------------------------------------------------------------------------------------------------------------
Per Share Data
- -----------------------------------------------------------------------------------------------------------------------
Net income (loss) per common and common
equivalent share $ (.08) $ .78 $ .49 $ (.88) $ (1.02)
- -----------------------------------------------------------------------------------------------------------------------
Cash dividends per common
share outstanding $ -- $ -- $ -- $ .16 $ .22
- -----------------------------------------------------------------------------------------------------------------------
Weighted average number of common and
common equivalent shares outstanding 64,134 65,134 62,211 54,760 49,968
- -----------------------------------------------------------------------------------------------------------------------
Balance Sheet Data
as of December 31, 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------
Cash and short-term investments $ 197,079 $ 211,996 $ 154,255 $ 119,531 $ 117,277
- -----------------------------------------------------------------------------------------------------------------------
Cash and investments, long-term $ 30,000 $ 30,000 $ 30,000 $ 30,000 $ 30,000
- -----------------------------------------------------------------------------------------------------------------------
Working capital $ 200,848 $ 213,491 $ 150,865 $ 103,754 $ 117,203
- -----------------------------------------------------------------------------------------------------------------------
Property, plant and equipment, net $ 102,253 $ 99,605 $ 102,291 $ 108,314 $ 112,252
- -----------------------------------------------------------------------------------------------------------------------
Total assets $ 513,359 $ 495,372 $ 429,290 $ 381,583 $ 397,255
- -----------------------------------------------------------------------------------------------------------------------
Short-term borrowings $ 9,055 $ 9,358 $ 8,661 $ 6,467 $ 5,562
- -----------------------------------------------------------------------------------------------------------------------
Long-term debt and other deferrals $ 56,375 $ 55,054 $ 53,123 $ 60,182 $ 55,742
- -----------------------------------------------------------------------------------------------------------------------
Stockholders' equity $ 319,640 $ 326,226 $ 258,419 $ 204,844 $ 232,616
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
All numerical references in thousands, except percentages
This Management's Discussion and Analysis of Results of Operations and
Financial Condition (MD&A) should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto. This annual report contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Actual
results could differ materially from the forward-looking statements as a result
of the factors set forth under the heading "Factors That May Affect Future
Results and Financial Condition" below.
Nature of Operations
Mentor Graphics Corporation (the Company) is a supplier of electronic
design automation (EDA) systems -- advanced computer software, accelerated
verification systems and intellectual property designs and data bases used to
automate the design, analysis and testing of electronic hardware and embedded
systems software in electronic systems and components. The Company markets its
products and services primarily to customers in the communications, computer,
semiconductor, consumer electronics, aerospace, and transportation industries.
The Company sells and licenses its products primarily through its direct sales
force in North America, Europe and Asia, and through distributors in territories
where the volume of business does not warrant a direct sales presence. In
addition to its corporate offices in Wilsonville, Oregon, the Company has sales,
support, software development and professional services offices worldwide.
Recent Mergers and Acquisitions
Acquisitions of complementary businesses are an integral part of the
Company's overall business strategy. Acquisitions accommodate the Company's
focused strategic requirements by filling gaps in existing products or
technologies, eliminating dependencies on third parties and providing the
Company with an avenue into new lines of business and new distribution channels.
The Company will continue to evaluate make-versus-buy alternatives, which may
result in additional business combinations in 1997. There can be no assurance
that products, technologies and businesses of acquired companies, or the
technical and sales personnel of such companies, will be effectively assimilated
with those of the Company.
In 1996, the Company completed nine business combinations, two of which
were accounted for as pooling of interests and seven of which were accounted for
as purchases. The Company purchased dQdt, Inc. (dQdt), Meta Systems, (Meta),
Seto Software GmbH (Seto), Royal Digital Centers, Inc. (Royal Digital), Open
Networks Engineering, Inc. (ONE), Systolic Technology, LTD (Systolic), and CAE
Technology, Inc. (CAE) in April 1996, May 1996, June 1996, August 1996, November
1996, November 1996 and December 1996, respectively. The total purchase price
including acquisition expenses for all 1996 purchase acquisitions was $40,708.
In connection with all purchase acquisitions, the Company recorded one-time
charges to operations for the write-off of each enterprise's in-process product
development which had not reached technological feasibility. The purchase
accounting allocations resulted in charges for in-process research and
development (R&D) of $26,234, goodwill capitalization of $5,517, and technology
capitalization of $8,957.
In January, 1996, the Company completed the acquisition of Microtec
Research, Inc. (Microtec), pursuant to a merger accounted for as a pooling of
interests. Accordingly, the results of Microtec are included in the Company's
Consolidated Financial Statements for all periods presented. A total of 6,223
shares of the Company's common stock were issued in the transaction. Merger
expenses of $4,410 were incurred associated with the elimination of duplicate
facilities, severance costs, the write-off of certain property and equipment and
legal and accounting fees associated with administration of the merger
activities.
In August, 1996, the Company completed the acquisition of Interconnectix,
Inc. (Interconnectix), pursuant to a merger accounted for as a pooling of
interests. Accordingly, the results of Interconnectix are included in the
Company's Consolidated Financial Statements for all periods presented. A total
of 2,133 shares of the Company's common stock were issued in the transaction.
Merger expenses of $700 were incurred associated primarily with severance costs
and legal and accounting fees associated with administration of the merger
activities.
In 1995, the Company completed five business combinations, two of which
were accounted for as pooling of interests and three of which were accounted for
as purchases. The Company purchased Axiom Datorer Scandinavian AB (Axiom), 3Soft
Corporation (3Soft), and Zeelan Technology, Inc. (Zeelan) in May 1995, December
1995, and December 1995, respectively. The purchase accounting allocations
resulted in charges for in-process R&D of $1,430, goodwill capitalization of
$528 and technology capitalization of $892.
In October 1995, the Company acquired Precedence
14
<PAGE>
Incorporated (Precedence), pursuant to a merger accounted for as a pooling of
interests. Accordingly, the results of Precedence are included in the Company's
Consolidated Financial Statements for all periods presented. A total of 735
shares of the Company's common stock were issued in the transaction. Merger
expenses of $210 were for services rendered to facilitate completion of the
merger agreement.
In May 1995, the Company acquired Exemplar Logic, Inc. (Exemplar), pursuant
to a merger accounted for as a pooling of interests. Accordingly, the results of
Exemplar are included in the Company's Consolidated Financial Statements for all
periods presented. A total of 1,512 shares of the Company's common stock were
issued in the transaction. Merger expenses of $400 were for services rendered to
facilitate completion of the merger agreement and for severance costs.
In 1994, the Company completed two business combinations, one of which was
accounted for as a pooling of interests and the other of which was accounted for
as a purchase. In September 1994, the Company completed the purchase of Anacad
Electrical Engineering Software GmbH (Anacad). The purchase accounting
allocation resulted in a charge for in-process R&D of $8,265, goodwill
capitalization of $2,897 and technology capitalization of $4,735.
In November 1994, the Company acquired Model Technology Incorporated (MTI),
pursuant to a merger accounted for as a pooling of interests. A total of 2,443
shares of the Company's common stock were issued in the transaction. Merger
costs of $1,000 were paid by MTI for consulting services rendered to facilitate
negotiation of the various components of the merger agreement. Also, cash
distributions of $2,346 were paid in 1994 by MTI to its shareholders in the
normal course of S-Corporation business prior to the date of acquisition.
Results of Operations
<TABLE>
<CAPTION>
Revenues and Gross Margins
Year ended December 31, 1996 Change 1995 Change 1994
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
System and software revenues $ 242,147 5% $ 230,533 2% $ 225,306
- --------------------------------------------------------------------------------------------------------------
System and software gross margins $ 202,951 4% $ 194,657 4% $ 186,954
- --------------------------------------------------------------------------------------------------------------
Percentage of revenues 83.8% 84.4% 83.0%
- --------------------------------------------------------------------------------------------------------------
Service and support revenues $ 205,739 2% $ 201,984 23% $ 164,813
- --------------------------------------------------------------------------------------------------------------
Service and support gross margins $ 111,119 (8)% $ 120,656 24% $ 97,100
- --------------------------------------------------------------------------------------------------------------
Percentage of revenues 54.0% 59.7% 58.9%
- --------------------------------------------------------------------------------------------------------------
Total revenues $ 447,886 4% $ 432,517 11% $ 390,119
- --------------------------------------------------------------------------------------------------------------
Total gross margins $ 314,070 -- $ 315,313 11% $ 284,054
- --------------------------------------------------------------------------------------------------------------
Percentage of revenues 70.1% 72.9% 72.8%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
System and Software
System and software revenues are derived from software products owned by
the Company, software products owned by third parties for which the Company pays
royalties, some workstation hardware and some accelerated verification system
sales as a result of the Meta acquisition in 1996. Software product revenues
accounted for approximately 85% of the 1996 increase in system and software
revenues, while a decline in workstation hardware product revenues was more than
offset by added accelerated verification system revenues. For 1995, software
product revenues increased by approximately 4%, while a decline in workstation
hardware product revenues partially offset this growth. The primary factor
contributing to the software product growth for 1996 and 1995 was increased
product offerings as a result of internal development and acquisitions over the
last several years. During 1996, the Company added new hardware/software
co-verification, re-usable intellectual property designs, library and data
management products and products that operate on Windows 95 and Windows NT
operating systems. The Company added many new products through business
combinations accounted for as purchases during 1996 and 1995, with such
purchases resulting in added revenues only from the date of acquisition and not
for all prior periods presented as is the case for pooling of interest
transactions.
Revenues from the Company's older product offerings declined in 1996 and
1995, partially offsetting the volume increases of newer product offerings. In
the fourth quarter of 1996, revenues from product offerings introduced prior to
1993 were less than 50% of total revenues for the first time. The rate of
decline for these older product offerings is expected to continue to negatively
impact the Company's future software product revenue performance.
Also, 1996 software product revenues have been adverse-
15
<PAGE>
ly affected by turnover of Microtec sales personnel.
Sales in Japan were negatively affected by a strengthening of the U.S.
dollar as compared to the yen in 1996. In 1995 sales were positively affected by
a weakening of the U.S. dollar against the yen. See "Geographic Revenues
Information" below for further details of the effects of foreign currencies on
revenues.
System and software gross margins as a percent of revenues declined from
1995 to 1996 due to higher costs for royalties related to third party contracts
and higher costs for amortization of previously capitalized software development
and purchased technology, offset by volume increases in system and software
revenues year to year. The Company continues to enter into and maintain third
party contracts that contribute varying levels of revenues and cost of revenues
quarter to quarter. Future trends of third party revenue content are difficult
to predict since they are dependent on such variables as new third party
agreements, potential acquisitions of third parties where existing agreements
are in place, and varying levels of customer demand for third party product
offerings.
The improvement in gross margins from 1994 to 1995 was primarily a result
of increased software product versus workstation hardware sales year to year,
lower amortization cost for previously capitalized software development offset
by higher costs for amortization of purchased technology. Software product gross
margins are much higher than workstation hardware gross margins and the mix
shift in 1995 favorably impacted gross margins.
Amortization of previously capitalized software development costs to system
and software cost of revenue was $6,215, $5,511, and $6,785 for 1996, 1995, and
1994, respectively. Amortization increased slightly in 1996 as the Company's
capitalization level increased in 1995 and to a lesser extent in 1994 as more
resources were directed to the development of new products and enhancement of
existing products. The 1995 decline in amortization is attributable to several
capitalized projects completing amortization schedules during 1994. Amortization
of purchased technology costs to system and software cost of revenues was
$3,559, $2,418 and $760 for 1996, 1995 and 1994, respectively. The increase in
1996 and 1995 is attributable to the purchase of seven and three companies in
1996 and 1995, respectively. Capitalized software development costs and
purchased technology costs are amortized over a three year period to system and
software cost of revenues. Due to the acquisitions previously discussed,
amortization of purchased technology is expected to continue to increase in
1997.
