-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, VDqcey0upYyRt0/ti6ZsiGD9OM0oMMJrLpl731H25SFxxvv0Ipjh6Xyx8T0ZrRlU u2pBbub4YbtIOO9n2MC3PA== 0000701811-94-000007.txt : 19940404 0000701811-94-000007.hdr.sgml : 19940404 ACCESSION NUMBER: 0000701811-94-000007 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19931231 FILED AS OF DATE: 19940331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MENTOR GRAPHICS CORP CENTRAL INDEX KEY: 0000701811 STANDARD INDUSTRIAL CLASSIFICATION: 7373 IRS NUMBER: 930786033 STATE OF INCORPORATION: OR FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 34 SEC FILE NUMBER: 000-13442 FILM NUMBER: 94519332 BUSINESS ADDRESS: STREET 1: 8005 SW BOECKMAN RD CITY: WILSONVILLE STATE: OR ZIP: 97070 BUSINESS PHONE: 5036857000 10-K 1 FORM 10-K 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, 1993 Commission file number 0 - 13442 MENTOR GRAPHICS CORPORATION (Exact name of registrant as specified in its charter) Oregon 93-0786033 (State or other jurisdiction of (IRS Employer ncorporation or organization) Identification No.) 8005 SW Boeckman Road 97070-7777 Wilsonville, Oregon (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code (503) 685-7000 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 $636,268,197 on March 1, 1994, based upon the last price of the Common Stock on that date reported in the NASDAQ National Market System. On March 1, 1994, there were 48,017,410 shares of the Registrant's Common Stock outstanding. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or in any amendment to this Form 10-K. X DOCUMENTS INCORPORATED BY REFERENCE Document Part of Form 10-K into which incorporated Portions of 1993 Annual Report Parts I, II and IV to Shareholders Portions of the 1994 Proxy Statement Part III PART I Item 1. Business General Mentor Graphics Corporation (Mentor Graphics or Company), an Oregon corporation organized in 1981, is headquartered in Wilsonville, Oregon. The Company's common stock is traded in the NASDAQ National Market System under the symbol MENT. Products and Services The Company designs, manufactures, markets and supports electronic design automation (EDA) software for the integrated circuit (IC) and systems design markets. The Company provides a broad range of EDA tools developed either by the Company or together with third parties to support the entire electronic design process. The Company's software products enable engineers and designers to design, analyze, place and route, and test custom ICs, application specific ICs (ASICs), printed circuit boards, multichip modules and other electronic systems and subsystems. The Company^s Falcon Framework software provides a common foundation for the Company's EDA software products. Falcon Framework software also allows for the integration of third party software tools developed by other commercial EDA vendors and by customers for their own internal use. The Company's products help customers reduce development time while producing innovative hardware products of high quality. In addition to software products, Mentor Graphics' Value Added Services division also offers consulting, support and training services to enhance customers' success in the design and manufacture of hardware products. Platforms The Company's software runs on UNIX workstations in a broad range of price and performance levels, including workstations manufactured by Hewlett-Packard Company, Sun Microsystems, Inc., Digital Equipment Corporation, NEC Corporation and International Business Machines Corporation. The above major computer manufacturers have a substantial installed base of workstations, and make frequent introductions of new products with significant price/performance improvements. The Company has written virtually all of its software in the high level languages C++, C, Pascal, or Fortran to facilitate its portability to other platforms in the future, should availability of the Company's software on such platforms prove desirable. Marketing and Sales The Company's marketing strategy emphasizes customer support, Value Added Services, a strong direct sales force and large corporate account penetration in the semiconductor, aerospace, computer, telecommunications and consumer electronics industries. Customers use the Company's products in the design of such diverse products as supercomputers, automotive electronics, missile guidance systems, signal processors, personal computers, gallium arsenide circuits, microprocessors and telecommunication switching systems. Mentor Graphics sells and licenses its products primarily through its direct sales force in the United States, through the direct sales forces of its wholly-owned subsidiaries in Asia and Europe and through distributors. During 1993, the Company transitioned from direct sales to distributorships in some Asian markets by assisting former employees to set up distributorship businesses for Company products. The Company is considering making similar transitions to distributorships in other geographies. During the years ended December 31, 1993 and 1992, 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 15 of Notes to Consolidated Financial Statements on pages 34-35 of the 1993 Annual Report to Shareholders and is incorporated by this reference. Fluctuating exchange rates and other factors beyond the Company's control, such as tariff and trade policies, domestic and foreign tax and economic policies and the relative stability of international economic and monetary conditions should continue to affect the level and profitability of sales outside the United States. The Company's OpenDoor program coordinates and supports the integration of commercial EDA products and customers' internal products into the Company's EDA environment. Under this program, the Company enables OpenDoor participant companies to develop interfaces from their products to the Company's products. OpenDoor participants can select from a range of integration technologies to achieve an optimal degree of integration for their products. There are now approximately 115 OpenDoor participants. No material portion of the Company's business is dependent on a single customer. The Company has traditionally experienced some seasonal fluctuations in receipt 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, the Company generally ships its products to customers within 10 to 90 days after receipt of an order, and a substantial portion of quarterly shipments tend to be made in the last month of each quarter. The Company believes that the dollar amount of its backlog is not material to an understanding of the Company's business. The Company sells and licenses its products and some third-party products pursuant to purchase orders and master purchase and license agreements. The Company has corporate agreements providing the general terms and conditions of sales and discounts to certain of its customers. The Company schedules deliveries only after receipt of purchase orders under these agreements. Manufacturing Operations The Company's manufacturing operations primarily consist of reproduction of the Company's software and documentation. In North America, manufacturing occurs at the Company's facility in Wilsonville, Oregon. Software and documentation distribution centers in The Netherlands, Japan and Singapore serve their respective regions. The Company generally does not integrate Company software with hardware from suppliers. The Company uses a manufacturing resource planning system which integrates purchasing, inventory control and accounting in all regions. Product Development The EDA market is competitive and characterized by rapid technological change, which requires continuous high expenditures for the enhancement of existing products and the development of new products. The Company is committed to the creation of new products and intends to continue to enhance its existing products. During the years ended December 31, 1993, 1992 and 1991, the Company expensed approximately $77,598,000, $73,947,000 and $79,539,000 respectively, and capitalized approximately $3,609,000, $6,120,000, and $9,917,000, respectively, related to product development. Substantially all of these costs were related to the development of the Company's proprietary application software. Suppliers The Company contracts with several suppliers who provide software products which the Company integrates into its product line, allowing the Company to both concentrate its development efforts on its core product line and offer its customers a more complete design solution. The Company no longer integrates and resells computer hardware with the Company's products. The Company believes that its customers realize little value in purchasing hardware through the Company. As a service to its customers in Europe and Japan, where some customers prefer to purchase both hardware and software from one source, the Company will continue to accept orders for hardware which is shipped directly from the supplier to customers. Customer Support and Professional Services The Company has a worldwide organization to meet its customers' needs for software support, training, consulting, custom IC design and documentation. The Company offers support contracts providing software updates and support. Most of the Company's customers are covered by software support contracts. Some hardware support is provided to customers under subcontract by third-party hardware suppliers, although the Company will not be entering into any new hardware support agreements with customers in 1994. The Company provides technical support for its products through a direct telephone support line and an electronic communications system. Additional professional services are offered through the Company's Value Added Services division which provides consulting and training to help the Company's customers improve their design processes and make the most efficient use of their EDA software tools. Competition The EDA industry is competitive and has been characterized by rapid technological advances in application software, operating systems and hardware. The Company's principal competitors are Cadence Design Systems Inc., Synopsys Inc., Viewlogic Systems, Inc., COMPASS Design Automation, Inc., Zuken Incorporated, Racal Redac, Ltd., Intergraph Corporation, and Seiko Corporation. The Company believes that other companies may be developing EDA systems. Some of the Company's competitors and potential competitors may have greater financial and marketing resources than Mentor Graphics. However, the Company believes the main competitive factors in the EDA industry 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 value added services. The Company believes that it generally competes favorably in these areas. The Company can give no assurance, however, that it will have the financial resources, marketing, distribution and service capability, depth of key personnel or technological knowledge to compete successfully in the EDA market. Employees The Company and its subsidiaries employed approximately 2,100 persons full time as of December 31, 1993 compared with approximately 2,200 persons at the end of 1992. The Company's success will depend in part on its ability to attract and retain employees who are in great demand. The Company continues to enjoy good employee relations. No Company employees are represented by a collective bargaining unit. Patents and Licenses The Company owns United States and Canadian patents covering the technology underlying several of its software products. The Company has also filed other patent applications on technology it has developed and intends to file additional patent applications in the future. While the Company 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. The Company believes that patents are less significant to the success of its business than technical competence, management ability, marketing capability and customer support. The Company 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. The Company typically incorporates restrictions on disclosure, usage and transferability into its agreements with customers and other third parties. Item 2. Properties The Company's Wilsonville, Oregon facilities are located in six owned buildings of approximately 570,000 total square feet located on about 90 acres. All corporate functions, as well as a majority of research and development and domestic activities, operate from this site. In January 1993, the Company entered into a five-year lease with a third party covering the Company's former manufacturing and warehouse building on its Wilsonville site. The building size is approximately 150,000 square feet. The Company leases additional space in San Jose, California, and in various locations throughout the United States and in foreign countries, primarily for sales and customer service operations. The Company 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 1994. Item 3. Legal Proceedings There are no material legal proceedings pending against the Company. 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, 1993. Executive Officers of Registrant The following are the executive officers of the Company: Name Position Age Has Served As An Officer of Company Since Walden C.Rhines President, Chief 47 1993 Executive Officer and Director R. Douglas Norby Senior Vice 58 1993 President and Chief Financial Officer Waldo J Richards Senior Vice President, 54 1993 Product Operations Frank S. Delia Vice President, Chief 47 1983 Administrative Officer, General Counsel and Secretary James J.Luttenbacher Corporate Controller 38 1993 and Chief Accounting Officer Patricia J.O'Connor Vice President, Human 38 1990 Resources The 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. All of the officers named have been employed by Mentor Graphics for the last five years except: 1) Mr. Rhines, who was employed from 1972 to 1993 by Texas Instruments, Incorporated where he held a variety of technical and management positions and was most recently Executive Vice President of Texas Instruments Semiconductor Group; 2) Mr. Norby, who was employed from 1992 to 1993 by Pharmetrix Corporation as President and Chief Executive Officer and from 1985 to 1992 by Lucasfilm, Ltd. where he last held the position of President and Chief Operating Officer; 3) Mr. Richards, who was employed from 1989 to 1993 by Sequent Computer Systems Inc. in a variety of engineering management positions; and 4) Mr. Luttenbacher, who was employed from 1981 to 1992 by Hewlett-Packard Company in a variety of accounting positions, the most recent of which was Manager of the North American Financial Services Group. PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters The Company paid a quarterly dividend of $0.06 per share during 1992 and during the first three quarters of 1993. The Company ceased payment of the dividend in the fourth quarter of 1993 and does not intend to pay dividends in the foreseeable future. Additional information required by this item is included under "Management's Discussion and Analysis of Results of Operations and Financial Condition" on pages 17-22, under "Quarterly Financial Information" on page 36 and under the shareholder information included on page 38 of the Company's 1993 Annual Report to Shareholders. Item 6. Selected Financial Data The information required by this item is included under "Selected Consolidated Financial Data" on page 16 of the Company's 1993 Annual Report to Shareholders. Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition The information required by this item is included under "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 17-22 of the Company's 1993 Annual Report to Shareholders. Item 8. Financial Statements and Supplementary Data The financial statements are included in the Company's 1993 Annual Report to Shareholders on pages 23-37 and are indexed here under Item 14(a)(1). The supplementary data required by this item is included under "Quarterly Financial Information" on page 36 of the Company's 1993 Annual Report to Shareholders. See also the financial statement schedules appearing here as indexed under Item 14(a)(2). Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 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 1994 Proxy Statement and is incorporated herein by reference. The information concerning the Company's Executive Officers is included herein on page 6 under the caption "Executive Officers of the Registrant." No information is included in response to Item 405 of Regulation S-K. Item 11. Executive Compensation The information required by this item is included under "Compensation of Directors," "Information Regarding Executive Officer Compensation" and "Certain Transactions" in the Company's 1994 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 1994 Proxy Statement and is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions The information required by this item is included under "Certain Transactions" in the Company's 1994 Proxy Statement and is incorporated herein by reference. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) (1) Financial Statements The documents listed are included on pages indicated in the Company's 1993 Annual Report to Shareholders: Page Consolidated Statements of Operations 23 Consolidated Balance Sheets 24 Consolidated Statements of Cash Flows 25 Consolidated Statements of Stockholders' Equity 26 Notes to Consolidated Financial Statements 27-35 Independent Auditors' Report 37 (2) Financial Statement Schedules The documents and schedules listed below are filed as part of this report on the pages indicated: Schedule Page I Marketable Securities 11 II Amounts Receivable from Related Parties and Underwriters, Promoters, and Employees other than Related Parties 12-13 V Property, Plant and Equipment 14 VI Accumulated Depreciation and Amortization of Property, Plant and Equipment 15 VIII Valuation and Qualifying Accounts 16 IX Short-Term Borrowings 17 X Supplementary Income Statement Information 18 Independent Auditors^ Report on Financial Statement Schedules 19 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 24 to the Company's Registration Statement on Form S-3 (Registration No. 33- 23024). B. Bylaws of the Company. 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, 1991 (1991 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.E. to the Company's 1989 10-K. *E. Stock Option Agreement under the 1986 Stock Plan dated October 15, 1993 between the Company and Walden C. Rhines. *F. 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. G. 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. H. 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. 13. Portions of the 1993 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 have been filed during the last quarter of the period covered by this Report. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 30, 1994. MENTOR GRAPHICS CORPORATION By _________________________ Walden C. Rhines President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant on March 30, 1994 in the capacities indicated. Signature Title (1) Principal Executive Officer: ____________________________ President, Chief Executive Walden C. Rhines Officer and Director (2) Principal Financial Officer: ____________________________ Senior Vice President and R. Douglas Norby Chief Financial Officer (3) Principal Accounting Officer: _____________________________ Corporate Controller and James J. Luttenbacher Chief Accounting Officer (4) Directors: _____________________________ Chairman of the Board and Thomas H. Bruggere Director _____________________________ Director Marsha B. Congdon _____________________________ Director David R. Hathaway _____________________________ Director Fontaine K. Richardson _____________________________ Director Jon A. Shirley _____________________________ Director David N. Strohm SCHEDULE I MENTOR GRAPHICS CORPORATION AND SUBSIDIARIES MARKETABLE SECURITIES (1) (In Thousands) Amount of Issue Carried in the Market Value Consolidated Name of Title of Cost of of Issue Balance Sheet Issuer Issue Issue at 12/31/93 at 12/31/93 Various Certificates $ 14,105 $14,105 $14,105 of Deposit Bank of Certificate 12,510 12,510 12,510 Tokyo of Deposit Various Euro CDs 10,477 10,477 10,477 Paper Various Commercial 5,458 5,458 5,458 Various Money Market 5,000 5,000 5,000 Note Various Corporate 1,515 1,515 1,515 Notes Citibank Floating Rate 995 995 995 Notes Various Money Funds 329 329 329 $ 50,389 ________________________________ (1) Individual issues not exceeding 2% of total assets were grouped according to type of security. This schedule includes $36,779 of investments classified as cash equivalents on the consolidated balance sheet. SCHEDULE II MENTOR GRAPHICS CORPORATION AND SUBSIDIARIES AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS, PROMOTERS, AND EMPLOYEES OTHER THAN RELATED PARTIES (In Thousands) Beginning Ending Balance Additions Deductions Balance Year ended December 31, 1991: Richard Anderson(1) $ 170 $ 0 $ 0 $ 170 John Goldsworthy(2) 100 0 100 0 Michael Burstein(3) 150 0 150 0 Marvin Wolfson(4) 332 0 186 146 James Hammock(5) 505 0 505 0 Kathleen Herder(6) 140 0 140 0 James Painter(7) 150 0 30 120 Wendell Roberts(8) 100 0 100 0 Gary Geaslen (9) 0 110 0 110 Dottie Wanat (10) 0 125 0 125 Donald Ramble (11) 0 250 0 250 $ 1,647 $ 485 $ 1,211 $ 921 Year ended December 31, 1992: Richard Anderson $ 170 $ 0 $ 170 $ 0 Marvin Wolfson 146 0 146 0 James Painter 120 0 30 90 Gary Geaslen 110 0 110 0 Dottie Wanat 125 0 125 0 Donald Ramble 250 0 50 200 James Luttenbacher (12) 0 100 100 0 Garry Burt (13) 0 150 0 150 $ 921 $ 250 $ 731 $ 440 Year ended December 31, 1993: James Painter $ 90 0 90 $ 0 Donald Ramble 200 0 50 150 Garry Burt 150 0 0 150 $ 440 $ 0 $ 140 $ 300 (1) Interest rate was 9% per annum. Note was secured by shares of the Company's common stock, covered by various stock options granted to debtor and a second trust deed on real property owned by debtor. Payment was made in full on February 26, 1992. Individual is no longer employed by the Company. (2) Interest rate was 8% per annum. Note was secured by a second trust deed on real property owned by debtor. The employee was terminated and note was forgiven as part of the restructure in August 1991. (3) Interest rate was 8.34% per annum. Note was secured by shares of the Company's common stock. Payment was made in full on May 2, 1991. (4) Interest rate was 10.5% per annum (with no interest payable for the last six months of 1990). Notes were secured by shares of the Company's common stock. Payment of $186 was received January 29, 1991. The remaining balance of $146 was paid in full on March 17, 1992. (5) Interest rate was 10% per annum. Note was secured by shares of the Company's common stock. Payment was made in full on February 13, 1991. (6) Interest rate was 10% per annum. The Relocation Bridge Note was secured by a second trust deed on real property owned by debtor. Payment was made in full on February 14, 1991. (7) Interest rate was 8.36% per annum. Note was secured by a second trust deed on real property owned by debtor. Loan was to be forgiven at a rate of 20% per year, as long as employee remained employed by the Company on September 14 of each year through 1995. Employee was terminated on January 15, 1993 and $40 was forgiven by the Company at that time. The promissory note was revised to $50. Payment was made in full on June 29, 1993. (8) Interest rate was 10% per annum. Note was secured by a second trust deed on real property owned by debtor. The employee was terminated and note was forgiven as part of the restructure in August 1991. (9) Interest rate was 9% per annum. Notes were secured by various stock options granted to debtor. Individual is no longer employed by the Company. Payment of $12 was received March 14, 1992. The remaining balance of $98 was paid on September 1, 1992. (10) Interest rate was 8.5% per annum. Note was secured by a second trust deed on real property owned by debtor. Payment was made in full on January 24, 1992. (11) Interest rate is 8.5% per annum. Note is secured by a second trust deed on real property owned by debtor. Loan shall be forgiven a rate of 20% per year, as long as the employee remains employed by the Company on July 1 of each year through 1996. (12) Interest rate was 6% per annum. The Relocation Bridge Note was secured by a second trust deed on real property owned by debtor. Payment of $71 was made on December 2, 1992. The remaining balance of $29 was paid in full on December 19, 1992. (13) Interest rate is 6.5% per annum. Note is secured by a second trust deed on real property owned by debtor. A replacement note was made on December 31, 1993 which requires payment of net proceeds upon exercise of the Company's common stock and four annual installments of $20, plus accrued interest through December 31, 1997. Upon payment of these amounts, remaining obligations under this note including principal and interest will be forgiven. SCHEDULE V MENTOR GRAPHICS CORPORATION AND SUBSIDIARIES PROPERTY, PLANT AND EQUIPMENT (In Thousands) Effect of Beginning Additions Currency Ending Classification Balance at Cost Retirements Changes Balance Year ended December 31, 1991: Computer equipment and furniture $108,450 $ 33,652 $(28,518) $ (75) $113,509 Buildings and building equipment 0 51,815 (14) 0 51,801 Land and improvements 5,121 9,101 0 0 14,222 Leasehold improvements 15,942 1,400 (9,141) 40 8,241 Service spare parts 9,123 1,001 (7,820) 179 2,483 $138,636 $ 96,969 $(45,493) $ 144 $190,256 Year ended December 31, 1992: Computer equipment and furniture $113,509 $ 16,988 $ (9,505) $ (2,464) $118,528 Buildings and building equipment 51,801 1,328 0 0 53,129 Land and improvements 14,222 345 0 0 14,567 Leasehold improvements 8,241 4,054 (1,918) (320) 10,057 Service spare parts 2,483 2,021 (1,542) 36 2,998 $190,256 $ 24,736 $(12,965) $ (2,748) $199,279 Year ended December 31, 1993: Computer equipment and furniture $118,528 $ 24,893 $ (20,345) $ (1,101) $121,975 Buildings and building equipment 53,129 320 (123) 0 53,326 Land and improvements 14,567 74 0 0 14,641 Leasehold improvements 10,057 58 (483) (19) 9,613 Service spare parts 2,998 1,284 (702) 277 3,857 $199,279 $ 26,629 $(21,653) $ (843) $203,412 SCHEDULE VI MENTOR GRAPHICS CORPORATION AND SUBSIDIARIES ACCUMULATED DEPRECIATION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT (In Thousands) Additions Charged to Effect of Beginning Costs and Currency Ending Classification Balance Expenses Retirements Changes Balance Year ended December 31, 1991: Computer equipment and furniture $ 57,676 $ 25,212 $(16,251) $ (5) $ 66,632 Buildings and building equipment 0 1,411 0 0 1,411 Land and improvements 0 332 0 0 332 Leasehold improvements 12,897 1,468 (8,844) 51 5,572 Service spare parts 5,625 1,278 (4,943) 136 2,096 $ 76,198 $ 29,701 $(30,038) $ 182 $ 76,043 Year ended December 31, 1992: Computer equipment and furniture $ 66,632 $ 21,434 $ (7,402) $(1,552) $ 79,112 Buildings and building equipment 1,411 1,578 0 0 2,989 Land and improvements 332 357 0 0 689 Leasehold improvements 5,572 1,316 (1,499) (201) 5,188 Service spare parts 2,096 1,065 (1,388) (52) 1,721 $ 76,043 $ 25,750 $(10,289) $(1,805) $ 89,699 Year ended December 31, 1993: Computer equipment and furniture $ 79,112 $ 23,230 $(17,202) $ (733) $ 84,407 Buildings and building equipment 2,989 1,578 (29) 0 4,538 Land and improvements 689 361 0 0 1,050 Leasehold improvements 5,188 1,398 (379) (11) 6,196 Service spare parts 1,721 1,033 (595) 150 2,309 $ 89,699 $ 27,600 $(18,205) $ (594) $ 98,500 SCHEDULE VIII MENTOR GRAPHICS CORPORATION AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS (In Thousands) Additions Charged to Beginning Cost & Ending Description Balance Expenses Deductions Balance Year ended December 31, 1991: Allowance for deferred tax assets $ 0 $ 0 $ 0 $ 0 Allowance for doubtful accounts $ 3,155 $ 1,224 $ 643 (1) $ 3,736 Allowance for obsolete inventory $ 7,392 $11,198 $ 2,951 (2) $15,639 Accrued restructure costs $ 0 $27,100 $16,867 (3) $10,233 Year ended December 31, 1992: Allowance for deferred tax assets $ 0 $ 0 $ 0 $ 0 Allowance for doubtful accounts $ 3,736 $ 1,282 $ 642 (1) $ 4,376 Allowance for obsolete inventory $15,639 $ 2,665 $ 5,868 (2) $12,436 Accrued restructure costs $10,233 $14,500 $12,463 (3) $12,270 Year ended December 31, 1993: Allowance for deferred tax assets $ 0 $58,495(4) $ 0 $58,495 Allowance for doubtful accounts $ 4,376 $ 508 $ 956 (1) $ 3,928 Allowance for obsolete inventory $12,436 $ 1,924 $ 6,346 (2) $ 8,014 Accrued restructure costs $12,270 $26,200 $10,096 (3) $28,374 (1) Deductions primarily represent accounts written off during the period. (2) Deductions primarily represent inventory scrapped during the period. (3) Deductions primarily represent payments made to carry out restructure plans and reversals of accrued restructure charges due to changes in estimates of $1,400 and $1,600 for the years ended December 31, 1993 and 1992, respectively. (4) Addition represents adoption of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" on January 1, 1993 and increases to the valuation allowance during the year. As such, the Company established a valuation allowance for certain deferred tax assets, including 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. SCHEDULE IX MENTOR GRAPHICS CORPORATION AND SUBSIDIARIES SHORT-TERM BORROWINGS (1) (In Thousands) Weighted Maximum Average Average Category of Weighted Amount Amount Interest Aggregate Average Outstanding Outstanding Rate Short-Term Ending Interest During the During the During the Borrowings Balance Rate Period Period (3) Period (4) Year ended December 31, 1991: Lines of credit (2) $ 4,459 8.88% $14,087 $ 8,612 9.13% Year ended December 31, 1992: Lines of credit (2) $ 5,457 8.48% $11,462 $ 6,825 8.65% Year ended December 31, 1993: Lines of credit (2) $ 2,843 7.66% $ 6,839 $ 5,160 7.92% ________________ (1) Short-term borrowings on the consolidated balance sheets consist of drawings on various multi-currency unsecured line of credit agreements as well as the current portion of long-term debt of $3,521, $91, and $52 for the years ended 1993, 1992, and 1991, respectively. See note 8 in the 1993 Annual Report to Shareholders for a more complete description of the Company's long-term debt. (2) The lines of credit generally have terms of one or two years and are subject to renewal upon expiration. (3) The average amount outstanding was computed by using the average monthly balances during the period. (4) The weighted average interest rates were computed by dividing the actual interest expense by the total of the average balance for each month for which an amount was outstanding, and then multiplying the result by twelve months to obtain an annual rate. SCHEDULE X MENTOR GRAPHICS CORPORATION AND SUBSIDIARIES SUPPLEMENTARY INCOME STATEMENT INFORMATION (In Thousands) Charged to Costs and Expenses Year Ended December 31 1991 1992 1993 Item (1) Advertising Costs $ 6,820 $ 8,084 $ 6,868 Maintenance & Repair $ 5,756 $ 6,296 $ 6,407 Royalty Costs $10,139 $ 9,854 $ 9,815 ________________________ (1) Items not presented did not exceed 1% of revenues in any of the above periods. Independent Auditors' Report The Board of Directors and Stockholders Mentor Graphics Corporation: Under date of February 1, 1994, we reported on the consolidated balance sheets of Mentor Graphics Corporation and subsidiaries as of December 31, 1993 and 1992, 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, 1993, which are included in the 1993 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 1993. In connection with our audits of the aforementioned consolidated financial statements, we also have audited the related consolidated financial statement schedules as listed in the accompanying index. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. As discussed in Notes 1 and 4 to the consolidated financial statements, the Company adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" in 1993. KPMG PEAT MARWICK Portland, Oregon February 1, 1994 EX-3.B 2 EXHIBIT 3(B) EXHIBIT 3.B Page 1 - Bylaws of Mentor Graphics Corporation BYLAWS OF MENTOR GRAPHICS CORPORATION ARTICLE I SHAREHOLDERS 1.1 Annual Meeting. The annual meeting of the shareholders shall be held on the third Wednesday in the month of May in each year at the hour of 3:00 p.m., for the purpose of electing directors and transacting such other business as may come before the meeting. If the day fixed for the annual meeting is a legal holiday, the meeting shall be held on the next succeeding Friday. 1.2 Failure to Hold Annual Meeting. If the annual meeting is not held at the designated time, the President or the Board of Directors may call the annual meeting meeting at a time fixed by the calling party not more than 60 days after the designated time by proper notice designating the meeting as the annual meeting. If the annual meeting is not held at the designated time or during the 60-day period thereafter, the annual meeting may be called by the holders of not less than one-tenth of all the shares entitled to vote at the meeting. In such event, notice shall be given not more than 15 days after the expiration of such 60-day period. The notice shall fix the time of the meeting at the earliest date permissible under the applicable notice requirements. 1.3 Special Meetings. Special meetings of the shareholders may be called by the President or by the Board of Directors, and shall be called by the President at the request of the holders of not less than one-tenth of all the outstanding shares of the corporation entitled to vote at the meeting. 1.4 Place of Meetings. Meetings of the shareholders shall be held at the principal business office of the corporation or at such other place as may be determined by the Board of Directors. 1.5 Notice of Meetings. Written or printed notice stating the place, day and hour of the meeting and, in case of a special meeting, the purpose or purposes for which the meeting is called, shall be mailed to each shareholder entitled to vote at the meeting at the shareholder's address as it appears on the stock transfer records of the corporation, with postage thereon prepaid, not less than 10 nor more than 60 days before the date of the meeting, by or at the direction of the President, the Secretary or the officer or persons calling the meeting. 1.6 Waiver of Notice. Whenever any notice is required to be given to any shareholder of the corporation, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. 1.7 Record Date. (a) The Board of Directors may fix a record date for the purpose of determining shareholders entitled to notice of a shareholders' meeting, to demand a special meeting, to vote or to take any other action, which date shall not be more than 70 days before the meeting or action requiring a determination of shareholders. (b) If no record date is fixed for the determination of shareholders entitled to notice of and to vote at a shareholders' meeting, the record date shall be the close of business on the day before the first notice is delivered to shareholders. (c) A determination of shareholders entitled to notice of or to vote at a shareholders' meeting is effective for any adjournment of the meeting unless the Board of Directors fixes a new record date, which it must do if the meeting is adjourned to a date more than 120 days after the date fixed for the original meeting. 1.8 Voting Records. The officer or agent having charge of the stock transfer books for shares of the corporation shall make, at least 10 days before each meeting of shareholders, a complete record of the shareholders entitled to vote at such meeting, or any adjournment thereof, arranged in alphabetical order, with the address of and the number of shares held by each, which record, for a period of 10 days prior to such meeting, shall be kept on file at the registered office of the corporation and shall be subject to inspection by any shareholder at any time during usual business hours. Such record shall also be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any shareholder during the whole time of the meeting. The original stock transfer book shall be prima facie evidence as to who are the shareholders entitled to examine such record or transfer books or to vote at any meeting of shareholders. Failure to comply with the requirements of this section shall not affect the validity of any action taken at such meeting. 1.9 Quorum. A majority of the outstanding shares of the corporation entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of shareholders. If a quorum is present at a meeting, a majority may adjourn the meeting from time to time to a different time and place without further notice. At such adjourned meeting at which a quorum is present, any business may be transacted which might have been transacted at the meeting as originally held. The shareholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum. 1.10 Manner of Acting. Unless otherwise required by law or the articles of incorporation, any question submitted to the shareholders shall be approved if the number of shares voted in favor of such question exceeds the number of shares voted in opposition. Any action which is required or permitted to be taken by the shareholders at a meeting may be taken without a meeting if a consent in writing setting forth the action so taken is signed by all of the shareholders entitled to vote on the matter. The action shall be effective on the date when the last signature is placed on the consent or at such earlier time as is set forth therein. Such consent, which shall have the same effect as a unanimous vote of the shareholders, shall be filed with the minutes of the corporation. 1.11 Proxies. At all meetings of shareholders, a shareholder may vote by proxy executed in writing by the shareholder or by a duly authorized attorney in fact. The proxy shall be filed with the Secretary of the corporation before or at the time of the meeting. No proxy shall be valid after 11 months from the date of its execution, unless otherwise provided in the proxy. 1.12 Voting of Shares by Certain Holders. (a) Shares standing in the name of another corporation may be voted by such officer, agent or proxy as the bylaws of such corporation may prescribe, or, in the absence of such provision, as the board of directors of such corporation may determine. (b) Shares held be an administrator, executor, guardian or conservator may be voted by the holder, either in person or by proxy, without a transfer of such shares into the holder's name. Shares standing in the name of a trustee may be voted by that trustee, either in person or by proxy, but no trustee shall be entitled to vote shares without a transfer of such shares into the trustee's name. (c) Shares standing in the name of a receiver may be voted by such receiver, and shares held by or under the control of a receiver may be voted by such receiver without the transfer thereof into the receiver's name if authority to do so is contained in an appropriate order of the court by which such receiver was appointed. (d) A shareholder whose shares are pledged shall be entitled to vote such shares until the shares have been transferred into the name of the pledgee, and thereafter the pledgee shall be entitled to vote the shares so transferred. (e) Neither treasury shares, nor shares of its own stock held by the corporation in a fiduciary capacity, nor shares held by another corporation if a majority of the shares entitled to vote for the election of directors of such other corporation is held by the corporation, shall be voted at any meeting or counted in determining the total number of outstanding shares at any given time. 1.13 Acquisition of Control Shares. As provided in Section 10, Chapter 820, Oregon Laws 1987 and to the fullest extent permitted by that section, the corporation shall be authorized to require a holder of control shares to sell the control shares to the corporation for fair value. The term "control shares" shall have the same meaning as that term has in Chapter 820, Oregon Laws 1987. The procedures for acquisition of control shares pursuant to this section shall be that the Board of Directors shall determine the fair value of the control shares and shall give notice to the holder of the control shares of the fair value and the time at which payment for the control shares will be available. The corporation will then make payment for the control shares against delivery of the shares. ARTICLE II BOARD OF DIRECTORS 2.1 General Powers. The business and affairs of the corporation shall be managed by its Board of Directors. 2.2 Number, Tenure and Qualification. The number of directors of the corporation shall be seven. The directors shall hold office until the next annual meeting of shareholders and until their successors shall have been elected and qualified. Directors need not be residents of the State of Oregon or shareholders of the corporation. The number of directors may be increased or decreased from time to time by amendment to the bylaws, but no decrease shall have the effect of shortening the term of any incumbent director. 2.3 Regular Meetings. A regular meeting of the Board of Directors shall be held without other notice than this bylaw immediately after, and at the same place as, the annual meeting of shareholders. The Board of Directors may provide, by resolution, the time and place, either within or without the State of Oregon, for the holding of additional regular meetings without other notice than the resolution. 2.4 Special Meetings. Special meetings of the Board of Directors may be called by or at the request of the President or by one-third of the directors. The person or persons authorized to call special meetings of the Board of Directors may fix any place, either within or without the State of Oregon, as the place for holding any special meeting of the Board of Directors called by them. 2.5 Notice. Written notice of any special meeting of the Board of Directors shall be given at least 10 days prior to the meeting by personal delivery, by mail or by telegram. If mailed, notice shall be deemed to be given when deposited in the United States mails addressed to the director at the director's business address, with postage thereon prepaid. If by telegram, notice shall be deemed to be given when the telegram is delivered to the telegraph company. The attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting. 2.6 Waiver of Notice. Whenever any notice is required to be given to any director of the corporation, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. 2.7 Quorum. A majority of the number of directors fixed by Section 2.2 of this Article II shall constitute a quorum for the transaction of business at any meeting of the Board of Directors. 2.8 Manner of Acting. (a) The act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors, unless a different number is provided by law, the articles of incorporation or these bylaws. (b) Members of the Board of Directors may hold a board meeting by conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. Participation in such a meeting shall constitute presence in person at the meeting. (c) Any action which is required or permitted to be taken by the directors at a meeting may be taken without a meeting if a consent in writing setting forth the action so taken is signed by all of the directors entitled to vote on the matter. The action shall be effective on the date when the last signature is placed on the consent or at such earlier time as is set forth therein. Such consent, which shall have the same effect as a unanimous vote of the directors, shall be filed with the minutes of the corporation. 2.9 Vacancies. Except as hereinafter provided, any vacancy occurring in the Board of Directors may be filled by the affirmative vote of a majority of the remaining directors though less than a quorum of the Board of Directors, or by a sole remaining director. Any directorship to be filled by reason of any increase in the number of directors of the corporation fixed by the bylaws may be filled by the affirmative vote of a majority of the number of directors fixed by the bylaws prior to such increase; provided that not more than two such directorships may be filled by the directors during any one period between annual meetings of the shareholders of the corporation. Any such directorship not so filled by the directors shall be filled by election at the next annual meeting of shareholders or at a special meeting of shareholders called for that purpose. A director elected to fill a vacancy shall be elected to serve until the next annual meeting of shareholders and until a successor shall be elected and qualified. 2.10 Compensation. By resolution of the Board of Directors, the directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors, and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as director. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. 2.11 Presumption of Assent. A director of the corporation who is present at a meeting of the Board of Directors at which action on any corporate matter is taken shall be presumed to have assented to the action taken unless the director's dissent to the action is entered in the minutes of the meeting or unless a written dissent to the action is filed with the person acting as the secretary of the meeting before the adjournment thereof or forwarded by certified or registered mail to the Secretary of the corporation immediately after the adjournment of the meeting. The right to dissent shall not apply to a director who voted in favor of the action. 2.12 Transactions with Directors. (a) Any contract or other transaction or determination between the corporation and one or more of its directors, or between the corporation and another party in which one or more of its directors are interested, shall be valid notwithstanding the relationship or interest or the presence or participation of such director or directors in a meeting of the Board of Directors or a committee thereof which acts upon or in reference to such contract, transaction, or determination, if: the fact of such relationship or interest is disclosed or known to the Board of Directors or committee and it authorizes, approves or ratifies the contract, transaction or determination by a vote or consent sufficient for the purpose without counting the votes or consents of such interested directors; or the fact of such relationship or interest is disclosed or known to the shareholders entitled to vote and they authorize, approve or ratify such contract, transaction or determination by vote or written consent; or the contract, transaction or determination is fair and reasonable to the corporation. (b) Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or committee which authorizes or ratifies such contract, transaction or determination. The interested directors shall not be disqualified from voting as shareholders for ratification or approval of such contract, transaction or determination. (c) None of the provisions of this section shall invalidate any contract, transaction or determination which would otherwise be valid under applicable law. 2.13 Removal. All or any number of the directors may be removed, with or without cause, at a meeting called expressly for that purpose, by a vote of the holders of a majority of the shares then entitled to vote at an election of directors. ARTICLE III EXECUTIVE COMMITTEE 3.1 Designation. The Board of Directors may designate two or more directors to constitute an executive committee. The designation of an executive committee, and the delegation of authority to it, shall not operate to relieve the Board of Directors, or any member thereof, of any responsibility imposed by law. No member of the executive committee shall continue to be a member thereof after ceasing to be a director of the corporation. The Board of Directors shall have the power at any time to increase or decrease the number of members of the executive committee, to fill vacancies thereon, to change any member thereof and to change the functions or terminate the existence thereof. 