[graphic bar chart depicting the following:
Revenues
(dollar figures are in millions)
-----------------------------------------------------------
System & Software Service & Support
------------------------ ------------------------
1994 1995 1996 1994 1995 1996
---- ---- ---- ---- ---- ----
$225 $231 $242 $165 $202 $206]
Sales of accelerated verification systems, which are the result of the
Company's acquisition of Meta, are expected to have a negative impact on system
and software product gross margins over time. Meta products include hardware,
which does not yield gross margins as high as software product sales. The impact
of accelerated verification systems sales on system and software cost of
revenues and gross margins was offset by the decline in workstation hardware
revenues during 1996 compared to the same period last year. Sales volumes for
accelerated verification systems were not material to the Company's system and
software revenue levels in 1996.
Service and Support
Service and support revenues consist of revenues from annual software
support maintenance contracts, hardware support, and professional services,
which includes consulting services, training services, and custom design
services. The increase in service and support revenues in 1996 is due primarily
to a 4% increase in software support revenues, partially offset by a 6% decline
in professional service revenues. The increase in service and support revenues
in 1995 is due to increases of 18% and 44% in software support and professional
service revenues, respectively.
The 1996 decline in growth levels of software support is due in part to the
decline in revenues from the Company's older product offerings in 1996 resulting
in a slower rate of increase to the Company's installed base of customers and in
part to the unfavorable effects of foreign currency fluctuations discussed
below. Factors contributing to the growth in software support revenues in 1995
included the effect of increased software product sales in prior years, a
focused effort to increase the acceptance rate of the Company's software support
offerings and favorable effects of foreign currency fluctuations.
16
<PAGE>
The Company is currently unbundling maintenance services in response to
customer requests. This change will allow customers to choose varying levels of
phone support and software update support. The effect of this change may result
in lower revenue levels as some customers could choose less than full support
from available options. Since growth in software support is dependent on
continued success of the software product offerings, increases in the Company's
installed customer base, and the impact of acquisitions, future software support
revenue levels are difficult to predict.
Professional service revenues totaled approximately $50,500, $53,800 and
$37,300 in 1996, 1995 and 1994, respectively. The decline in professional
service revenues in 1996 was attributable in part to a process of realigning the
core consulting business in an attempt to better support ASIC and IC design
methodologies. This realignment resulted in start-up difficulties such as proper
scoping of personnel requirements to meet engagement deliverables and recruiting
and hiring of additional personnel qualified to meet such deliverables, all of
which delayed conversion of order backlog into revenue. This decline was
partially offset by increased custom design professional service revenues as
customer demand for such services continued to grow. The increase in 1995 was
primarily attributable to strong demand for both consulting services and custom
design services.
Service and support gross margins decreased in 1996 as a result of negative
professional service gross margins, partially offset by slightly improved
software support gross margins. The negative professional service gross margins
are the result of the start-up difficulties discussed above and unexpected costs
to complete certain custom design contracts. Service and support gross margins
improved in 1995 as a result of higher software maintenance revenues volume and
slightly improved professional service gross margins.
[graphic bar chart depicting the following:
Gross Margins
-----------------------------------------------------------
System & Software Service & Support
------------------------ ------------------------
1994 1995 1996 1994 1995 1996
---- ---- ---- ---- ---- ----
83.0% 84.4% 83.8% 58.9% 59.7% 54.0%]
Consistent with EDA consulting and training business models, gross margins
generated by the Company's professional service activities have been, and are
expected to continue to be, lower than software support. As a result, service
and support gross margins may continue to decline as growth in the professional
service business is expected to be higher than growth in software support.
Geographic Revenues Information
Domestic revenues from unaffiliated customers including service and support
revenues increased by 7% from 1995 to 1996 and 7% from 1994 to 1995.
International revenues from unaffiliated customers including service and support
revenues represented 46%, 48% and 46% of total revenues in 1996, 1995 and 1994,
respectively. European revenues decreased by 3% from 1995 to 1996 and increased
by 17% from 1994 to 1995. Japanese revenues decreased by 1% from 1995 to 1996
and increased by 11% from 1994 to 1995. The effects of exchange rate differences
from the Japanese Yen to the U.S. dollar negatively impacted revenues by
approximately 14% in 1996 and positively impacted revenues by approximately 7%
in 1995. The effects of exchange rate differences from European currencies to
the U.S. dollar for 1996 and 1995 were not significant as approximately half of
European revenues are booked in U.S. dollars and movements of such currencies
against the U.S. dollar were not significant. For 1996, European revenues were
unfavorably impacted by a slowdown in spending by telecommunication customers
while Japanese revenues were favorably impacted by new product offerings
previously discussed. For 1995, European revenues were favorably impacted by
improving economic conditions while Japan's results reflected economic weakness.
Since the Company generates approximately half of its revenues outside of the
United States and expects this to continue in the future, revenue results should
continue to be impacted by the effects of future foreign currency fluctuations.
17
<PAGE>
<TABLE>
<CAPTION>
Operating Expenses
Year ended December 31, 1996 Change 1995 Change 1994
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Gross research and development $ 98,596 4% $ 94,911 9% $ 86,949
- --------------------------------------------------------------------------------------------------------------
Percentage of total revenues 22.0% 21.9% 22.3%
- --------------------------------------------------------------------------------------------------------------
Capitalized software development $ 5,691 (30)% $ 8,129 42% $ 5,718
- --------------------------------------------------------------------------------------------------------------
Percentage of total revenues 1.3% 1.9% 1.5%
- --------------------------------------------------------------------------------------------------------------
Net research and development $ 92,905 7% $ 86,782 7% $ 81,231
- --------------------------------------------------------------------------------------------------------------
Percentage of total revenues 20.7% 20.1% 20.8%
- --------------------------------------------------------------------------------------------------------------
Marketing and selling $ 146,754 7% $ 137,771 7% $ 129,119
- --------------------------------------------------------------------------------------------------------------
Percentage of total revenues 32.8% 31.9% 33.1%
- --------------------------------------------------------------------------------------------------------------
General and administration $ 40,918 7% $ 38,206 (3)% $ 39,504
- --------------------------------------------------------------------------------------------------------------
Percentage of total revenues 9.1% 8.8% 10.1%
- --------------------------------------------------------------------------------------------------------------
Special charges $ 11,998 --- $ (2,040) --- $ (6,045)
- --------------------------------------------------------------------------------------------------------------
Percentage of total revenues 2.7% (0.5)% (1.5)%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
Research and Development
As a percent of revenue, gross R&D costs were approximately flat from 1995
to 1996 and decreased slightly from 1994 to 1995. In 1996, gross R&D costs
increased due, in part, to the purchases of 3Soft late in 1995 and Seto and Meta
in 1996, which resulted in a year to year increase of approximately $5,000. In
1995, gross R&D costs increased due to the purchases of Anacad and Axiom, which
resulted in a year to year increase of approximately $4,000. In addition, other
business combinations accounted for as pooling of interests including Microtec,
MTI, Exemplar, Precedence and Interconnectix, which were included in 1996 and
1995 results, experienced higher R&D investment in 1996 and 1995. Offsetting
these increases, was a reduction in spending for base business product lines.
During 1996, the Company capitalized software development costs of $5,691,
compared to $8,129 and $5,718 for 1995 and 1994, respectively.
The Company will continue to evaluate make-versus-buy alternatives in 1997
which may result in more acquisitions. Overall, management's goal, which may not
be acheived, is to maintain or reduce the ratio of R&D expense as a percent of
revenues from 1996 levels. Achievement of this goal is not guaranteed. See
"Factors That May Affect Future Results and Financial Condition" discussion
below.
Marketing and Selling
In 1996 and 1995, the increase in marketing and selling expenses was
principally attributable to merger and acquisition activity discussed above and
revenue growth year to year. The year to year impact of acquisitions on
marketing and selling costs in 1996 was approximately $6,000. In addition, the
Company incurred higher selling costs due to higher revenue levels year to year
and higher marketing costs due to increased new product introductions. In 1995,
marketing and selling expenses increased due to the purchases of Anacad and
Axiom which resulted in a year to year increase of approximately $3,700. A
stronger U.S. dollar during 1996 reduced expenses by approximately 7% and 19% in
Europe and Japan, respectively. For 1995, a weaker U.S. dollar increased
expenses by approximately 3% and 17% in Europe and Japan, respectively.
General and Administrative
The increase in general and administrative costs from 1995 to 1996 was a
result of integration costs and additional headcount related to business
purchases previously discussed. For 1995, the decrease from 1994 was due to a
focused effort to reduce administrative expenses during the year.
Special Charges
In the fourth quarter of 1996, the Company recorded special charges of
$11,998. The Company downsized and redirected certain operations and retargeted
an incentive compensation program resulting in severance costs, facility lease
and equipment abandonment costs and other costs totaling approximately $7,000.
The Company also recognized an impairment in value of goodwill and certain other
assets associated with its Meta subsidiary which resulted in a write-down of
$5,000. During 1995, the Company filed suit in United States (U.S.) Federal
District Court against Quickturn Design Systems, Inc. (competitor) for
declarative judgment on non-infringement, invalidity and unenforceability of
three of the competitor's patents in anticipation of acquiring Meta. In January
1996, the competitor filed an administrative complaint with the International
Trade Commission (ITC), a federal administrative agency, seeking to hinder the
distribution of the Meta technology in the United States. Early in the third
18
<PAGE>
quarter of 1996, the ITC issued a temporary ruling allowing the importation of
this technology to the U.S., but requiring posting of a bond for each sale.
Subsequent to the ITC temporary ruling, domestic orders for Meta products were
not as strong as expected. While the Company continues to expect the Meta
technologies to perform favorably over a longer term, the near-term outlook is
not positive enough to support reasonable recoverability of the carrying amounts
of these assets.
During the second quarter of 1995, the Company recorded a $2,040 special
charge adjustment. The adjustment was primarily associated with the 1993 charge
and was mainly the result of reduced estimates for severance costs associated
with replacement and globalization of the Company's information systems.
Information system implementation delays culminated when a key project plan
milestone was missed during the second quarter, resulting in lower estimated
costs for write-offs of old equipment due to prolonged in-service periods. In
addition, certain actions associated with a product discontinuance plan were not
taken when management determined that the technology could be used by the
Company's consulting organization and sold as a custom integrated service rather
than as a commercial design tool.
During 1994, the Company recorded a special charge 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 special 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
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.
All of the $3,751 special charge accrual as of December 31, 1995 resulted
in cash outflows in 1996. The remaining accrual of $5,340 as of December 31,
1996 is expected to be disbursed in 1997.
Merger and Acquisition Related Charges
In 1996, the Company incurred merger and acquisition related charges of
$31,344 as a result of nine business combinations. Seven acquisitions were
accounted for as purchases which resulted in charges for in-process R&D of
$26,234. The charges were a result of allocating a portion of the acquisition
costs to in-process product development that had not reached technological
feasibility. The acquisitions of Microtec and Interconnectix were accounted for
as pooling of interests which resulted in merger expenses of $4,410 and $700,
respectively. These costs were for services rendered to facilitate completion of
the merger agreements, severance costs to eliminate redundant management
positions and facilities closure costs to eliminate redundant sales offices.
In 1995 the Company incurred merger related charges of $2,040. The
purchases of Axiom, 3Soft and Zeelan resulted in charges for in-process R&D of
$400, $850, and $180, respectively. The acquisitions of Precedence and Exemplar
were accounted for as pooling of interests which resulted in merger expenses of
$400 and $210, respectively. These costs were for services rendered to
facilitate completion of the merger agreements and severance costs to eliminate
redundant management positions.
In 1994 the Company incurred acquisition related charges of $9,265. The
purchase of Anacad resulted in a charge for in-process R&D of $8,265. In
addition, merger expenses of $1,000 were paid by MTI for consulting services
rendered to facilitate negotiation of the various components of the merger
agreement.
19
<PAGE>
Other Income (Expense)
Year ended December 31, 1996 1995 1994
- ---------------------------------------------------------------------------
Other income, net $ 8,411 $ 6,494 $ 3,238
- ---------------------------------------------------------------------------
Interest income was $9,485, $9,194, and $5,247 in 1996, 1995 and 1994,
respectively. The improvement in interest income is attributable to higher
average cash balances due to earnings in 1995 and 1994. Interest expense was
$2,423, $2,585, and $2,826 in 1996, 1995 and 1994, respectively. In 1996, the
Company sold common stock of two independent public companies for $6,744 which
had carrying costs of $1,199, resulting in a gain of $5,545. Other income was
adversely affected by legal costs related to the litigation with a competitor of
$3,611 in 1996.
Provision for Income Taxes
The provision for income taxes was $3,540, $8,542 and $3,765 in 1996, 1995
and 1994, respectively. The $3,540 tax provision in 1996 despite a $1,438
pre-tax loss for the year is primarily due to one-time non-tax deductible in
process R&D charges and other non-tax deductible costs related to acquisitions.
These increases to the tax provision were partially offset due to the reversal
of the valuation allowance for certain current deferred tax assets and due to
significant pre-tax income in certain jurisdictions where lower tax rates apply.
Based on the Company's operating income levels before tax in the United States
(U.S.), it was determined that it was more likely than not that certain of its
current deferred tax assets in the U.S. would be realized. As such, the tax
provision for 1996 was reduced for the reversal of the valuation allowance for
those deferred tax assets.
The Company incurred a lower effective tax rate in 1995 compared to 1994
primarily due to the reversal of the valuation allowance related to deferred tax
assets of the Company's Japanese subsidiary. Based on operating income levels
before tax for this subsidiary, it was determined that it was more likely than
not that its deferred tax assets would be realized. As such, the tax provision
for 1995 was reduced for the reversal of the valuation allowance for the
Japanese deferred tax assets.
The Company's income tax position for each year combines the effects of
available tax benefits in certain countries where the Company does business,
benefits from available net operating loss carry forwards, and tax expense for
subsidiaries with pre-tax income. As such, the Company's income tax position and
resultant effective tax rate is uncertain for 1997 and beyond.
Effects of Foreign Currency Fluctuations
Approximately half of the Company's revenues are generated outside of the
United States. For 1996 and 1995, approximately half of European and all of
Japanese revenues were subject to exchange rate fluctuations as they were booked
in local currencies. The effects of these fluctuations were substantially offset
by local currency cost of revenues and operating expenses resulting in an
immaterial net effect on the Company's results of operations.
The "foreign currency translation adjustment," as reported in the
stockholders' equity section of the consolidated balance sheets, decreased to
$12,098 at December 31, 1996, from $13,594 at the end of 1995. This reflects the
decrease in the value of net assets denominated in foreign currencies since
year-end 1995 as a result of a stronger U.S. dollar at the close of 1996.
During 1995, the Company entered into a three year forward contract to
stabilize the currency effects on a portion of the Company's net investment in
its Japanese subsidiary. The contract to sell Yen 2.2 billion will guarantee the
Company $24,900 at the contract's expiration. Any differences between the
contracted currency rate and the currency rate at each balance sheet date will
impact the foreign currency translation adjustment component of the
stockholders' equity section of the consolidated balance sheet. The result is a
partial offset of the effect of Japanese currency changes on stockholders'
equity during the contract term. This forward contract should not impact current
or future consolidated statements of operations.
20
<PAGE>
Liquidity and Capital Resources
<TABLE>
<CAPTION>
Year ended December 31, 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C>
Current assets $ 338,192 $ 327,583
- -----------------------------------------------------------------------------
Cash and short term investments $ 197,079 $ 211,996
- -----------------------------------------------------------------------------
Cash and investments, long-term $ 30,000 $ 30,000
- -----------------------------------------------------------------------------
Cash provided by operations $ 42,314 $ 82,253
- -----------------------------------------------------------------------------
Cash used for investment activities,
excluding short-term investments $ (57,819) $ (38,442)
- -----------------------------------------------------------------------------
Cash provided by financing activities $ 206 $ 14,894
- -----------------------------------------------------------------------------
</TABLE>
Cash and Investments
Total cash and investments decreased $14,917 during 1996. Cash provided by
operations was $42,314, a decrease of $39,939 from 1995. A net loss of $4,978
negatively impacted cash provided by operations in 1996. In addition, the
Company completed nine business combinations, six of which required cash
payments of $32,358. In 1995, cash was positively impacted by the net profit
earned of $50,506 for the year. This source of cash was offset by an increase in
trade accounts receivables and a decrease in accrued liabilities associated with
the special charges accrual.
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 $12,477 and $17,429 in 1996 and 1995,
respectively. This increase was offset by investment in property, plant and
equipment of $23,931 in 1996 and $22,653 in 1995 and repurchases of common stock
of $11,507 in 1996 and $2,250 in 1995.
Trade Accounts Receivable
The trade accounts receivable balance increased $11,995 from December 31,
1995. The increase is primarily attributable to an increase in shipments late in
the quarter versus a more evenly distributed shipment pattern. The Company has
historically realized a majority of revenues in the last month of each quarter
due to the timing of orders and experienced an increase in this trend in 1996.
Future trade receivable trends are difficult to predict due to this
relationship.
[graphic bar chart depicting the following:
Cash & Investments Cash Provided by Operations
------------------------ ---------------------------
1994 1995 1996 1994 1995 1996
---- ---- ---- ---- ---- ----
$184 $242 $227 $ 53 $ 82 $ 42
(dollar figures are in millions)]
Other Assets
Other assets increased to $42,914 at December 31, 1996 from $38,184 at
December 31, 1995. Net capitalized software development costs decreased by $524
in 1996. Seven acquisitions accounted for as purchases in 1996 resulted in
goodwill capitalization of $5,517 and technology capitalization of $8,957,
partially offset by amortization of $6,998 and a goodwill write-down of $2,747.
In addition, the Company sold common stock of two independent public companies
in 1996. In 1995, net capitalized software development costs increased by
$2,618. Three acquisitions accounted for as purchases in 1995 resulted in
goodwill capitalization of $528 and technology capitalization of $892. Goodwill
costs are being amortized over a three year period to R&D expense and technology
costs are being amortized over a three year period to system and software cost
of revenues.
Long-term Debt
Long-term debt decreased $501 from December 31, 1995. The Company had total
borrowings outstanding of $52,480 and $53,320 under its $55,000 committed
revolving credit facility as of December 31, 1996 and 1995, respectively. As of
December 31, 1996, the Company maintained an interest rate swap agreement
associated with the revolving credit facility debt which effectively converts
floating rates on $17,500 of the debt to a fixed rate of 9.55%. Effective
February 11, 1997, the Company terminated its interest rate swap agreement at a
cost of $1,650. In addition, in the first quarter of 1997, the Company approved
a plan to pay down the committed revolving credit facility to
21
<PAGE>
zero by the end of the March 1997. The Company expects to use its cash and short
term investments and its long-term cash to complete this pay-down.
Capital Resources
Total capital expenditures increased to $58,872 for 1996, compared to
$30,313 for 1995. Nine business combinations were completed in 1996, of which
six resulted in cash payments of $32,358. The Company also acquired a number of
technologies, primarily software source code, totaling $2,583 in 1996. In
addition, the Company purchased technologies totaling $1,444 during 1995. The
Company will continue to evaluate make-versus-buy alternatives which should
result in additional capital expenditures in 1997. Expenditures for property and
equipment were $23,931 and $22,653 in 1996 and 1995, respectively. Future
capital expenditure plans include maintaining current design environment
equipment and sales demonstration equipment and continuing the implementation of
a new global information system.
The Company anticipates that current cash balances, anticipated cash flows
from operating activities, and existing credit facilities will be sufficient to
meet its working capital needs for at least the next twelve months.
Factors That May Affect Future Results And
Financial Condition
The statements contained in this annual report that are not statements of
historical fact are forward looking statements that involve a number of risks
and uncertainties. Moreover, from time to time the Company may issue other
forward looking statements. The following discussion highlights factors that
could cause actual results to differ materially from the forward looking
statements. The forward looking statements should be considered in light of
these factors.
The Company competes in the highly competitive and dynamic EDA (electronic
design automation) and integrated systems design industries. The Company's
success is dependent upon its ability to develop and market products that are
innovative, cost-competitive and that meet customers' expectations, and to
deliver those products to its customers in a timely manner. Competition in the
EDA industry is intense, which can create adverse effects including, but not
limited to, price reductions, lower product margins, loss of market share and
additional working capital requirements.
A material amount of the Company's software product revenue is usually the
result of current quarter order performance of which the majority is usually
booked in the last month of each quarter. In addition, the Company's revenue
often includes multi-million dollar contracts. The timing of the completion of
these contracts and the terms of delivery of software, hardware and other
services can have a material impact on revenue recognition for a given quarter.
The combination of these factors impairs and delays the Company's ability to
identify shortfalls or overages from quarterly revenue targets.
The Company generally realizes approximately half of its revenues outside
the United States and expects this to continue in the future. As such, the
Company's business and operating results can be impacted by the effects of
foreign currency fluctuations. In order to hedge the impact of foreign currency
fluctuations, the Company enters into foreign currency forward contracts.
However, significant changes in exchange rates may have a material adverse
impact on the Company's results of operations. International operations subject
the Company to other risks including, but not limited to, changes in regional or
worldwide economic or political conditions, government trade restrictions,
limitations on repatriation of earnings, licensing and intellectual property
rights protection.
The Company is currently reorganizing its professional services business to
better support its integrated systems design strategy which focuses on ASIC and
IC design methodologies. This resulted in lower billable hours for revenue
generating services in 1996. In addition, business reorganizations can increase
personnel management complexities including retention and hiring of key
technical and management positions. While the Company will look to improve the
utilization of its consultants, there can be no assurance that the challenges
will be effectively met.
The Company's operating expenses are generally committed in advance of
revenue and are based to a large degree on future revenue expectations.
Operating expenses are incurred in order to generate and sustain higher future
revenue levels. If the revenue does not materialize as expected, the Company's
results of operations can be adversely impacted.
Acquisitions of complementary businesses are an integral part of the
Company's overall business strategy. There are several risks associated with
this strategy including integration of sales channels, training and education of
the sales force for new product offerings, integration of product development
efforts, retention of key employees, integration of systems of internal
controls, and integration of information systems. All of these factors can
impair the Company's ability to forecast, to meet quarterly revenue and earnings
targets, and to effectively manage the business for long-term growth.
22
<PAGE>
While the Company is aware of and is addressing such issues, there can be no
assurance that these challenges will be effectively met.
As a result of the acquisition of Meta, the Company has entered the
hardware development and assembly business. Some additional issues must be
managed by the Company, such as: procuring hardware components on a timely
basis, assembling and shipping systems on a timely basis with appropriate
quality control, developing new distribution and shipment processes, managing
inventory and placing new demands on the sales force.
The Company has recently added new re-usable intellectual property products
and services to its portfolio of offerings to address this emerging market. As
with all emerging markets, there is inherent uncertainty regarding the overall
rate of growth. Specifically, growth in the re-usable intellectual property
market is subject to significant uncertainties and risks as market participants,
including the Company, seek to gain customer acceptance for the overall concept
of incorporating these intellectual property designs into their products,
identify and develop the correct products to meet evolving customer demands, and
identify and implement effective distribution models for this new class of
products.
The Company is currently involved in the replacement of its financial
information systems, based primarily on software from SAP. The implementation
phase of new information systems can cause significant disruptions to the
Company's work efficiency. There can be no assurance that the project will be
completed within budgeted time or dollar parameters.
The Company believes it has been successful at recruiting and retaining
necessary personnel to research and develop products that satisfy customers
needs. There can be no assurance that the Company can continue to recruit and
retain such personnel.
Generally accepted accounting principles require management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities and contingencies at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting periods. Actual
results could differ from those estimates.
Due to the factors above, as well as other market factors outside the
Company's control, the Company's future earnings and stock price may be subject
to significant volatility. Past financial performance should not be considered a
reliable indication of future performance. The investment community should use
caution in using historical trends to estimate future results or trends. In
addition, if future results vary significantly from expectations of analysts,
the Company's stock price could be adversely impacted.