3.2 Powers. During the interval between meetings of the Board of Directors, and subject to such limitations as may be imposed by resolution of the Board of Directors, the executive committee may have and may exercise all the authority of the Board of Directors in the management of the corporation, provided that the executive committee shall not have the authority of the Board of Directors in reference to amending the articles of incorporation; adopting a plan of merger or consolidation; recommending to the shareholders the sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all the property and assets of the corporation otherwise than in the usual regular course of its business; recommending to the shareholders a voluntary dissolution of the corporation or a revocation thereof; or amending the bylaws of the corporation. 3.3 Procedures; Meetings; Quorum. (a) The Board of Directors shall appoint a chairman from among the members of the executive committee and shall appoint a secretary who may, but need not, be a member of the executive committee. The chairman shall preside at all meetings of the executive committee and the secretary of the executive committee shall keep a record of its acts and proceedings. (b) Regular meetings of the executive committee, of which no notice shall be necessary, shall be held on such days and at such places as shall be fixed by resolution adopted by the executive committee. Special meetings of the executive committee shall be called at the request of the President or of any member of the executive committee, and shall be held upon such notice as is required by these bylaws for special meetings of the Board of Directors, provided that notice by word of mouth or telephone shall be sufficient if received in the city where the meeting is to be held not later than the day immediately preceding the day of the meeting. (c) Attendance of any member of the executive committee at a meeting shall constitute a waiver of notice of the meeting. A majority of the executive committee, from time to time, shall be necessary to constitute a quorum for the transaction of any business, and the act of a majority of the members present at a meeting at which a quorum is present shall be the act of the executive committee. Members of the executive committee may hold a meeting of such committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in such a meeting shall constitute presence in person at the meeting. (d) Any action which may be taken at a meeting of the executive committee may be taken without a meeting if a consent in writing setting forth the actions so taken shall be signed by all members of the executive committee entitled to vote with respect to the subject matter thereof. The action shall be effective on the date when the last signature is placed on the consent or at such earlier time as is set forth therein. The consent shall have the same effect as a unanimous vote of the executive committee. (e) The Board of Directors may vote to pay the members of the executive committee a reasonable fee as compensation for attendance at meetings of the executive committee. ARTICLE IV OFFICERS 4.1 Number. The officers of the corporation shall be a Chairman of the Board, President and Chief Executive Officer, one or more Executive Vice Presidents, one or more Vice Presidents, a Secretary, and a Treasurer. Such other officers and assistant officers as may be deemed necessary may be appointed by the Board of Directors and shall have such powers and duties as may be prescribed by the Board of Directors. Any two or more offices may be held by the same person. 4.2 Election and Term of Office. The officers of the corporation shall be appointed annually by the Board of Directors at the first meeting of the Board of Directors held after the annual meeting of the shareholders. If the appointment of officers shall not be held at the meeting, it shall be held as soon thereafter as is convenient. Each officer shall hold office until a successor shall have been duly appointed and shall have qualified or until the officer's death, resignation or removal in the manner hereinafter provided. 4.3 Removal. Any officer or agent appointed by the Board of Directors may be removed by the Board of Directors whenever in its judgment the best interests of the corporation would be served thereby, but removal shall be without prejudice to the contract rights, if any, of the person so removed. Appointment of an officer or agent shall not of itself create contract rights. 4.4 Vacancies. A vacancy in any office because of death, resignation, removal, disqualification or otherwise, may be filled by the Board of Directors for the unexpired portion of the term. 4.5 Chairman of the Board. The Chairman of the Board of Directors shall preside at all meetings of the Board of Directors and shall perform such other duties as may be prescribed from time to time by the Board of Directors. In the absence of the Chairman of the Board or in the event of the death, inability or refusal to act of the Chairman of the Board, the Board shall appoint an acting chair from the remaining directors; the acting chair shall preside at all meetings of the Board of Directors until the return of the Chairman of the Board or until a new Chairman of the Board is selected. 4.6 President and Chief Executive Officer. The President and Chief Executive Officer (herein referred to as the "President") shall be the chief executive officer of the corporation and shall be in general charge of its business and affairs, subject to the control of the Board of Directors. The President shall preside at all meetings of the shareholders. The President may execute on behalf of the corporation all contracts, agreements, stock certificates and other instruments, including all contracts, agreements and instruments calling for the signature of the president of the corporation. The President shall from time to time report to the Board of Directors all matters within the President's knowledge affecting the corporation which should be brought to the attention of the Board. The President may vote all shares of stock in other corporations owned by the corporation and shall be empowered to execute proxies, waivers of notice, consents and other instruments in the name of the corporation with respect to such stock. The President shall perform such other duties as may be required by the Board of Directors. 4.7 Executive Vice President. In the absence of the President, or in the event of the President's death, inability or refusal to act, the Executive Vice President (or, if there is more than one Executive Vice President, the Executive Vice Presidents, in the order designated by the Board of Directors) shall perform the duties of the President, and when so acting, shall have all of the powers of and be subject to all restrictions upon the President. The Executive Vice Presidents may vote all shares of stock in other corporations owned by the corporation and shall be empowered to execute proxies, waivers of notice, consents and other instruments in the name of the corporation with respect to such stock. The Executive Vice Presidents shall perform such other duties as may be assigned from time to time by the President or by the Board of Directors. 4.8 Vice Presidents. In the absence of the Executive Vice President or in the event of the death, inability or refusal to act of the Executive Vice President, the Vice President (or in the event there be more than one Vice President, the Vice Presidents in the order designated at the time of their appointment, or in the absence of any designation, then in the order of their appointment) shall perform the duties of the Executive Vice President, and when so acting shall have all of the powers of, and be subject to all the restrictions upon, the Executive Vice President. Any Vice President shall perform such other duties as may be assigned from time to time by the President or the Board of Directors. 4.9 Secretary. The Secretary shall keep the minutes of all meetings of the directors and shareholders, and shall have custody of the minute books and other records pertaining to the corporate business. The Secretary may vote all shares of stock in other corporations owned by the corporation and shall be empowered to execute proxies, waivers of notice, consents and other instruments in the name of the corporation with respect to such stock. The Secretary shall countersign all stock certificates and other instruments requiring the seal of the corporation and shall perform such other duties as may be required by the Board of Directors. 4.10 Treasurer. The Treasurer shall be the chief financial and accounting officer of the corporation. The Treasurer shall keep correct and complete records of accounts showing the financial condition of the corporation. The Treasurer shall be legal custodian of all moneys, notes, securities and other valuables that may come into the possession of the corporation. The Treasurer shall deposit all funds of the corporation which come into the Treasurer's hands in depositories which the Board of Directors may designate. The Treasurer shall pay the funds out only on the check of the corporation signed in the manner authorized by the Board of Directors. The Treasurer shall perform such other duties as the Board of Directors may require. 4.11 Salaries. The salaries of officers shall be fixed from time to time by the Board of Directors and no officer shall be prevented from receiving such salary because the officer is also a director of the corporation. ARTICLE V INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES AND OTHER AGENTS 5.1 Directors and Officers. The corporation shall indemnify its directors and officers to the fullest extent permitted by the Oregon Business Corporation Act (Act), as the same exists or may hereafter be amended (but, in the case of alleged occurrences of actions or omissions preceding any such amendment, only to the extent that such amendment permits the corporation to provide broader indemnification rights than the Act permitted the corporation to provide prior to such amendment). 5.2 Employees and Other Agents. The corporation shall have power to indemnify its employees and other agents as set forth in the Act. 5.3 No Presumption of Bad Faith. The termination of any proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent shall not, of itself, create a presumption that the person did not act in good faith and in a manner which the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal proceeding, that the person had reasonable cause to believe that the conduct was unlawful. 5.4 Advances of Expenses. The expenses incurred by a director or officer in any proceeding shall be paid by the corporation in advance at the written request of the director or officer, if the director or officer: (a) furnishes the corporation a written affirmation of such person's good faith belief that such person is entitled to be indemnified by the corporation; and (b) furnishes the corporation a written undertaking to repay such advance to the extent that it is ultimately determined by a court that such person is not entitled to be indemnified by the corporation. Such advances shall be made without regard to the person's ability to repay such expenses and without regard to the person's ultimate entitlement to indemnification under this bylaw or otherwise. 5.5 Enforcement. Without the necessity of entering into an express contract, all rights to indemnification and advances under this bylaw shall be deemed to be contractual rights and be effective to the same extent and as if provided for in a contract between the corporation and the director or officer who serves in such capacity at any time while this bylaw and relevant provisions of the Act and other applicable law, if any, are in effect. Any right to indemnification or advances granted by this bylaw to a director or officer shall be enforceable by or on behalf of the person holding such right in any court of competent jurisdiction if (a) the claim for indemnification or advances is denied, in whole or in part, or (b) no disposition of such claim is made within ninety (90) days of request therefor. The claimant in such enforcement action, if successful in whole or in part, shall be entitled to be paid also the expense of prosecuting a claim. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in connection with any proceeding in advance of its final disposition when the required affirmation and undertaking have been tendered to the corporation) that the claimant has not met the standards of conduct which make it permissible under the Act for the corporation to indemnify the claimant for the amount claimed, but the burden of proving such defense shall be on the corporation. Neither the failure of the corporation (including its Board of Directors, independent legal counsel or its shareholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because the claimant has met the applicable standard of conduct set forth in the Act, nor an actual determination by the corporation (including its Board of Directors, independent legal counsel or its shareholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. 5.6 Non-Exclusivity of Rights. The rights conferred on any person by this bylaw shall not be exclusive of any other right which such person may have or hereafter acquire under any statute, provision of the Articles of Incorporation, bylaws, agreement, vote of shareholders or disinterested Directors or otherwise, both as to action in the person's official capacity and as to action in another capacity while holding office. The corporation is specifically authorized to enter into individual contracts with any or all of its directors, officers, employees or agents respecting indemnification and advances, to the fullest extent permitted by the law. 5.7 Survival of Rights. The rights conferred on any person by this bylaw shall continue as to a person who has ceased to be a director, officer, employee or other agent and shall inure to the benefit of the heirs, executors and administrators of such a person. 5.8 Insurance. To the fullest extent permitted by the Act, the corporation, upon approval by the Board of Directors, may purchase insurance on behalf of any person required or permitted to be indemnified pursuant to this bylaw. 5.9 Amendments. Any repeal of this bylaw shall only be prospective and no repeal or modification hereof shall adversely affect the rights under this bylaw in effect at the time of the alleged occurrence of any action or omission to act that is the cause of any proceeding against any agent of the corporation. 