23
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31, 1996 1995 1994
- ----------------------------------------------------------------------------------------
In thousands, except per share data
<S> <C> <C> <C>
Revenues:
- ----------------------------------------------------------------------------------------
System and software $ 242,147 $ 230,533 $ 225,306
- ----------------------------------------------------------------------------------------
Service and support 205,739 201,984 164,813
- ----------------------------------------------------------------------------------------
Total revenues 447,886 432,517 390,119
- ----------------------------------------------------------------------------------------
Cost of revenues:
- ----------------------------------------------------------------------------------------
System and software 39,196 35,876 38,352
- ----------------------------------------------------------------------------------------
Service and support 94,620 81,328 67,713
- ----------------------------------------------------------------------------------------
Total cost of revenues 133,816 117,204 106,065
- ----------------------------------------------------------------------------------------
Gross Margin 314,070 315,313 284,054
- ----------------------------------------------------------------------------------------
Operating expenses:
- ----------------------------------------------------------------------------------------
Research and development 92,905 86,782 81,231
- ----------------------------------------------------------------------------------------
Marketing and selling 146,754 137,771 129,119
- ----------------------------------------------------------------------------------------
General and administration 40,918 38,206 39,504
- ----------------------------------------------------------------------------------------
Special charges 11,998 (2,040) (6,045)
- ----------------------------------------------------------------------------------------
Merger and acquisition related charges 31,344 2,040 9,265
- ----------------------------------------------------------------------------------------
Total operating expenses 323,919 262,759 253,074
- ----------------------------------------------------------------------------------------
Operating income (loss) (9,849) 52,554 30,980
- ----------------------------------------------------------------------------------------
Other income, net 8,411 6,494 3,238
- ----------------------------------------------------------------------------------------
Income (loss) before income taxes (1,438) 59,048 34,218
- ----------------------------------------------------------------------------------------
Provision for income taxes 3,540 8,542 3,765
- ----------------------------------------------------------------------------------------
Net income (loss) $ (4,978) $ 50,506 $ 30,453
- ----------------------------------------------------------------------------------------
Net income (loss) per common and
common equivalent share $ (0.08) $ 0.78 $ 0.49
- ----------------------------------------------------------------------------------------
Weighted average number of common and
common equivalent shares outstanding 64,134 65,134 62,211
- ----------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
As of December 31, 1996 1995
- ------------------------------------------------------------------------------------------------------------
In thousands
<S> <C> <C>
Assets
Current assets:
- ------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 165,406 $ 186,676
- ------------------------------------------------------------------------------------------------------------
Short-term investments 31,673 25,320
- ------------------------------------------------------------------------------------------------------------
Trade accounts receivable, net of allowance for doubtful
accounts of $3,163 in 1996 and $3,291 in 1995 108,957 96,962
- ------------------------------------------------------------------------------------------------------------
Other receivables 6,697 3,464
- ------------------------------------------------------------------------------------------------------------
Prepaid expenses and other 15,937 14,394
- ------------------------------------------------------------------------------------------------------------
Deferred income taxes 9,522 767
- ------------------------------------------------------------------------------------------------------------
Total current assets 338,192 327,583
- ------------------------------------------------------------------------------------------------------------
Property, plant and equipment, net 102,253 99,605
- ------------------------------------------------------------------------------------------------------------
Cash and investments, long-term 30,000 30,000
- ------------------------------------------------------------------------------------------------------------
Other assets 42,914 38,184
- ------------------------------------------------------------------------------------------------------------
Total assets $ 513,359 $ 495,372
- ------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
- ------------------------------------------------------------------------------------------------------------
Short-term borrowings $ 9,055 $ 9,358
- ------------------------------------------------------------------------------------------------------------
Accounts payable 15,003 9,589
- ------------------------------------------------------------------------------------------------------------
Income taxes payable 19,598 14,542
- ------------------------------------------------------------------------------------------------------------
Accrued payroll and related liabilities 28,592 26,883
- ------------------------------------------------------------------------------------------------------------
Accrued and other liabilities 33,031 26,137
- ------------------------------------------------------------------------------------------------------------
Deferred revenue 32,065 27,583
- ------------------------------------------------------------------------------------------------------------
Total current liabilities 137,344 114,092
- ------------------------------------------------------------------------------------------------------------
Long-term debt 52,441 52,942
- ------------------------------------------------------------------------------------------------------------
Other long-term deferrals 3,934 2,112
- ------------------------------------------------------------------------------------------------------------
Total liabilities 193,719 169,146
- ------------------------------------------------------------------------------------------------------------
Stockholders' equity:
- ------------------------------------------------------------------------------------------------------------
Common stock, no par value, authorized 100,000 shares; 64,608 and
63,875 issued and outstanding for 1996 and 1995, respectively 297,756 294,917
- ------------------------------------------------------------------------------------------------------------
Incentive stock, no par value, authorized 1,200 shares; none issued -- --
- ------------------------------------------------------------------------------------------------------------
Retained earnings 9,786 17,715
- ------------------------------------------------------------------------------------------------------------
Foreign currency translation adjustment 12,098 13,594
- ------------------------------------------------------------------------------------------------------------
Total stockholders' equity 319,640 326,226
- ------------------------------------------------------------------------------------------------------------
Commitments and Contingencies
- ------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 513,359 $ 495,372
- ------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31, 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
In thousands
<S> <C> <C> <C>
Operating Cash Flows:
- -------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (4,978) $ 50,506 $ 30,453
- -------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization of
property, plant and equipment 21,472 25,955 25,923
- -------------------------------------------------------------------------------------------------------------------
Gain on sale of investments
held for sale (5,545) -- --
- -------------------------------------------------------------------------------------------------------------------
Deferred taxes (5,988) (1,338) (290)
- -------------------------------------------------------------------------------------------------------------------
Amortization 11,586 10,037 8,147
- -------------------------------------------------------------------------------------------------------------------
Write-down of assets 31,234 1,430 8,265
- -------------------------------------------------------------------------------------------------------------------
Changes in operating assets and liabilities:
Trade accounts receivable (11,201) (4,205) (4,096)
- -------------------------------------------------------------------------------------------------------------------
Prepaid expenses and other assets (5,534) 500 (2,207)
- -------------------------------------------------------------------------------------------------------------------
Accounts payable 3,458 (4,549) (1,598)
- -------------------------------------------------------------------------------------------------------------------
Accrued liabilities 1,319 1,378 (11,968)
- -------------------------------------------------------------------------------------------------------------------
Other liabilities and deferrals 6,491 2,539 661
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 42,314 82,253 53,290
- -------------------------------------------------------------------------------------------------------------------
Investing Cash Flows:
- -------------------------------------------------------------------------------------------------------------------
Net maturities (purchases) of short-term investments (5,018) (14,430) 8,549
- -------------------------------------------------------------------------------------------------------------------
Proceeds from sale of investments held for sale 6,744 -- --
- -------------------------------------------------------------------------------------------------------------------
Purchases of property, plant and equipment (23,931) (22,653) (16,209)
- -------------------------------------------------------------------------------------------------------------------
Capitalization of software development costs (5,691) (8,129) (5,718)
- -------------------------------------------------------------------------------------------------------------------
Purchase of businesses (32,358) (6,216) (10,050)
- -------------------------------------------------------------------------------------------------------------------
Purchase of technologies (2,583) (1,444) (1,700)
- -------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (62,837) (52,872) (25,128)
- -------------------------------------------------------------------------------------------------------------------
Financing Cash Flows:
- -------------------------------------------------------------------------------------------------------------------
Proceeds from issuance of common stock 12,477 17,429 17,479
- -------------------------------------------------------------------------------------------------------------------
Proceeds (repayment) of short-term borrowings (263) 868 (282)
- -------------------------------------------------------------------------------------------------------------------
Repayment of long-term debt (501) (1,153) (3,998)
- -------------------------------------------------------------------------------------------------------------------
Cash distribution -- -- (2,346)
- -------------------------------------------------------------------------------------------------------------------
Adjustment for pooling of interests -- -- 899
- -------------------------------------------------------------------------------------------------------------------
Repurchase of common stock (11,507) (2,250) --
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 206 14,894 11,752
- -------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on
cash and cash equivalents (953) (1,261) 2,383
- -------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents (21,270) 43,014 42,297
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of period 186,676 143,662 101,365
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 165,406 $ 186,676 $ 143,662
- -------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Foreign
Retained Currency Total
Common Stock Earnings Translation Stockholders'
In thousands Shares Amount Deficit Adjustment Equity
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993,
as previously reported 54,343 $252,363 $(62,517) $7,670 $197,516
- -----------------------------------------------------------------------------------------------------------------------------------
Adjustment for acquisition of business 2,011 8,556 (2,069) -- 6,487
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1993,
as restated 56,354 260,919 (64,586) 7,670 204,003
- -----------------------------------------------------------------------------------------------------------------------------------
Stock issued under stock option
and stock purchase plans 1,451 10,963 -- -- 10,963
- -----------------------------------------------------------------------------------------------------------------------------------
Stock issued for acquisition of business 2,443 1 899 -- 900
- -----------------------------------------------------------------------------------------------------------------------------------
Stock issued, net of issuance costs 693 6,515 -- -- 6,515
- -----------------------------------------------------------------------------------------------------------------------------------
Compensation related to nonqualified
stock options granted -- 114 -- -- 114
- -----------------------------------------------------------------------------------------------------------------------------------
Accretion of redeemable preferred stock -- -- (160) -- (160)
- -----------------------------------------------------------------------------------------------------------------------------------
Conversion of redeemable
convertible preferred stock 554 1,122 -- -- 1,122
- -----------------------------------------------------------------------------------------------------------------------------------
Foreign currency translation adjustment -- -- -- 5,043 5,043
- -----------------------------------------------------------------------------------------------------------------------------------
Change in value of investments
available for sale -- -- 1,812 -- 1,812
- -----------------------------------------------------------------------------------------------------------------------------------
Net income -- -- 30,453 -- 30,453
- -----------------------------------------------------------------------------------------------------------------------------------
Cash distribution -- -- (2,346) -- (2,346)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 61,495 279,634 (33,928) 12,713 258,419
- -----------------------------------------------------------------------------------------------------------------------------------
Stock issued under stock option and
stock purchase plans 2,490 17,429 -- -- 17,429
- -----------------------------------------------------------------------------------------------------------------------------------
Compensation related to nonqualified
stock options granted -- 104 -- -- 104
- -----------------------------------------------------------------------------------------------------------------------------------
Repurchase of common stock (110) (2,250) -- -- (2,250)
- -----------------------------------------------------------------------------------------------------------------------------------
Foreign currency translation adjustment -- -- -- 881 881
- -----------------------------------------------------------------------------------------------------------------------------------
Change in value of investments
available for sale -- -- 1,137 -- 1,137
- -----------------------------------------------------------------------------------------------------------------------------------
Net income -- -- 50,506 -- 50,506
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 63,875 294,917 17,715 13,594 326,226
- -----------------------------------------------------------------------------------------------------------------------------------
Stock issued under stock option
and stock purchase plans 1,428 12,477 -- -- 11,622
- -----------------------------------------------------------------------------------------------------------------------------------
Stock issued for acquisition of businesses 138 1,825 -- -- 1,825
- -----------------------------------------------------------------------------------------------------------------------------------
Compensation related to nonqualified
stock options granted -- 44 -- -- 44
- -----------------------------------------------------------------------------------------------------------------------------------
Repurchase of common stock (833) (11,507) -- -- (10,652)
- -----------------------------------------------------------------------------------------------------------------------------------
Foreign currency translation adjustment -- -- -- (1,496) (1,496)
- -----------------------------------------------------------------------------------------------------------------------------------
Change in value of investments
available for sale -- -- (2,951) -- (2,951)
- -----------------------------------------------------------------------------------------------------------------------------------
Net loss -- -- (4,978) -- (4,978)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 64,608 $297,756 $9,786 $12,098 $319,640
- -----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</TABLE>
27
<PAGE>
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
the Company and its wholly owned and majority-owned subsidiaries. All
significant intercompany accounts and transactions are eliminated in
consolidation.
Foreign Currency Translation
Local currencies are the functional currencies for the Company's foreign
subsidiaries except for the Netherlands and Singapore where the U.S. dollar is
used as the functional currency. Assets and liabilities of foreign operations
are translated to U.S. dollars at current rates of exchange, and revenues and
expenses are translated using weighted average rates. Gains and losses from
foreign currency translation are included as a separate component of
stockholders' equity. Foreign currency transaction gains and losses are included
as a component of other income and expense.
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,
1996 and 1995, the Company had forward contracts and options outstanding of
$39,058 and $38,069, respectively, to primarily sell various foreign currencies.
These contracts generally have maturities which do not exceed twelve months. At
December 31, 1996 and 1995, the difference between the recorded value and the
fair value of the Company's foreign exchange position related to these contracts
was approximately zero. The fair value of these contracts was calculated based
on dealer quotes. The Company does not anticipate non-performance by the
counterparties to these contracts.
During 1995, the Company entered into a three year forward contract to
stabilize the currency effects on a portion of the Company's net investment in
its Japanese subsidiary. The contract was amended in 1996, reducing some
portions to a shorter term. The revised contract to sell Yen 2.2 billion will
guarantee the Company $24,900 at the contract's expiration. Any differences
between the contracted currency rate and the currency rate at each balance sheet
date will impact the foreign currency translation adjustment component of the
stockholders' equity section of the Consolidated Balance Sheets. The result is a
partial offset of the effect of Japanese currency changes on stockholders'
equity during the contract term. This forward contract should not impact current
or future consolidated statements of operations. At December 31, 1996, the
difference between the recorded value and the fair value of the Company's
foreign exchange position related to this contract was approximately zero. The
fair value of this contract was calculated based on dealer quotes. The Company
does not anticipate non-performance by the counterparty to this contract.
The fair market value of the Company's long-term debt 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 places its cash equivalents and short-term investments with
major banks and financial institutions. The Company's investment policy limits
its credit exposure to any one financial institution. Concentrations of credit
risk with respect to trade receivables are limited due to the large number of
customers comprising the Company's customer base, and their dispersion across
different businesses and geographic areas. The carrying amounts of cash
equivalents, short-term investments, trade receivables, accounts payable, and
short term borrowings approximate fair value because of the short-term nature of
these instruments.
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" requires reporting of
investments as either held to maturity, available for sale or trading. Under
Statement No. 115, the securities held had been classified as available for
sale, which requires the difference between original carrying cost and market
value to be recognized as a separate component of stockholders' equity.
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, 1996
and 1995, the Company held $41,211 and $41,716, of short term securities under
agreements to resell on January 1, 1997 and 1996, respectively. Due to the
short-term nature of these investments,
28
<PAGE>
the Company did not take possession of the securities. The Company does not
believe it is exposed to any significant credit risk or market risk on cash and
cash equivalent balances.
Short-term investments consist of certificates of deposit, commercial paper
and other highly liquid investments with original maturities in excess of three
months. These investments mature primarily in less than one year.
Property, Plant and Equipment
Property, plant and equipment is stated at cost and consists of land and
land improvements, buildings and building equipment, computer equipment,
information systems and furniture, leasehold improvements, and service spare
parts. 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.
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." Statement No. 121 provides
specific guidance regarding when impairment of long-lived assets such as plant,
equipment and certain intangibles including goodwill and capitalized technology
should be recognized and how impairment losses of such assets should be
measured. Initial adoption of Statement No. 121 did not have a material effect
on the Company's consolidated financial statements. Management reviews
long-lived assets and the related intangible assets for impairment whenever
events or changes in circumstances indicate the carrying amount of such assets
may not be recoverable. Recoverability of these assets is determined by
comparing the forecasted undiscounted net cash flows of the operation to which
the assets relate, to the carrying amount including associated intangible assets
of such operation. If the operation is determined to be unable to recover the
carrying amount of its assets, then intangible assets are written down first,
followed by the other long-lived assets of the operation, to fair value. Fair
value is determined based on discounted cash flows or appraised values,
depending upon the nature of the assets.
Income Taxes
The Company uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred income taxes are
recognized for the future tax consequences attributable to temporary differences
between the financial statement carrying amounts and tax balances of existing
assets and liabilities. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred taxes of a change in tax rates is recognized in income in the period
that includes the enactment date.
Revenue Recognition
Revenues from system sales and software licenses are recognized at the time
of shipment. Contract service revenues are billed in advance and recorded as
deferred revenue. Service revenues are then recognized ratably over the
contractual period as the services are performed. Training and consulting
revenues are recognized as the related services are performed. Custom design and
software porting revenues are recognized using the percentage of completion
method or as contract milestones are achieved.
Software Development Costs
The Company accounts for software development costs in accordance with
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed." The Company
capitalizes certain costs incurred in the production of computer software once
technological feasibility of the product to be marketed has been established.
Capitalization of these costs ceases when the product is considered available
for general release to customers. Costs incurred prior to technological
feasibility, including amounts attributable to in-process research and
development in business acquisitions, are expensed as incurred.
Amortization of capitalized software development costs is calculated as the
greater of the ratio that the current product revenues bear to estimated future
revenues or the straight-line method over the expected product life cycle of
approximately three years. Amortization is included in system and software cost
of revenues in the Consolidated Statements of Operations.
Stockholders' Equity
In August 1995, the Company's Board of Directors approved a plan to
repurchase, from time to time over the next eighteen months on the open market,
up to $50,000 in market value of the Company's common shares. During 1996, the
Company repurchased 833 shares, approximately 500 of
29
<PAGE>
which were repurchased immediately prior to Employee Stock Purchase Plan
purchases and then reissued to the plan participants. The remaining shares were
repurchased in the first quarter of 1996 and subsequently reissued through stock
option exercises prior to consummation of the August 1996 acquisition of
Interconnectix, Inc. The market value of all shares repurchased in 1996 was
$11,507. In the third quarter of 1996, the Company's Board of Directors
rescinded the share repurchase plan except that the Board authorized the
continued repurchase of shares for purposes of immediate reissuance under the
Employee Stock Purchase Plan.
During the third quarter of 1995, the Company repurchased 110 shares on the
open market with a market value of $2,250. These shares were subsequently
reissued through the stock option exercises prior to consummation of the October
1995 acquisition of Precedence Incorporated.
Net Income (Loss) per Common and Common
Equivalent Share
For 1996, 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 1996. For 1995 and 1994, net income per
common and common equivalent share was calculated on the basis of the weighted
average number of common shares outstanding plus dilutive common stock
equivalents related to stock options outstanding.
Use of Estimates
Generally accepted accounting principles require management to make
estimates and assumptions that affect the reported amount of assets, liabilities
and contingencies at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. Actual results
could differ from those estimates.
Reclassifications and Restatements
Certain reclassifications have been made in the accompanying consolidated
financial statements for 1994 and 1995 to conform with the 1996 presentation. As
discussed in Note 3, certain acquisitions have resulted in the Company's
restatement of its consolidated financial statements.
2. Special Charges
Following is a summary of the major elements of the special charges:
<TABLE>
<CAPTION>
Year ended December 31, 1996 1995 1994
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Additional charges:
- -------------------------------------------------------------------------------------------
Employee severance $ 3,486 $ -- $ 2,430
- -------------------------------------------------------------------------------------------
Asset impairment 5,000 -- --
- -------------------------------------------------------------------------------------------
Other 3,512 -- 1,570
- -------------------------------------------------------------------------------------------
Total additions 11,998 -- 4,000
- -------------------------------------------------------------------------------------------
Adjustment of charges:
Employee severance -- (1,540) (3,324)
- -------------------------------------------------------------------------------------------
Employee relocation -- -- (2,600)
- -------------------------------------------------------------------------------------------
Asset write-offs and product
discontinuance costs -- (500) (2,060)
- -------------------------------------------------------------------------------------------
Facilities closure and consolidation -- -- (2,061)
- -------------------------------------------------------------------------------------------
Total adjustments -- (2,040) (10,045)
- -------------------------------------------------------------------------------------------
Net special charges $ 11,998 $ (2,040) $ (6,045)
- -------------------------------------------------------------------------------------------
</TABLE>
In the fourth quarter of 1996, the Company recorded special charges of
$11,998. The Company downsized and redirected certain operations and retargeted
an incentive compensation program resulting in severance costs, facility lease
and equipment abandonment costs and other costs totaling approximately $7,000.
The Company also recognized an impairment in value of goodwill and certain other
assets associated with its Meta subsidiary which resulted in a write-down of
$5,000. During 1995, the Company filed suit in United States (U.S.) Federal
District Court against Quickturn Design Systems, Inc. (competitor) for
declarative judgment on non-infringement, invalidity and unenforceability of
three of the competitor's patents in anticipation of acquiring Meta. In January
1996, the competitor filed an administrative complaint with the International
Trade Commission (ITC), a federal administrative agency, seeking to hinder the
distribution of the Meta technology in the United States. Early in the third
quarter of 1996, the ITC issued a temporary ruling allowing the importation of
this technology to the U.S., but requiring posting of a bond for each sale.
Subsequent to the ITC temporary ruling, domestic orders for Meta products were
not as strong as expected. While the Company continues to expect the Meta
technologies to perform favorably over a longer term, the near-term outlook is
not positive enough to support reasonable recoverability of the carrying amounts
of these assets.
During the second quarter of 1995, the Company recorded a $2,040 special
charge adjustment. The adjustment was primarily associated with the 1993 charge
and was mainly the
30
<PAGE>
result of reduced estimates for severance costs associated with replacement and
globalization of the Company's information systems. Information system
implementation delays culminated when a key project plan milestone was missed
during the second quarter, resulting in lower estimated costs for write-offs of
old equipment due to prolonged in-service periods. In addition, certain actions
associated with a product discontinuance plan were not taken when management
determined that the technology could be used by the Company's consulting
organization and sold as a custom integrated service rather than as a commercial
design tool.
During 1994, the Company recorded a special charge 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 special 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
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.
All of the $3,751 special charge accrual as of December 31, 1995 resulted
in cash outflows in 1996. The remaining accrual of $5,340 as of December 31,
1996 is expected to be disbursed in 1997.
3. Business Acquisitions
In 1996, the Company completed nine business combinations: two were
accounted for as pooling of interests and seven were accounted for as purchases.
The Company purchased dQdt, Inc. (dQdt), Meta Systems (Meta), Seto Software Gmbh
(Seto), Royal Digital Centers, Inc. (Royal Digital), Open Networks Engineering
Inc. (ONE), Systolic Technology, LTD (Systolic), and CAE Technology, Inc. (CAE)
in April 1996, May 1996, June 1996, August 1996, November 1996, November 1996
and December 1996, respectively. The results of operations of each acquisition
accounted for as a purchase are included in the Company's results of operations
from the date of acquisition. dQdt is primarily engaged in developing and
marketing intellectual property (IP) related to advanced digital signal
processor design for communication and multimedia applications. Meta is
primarily engaged in developing and marketing accelerated verification products.
Seto is primarily engaged in developing and marketing personal computer-based
layout tools used in the printed circuit board design process. Royal Digital is
primarily engaged in developing and marketing printed circuit board
computer-aided design tools that enhance design-for-manufacturability. ONE is
primarily engaged in developing and marketing telecommunication management
network stack, packaged as reusable IP. Systolic and CAE are primarily engaged
in developing and marketing of IP for telecommunications, data communications
and computer peripheral interfaces.
The total purchase price including acquisition expenses for all 1996
purchase acquisitions was $40,708. The Company paid the purchase price in cash
for each transaction except for dQdt in which the Company paid the purchase
price in its common stock with a market value on the purchase date of $1,825.
The cost of each acquisition was allocated on the basis of estimated fair value
of the assets and liabilities assumed. In connection with all purchase
acquisitions, the Company recorded one-time charges to operations for the
write-off of each enterprises' in-process product development that had not
reached technological feasibility. The purchase accounting allocations resulted
in charges for in-process R&D of $26,234, goodwill capitalization of $5,517, and
technology capitalization of $8,957. The separate operational results of all
acquisitions accounted for as purchases 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 January 31, 1996, the Company issued 6,223 shares of its common stock
for all outstanding common stock of Microtec Research, Inc. (Microtec). In
addition, the Company reserved 688 shares of its common stock for previously
outstanding options to purchase Microtec common stock. These options vest and
become exercisable under the
31
<PAGE>
terms of the respective, original Microtec stock option agreements. The Company
accounted for this transaction as a pooling of interests and accordingly, the
Company's consolidated financial statements have been restated to include the
results of Microtec for all periods presented. Microtec is primarily engaged in
developing and marketing embedded systems and products to optimize the
development and operation of embedded systems across hardware/software
boundaries. Merger expenses of $4,410 were incurred associated with the
elimination of duplicate facilities, severance costs, the write-off of certain
property and equipment and legal and accounting fees associated with
administration of the merger.