5.10 Savings Clause. If this bylaw or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, the corporation shall indemnify each director, officer or other agent to the fullest extent permitted by any applicable portion of this bylaw that shall not have been invalidated, or by any other applicable law. 5.11 Certain Definitions. For the purposes of this bylaw, the following definitions shall apply: (a) The term "proceeding" shall be broadly construed and shall include, without limitation, the investigation, preparation, prosecution, defense, settlement and appeal of any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative. (b) The term "expenses" shall be broadly construed and shall include, without limitation, expense of investigations, judicial or administrative proceedings or appeals, attorneys' fees and disbursements and any expenses of establishing a right to indemnification under Section 5.5 of this bylaw, but shall not include amounts paid in settlement, judgments or fines. (c) The term "corporation" shall include, in addition to the resulting or surviving corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this bylaw with respect to the resulting or surviving corporation as the person would have with respect to such constituent corporation if its separate existence had continued. (d) References to a "director," "officer," "employee," or "agent" of the corporation shall include, without limitation, situations where such person is serving at the request of the corporation as a director, officer, employee, trustee or agent of another corporation, partnership, joint venture, trust or other enterprise. (e) References to "other enterprises" shall include employee benefit plans; references to "fines" in the Act shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to "serving at the request of the corporation" shall include any service as a director, officer, employee or agent of the corporation which imposes duties on, or involves services by, such director, officer, employee, or agent with respect to an employee benefit plan, its participants, or beneficiaries; and a person who acted in good faith and in a manner the person reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the corporation" as referred to in this bylaw. ARTICLE VI CERTIFICATES FOR SHARES AND THEIR TRANSFER 6.1 Certificates for Shares. (a) Certificates representing shares of the corporation shall be in such form as shall be determined by the Board of Directors. Such certificates shall be signed by the President or a Vice President and by the Secretary or an Assistant Secretary and may be sealed with the seal of the corporation or a facsimile thereof. All certificates for shares shall be consecutively numbered or otherwise identified. (b) The name and address of the person to whom the shares represented thereby are issued, with the number of shares and date of issue, shall be entered on the stock transfer books of the corporation. All certificates surrendered to the corporation for transfer shall be cancelled and no new certificate shall be issued until the former certificate for a like number of shares shall have been surrendered and cancelled, except that in case of a lost, destroyed or mutilated certificate a new one may be issued therefor upon such terms and indemnity to the corporation as the Board of Directors may prescribe. 6.2 Transfer of Shares. Transfer of shares of the corporation shall be made only on the stock transfer books of the corporation by the holder of record thereof or by the holder's legal representative, who shall furnish proper evidence of authority to transfer, or by the holder's attorney thereunto authorized by power of attorney duly executed and filed with the Secretary of the corporation. The person in whose name shares stand on the books of the corporation shall be deemed by the corporation to be the owner thereof for all purposes. 6.3 Transfer Agent and Registrar. The Board of Directors may from time to time appoint one or more Transfer Agents and one or more Registrars for the shares of the corporation, with such powers and duties as the Board of Directors shall determine by resolution. The signatures of the President or Vice President and the Secretary or Assistant Secretary upon a certificate may be facsimiles if the certificate is manually signed on behalf of a Transfer Agent or by a Registrar other than the corporation itself or an employee of the corporation. 6.4 Officer Ceasing to Act. In case any officer who has signed or whose facsimile signature has been placed upon a stock certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the corporation with the same effect as if the signer were such officer at the date of its issuance. 6.5 Fractional Shares. The corporation shall not issue certificates for fractional shares. ARTICLE VII CONTRACTS, LOANS, CHECKS AND OTHER INSTRUMENTS 7.1 Contracts. The Board of Directors may authorize any officer or officers and agent or agents to enter into any contract or execute and deliver any instrument in the name of and on behalf of the corporation, and such authority may be general or confined to specific instances. 7.2 Loans. No loans shall be contracted on behalf of the corporation and no evidence of indebtedness shall be issued in its name unless authorized by a resolution of the Board of Directors. Such authority may be general or confined to specific instances. 7.3 Checks, Drafts, etc. All checks, drafts or other orders for the payment of money and notes or other evidences of indebtedness issued in the name of the corporation shall be signed by such officer or officers and agent or agents of the corporation and in such manner as shall from time to time be determined by resolution of the Board of Directors. ARTICLE VIII SEAL The seal of the corporation shall be circular in form and shall have inscribed thereon the name of the corporation and the state of incorporation and the words "Corporate Seal." ARTICLE IX AMENDMENTS These bylaws may be altered, amended or repealed and new bylaws may be adopted by the Board of Directors at any regular or special meeting, subject to repeal or change by action of the shareholders of the corporation. ADOPTED BY THE BOARD OF DIRECTORS ON DECEMBER 3, 1981. SECTION 2.2 WAS AMENDED ON MARCH 14, 1983. SECTIONS 2.2, 2.9 AND 4.1 WERE AMENDED, SECTIONS 4.5 AND 4.6 WERE DELETED, NEW SECTIONS 4.5-4.9 WERE ADDED AND SECTIONS 4.7- 4.9 WERE RENUMBERED AS SECTIONS 4.10-4.12 ON DECEMBER 6, 1983, EFFECTIVE DECEMBER 30, 1983. SECTION 2.2 WAS AMENDED ON APRIL 12, 1984. SECTIONS 4.1 AND 4.8 WERE AMENDED ON OCTOBER 11, 1984. SECTION 1.1 WAS AMENDED ON FEBRUARY 20, 1986. SECTION V WAS DELETED AND SECTION 5.1- 5.11 WERE ADDED ON MAY 20, 1987. THE BYLAWS WERE RESTATED BY THE BOARD OF DIRECTORS ON OCTOBER 21, 1987. SECTIONS 1.5 AND 1.7 WERE AMENDED AND SECTION 1.13 WAS ADDED ON JANUARY 28, 1988. SECTIONS 1.10, 4.1-4.3, 4.5-4.12 WERE AMENDED ON JULY 11, 1989. SECTIONS 1.1, 4.1, 4.5 AND 4.8 WERE AMENDED, SECTION 4.7 WAS DELETED, A NEW SECTION 4.6 WAS ADDED AND SECTIONS 4.6 AND 4.8-4.11 WERE RENUMBERED ON DECEMBER 6, 1990. SECTION 2.2 WAS AMENDED ON JULY 24, 1991. SECTION 2.2 WAS AMENDED ON JUNE 30, 1992. SECTION 2.2 WAS AMENDED ON JULY 19, 1992. SECTION 2.2 WAS AMENDED ON MARCH 22, 1993. SECTION 2.2 WAS AMENDED ON MAY 28, 1993. EX-10.E 3 EXHIBIT 10(E) EXHIBIT 10.E Non-Employee Director Stock Option April 27, 1993 1 100,000 shares $1.00 per share STOCK OPTION AGREEMENT Mentor Graphics Corporation 1986 Stock Option Plan October 19, 1993 Mentor Graphics Corporation an Oregon corporation 8005 S.W. Boeckman Road Wilsonville, Oregon 97070-7777 Company Walden C. Rhines 9963 Rockbrook Dallas, Texas 75220 Optionee The Company is pleased to inform you that it has granted you a nonqualified stock option to purchase shares under its 1986 Stock Option Plan (1986 Plan). The 1986 Plan is administered by the Compensation Committee (Committee) of the Board of Directors for the benefit of non-employee directors of the Company. The option agreement is as follows: 1. Grant of Option. The Company grants to you an option to purchase 100,000 shares of the Company's common stock for $1.00 per share. 2. Vesting Provisions; Change in Control. 2.1 This option is fully vested and will terminate on October 19, 2003, unless it is earlier terminated as provided below. 2.2 Until it expires or is terminated and except as provided in 2.4 or 2.5, you may exercise this option from time to time to purchase shares up to the following limits: Years After 4/27/93 Percent Exercisable Less than 1 0% 1 to 2 20% 2 to 3 40% 3 to 4 60% 4 to 5 80% over 5 100% 2.3 The table in 2.2 is based on an Option Year. An Option Year is a 12-month period starting on the date specified in the table or an anniversary of that date. 2.4 On death the exercise limit will be at least 50 percent. 2.5 Upon the occurrence of a Change in Control, this option shall automatically become exercisable in full for the remainder of its term. "Change in Control" means the occurrence of any of the following events: 2.5.1 the approval by the Company's shareholders of: (a) any consolidation, merger or plan of share exchange involving the Company (Merger) in which the Company is not the continuing or surviving corporation or pursuant to which shares of Common Stock would be converted into cash, securities or other property, other than a Merger involving the Company in which the holders of the Company's Common Stock immediately prior to the Merger have the same proportionate ownership of Common Stock of the surviving corporation immediately after the Merger; (b) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, the assets of the Company; or (c) the adoption of any plan or proposal for the liquidation or dissolution of the Company; 2.5.2 at any time during a period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors (Incumbent Directors) shall cease for any reason to constitute at least a majority thereof, unless each new director elected during such two-year period was nominated or appointed by two-thirds of the Incumbent Directors then in office and voting (new directors nominated or appointed by two-thirds of the Incumbent Directors shall also be deemed to be Incumbent Directors); or 2.5.3 any person (as such term is used in Section 13(d) of the Securities Exchange Act of 1934 (1934 Act) shall, as a result of a tender or exchange offer, open market purchases, privately negotiated purchases or otherwise, have become the beneficial owner (within the meaning of Rule 13d-3 under the 1934 Act), directly or indirectly, of securities of the Company ordinarily having the right to vote in the election of directors (Voting Securities) representing twenty percent (20%) or more of the combined voting power of the then outstanding Voting Securities. 3. Limited Stock Appreciation Rights. 3.1 This option is granted in tandem with a limited stock appreciation right. 3.2 The limited stock appreciation right shall entitle you to receive from the Company an amount equal to the excess of the fair market value at the time of exercise of one share of the Company's Common Stock over the option price per share under this option, multiplied by the number of shares exercised pursuant to the limited stock appreciation right. 3.3 The limited stock appreciation right shall be exercisable only during the 60 calendar days immediately following a Change in Control and only if the immediate resale of shares acquired upon exercise of this option would subject you to liability under Section 16(b) of the 1934 Act, provided, however, that the limited stock appreciation right may not be exercised within six months of its date of grant. Upon exercise of the limited stock appreciation right, the option or portion thereof to which the right relates must be surrendered. 3.4 Payment upon exercise of the limited stock appreciation right by the Company may be made only in cash. 3.5 The limited stock appreciation right may not be assigned or transferred except on death, by will or operation of law and may be exercised only by you or by your successor or representative after death. 4. Exercise Requirements. 4.1 If you cease to be a director for any reason, the Company will establish an Option Reference Date. Any portion of the option that is not exercisable on the Option Reference Date will lapse. The Company will fix the Option Reference Date as follows: 4.1.1 If you cease to be a director because of death or disability, the first day of the next Option Year will be the Option Reference Date. You are disabled if as a result of illness or injury you suffer from a condition of mind or body that permanently prevents you from serving in your capacity as a director. The Committee will conclusively determine disability. 4.1.2 If 4.1.1 does not apply, the Option Reference Date will be your last day as a director. 4.2 You may exercise any portion of the option that is exercisable on the Option Reference Date up to the earlier of the date in 2.1 or a date fixed as follows: 4.2.1 On death or disability - one year after your last day as a director. 4.2.2 If 4.2.1 does not apply - one month after the Option Reference Date. 5. Nonassignability. You may not assign or transfer this option except on death, by will or operation of law. Only you or your successor or representative after death may exercise this option. 6. Method of Exercise; Closing. 6.1 You may exercise this option by written notice to the Company, attention: General Counsel, stating the number of shares you want to buy and the proposed date of closing. Unless otherwise agreed to by you and the Company, the Company will fix the date of closing as the date the Company receives your exercise notice or the date the Company receives full payment for the shares, whichever is later. 6.2 You or your successor purchaser must furnish to the Company before closing such other documents or representations as the Company may require to assure compliance with applicable laws and regulations. 6.3 You must pay the full purchase price in cash or by delivery of Company stock at or before closing. The Company will not issue any of the purchased shares and you will not have shareholder rights in them until you have made full payment. 6.4 The Company will value stock you deliver in payment of the option in accordance with Section 7.5 of the Plan. 6.5 You, or your successor purchaser, must deposit sufficient funds with the Company at closing to cover any income or other taxes to be withheld on account of the exercise. If funds are not deposited or other arrangements made forwithholding, the Company may refuse to close or may retain shares having a value equal to the amount it is required to withhold. If, after closing, withholding becomes required beyond any amount deposited at closing, you, or your successor purchaser, will pay such amount to the Company on demand. 7. Changes in Capital Structure. 7.1 If any change is made in the outstanding common shares of the Company without the Company's receiving any consideration, the Company will make a corresponding change in the shares under this option so that you will be in the same position after exercise of the option as would have been the case if you had exercised the option before the change. The Company will not change the total purchase price for the unexercised portion of the option. The Company will disregard fractional shares. 7.2 If the Company consolidates with another corporation or merges into another corporation, this will be a change to which 7.1 applies. The new corporation will revise the option or issue a new option giving you an equivalent right to buy the shares of the new corporation. 7.3 The Board will make the adjustment under 7.1 or 7.2 and its determination will be conclusive. 