On August 30, 1996, the Company issued 2,133 shares of its common stock for
all outstanding common stock of Interconnectix, Inc. (Interconnectix). In
addition, the Company reserved 112 shares of its common stock for previously
outstanding options to purchase Interconnectix common stock. These options vest
and become exercisable under the terms of the respective, original
Interconnectix stock option agreements. The Company accounted for this
transaction as a pooling of interests and accordingly, the Company's
consolidated financial statements have been restated to include the results of
Interconnectix for all periods presented. Interconnectix is primarily engaged in
developing and marketing interconnect synthesis software for the design of
high-speed, high-performance printed circuit boards. Merger expenses of $700
were incurred associated with severance costs and legal and accounting fees
associated with administration of the merger.
The Company purchased Axiom Datorer Scandinavian AB (Axiom), 3Soft
Corporation (3Soft), and Zeelan Technology, Inc. (Zeelan) in May 1995, December
1995, and December 1995, respectively. Axiom and Zeelan are primarily engaged in
developing, marketing and supporting software library tools used to model
electronic components for the printed circuit board and the application specific
integrated circuit markets of the EDA industry. 3Soft is primarily engaged in
developing, marketing and supporting a library of pre-designed and tested
standard logic functions or blocks which are process technology independent. The
purchase accounting allocations resulted in charges for in-process R&D of
$1,430, goodwill capitalization of $528 and technology capitalization of $892.
In May 1995, the Company issued 1,512 shares of its common stock for all
outstanding common stock of Exemplar Logic, Inc. (Exemplar). Exemplar develops,
markets and supports a family of software tools for high level design automation
for the application specific integrated circuit and field programmable gate
array markets. The Company accounted for this transaction as a pooling of
interests and accordingly, the results of Exemplar are included in the Company's
consolidated financial statements for all periods presented. Merger expenses of
$400 were for services rendered to facilitate completion of the merger agreement
and severance costs.
In October 1995, the Company issued 735 shares of its common stock for all
outstanding common stock of Precedence Incorporated (Precedence). Precedence is
primarily engaged in developing, marketing and supporting simulation backplane
technology and co-simulation solutions for the electronic design automation
industry. The Company accounted for this transaction as a pooling of interests
and accordingly, the results of Precedence are included in the Company's
consolidated financial statements for all periods presented. Merger expenses of
$210 were for services rendered to facilitate completion of the merger
agreement.
In September 1994, the Company completed the purchase 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 EDA
industry. The total purchase price of $12,000 was financed with cash of $10,050
and the issuance of a short-term obligation classified under accrued liabilities
totaling $1,950, which was fully paid by December 31, 1995. The purchase
accounting allocation resulted in a charge for in-process R&D of $8,265,
goodwill capitalization of $2,897 and technology capitalization of $4,735.
In December 1994, the Company issued 2,443 shares of its common stock for
all outstanding common stock of Model Technology Incorporated (MTI). MTI is a
developer of VHDL and Verilog simulation point tools using direct compile
technology to design and test components and boards. The Company accounted for
this transaction as a pooling of interests and accordingly, the results of MTI
are included in the Company's consolidated financial statements for 1994 and
1995. Merger costs of $1,000 were paid by MTI for consulting services rendered
to facilitate negotiation of the various components of the merger agreement.
Also, cash distributions of $2,346 were paid in 1994 by MTI to its shareholders
in the normal course of S-Corporation business prior to the date of acquisition.
32
<PAGE>
4. Income Taxes
Domestic and foreign pre-tax income (loss) is as follows:
<TABLE>
<CAPTION>
Year ended December 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic $ (10,023) $ 25,826 $ 8,569
- ------------------------------------------------------------------------------------------
Foreign 8,585 33,222 25,649
- ------------------------------------------------------------------------------------------
Total $ (1,438) $ 59,048 $ 34,218
- ------------------------------------------------------------------------------------------
</TABLE>
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
Year ended December 31, 1996 1995 1994
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
- -------------------------------------------------------------------------------------------
Federal $ 3,563 $ 1,511 $ (269)
- -------------------------------------------------------------------------------------------
State 118 413 63
- -------------------------------------------------------------------------------------------
Foreign 5,847 7,956 4,261
- -------------------------------------------------------------------------------------------
Total current 9,528 9,880 4,055
- -------------------------------------------------------------------------------------------
Deferred:
- -------------------------------------------------------------------------------------------
Federal (6,093) 251 (347)
- -------------------------------------------------------------------------------------------
Foreign 105 (1,589) 57
- -------------------------------------------------------------------------------------------
Total deferred (5,988) (1,338) (290)
- -------------------------------------------------------------------------------------------
Total $ 3,540 $ 8,542 $ 3,765
- -------------------------------------------------------------------------------------------
</TABLE>
The effective tax rate differs from the federal tax rate as follows:
<TABLE>
<CAPTION>
Year ended December 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal tax rate (35.0%) 35.0% 35.0%
- ------------------------------------------------------------------------------------------
State taxes, net (5.0) 5.0 3.5
- ------------------------------------------------------------------------------------------
Foreign tax rate differential (435.4) (4.8) 9.2
- ------------------------------------------------------------------------------------------
Income and losses of
foreign subsidiaries 457.4 7.2 6.4
- ------------------------------------------------------------------------------------------
Foreign tax credits (480.5) (7.6) --
- ------------------------------------------------------------------------------------------
Change in valuation allowance (212.6) (22.4) (42.1)
- ------------------------------------------------------------------------------------------
Write-off of non-deductible
acquisition cost 961.8 -- --
- ------------------------------------------------------------------------------------------
Other, net (4.6) 1.5 (1.8)
- ------------------------------------------------------------------------------------------
Effective tax rate 246.1% 13.9% 10.2%
- ------------------------------------------------------------------------------------------
</TABLE>
The significant components of deferred income tax expense are as follows:
<TABLE>
<CAPTION>
Year ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net changes in deferred tax
assets and liabilities $ (3,462) $ (358) $ 12,197
- --------------------------------------------------------------------------------
Increase(decrease) in
beginning-of-year balance
of the valuation allowance
for deferred tax assets $ (2,526) $ (980) $ (12,487)
- --------------------------------------------------------------------------------
Total $ (5,988) $ (1,338) $ (290)
- --------------------------------------------------------------------------------
</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, 1996 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Depreciation of property and equipment $ 696 $ 1,788
- ----------------------------------------------------------------------------------------------
Reserves and allowances 498 674
- ----------------------------------------------------------------------------------------------
Accrued expenses not currently deductible 6,338 5,899
- ----------------------------------------------------------------------------------------------
Net operating loss carryforwards 27,654 26,969
- ----------------------------------------------------------------------------------------------
Tax credit carryforwards 21,713 17,513
- ----------------------------------------------------------------------------------------------
Purchased technology 1,217 848
- ----------------------------------------------------------------------------------------------
Other, net 1,284 2,590
- ----------------------------------------------------------------------------------------------
Total gross deferred tax assets 59,400 56,281
- ----------------------------------------------------------------------------------------------
Less valuation allowance (48,522) (51,048)
- ----------------------------------------------------------------------------------------------
Net deferred tax assets 10,878 5,233
- ----------------------------------------------------------------------------------------------
Deferred tax liabilities:
Capitalization of software
development costs (4,473) (4,816)
- ----------------------------------------------------------------------------------------------
Net deferred tax asset $ 6,405 $ 417
- ----------------------------------------------------------------------------------------------
</TABLE>
The Company has established a valuation allowance for certain deferred tax
assets, including those for net operating loss and tax credit carryforwards.
Statement No. 109 requires that such a valuation allowance be recorded when it
is more likely than not that some portion of the deferred tax assets will not be
realized. The portion of the valuation allowance for deferred tax assets for
which subsequently recognized tax benefits will be applied directly to
contributed capital is $16,207 as of December 31, 1996. This amount is
attributable to differences between financial and tax reporting of employee
stock option transactions.
As of December 31, 1996, the Company, for income tax purposes, has net
operating loss carryforwards of approximately $65,075, research and
experimentation credits carryforwards of $12,523 and a foreign tax credit
carryforward of
33
<PAGE>
$6,910. If not used by the Company to reduce income taxes payable in future
periods, net operating loss carryforwards will expire between 1999 through 2011,
research and experimentation credit carryforwards between 1998 through 2011 and
the foreign tax credit carryforward in the year 2001.
The Company has not provided for Federal income taxes on approximately
$130,905 of undistributed earnings of foreign subsidiaries at December 31, 1996,
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, 1996 1995
- -----------------------------------------------------------------------------------
<S> <C> <C>
Computer equipment and furniture $ 162,248 $ 152,662
- -----------------------------------------------------------------------------------
Buildings and building equipment 53,891 53,638
- -----------------------------------------------------------------------------------
Land and improvements 14,650 14,641
- -----------------------------------------------------------------------------------
Leasehold improvements 8,282 10,723
- -----------------------------------------------------------------------------------
Service spare parts 167 207
- -----------------------------------------------------------------------------------
239,238 231,871
- -----------------------------------------------------------------------------------
Less accumulated depreciation
and amortization (136,985) (132,266)
- -----------------------------------------------------------------------------------
Property, plant and equipment, net $ 102,253 $ 99,605
- -----------------------------------------------------------------------------------
</TABLE>
The Company has entered into agreements to lease portions of its
headquarters site in Wilsonville, Oregon. Under terms of these agreements
approximately 180 square feet of space was made available to a third party on a
firm take-down schedule. These agreements result in rental payments of $2,540,
extending through 1998.
6. Other Assets
A summary of other assets follows:
<TABLE>
<CAPTION>
As of December 31, 1996 1995
- -----------------------------------------------------------------------------------
<S> <C> <C>
Software development costs, net $ 10,806 $ 11,330
- -----------------------------------------------------------------------------------
Purchased technology, net 13,190 5,841
- -----------------------------------------------------------------------------------
Goodwill, net 3,195 3,864
- -----------------------------------------------------------------------------------
Investment in real estate 2,935 2,935
- -----------------------------------------------------------------------------------
Investments available for sale --- 4,150
- -----------------------------------------------------------------------------------
Other 12,788 10,064
- -----------------------------------------------------------------------------------
Total $ 42,914 $ 38,184
- -----------------------------------------------------------------------------------
</TABLE>
The Company capitalized software development costs amounting to $5,691 and
$8,129 in 1996 and 1995, respectively. Related amortization expense of $6,215,
$5,511, and $6,785 was recorded for the years ended December 31, 1996, 1995, and
1994, respectively.
Acquisitions accounted for as purchases in 1996 and 1995, resulted in
goodwill capitalization of $5,517 and $528, and technology capitalization of
$8,957 and $892, respectively. Total purchased technology amortization expense
of $3,559, $2,418, and $760 was recorded for the years ended December 31, 1996,
1995, and 1994, respectively. Also, the Company recognized an impairment in
value of goodwill associated with its Meta subsidiary which resulted in a
write-down of $2,747. Goodwill costs are being amortized over a three year
period to R&D expense and technology costs are being amortized over a three year
period to system and software cost of revenues.
During 1996, the Company sold common stock of two independent public
companies.
7. Short-Term Borrowings
Short-term borrowings represent drawings by subsidiaries under
multi-currency unsecured credit agreements and the current portion of long-term
debt. Interest rates are generally based on the applicable country's prime
lending rate depending on the currency borrowed. The weighted average interest
rate on short term borrowings during 1996 and 1995 was approximately 6%. The
Company has available lines of credit of approximately $30,506 as of December
31, 1996. 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, 1996 1995
- -----------------------------------------------------------------------------------
<S> <C> <C>
Revolving term credit facility $ 52,480 $ 53,320
- -----------------------------------------------------------------------------------
Other 801 462
- -----------------------------------------------------------------------------------
53,281 53,782
- -----------------------------------------------------------------------------------
Less current portion (840) (840)
- -----------------------------------------------------------------------------------
Total $ 52,441 $ 52,942
- -----------------------------------------------------------------------------------
</TABLE>
At December 31, 1996 and 1995, the Company had a committed credit facility
with a bank which remains in effect until July 2000. The commitment level at
December 31, 1996 was $52,480. The agreement requires commitment reductions of
$840 annually which began in July 1994, therefore the debt was reduced by $840
in 1996 and 1995. Also, $840 of the debt is classified as current in short-term
borrowings on the consolidated balance sheets as of December 31, 1996 and 1995.