8. Successorship. Subject to the limits in 5, this agreement will be binding upon and benefit the parties, their successors and assigns. 9. Notices. Any notices under this option must be in writing and will be effective when actually delivered or, if mailed, when deposited postpaid. Each party shall direct mail to the address stated in this option or to such other address as a party may certify by notice to the other party. Each party will send notices to the Board at the Company's address MENTOR GRAPHICS CORPORATION OPTIONEE By:___________________________ ___________________________ Frank S. Delia Marsha B. Congdon Vice President and Chief Administrative Officer EX-13 4 EXHIBIT 13 EXHIBIT 13 Selected Consolidated Financial Data Year ended December31, 1993 1992 1991 1990 1989 In thousands, except per share data and percentages Statement of Operations Data Total revenues $339,775 $350,766 $400,127 $435,185 $426,359 Research and development expense $ 77,598 $ 73,947 $ 79,539 $ 76,315 $ 70,891 Operating income (loss) $(29,392)$(40,732) $(60,501) $ 20,715 $ 60,150 Net income (loss) $(32,073)$(50,861) $(61,613) $ 23,625 $ 45,539 Gross margin percent 64.6% 56.4% 50.0% 58.3% 60.4% Operating income(loss) as a percent of total revenues (8.7%) (11.6%) (15.1%) 4.8% 14.1% Per Share Data Net income (loss) per common and common equivalent share $ (.69)$ (1.13) $ (1.43) $ .53 $ 1.06 Cash dividends per common share outstanding $ .18 $ .24 $ .24 $ .22 $ .15 Weighted average number of common and common equivalent shares outstanding 46,410 45,142 43,153 44,833 43,073 Balance Sheet Data As of December 31, 1993 1992 1991 1990 1989 Cash and short-term investments $109,568 $108,783 $144,022 $161,755 $160,343 Cash and investments, long-term $ 30,000 $ 30,000 $ ^ $ ^ $ ^ Working capital $ 96,336 $108,892 $169,875 $208,223 $209,734 Property, plant and equipment, net $104,912 $109,580 $114,213 $ 62,438 $ 51,563 Construction in progress $ ^ $ ^ $ 1,156 $ 60,603 $ 15,959 Total assets $353,584 $ 378,565 $445,661 $504,287 $406,382 Short-term borrowings $ 6,364 $ 5,548 $ 4,511 $ 11,953 $ 9,933 Long-term debt $ 54,321 $ 55,709 $ 50,554 $ 50,167 $ 7,729 Stockholders^ equity $195,711 $221,406 $267,667 $326,419 $297,850 MANAGEMENT^S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS Revenues and Gross Margins 1993 Change 1992 Change 1991 System and software revenues $191,180 (10%) $ 212,397 (19%) $262,608 System and software gross margins $138,879 7% $ 130,404 (10%) $145,694 Percentage of revenues 72.6% 61.4% 55.5% Service and support revenues $148,595 7% $ 138,369 1% $137,519 Service and support gross margins $ 80,704 20% $ 67,394 24% $ 54,387 Percentage of revenues 54.3% 48.7% 39.5% Total revenues $339,775 (3%) $350,766 (12%) $400,127 Total gross margins $219,583 11% $197,798 (1%) $200,081 Percentage of revenues 64.6% 56.4% 50.0% System and Software System and software revenues declined 10% from 1992 to 1993 and 19% from 1991 to 1992. The primary factors contributing to the decline in system and software revenues include a significant reduction in hardware revenues and a generally poor world-wide economy, partially offset by the transition of customers to the Company^s Version 8 software. During the last two years, the Company has been executing a plan to exit from the hardware business. This transition has been slow while the Company attempted to meet the demands of some customers who prefer to purchase their electronic design automation (EDA) solutions from one vendor. The majority of the Company^s customers meet their hardware needs by working directly with hardware vendors. Hardware revenue is expected to become immaterial to the Company^s financial statements in 1994. The software component of system and software revenues increased 14% from 1992. During the first quarter of 1993 the Company shipped Version 8.2 of its software. This release included enhanced performance and reliability and was a key factor in the Company^s ability to increase the conversion of existing customers. Customers who have transitioned or are in the process of transitioning from Version 7 to Version 8 increased from 30% in 1992 to approximately 80% at the end of 1993. With a reliable production quality release in place the Company will concentrate more effort toward identifying and developing enhancement options for the Version 8 software. Revenues for the past three years continued to be negatively impacted by a poor international economy. In 1993, the Company experienced improved order activity in North America while Japan and Europe results continued to reflect weakness. The situation in Japan was particularly unfavorable as customers remain extremely cautious in their capital spending. While difficult to predict, the Company^s revenue will likely continue to be negatively impacted by the economic recessions in Japan and Europe. System and software gross margin percentage improvements in 1993 and 1992 are a result of increased software versus hardware sales each year. This mix shift is expected to continue to favorably impact gross margin percentage at a much less accelerated rate as hardware product revenues will likely become immaterial in 1994. Gross margins were negatively impacted by amortization of previously capitalized software development costs to system and software cost of revenues totalling $7,449, $5,875, and $3,961 for 1993, 1992, and 1991, respectively. The increase is the result of higher levels of capitalization during development of Version 8 software products. In 1994, amortization is expected to decrease as some Version 8 software products become fully amortized. Service and Support The increase in service and support revenue in 1993 and 1992 is attributable to continued growth in professional services and continued customer acceptance of the Company^s software support programs. The Company has focused resources in the past two years on development of a professional service business which provides consulting and training to meet customer needs for comprehensive EDA solutions. The response to these services has been favorable as many customers seek external help to improve their EDA processes. In 1993, the Company received several large orders for combined software and services. Increased professional service revenue is expected in 1994 based on anticipated growth in customer demand. The Company also recognized a one-time benefit from an individual service contract in the third quarter of 1993 increasing service and support revenue by $2,100. These positive factors were offset by reduced hardware service revenues as the Company continued to deemphasize hardware-related activities. Service and support gross margins have improved in 1993 and 1992 as a result of exiting the hardware service business and focusing on higher margin software support. The Company also experienced lower software update costs by implementing CD ROM technology for paperless documentation, and reducing the number of major update releases in the last two years. Consistent with consulting and training business models, gross margins generated by the Company^s professional services activities have been, and are expected to continue to be, lower than software support. Lower overall service and support gross margins are anticipated as growth in the professional service business is expected to be higher than growth in software support. Operating Expense 1993 Change 1992 Change 1991 Research and development $ 77,598 5% $ 73,947 (7%) $ 79,539 Percentage of total revenues 22.8% 21.1% 19.9% Marketing, general, and administration $146,577 (3%) $151,683 (1%) $153,943 Percentage of total revenues 43.1% 43.2% 38.5% Restructure costs $ 24,800 92% $ 12,900 (52%) $ 27,100 Percentage of total revenues 7.3% 3.7% 6.8% Research and Development Gross research and development (R&D) costs were $81,207 for 1993, a 1% increase from 1992 and a 9% reduction from 1991. R&D expenditures were approximately flat in 1993 while the Company focused on performance improvements of its Version 8 software release. Offsetting these expenses was a reduction in headcount for the year due to voluntary attrition. 1992 gross R&D costs were reduced from 1991 as a result of lower headcount due to Company restructuring. In addition, 1991 R&D costs included a charge of $2,106 related to the write-off of previously purchased technology. During 1993, the Company capitalized R&D costs of $3,609, compared to $6,120 and $9,917 for 1992 and 1991, respectively. The decline in R&D capitalization during 1993 relates to substantial completion of development activities associated with Version 8, a focus on performance improvements, and an effort toward transition of customers to the new software. Capitalization is expected to increase in 1994 as more resources are directed toward development of new products and enhancement of existing products. Gross R&D costs are expected to decline from 1993 levels due to the Company restructuring plan approved in December 1993. See Restructuring Costs discussion below. These cost savings are expected to be realized in phases throughout 1994 as product group management will execute separate plans to meet their 1994 financial goals. Also, improvement of product development processes are expected to increase productivity in the coming year. Negatively impacting R&D expenses will be the lifting of the October 1992 Company-wide salary freeze, which occurred in the third quarter of 1993. Maintaining a competitive salary structure is a stated goal of management. Marketing, General, and Administration Marketing, general and administration (MG&A) expenses were $146,577 for 1993, a 3% and 5% reduction from 1992 and 1991, respectively. The decline in 1993 represents continued headcount reductions due to voluntary attrition, partially offset by increased recruiting costs associated with the successful hiring of several key management positions. In 1994, MG&A expenses are expected to decline as actions associated with the December 1993 restructuring take place. Negatively impacting MG&A expenses will be the lifting of the October 1992 Company-wide salary freeze. Also, the Company will experience additional costs for implementation of a new global information system in the coming year. This system is expected to significantly improve management^s ability to capture and analyze financial and non-financial data. Restructuring Costs In December 1993, management of the Company approved a restructuring plan aimed at reducing operating expenses by streamlining and reorganizing Company operations. Restructure costs of $24,800 to be incurred in executing this plan were recognized in 1993. These costs consist primarily of costs directly related to the severance and relocation of employees, facilities closures, and write-offs of excess equipment and intangible software technology assets related to discontinued product development activities. The plan will be implemented in phases throughout 1994. The plan will be carried out within divisional and regional units based on their individual business plans. In 1994, implementation of the restructuring plan is expected to reduce expenses by approximately $10,000 which may be partially offset by increased expenditures in other areas. When all elements of the restructuring plan have been fully implemented, the Company expects future costs and expenses to be reduced even further. Also, approximately $22,000 of the 1993 restructure charge is expected to result in cash expenditures in 1994. Spending associated with certain facilities closures may extend beyond 1994. In August 1992 and 1991, the Company executed restructuring plans aimed at improving its focus on the core businesses of integrated circuit design and electronic systems design. Costs associated with the restructurings of $12,900 and $27,100 were recognized in 1992 and 1991, respectively. Restructuring costs included direct costs related to the severance and relocation of employees, consolidation of facilities, and write-offs of intangible software technology assets related to discontinued product lines. The 1991 charge was offset by a net gain on the sale of certain assets and the subcontracting of the Company^s North America hardware service business to Hewlett-Packard Company. See note 2 of Notes to Consolidated Financial Statements. Other Income (Expense) 1993 Change 1992 Change 1991 Interest income $ 4,338 (18%) $ 5,284 (46%) $ 9,800 Interest expense $ (4,404) (19%) $ (5,469) 1% $(5,428) Contract settlement$ ^ ^ $ (6,150) ^ $ ^ Write-off of non-operating items $ ^ ^ $ (1,148) (85%) $(7,838) Life insurance proceeds $ ^ ^ $ ^ ^ $ 1,000 Other Income (Expense) Interest income has declined significantly in the last three years due to reduced average cash balances and much lower interest rates on investments. Interest expense declined significantly in 1993 as a result of a reduction in the notional amount of the Company^s interest rate swap agreement from $50,000 to $17,500, and lower average debt outstanding through management of the Company^s long-term committed revolving credit facility. The reduction in notional amount results in subjecting $32,500 of borrowings to more favorable floating rates. The interest rate swap agreement converts floating rates on the remaining borrowings of $17,500 to a fixed rate of 9.55%. 1992 interest expense was relatively flat with 1991 levels, primarily a result of the interest rate swap agreement which essentially fixed interest rates on $50,000 of borrowings in each year. Other expense for 1992 includes a charge of $6,150 related to termination of a contractual relationship with a third-party software supplier. The Company paid $4,250 in the fourth quarter of 1992 and took a write-off of $1,900 in balance sheet amounts related to the contract. In exchange, the supplier relinquished all future claims against the Company, including cancellation of the obligation to pay royalties on sales of certain products through September 30, 1994. Other expense also includes write- downs for certain non-operating assets to net realizable value, totaling $1,148 and $7,838 for 1992 and 1991, respectively. In addition, the Company recorded a one-time benefit of $1,000 in other income related to the proceeds received from a key-man life insurance policy during 1991. The Company is not the beneficiary of any other life insurance policy on any employee. Provision (Benefit) for Income Taxes The provision for income taxes was $2,424 and $2,590 in 1993 and 1992, respectively. The Company recorded a benefit for income taxes of $1,390 in 1991. The Company^s income tax position for each year combines the effects of available tax benefits in certain countries where the Company does business, benefits from available net operating loss carrybacks, and tax expense for subsidiaries with pre-tax income. As such, the Company^s income tax position and resultant effective tax rate is uncertain in 1994. Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, ^Accounting for Income Taxes.