Interest on borrowings under the credit facility is floating rate based.
Borrowings are collateralized by
34
<PAGE>
cash and investments of $30,000 and a trust deed on the Company's headquarters
site in Wilsonville, Oregon of $25,000.
At December 31, 1996 and 1995, the Company had an interest rate swap
agreement with a bank, which effectively converts floating rates on $17,500 of
borrowings to a fixed rate of 9.55% until expiration of the agreement in January
2000. The average floating interest rate as of December 31, 1996 was
approximately 6%.
Effective February 11, 1997, the Company terminated its $17.5 million
interest rate swap agreement at a cost of $1,650. In addition, in the first
quarter of 1997, the Company approved a plan to pay down the committed revolving
credit facility to zero by the end of the March 1997.
9. Incentive Stock
The Board of Directors has the authority to issue incentive stock in one or
more series and to determine the relative rights and preferences of the
incentive stock. The incentive stock is convertible into common stock upon
attainment of specified objectives or upon the occurrence of certain events to
be determined by the Board of Directors.
10. Employee Stock and Savings Plans
The Company has three common stock option plans which provide for the
granting of incentive and nonqualified stock options to key employees, officers,
and non-employee directors of the Company and its subsidiaries. The three stock
option plans are administered by the Compensation Committee of the Board of
Directors, and permit accelerated vesting of outstanding options upon the
occurrence of certain changes in control of the Company.
The Company also has a stock plan which provides for the sale of common
stock to key employees of the Company and its subsidiaries. Shares can be
awarded under the plan at no purchase price as a stock bonus and the stock plan
also provides for the granting of nonqualified stock options.
During 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation", which defines a fair value based method of accounting for an
employee stock option and similar equity instrument. As is permitted under
Statement No. 123, the Company has elected to continue to account for its
stock-based compensation plans under APB Opinion No. 25. The Company has
computed, for pro forma disclosure purposes, the value of all options granted
during 1996 and 1995 using the Black-Scholes option pricing model as prescribed
by Statement No. 123 using the following weighted average assumptions for
grants:
Year Ended December 31, 1996 1995
- ------------------------------------------------------------
Risk-free interest rate 6% 6%
- ------------------------------------------------------------
Expected dividend yield 0% 0%
- ------------------------------------------------------------
Expected lives 5.5 5.5
- ------------------------------------------------------------
Expected volatility 91% 94%
- ------------------------------------------------------------
Using the Black-Scholes methodology, the total value of options granted
during 1996 and 1995 was $41,018 and $19,848, respectively, which would be
amortized on a pro forma basis over the vesting period of the options. The
weighted average fair value of options granted during 1996 and 1995 was $8.02
per share and $12.94 per share, respectively. If the Company had accounted for
its stock-based compensation plans in accordance with Statement No. 123, the
Company's net income (loss) and net income (loss) per share would approximate
the pro forma disclosures below:
<TABLE>
<CAPTION>
Year Ended December 31,
- -----------------------------------------------------------------------------------------------
1996 1995
----------------------- ------------------------
As Pro As Pro
Reported Forma Reported Forma
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income (loss) $ (4,978) $ (14,496) $ 50,506 $ 47,933
- -----------------------------------------------------------------------------------------------
Net income (loss) per share $ (.08) $ (.23) $ .78 $ .75
- -----------------------------------------------------------------------------------------------
</TABLE>
The effects of applying Statement No. 123 in this pro forma disclosure are
not indicative of future amounts. Statement No. 123 does not apply to awards
prior to January 1, 1995, and additional awards are anticipated in future years.
Options under all four plans generally become exercisable over a four to
five-year period from the date of grant or from the commencement of employment
at prices generally not less than the fair market value at the date of grant.
The excess of the fair market value of the shares at the date of grant over the
option price, if any, is charged to operations ratably over the vesting period.
At December 31, 1996, options for 2,517 shares were exercisable, with a weighted
average exercise price of $7.87, 22,310 shares were reserved for issuance and
3,593 shares were available for future grant. Stock options outstanding, the
weighted average exercise price and transactions involving the stock option
plans are summarized as follows:
35
<PAGE>
<TABLE>
<CAPTION>
Price Per
Shares Share
- ---------------------------------------------------------------------------
<S> <C> <C>
Balance at December 31, 1994 6,830 $ 8.27
- ---------------------------------------------------------------------------
Granted 1,534 13.87
- ---------------------------------------------------------------------------
Exercised (1,870) 7.10
- ---------------------------------------------------------------------------
Canceled (421) 10.18
- ---------------------------------------------------------------------------
Balance at December 31, 1995 6,073 $ 9.17
- ---------------------------------------------------------------------------
Granted 5,113 9.83
- ---------------------------------------------------------------------------
Exercised (1,013) 5.38
- ---------------------------------------------------------------------------
Canceled (3,323) 13.27
- ---------------------------------------------------------------------------
Balance at December 31, 1996 6,850 $ 8.23
- ---------------------------------------------------------------------------
</TABLE>
At December 31, 1996, the range of exercise prices and weighted average
remaining contractual life of outstanding options was $.07 - $19.76 and 8 years,
respectively.
In November 1996, the Compensation Committee of the Board of Directors
adopted a resolution to offer employees holding nonqualified stock options for
2,595 shares the opportunity to exchange their existing stock options for new
nonqualified stock options. The exchange allowed employees to receive options
for the same number of shares at $7.75 per share, the then current market price,
instead of an average original exercise price of $14.17. The new options vest
over two to six years. The offer was made because the Board of Directors
believes lower-priced options provide a greater retention advantage and
incentive to key employees and officers. Option holders elected to exchange
options covering 1,791 shares.
In May 1989, the shareholders adopted the 1989 Employee Stock Purchase Plan
and reserved 1,400 shares for issuance. The shareholders have subsequently
amended the plan to reserve an additional 4,000 shares for issuance. Under the
plan, each eligible employee may purchase up to six hundred shares of stock per
quarter at prices no less than 85% of its fair market value determined at
certain specified dates. Employees purchased 516 and 382 shares under the plan
in 1996 and 1995, respectively. At December 31, 1996, 1,899 shares remain
available for future purchase under the plan. The plan will expire upon either
issuance of all shares reserved for issuance or at the discretion of the Board
of Directors. There are no plans to terminate the plan at this time.
The Company has an employee savings plan (the Savings Plan) that qualifies
as a deferred salary arrangement under Section 401(k) of the Internal Revenue
Code. Under the Savings Plan, participating U.S. employees may defer a portion
of their pretax earnings, up to the Internal Revenue Service annual contribution
limit. The Company currently matches 50% of eligible employee's contributions,
up to a maximum of 6% of the employee's earnings. Employer matching
contributions vest over 5 years, 20% for each year of service completed. The
Company's matching contributions to the Savings Plan were $2,299, $2,220, and
$1,997 in 1996, 1995, and 1994, 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 cancelable lease
with a six month notice of cancellation. The total commitment under this
cancelable lease, which expires in December 1998, is $5,382, of which the first
six months payments of $1,345 are included in the schedule below. Future minimum
lease payments under all noncancellable operating leases are approximately as
follows:
Operating
Annual periods ending Lease
December 31, Payments
- -------------------------------------------------------------------
1997 $ 11,615
- -------------------------------------------------------------------
1998 9,211
- -------------------------------------------------------------------
1999 7,932
- -------------------------------------------------------------------
2000 6,290
- -------------------------------------------------------------------
2001 3,872
- -------------------------------------------------------------------
Later years 16,443
- -------------------------------------------------------------------
Total $ 55,363
- -------------------------------------------------------------------
Rent expense under operating leases was approximately $15,480, $16,181, and
$15,821 for the years ended December 31, 1996, 1995, and 1994, respectively.
12. Other Income (Expense)
Other income (expense) is comprised of the following:
<TABLE>
<CAPTION>
Year ended December 31, 1996 1995 1994
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income $ 9,485 $ 9,194 $ 5,247
- -----------------------------------------------------------------------------------------------
Interest expense (2,423) (2,585) (2,826)
- -----------------------------------------------------------------------------------------------
Foreign exchange gain (loss) (468) (506) 626
- -----------------------------------------------------------------------------------------------
Litigation costs (3,611) --- ---
- -----------------------------------------------------------------------------------------------
Gain on sale of investments 5,545 --- ---
- -----------------------------------------------------------------------------------------------
Other, net (117) 391 191
- -----------------------------------------------------------------------------------------------
Total $ 8,411 $ 6,494 $ 3,238
- -----------------------------------------------------------------------------------------------
</TABLE>
Included in other income (expense) are legal costs related to certain
litigation. In addition, the Company sold common stock of two independent public
companies.
36
<PAGE>
13. Supplemental Cash Flow Information
The following provides additional information concerning supplemental
disclosures of cash flow activities:
<TABLE>
<CAPTION>
Year ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash paid for:
Interest expense $ 2,198 $ 2,317 $ 2,374
- --------------------------------------------------------------------------------------
Income taxes $ 1,984 $ 7,611 $ 3,364
- --------------------------------------------------------------------------------------
Issuance of common
stock for purchase
of business $ 1,825 -- --
- --------------------------------------------------------------------------------------
</TABLE>
14. Industry and Geographic Information
The Company is a supplier of EDA systems - advanced computer software,
accelerated verification systems and intellectual property designs and data
bases used to automate the design, analysis and testing of electronic hardware
and embedded systems software in electronic systems and components. System and
software revenues comprise more than half of the Company's revenues and are
derived primarily from software products owned by the Company and by third
parties for which royalties are paid by the Company. Service and support
revenues are derived primarily from annual software support maintenance
contracts and professional services. The Company markets its products primarily
to customers in the communications, computer, semiconductor, consumer
electronics, aerospace and transportation industries. The Company sells and
licenses its products primarily through its direct sales force in North America,
Europe and Asia, and through distributors in territories where the volume of
business does not warrant a direct sales presence. In addition to its corporate
offices in Wilsonville, Oregon, the Company has sales, support, software
development and professional services offices worldwide.
Intercompany transfers are accounted for at amounts generally above cost.
Corporate expenses are general expenses included in the United States and are
allocated to the operations of each geographic area. For the purposes of
determining operating income, corporate administration expenses, corporate
marketing expenses and research and development costs are allocated to each
region. In addition, special and merger related charges are included in the
respective region where the costs were incurred. Corporate assets of cash and
investments and the Company's headquarter facilities in Wilsonville, Oregon are
included in the United States. Geographic information for 1996, 1995 and 1994 is
set forth in the table below.
<TABLE>
<CAPTION>
Geographic Information U.S. Europe Japan Other Intl. Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1996
- -----------------------------------------------------------------------------------------------------------------------------------
Revenues from unaffiliated customers $ 239,972 $ 113,678 $ 67,902 $ 26,334 $ -- $ 447,886
- -----------------------------------------------------------------------------------------------------------------------------------
Intercompany transfers -- -- -- 17,136 (17,136) --
- -----------------------------------------------------------------------------------------------------------------------------------
Total revenues $ 239,972 $ 113,678 $ 67,902 $ 43,470 $ (17,136) $ 447,886
- -----------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) $ (9,712) $ (16,337) $ 10,917 $ 5,283 $ -- $ (9,849)
- -----------------------------------------------------------------------------------------------------------------------------------
Identifiable assets $ 330,609 $ 105,582 $ 42,634 $ 34,534 $ -- $ 513,359
- -----------------------------------------------------------------------------------------------------------------------------------
1995
- -----------------------------------------------------------------------------------------------------------------------------------
Revenues from unaffiliated customers $ 223,962 $ 117,159 $ 68,650 $ 22,746 $ -- $ 432,517
- -----------------------------------------------------------------------------------------------------------------------------------
Intercompany transfers -- -- -- 18,524 (18,524) --
- -----------------------------------------------------------------------------------------------------------------------------------
Total revenues $ 223,962 $ 117,159 $ 68,650 $ 41,270 $ (18,524) $ 432,517
- -----------------------------------------------------------------------------------------------------------------------------------
Operating income $ 31,500 $ 6,263 $ 9,940 $ 4,851 $ -- $ 52,554
- -----------------------------------------------------------------------------------------------------------------------------------
Identifiable assets $ 303,725 $ 110,834 $ 52,047 $ 28,766 $ -- $ 495,372
- -----------------------------------------------------------------------------------------------------------------------------------
1994
- -----------------------------------------------------------------------------------------------------------------------------------
Revenues from unaffiliated customers $ 209,114 $ 99,906 $ 61,762 $ 19,337 $ -- $ 390,119
- -----------------------------------------------------------------------------------------------------------------------------------
Intercompany transfers -- -- -- 13,618 (13,618) --
- -----------------------------------------------------------------------------------------------------------------------------------
Total revenues $ 209,114 $ 99,906 $ 61,762 $ 32,955 $ (13,618) $ 390,119
- -----------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) $ 17,296 (939) $ 12,328 $ 2,295 $ -- $ 30,980
- -----------------------------------------------------------------------------------------------------------------------------------
Identifiable assets $ 268,703 $ 94,325 $ 46,606 $ 19,656 $ -- $ 429,290
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
QUARTERLY FINANCIAL INFORMATION - UNAUDITED
Quarter ended March 31 June 30 September 30 December 31
- ----------------------------------------------------------------------------------------------------------------------
in thousands, except per share data
<S> <C> <C> <C> <C>
1996
- ----------------------------------------------------------------------------------------------------------------------
Total revenues $ 109,053 $ 117,279 $ 100,793 $ 120,761
- ----------------------------------------------------------------------------------------------------------------------
Gross margin $ 75,492 $ 83,890 $ 68,934 $ 85,754
- ----------------------------------------------------------------------------------------------------------------------
Operating income (loss) $ 2,806 $ 4,062 $ (64) $ (16,653)
- ----------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 3,771 $ 2,526 $ 74 $ (11,349)
- ----------------------------------------------------------------------------------------------------------------------
Net income (loss) per common and
common equivalent share $ 0.06 $ 0.04 $ 0.00 $ (0.18)
- ----------------------------------------------------------------------------------------------------------------------
1995
- ----------------------------------------------------------------------------------------------------------------------
Total revenues $ 98,914 $ 106,088 $ 107,421 $ 120,094
- ----------------------------------------------------------------------------------------------------------------------
Gross margin $ 70,936 $ 76,534 $ 77,617 $ 90,226
- ----------------------------------------------------------------------------------------------------------------------
Operating income (loss) $ 8,541 $ 11,306 $ 13,482 $ 19,225
- ----------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 7,706 $ 11,890 $ 12,379 $ 18,531
- ----------------------------------------------------------------------------------------------------------------------
Net income (loss) per common and
common equivalent share $ 0.12 $ 0.18 $ 0.19 $ 0.29
- ----------------------------------------------------------------------------------------------------------------------
Common stock market price:
Quarter ended March 31 June 30 September 30 December 31
- ----------------------------------------------------------------------------------------------------------------------
1996
- ----------------------------------------------------------------------------------------------------------------------
High $ 18 1/4 $ 18 3/8 $ 16 1/4 $ 10 5/8
- ----------------------------------------------------------------------------------------------------------------------
Low $ 12 3/8 $ 13 3/8 $ 8 7/8 $ 7 3/8
- ----------------------------------------------------------------------------------------------------------------------
1995
- ----------------------------------------------------------------------------------------------------------------------
High $ 16 3/8 $ 18 1/2 $ 21 3/8 $ 22 7/8
- ----------------------------------------------------------------------------------------------------------------------
Low $ 12 3/8 $ 14 7/8 $ 16 1/8 $ 16 1/8
- ----------------------------------------------------------------------------------------------------------------------
The table above sets forth for the quarters indicated the high and low sales
prices for the common stock as reported on the NASDAQ National Market System. As
of December 31, 1996, the Company had 1,381 stockholders of record.
</TABLE>
38
<PAGE>
REPORTS OF MANAGEMENT AND INDEPENDENT AUDITORS
Report of Management
Management of Mentor Graphics Corporation is responsible for the
preparation of the accompanying consolidated financial statements. The
consolidated financial statements have been prepared in conformity with
generally accepted accounting principles appropriate in the circumstances and
necessarily include some amounts which represent the best estimates and
judgments of management. The consolidated financial statements have been audited
by KPMG Peat Marwick LLP, independent auditors, whose report is included on this
page.
The Audit Committee of the Board of Directors is comprised of three
directors who are not officers or employees of Mentor Graphics Corporation or
its subsidiaries. These directors meet with management and the independent
auditors in connection with their review of matters relating to the Company's
annual financial statements, the Company's system of internal accounting
controls, and the services of the independent auditors. The Committee meets with
the independent auditors, without management present, to discuss appropriate
matters. The Committee reports its findings to the Board of Directors and also
recommends the selection and engagement of independent auditors.
GREGORY K. HINCKLEY
Gregory K. Hinckley
Executive Vice President
and Chief Operating Officer/Chief Financial Officer
WALDEN RHINES
Walden Rhines
President and Chief Executive Officer
Independent Auditors' Report
To the Stockholders and Board of Directors
Mentor Graphics Corporation:
We have audited the accompanying consolidated balance sheets of Mentor
Graphics Corporation and subsidiaries as of December 31, 1996 and 1995, 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, 1996.
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, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996 in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the consolidated financial statements, the
Company adopted the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" in 1994.
KPMG Peat Marwick LLP
Portland, Oregon
January 30, 1997, except for note 8, which is as of February 11, 1997
39
<PAGE>
<TABLE>
<CAPTION>
SHAREHOLDERS' INFORMATION
<S> <C> <C>
Directors Corporate Headquarters Investor Relations
Jon A. Shirley Mentor Graphics Corporation For additional information on the
Chairman of the Board of Directors 8005 S.W. Boeckman Road Company, or to obtain a copy of Mentor
Private Investor Wilsonville, Oregon 97070-7777 U.S.A. Graphics' Annual Report on Form 10-K
Phone: 503-685-7000 filed with the Securities and Exchange
Walden C. Rhines Fax: 503-685-1202 Commission, contact:
President and Chief Executive Officer
Mentor Graphics Corporation Silicon Valley Headquarters Investor Relations
Mentor Graphics Corporation
Marsha B. Congdon Mentor Graphics Corporation 8005 S.W. Boeckman Road
Private Investor 1001 Ridder Park Driver Wilsonville, Oregon 97070-7777
San Jose, California 95131-2314 U.S.A.
James R. Fiebiger Phone: 408-436-1500 For financial and company information,
Chairman of the Board and Managing Fax: 408-436-1501 call 1-800-546-4628.
Director
Thunderbird Technologies, Inc. European Headquarters Stock Trading
David A. Hodges Mentor Graphics Corporation Mentor Graphics Corporation's
Professor, College of Engineering 49, Avenue de l'Europe BP22 common stock traded publicly in the
The University of California at Berkeley 78142-Velizy Cedex, France NASDAQ National Market System under
Phone: 33-1-30-67-18-18 the symbol MENT.
Fontaine K. Richardson Fax: 33-1-34-65-19-44
General Partner Visit Mentor Graphics on the
Eastech Management Company, Inc. Pacific Rim Headquarters World Wide Web
Executive Officers Mentor Graphics Singapore PTE, LTD. http://www.mentorg.com
2 Science Park Driver Hex 51 & 53A
Walden C. Rhines The Faraday
President and Chief Executive Officer Singapore Science Park
Mentor Graphics Corporation Singapore 0511
Phone: 65-779-0075
Gregory K. Hinckley Fax: 65-870-2799
Executive Vice President,
Chief Operating Officer and Japanese Headquarters
Chief Financial Officer
Mentor Graphics Japan Co., Ltd.
G.M. "Ken" Bado Gotenyama Hills
Senior Vice President, World Trade 7-35, Kita-Shinagawa 4-chome
Shinagawa-Ku, Tokyo 140 Japan
Glenn D. House, Sr. Phone: 81-3-5488-3030
Senior Vice President, Strategy and Fax: 81-3-5488-3031
Product Operations
Dean Freed
Vice President,
General Counsel and Secretary
Richard Trebing
Corporate Controller and
Chief Accounting Officer
</TABLE>
EXHIBIT 21
List of Subsidiaries of the Company
- -----------------------------------
The following is a list of Mentor Graphics Corporation operating subsidiaries.
Mentor Graphics has no parent companies.
SUBSIDIARY PERCENT OWNED
Anacad Electrica Engineering Egypt 100%
Anacad Electrical Engineering SARL (France) 100%
Antares Corporation 100%
CAE Technology, Inc. 100%
dQdt, Inc. 100%
European Development Center 74%
Exemplar Logic, Inc. 100%
Interconnectix, Inc. 100%
Mentor Graphics (Canada) Ltd. 100%
Mentor Graphics (Denmark) A/S 100%
Mentor Graphics (Finland) OY 100%
Mentor Graphics (France) SARL 100%
Mentor Graphics (Schweiz) AG Switzerland 100%
Mentor Graphics (Singapore) PTE. LTD. 100%
Mentor Graphics (Taiwan) Co. Ltd. 100%
Mentor Graphics (United Kingdom) Ltd. 100%
Mentor Graphics Design S.A. (Spain) SA 100%
Mentor Graphics Deutschland (GmBH) 100%
Mentor Graphics Israel Ltd. 100%
Mentor Graphics Japan Co. Ltd. 100%
Mentor Graphics Netherlands BV 100%
Mentor Graphics Scandinavia AB 100%
Meta Systems S.A. 100%
Microtec Research Japan Co. Ltd. 100%
Microtec Research, Inc. 100%
Model Technology Inc. 100%
Open Networks Engineering, Inc. 100%
Precedence Incorporated 100%
Royal Digital Centers, Inc. 100%
Seto Software GmbH 100%
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, 333-277, 333-2883 and 333-11601) of Mentor Graphics Corporation and
subsidiaries of our reports dated January 30, 1997, except for note 8, which is
as of February 11, 1997, relating to the consolidated balance sheets of Mentor
Graphics Corporation and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, cash flows and stockholders'
equity and related schedule for each of the years in the three-year period ended
December 31, 1996, which reports appear or are incorporated by reference in the
December 31, 1996 annual report on Form 10-K of Mentor Graphics Corporation and
subsidiaries. Our reports refer to a change in the method of accounting for
certain investments in debt and equity securities.
KPMG PEAT MARWICK LLP
Portland, Oregon
March 28, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1994 DEC-31-1995 DEC-31-1996
<PERIOD-END> DEC-31-1994 DEC-31-1995 DEC-31-1996
<CASH> 0<F1> 186,676 165,406
<SECURITIES> 0<F1> 25,320 31,673
<RECEIVABLES> 0<F1> 96,962 108,957
<ALLOWANCES> 0<F1> 3,291 3,163
<INVENTORY> 0<F1> 0 0
<CURRENT-ASSETS> 0<F1> 327,583 338,192
<PP&E> 0<F1> 99,605 102,253
<DEPRECIATION> 25,923 25,955 21,472
<TOTAL-ASSETS> 0<F1> 495,372 513,359
<CURRENT-LIABILITIES> 0<F1> 114,092 137,344
<BONDS> 0<F1> 0 0
0<F1> 0 0
0<F1> 0 0
<COMMON> 0<F1> 294,917 297,756
<OTHER-SE> 0<F1> 31,309 21,884
<TOTAL-LIABILITY-AND-EQUITY> 0<F1> 495,372 513,359
<SALES> 390,119 432,517 447,886
<TOTAL-REVENUES> 390,119 432,517 447,886
<CGS> 106,065 117,204 133,816
<TOTAL-COSTS> 106,065 117,204 133,816
<OTHER-EXPENSES> 253,074 262,759 323,919
<LOSS-PROVISION> 629 308 1,168
<INTEREST-EXPENSE> 2,826 2,585 2,423
<INCOME-PRETAX> 34,218 59,048 (1,438)
<INCOME-TAX> 3,765 8,542 3,540
<INCOME-CONTINUING> 30,453 50,506 (4,978)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 30,453 50,506 (4,978)
<EPS-PRIMARY> .49 .78 (.08)
<EPS-DILUTED> .49 .78 (.08)
<FN>
<F1> The restated balance sheet as of December 31, 1994 is not included
in this report.
</FN>
</TABLE>