^ The cumulative effect of the change in the method of accounting for income taxes was not material to the Company^s financial statements, and is therefore not disclosed separately in the Consolidated Statement of Operations for the year ended December 31, 1993. Effects of Foreign Currency Fluctuations The Company experienced net gains from foreign currency transactions of $247, $297 and $827 in 1993, 1992 and 1991, respectively. These amounts are composed of realized gains and losses on cash transactions involving various foreign currencies, and unrealized gains and losses related to foreign currency receivables and payables resulting from exchange rate fluctuations between the various currencies in which the Company operates. Foreign currency gains and losses are included as a component of other income and expense. The ^foreign currency translation adjustment,^ as reported in the stockholders^ equity section of the Consolidated Balance Sheets, increased to $7,539 at December 31, 1993, from $5,467 at the end of 1992. This reflects the increase in the value of net assets denominated in foreign currencies since year-end 1992, as a result of a weaker U.S. dollar at the close of 1993. During 1993 and 1992, the U.S. dollar was volatile against the European currencies in which the Company does business, primarily the Deutsche mark, British pound, and French franc. The U.S. dollar strengthened relative to the European currencies during the first three months and last six months of the year. The dollar weakened when compared to the yen during the first nine months of 1993 and rebounded slightly in the fourth quarter. Foreign currency fluctuations in Europe and Japan resulted in a slightly weaker U.S. dollar overall during 1993. A weaker U.S. dollar results in the Company^s products being more affordable in foreign markets, which generally results in favorable economics for the Company. The weakening of the dollar relative to the foreign currencies also has a positive impact on revenues as local currency revenues translate into more U.S. dollars. However, this translation also results in higher reported expenses in U.S. dollar terms. In 1994, the Company implemented a hedging strategy focused on further reducing its exposure to foreign currency exchange rate fluctuations. This strategy effectively hedges a percentage of anticipated future foreign currency revenues against exchange rate fluctuations. The Company generates approximately half of its revenues outside of the United States and expects this to continue in the future. As such, the Company^s business and operating results will continue to be impacted by the effects of future foreign currency fluctuations. Liquidity and Capital Resources Year Ended December 31, 1993 1992 1991 Cash and short-term investments $109,568 $108,783 $144,022 Cash and investments, long-term $ 30,000 $ 30,000 $ ^ Inventory $ 2,299 $ 9,683 $ 23,329 Other assets $ 20,584 $ 30,998 $ 35,885 Long-term debt $ 54,321 $ 55,709 $ 50,554 Cash provided by operating activities $ 25,289 $ 13,610 $ 30,790 Cash used for investing activities, excluding short-term investments $(26,754) $(29,559)$(42,172) Cash provided (used) by financing activities $ 1,862 $(18,354)$ (6,429) Cash and Investments Total cash and investments remained relatively flat with an increase of $785 during 1993. Cash provided by operating activities was $25,289, an increase of $11,679 from 1992. Negatively impacting cash provided by operating activities was the net loss incurred for the year and reductions in accounts payable. These uses of cash were offset by a reduction in trade accounts receivable, continued transition out of the hardware business resulting in lower inventory levels, and increased accrued liabilities associated with the year-endrestructuring. Cash and short-term investments were positively impacted by the proceeds from issuance of common stock upon exercise of stock options and employee stock plan purchases in the amount of $10,672. This increase was offset by dividends paid to stockholders during 1993 of $8,291. See Dividends discussion below. In addition, the Company spent $22,790 for property, plant and equipment which was primarily UNIX-based design environment equipment. See Capital Resources discussion below. Inventory Inventory was down $7,384 from December 31, 1992 as a result of the Company^s move away from selling hardware to emphasize software sales. As this transition has been implemented, the Company has instituted drop shipment programs to minimize the risk of holding inventory for resale. Operating inventory levels are near zero as the transition to a software-only business model is in the final stages. Demonstration equipment included in inventory amounted to $1,835 and $4,626 at December 31, 1993 and 1992, respectively. Other Assets Other assets were down $10,414 from December 31, 1992. Net capitalized software development costs were lower by $4,364 as amortization and restructuring-related write-offs exceeded capitalization for the year. In September 1993, the Company received a partial refund of a rent deposit totalling $4,800 as a result of renegotiating a long-term office lease in Japan. Capital Resources Total capital expenditures decreased to $23,145 for 1993, compared to $23,439 and $38,255 for 1992 and 1991, respectively. Expenditures for property and equipment were $22,790 and $18,784 in 1993 and 1992, respectively. During 1992, the Company continued its commitment to invest in a high quality software development environment, purchasing the latest workstations for engineers. In 1993, the Company made additional investments in new computer equipment for development engineers as the Company^s research and development efforts were fully transitioned to a UNIX-based design environment. Future capital expenditure plans include maintaining a state-of-the-art design environment for research and development, maintaining updated sales demonstration equipment, and implementing a new global information system. Also, approximately $22,000 of the 1993 restructure charge of $24,800 is expected to result in cash expenditures during 1994. Spending associated with certain facilities closures may extend beyond 1994. Long-term Debt Long-term debt decreased $1,388 from December 31, 1992. As of December 31, 1993 the Company had no commercial paper outstanding compared to borrowings of $3,096 as of December 31, 1992. The Company does not anticipate issuing commercial paper in the foreseeable future. The Company had borrowings outstanding of $55,000 and $50,000 under its $55,000 committed revolving credit facility as of December 31, 1993 and 1992 respectively. Due to required commitment reductions of $840 annually beginning in July 1994, the Company classified $840 of the credit facility borrowings as current which are included in short-term borrowings on the Consolidated Balance Sheet as of December 31, 1993. During the third quarter of 1992, the Company^s Japanese subsidiary entered into an agreement to borrow 300 million Yen ($2,681 and $2,405 at December 31, 1993 and 1992 exchange rates, respectively). These borrowings mature on July 20, 1994 and have a maximum interest rate of 5.95%. As such, the debt is classified as current and is included in short-term borrowings on the Consolidated Balance Sheet as of December 31, 1993. Dividends In October 1993, the Board of Directors voted to discontinue paying a quarterly dividend to shareholders. The Company intends to reinvest future earnings in opportunities for growth. Dividends were paid during the first three quarters of 1993 totalling $8,291. Consolidated Statements of Operations Year ended December 31, 1993 1992 1991 In thousands, except per share data Revenues: System and software $191,180 $212,397 $262,608 Service and support 148,595 138,369 137,519 Total revenues 339,775 350,766 400,127 Cost of revenues: System and software 52,301 81,993 116,914 Service and support 67,891 70,975 83,132 Total cost of revenues 120,192 152,968 200,046 Gross margin 219,583 197,798 200,081 Operating expenses: Research and development (note 6) 77,598 73,947 79,539 Marketing, general, and administration 146,577 151,683 153,943 Restructure costs (note 2) 24,800 12,900 27,100 Total operating expenses 248,975 238,530 260,582 Operating loss (29,392) (40,732) (60,501) Other expense, net (note 12) (257) (7,539) (2,502) Loss before income taxes (29,649) (48,271) (63,003) Provision (benefit) for income taxes (note 4) 2,424 2,590 (1,390) Net loss $ (32,073)$ (50,861)$ (61,613) Net loss per common and common equivalent share $ (.69)$ (1.13)$ (1.43) Weighted average number of common and common equivalent shares outstanding 46,410 45,142 43,153 See accompanying notes to consolidated financial statements. Consolidated Balance Sheets As of December 31, 1993 1992 In thousands Assets Current assets: Cash and cash equivalents $ 95,958 $ 72,012 Short-term investments 13,610 36,771 Trade accounts receivable, net of allowance for doubtful accounts of $3,928 in 1993 and $4,376 in 1992 72,655 75,604 Other receivables 4,167 4,678 Inventory 2,299 9,683 Prepaid expenses and other 9,399 9,239 Total current assets 198,088 207,987 Property, plant and equipment, net (notes 5 and 8) 104,912 109,580 Cash and investments, long-term (note 8) 30,000 30,000 Other assets (note 6) 20,584 30,998 Total assets $353,584 $378,565 Liabilities and Stockholders^ Equity Current liabilities: Short-term borrowings (notes 7 and 8) $ 6,364 $ 5,548 Accounts payable 10,637 17,185 Income taxes payable (note 4) 9,974 9,079 Accrued payroll and related liabilities 14,162 12,043 Accrued restructure costs (note 2) 28,374 12,270 Accrued and other liabilities 14,603 17,122 Deferred revenue 17,638 25,848 Total current liabilities 101,752 99,095 Long-term debt (note 8) 54,321 55,709 Other long-term deferrals 1,800 2,355 Total liabilities 157,873 157,159 Stockholders^ equity: (notes 9 and 10) Common stock, no par value, authorized 100,000 shares; 47,659 and 45,597 issued and outstanding for 1993 and 1992, respectively 243,951 231,354 Incentive stock, no par value, authorized 1,200 shares; none issued ^ ^ Accumulated deficit (55,779) (15,415) Foreign currency translation adjustment 7,539 5,467 Total stockholders^ equity 195,711 221,406 Commitments and contingencies (note 11) Total liabilities and stockholders' equity $ 353,584 $378,565 See accompanying notes to consolidated financial statements. Consolidated Statements of Cash Flows Year ended December 31, 1993 1992 1991 In thousands Operating Cash Flows: Net loss $(32,073) $(50,861) $(61,613) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization of property, plant and equipment 27,600 25,750 29,701 Deferred taxes (259) 2,512 3,594 Amortization of other assets 8,217 8,743 8,800 Amortization of nonqualified stock options 1,418 237 676 Write-down of assets ^ restructure (note 2) 524 935 7,895 Write-down of assets ^ other 288 5,153 14,580 Changes in operating assets and liabilities: Trade accounts receivable 2,788 23,490 18,562 Inventory 7,771 13,934 593 Prepaid expenses and other assets 6,623 9,409 (5,881) Accounts payable (5,845) (9,383) 6,913 Accrued liabilities 16,634 (8,078) (606) Other liabilities and deferrals (8,397) (8,231) 7,576 Net cash provided by operating activities 25,289 13,610 30,790 Investing Cash Flows: Net maturities (purchases) of short-term investments 23,161 28,831 (4,888) Purchases of property, plant and equipment (22,790) (18,784) (31,235) Capitalization of software development costs (3,609) (6,120) (9,917) Development of corporate facilities (355) (4,655) (7,020) Proceeds from sale of hardware service business (note 2) ^ ^ 6,000 Net cash used by investing activities (3,593) (728) (47,060) Financing Cash Flows: Proceeds from issuance of common stock 11,179 16,074 10,864 Proceeds (repayment) of short-term borrowings (89) 1,222 (6,836) Proceeds (repayment) of long-term debt (937) 5,176 (110) Dividends paid to stockholders (8,291) (10,826) (10,347) Increase in cash and investments, long-term ^ (30,000) ^ Net cash provided (used) by financing activities 1,862 (18,354) (6,429) Effect of exchange rate changes on cash and cash equivalents 388 (992) 181 Net change in cash and cash equivalents 23,946 (6,464) (22,518) Cash and cash equivalents at beginning of period 72,012 78,476 100,994 Cash and cash equivalents at end of period $ 95,958 $ 72,012 $78,476 See accompanying notes to consolidated financial statements. Consolidated Statements of Stockholders' Equity Retained Foreign Total Earnings, Currency Stock- Common Stock (Accumulated Translation holders^ In thousands, except per share data Shares Amount Deficit) Adjustment Equity Balance at December 31, 1990 42,397 $203,417 $118,232 $ 4,770 $326,419 Stock issued under stock option and stock purchase plans 1,198 10,950 ^ ^ 10,950 Compensation related to nonqualified stock options granted (note 10) ^ 676 ^ ^ 676 Foreign currency translation adjustment ^ ^ ^ 1,582 1,582 Net loss ^ ^ (61,613) ^ (61,613) Cash dividends ($.24 per common share outstanding) ^ ^ (10,347) ^ (10,347) Balance at December 31, 1991 43,595 215,043 46,272 6,352 267,667 Stock issued under stock option and stock purchase plans 2,002 16,074 ^ ^ 16,074 Compensation related to nonqualified stock options granted (note 10) ^ 237 ^ ^ 237 Foreign currency translation adjustment ^ ^ ^ (885) (885) Net loss ^ ^ (50,861) ^ (50,861) Cash dividends ($.24 per common share outstanding) ^ ^ (10,826) ^ (10,826) Balance at December 31, 1992 45,597 231,354 (15,415) 5,467 221,406 Stock issued under stock option and stock purchase plans 1,641 10,672 ^ ^ 10,672 Stock issued for acquisition of business (note 3) 421 507 ^ ^ 507 Compensation related to nonqualified stock options granted (note 10) ^ 1,418 ^ ^ 1,418 Foreign currency translation adjustment ^ ^ ^ 2,072 2,072 Net loss ^ ^ (32,073) ^ (32,073) Cash dividends ($.18 per common share outstanding) ^ ^ (8,291) ^ (8,291) Balance at December 31, 1993 47,659 $243,951 $(55,779) $ 7,539 $195,711 See accompanying notes to consolidated financial statements. All numerical references in thousands, except percentages and per share data 1. Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the financial statements of Mentor Graphics Corporation and its wholly owned and majority-owned subsidiaries (the Company). All significant intercompany accounts and transactions are eliminated in consolidation. Foreign Currency Translation Local currencies are the functional currencies in the Company^s foreign subsidiaries except for the Netherlands and Singapore where the U.S. dollar is used as the functional currency. Assets and liabilities of foreign operations are translated to U.S. dollars at current rates of exchange, and revenues and expenses are translated using weighted average rates. Gains and losses from foreign currency translation are included as a separate component of stockholders^ equity. Foreign currency transaction gains and losses are included as a component of other income and expense (note 12). Financial Instruments The Company enters into forward foreign exchange contracts as a hedge against foreign currency sales commitments. Remeasurement gains and losses on these contracts are deferred and recognized when the sales occur. All subsequent remeasurement gains and losses are recognized as they occur to offset remeasurement gains and losses recognized on the related foreign currency accounts receivable balances (note 14). The Company has entered into an interest rate swap agreement to manage exposure to interest rate fluctuations. The differential to be paid or received is accrued and recognized over the life of the agreement as an adjustment to interest expense (note 8). The Company places its cash equivalents and short-term investments with major banks and financial institutions. The investment policy limits the Company^s creditexposure to any one financial institution. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising the Company^s customer base, and their dispersion across different businesses and geographic areas. The carrying amounts of cash equivalents, short-term investments, trade receivables, accounts payable, and short-term borrowings approximate fair value because of the short-term nature of these instruments. The Company has evaluated Statement of Financial Accounting Standards No. 115, ^Accounting for Certain Investments in Debt and Equity Securities,^ issued in May 1993. As required, the Company will adopt Statement No. 115 effective January 1, 1994, prospectively. The Statement requires reporting of investments as either held to maturity, trading or available for sale. The Company owns common stock and common stock warrants of an independent public company with a carrying cost of $0 and a market value of $1,375 as of December 31, 1993. Pursuant to rule 144 under the Securities Act of 1933 the Company must follow a restricted schedule for selling these equity securities. It is anticipated that the shares will be sold when restriction milestones have been met. Accordingly, under Statement No. 115, the securities will be classified as held for sale which, upon adoption in the first quarter of 1994, will require the difference between carrying cost and market value to be recognized and included as a separate component of stockholders^ equity. No other investments owned by the Company are expected to be materially impacted by the provisions of this Statement as the underlying carrying values approximate market. Cash, Cash Equivalents, and Short-Term Investments The Company classifies highly liquid investments purchased with an original maturity of three months or less as cash equivalents. Short-term investments consist of certificates of deposit, commercial paper and other highly liquid investments with original maturities in excess of three months. It is the Company^s intent to hold these investments for less than one year. Inventory Inventory, consisting principally of computer hardware and demonstration equipment, is stated at the lower of average cost or market. Demonstration equipment comprised $1,835 and $4,626 of the total inventory balance at December 31, 1993 and 1992, respectively. Property, Plant and Equipment Property, plant and equipment is stated at cost and consists of land and land improvements, buildings and building equipment, computer equipment and furniture, leasehold improvements, and service spare parts (note 5). Expenditures for additions to property, plant and equipment are capitalized. The cost of repairs and maintenance is expensed as incurred. Depreciation of buildings and building equipment, and land improvements, is computed on a straight-line basis over lives of forty and twenty years, respectively. Depreciation of computer equipment and furniture is computed principally on a straight-line basis over the estimated useful lives of the assets, generally three to five years. Leasehold improvements are amortized on a straight- line basis over the lesser of the term of the lease or estimated useful lives of the improvements. Service spare parts are amortized on a straight-line basis over their estimated useful lives, generally four years. Income Taxes In February 1992, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 109, ^Accounting for Income Taxes^. Statement No. 109 requires a change from the deferred method under APB Opinion 11 to the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts and tax balances of existing assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under Statement No. 109, the effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Effective January 1, 1993, the Company adopted Statement No. 109. The cumulative effect of that change in the method of accounting for income taxes was not material to the Company^s financial statements, and is therefore not disclosed separately in the Consolidated Statement of Operations for the year ending December 31, 1993. Pursuant to the deferred method under APB Opinion 11, which was applied in 1992 and prior years, deferred income taxes are recognized for income and expense items that are reported in different years for financial reporting purposes and income tax purposes using the tax rate applicable for the year of calculation. Under the deferred method, deferred taxes are not adjusted for subsequent changes in tax rates. Revenue Recognition Revenues from system sales and software licenses are recognized at the time of shipment. Contract service revenues are billed in advance and recorded as deferred revenue. Service revenues are then recognized ratably over the contractual period as the services are performed. Training and consulting revenues are recognized as the related services are performed. Custom design and software porting revenues are recognized using the percentage of completion method or as contract milestones are achieved. Software Development Costs The Company capitalizes certain software development costs incurred. These capitalized costs are amortized over the estimated economic life of the software, not exceeding three years, computed principally on a straight-line basis. Amortization is included in system and software cost of revenues in the Consolidated Statements of Operations. All other research and development costs are expensed as incurred. Net Loss Per Common and Common Equivalent Share For 1993, 1992 and 1991, the weighted average number of common and common equivalent shares outstanding was calculated using only common shares outstanding. Common stock equivalents, related to stock options outstanding, are anti dilutive as the Company is in a loss situation and, therefore, are not included. Reclassifications Certain reclassifications have been made in the accompanying consolidated financial statements for 1991 and 1992 to conform with the 1993 presentation. 2. Restructuring In December 1993, the Company recorded a charge of $24,800 associated with a restructuring plan aimed at reducing operating expenses by streamlining and reorganizing company operations. These costs consist primarily of direct costs related to the severance and relocation of employees, facilities closures, and write-offs of excess equipment and intangible software technology assets related to discontinued product development. The plan will be implemented in phases during 1994. In August 1992 and 1991, the Company executed restructuring plans aimed at improving its focus on the core businesses of integrated circuit design and electronic systems design. Restructure costs of $12,900 and $27,100 were recognized in 1992 and 1991, respectively. These restructuring costs included direct costs related to the severance and relocation of employees, consolidation of facilities, and write-offs of intangible software technology assets related to discontinued product lines. The 1991 restructure costs were offset by a net gain on the sale of certain assets and the subcontracting of the Company^s North American hardware service business to Hewlett-Packard Company. Following is a summary of the major elements of the restructure charges: Year ended December 31, 1993 1992 1991 Employee severance and relocation $ 19,400 $ 5,700 $ 9,700 Asset write-offs and product discontinuance costs 2,300 6,435 16,300 Facilities closures and consolidation 4,300 1,800 2,600 Sale of hardware service business ^ ^ (2,400) Reversal of accrued restructure costs due to change in estimates (1,400) (1,600) ^ Other 200 565 900 Total $ 24,800 $ 12,900 $ 27,100 3. Business Acquisition On December 1, 1993, the Company issued approximately 421 shares of its common stock for all the outstanding common and preferred stock of CheckLogic Systems, Inc. (CheckLogic). In addition, up to 35 common shares were reserved for issuance with respect to CheckLogic employee stock options outstanding. CheckLogic is a developer of automatic test pattern generation point tools used to test designs of application specific integerated circuits. The Company has accounted for this transaction as a pooling of interests, and the financial results for the year ended December 31, 1993 include the accounts of CheckLogic. The separate financial results of CheckLogic prior to the acquisition are not material, and accordingly the consolidated financial statements for 1992 and 1991 have not been restated. 4. Income Taxes As discussed in Note 1, the Company adopted Statement No. 109 as of January 1, 1993. The cumulative effect of this change in accounting for income taxes was not material to the Company^s financial statements, and is therefore not disclosed separately in the Consolidated Statement of Operations, for the year ended December 31, 1993. Prior years^ financial statements have not been restated to apply the provisions of Statement No. 109. Domestic and foreign pre-tax income (loss) is as follows: Year ended December 31, 1993 1992 1991 Domestic $(23,682) $(41,322) $(72,570) Foreign (5,967) (6,949) 9,567 Total $(29,649) $(48,271) $(63,003) The provision (benefit) for income taxes is as follows: Year ended December 31, 1993 1992 1991 Current: Federal $ ^ $ (1,141) $(13,292) State (162) 138 (311) Foreign 2,041 1,081 8,619 1,879 78 (4,984) Deferred: Federal 655 102 5,515 Foreign (110) 2,410 (1,921) 545 2,512 3,594 Total $ 2,424 $ 2,590 $ (1,390) The effective tax (benefit) rate differs from the Federal statutory rates as follows: Year ended December 31, 1993 1992 1991 Federal statutory tax (benefit) rate (35.0%) (34.0%) (34.0%) State taxes, net of Federal tax benefits (2.3) 0.3 (0.5) Differences in foreign tax rates 8.0 0.3 2.9 Losses from foreign subsidiaries 0.6 7.7 2.6 Unrealized benefit of net operating loss carryforwards ^ 26.9 8.2 Unrealized benefit of tax credit carryforwards ^ ^ 16.6 Alternative minimum tax ^ ^ 2.0 Adjustment of deferred tax assets due to net operating loss ^ 4.2 21.4 Reduction of income tax liability due to net operating loss ^ ^ (21.4) Adjustment of beginning of year balance of deferred tax assets and liabilities for settlement of Federal income tax obligations 2.5 ^ ^ Change in valuation allowance for deferred tax assets 29.5 ^ ^ Other, net 4.9 ^ ^ Effective tax (benefit) rate 8.2% 5.4% (2.2%) The significant components of deferred income tax expense for the year ended December 31, 1993 are as follows: Net changes in deferred tax assets and liabilities $ (8,205) Increase in beginning-of-year balance of the valuation allowance for deferred tax assets 8,750 Total $ 545 For the years ended December 31, 1992 and 1991, deferred income tax expense of $2,512 and $3,594, respectively, results from timing differences in the recognition of income and expense for income tax and financial reporting purposes. The sources and tax effects of those timing differences are presented below: As of December 31, 1992 1991 Depreciation $ 1,198 $ (5,267) Inventory valuation adjustments 556 (1,155) Accrued vacation and other compensation 822 1,562 Other asset valuation adjustments 413 (1,040) Capitalization of software development costs (152) 138 Customer service accruals 901 (419) Accrued restructure costs (292) (3,512) Adjustment of deferred tax assets due to net operating loss (1,296) 13,485 Other, net 362 (198) Total $ 2,512 $ 3,594 The tax effects of temporary differences and carryforwards which gave rise to significant portions of deferred tax assets and liabilities were as follows: As of December 31, 1993 Deferred tax assets: Property and equipment, principally due to differences in depreciation and capitalized interest $ 810 Inventories, principally due to adjustments to lower of cost or market 3,358 Accounts receivable, principally due to allowance for doubtful accounts 1,241 Compensated absences and other compensation, principally due to accrual for financial reporting purposes 3,105 Restructure costs, principally due to accrual for financial reporting purposes 9,642 Net operating loss carryforwards 29,576 Tax credit carryforwards 11,523 Other, net 1,663 Total gross deferred tax assets 60,918 Less valuation allowance (58,495) Net deferred tax assets 2,423 Deferred tax liabilities: Capitalization of software development costs for financial reporting purposes (3,634) Net deferred tax liabilities $ (1,211) The Company has established a valuation allowance for certain current deferred tax assets, and net operating loss and tax credit carryforwards. Statement No. 109 requires that such a valuation allowance be recorded when it is more likely than not that some portion of the deferred tax assets will not be realized. The valuation allowance as of January 1, 1993 was $49,745. The effect of Statement No. 109 on the consolidated effective tax rate for 1993 and future years, compared to those rates which would have applied under APB Opinion 11, is not expected to be material to the Company^s financial statements. As of December 31, 1993, the Company has net operating loss carryforwards for income tax purposes of approximately $74,100. Such carryforwards will expire from 1996 to 2008 if not used by the Company to reduce income taxes payable in future periods. As of December 31, 1993 the Company has foreign tax credits and research and experimentation tax credits totaling approximately $11,500. These tax credits can be applied against Federal tax liabilities from 1994 through 2008 subject to various limitations under current tax law. The Company has not provided for Federal income taxes on approximately $64,600 of undistributed earnings of foreign subsidiaries at December 31, 1993, since these earnings have been invested indefinitely in subsidiary operations. Upon repatriation, some of these earnings would generate foreign tax credits which will reduce the Federal tax liability associated with any future foreign dividend. The Company has settled its Federal income tax obligations through 1991. The Company believes the provisions for income taxes for years since 1991 are adequate. 5. Property, plant and Equipment A summary of property, plant and equipment follows: As of December 31, 1993 1992 Computer equipment and furniture $121,975 $118,528 Buildings and building equipment 53,326 53,129 Land and improvements 14,641 14,567 Leasehold improvements 9,613 10,057 Service spare parts 3,857 2,998 203,412 199,279 Less accumulated depreciation and amortization (98,500) (89,699) Property, plant and equipment, net $104,912 $109,580 In January, 1993, the Company entered into an agreement to lease a portion of its headquarters site in Wilsonville, Oregon. Under terms of the five-year agreement, approximately 150 square feet of space will be made available to a third party on a firm take-down schedule. The agreement results in rental payments of $3,985 over the remaining term of the lease. 6. Other Assets A summary of other assets follows: As of December 31, 1993 1992 Software development costs, net $ 9,085 $ 13,449 Long-term deposits 5,613 10,119 Investment in real estate 2,935 2,935 Long-term receivables 2,453 2,693 Purchased technology, net 106 744 Long-term prepaid royalties and licenses 63 794 Other 329 264 Total $ 20,584 $ 30,998 The Company capitalized software development costs of $3,609, $6,120, and $9,917 in 1993, 1992, and 1991, respectively. Related amortization expense of $7,449, $5,875, and $3,961 was recorded for the years ended December 31, 1993, 1992, and 1991, respectively. Purchased technology is carried at cost and is amortized over the estimated economic life of the technology, generally three years. Related amortization expense of $565, $636, and $3,183 was recorded for the years ended December 31, 1993, 1992, and 1991, respectively. During 1993, 1992 and 1991, certain purchased technology and software development costs were written off due to product discontinuances resulting from the December 1993, August 1992 and August 1991 restructurings. These write-offs, combined with write-downs of certain other software development, prepaid royalties, and purchased technology to net realizable value, totaled $812, $1,005 and $11,774 in 1993, 1992 and 1991, respectively. 7. Short-Term Borrowings Short-term borrowings represent drawings by subsidiaries under multi-currency unsecured credit agreements and the current portion of long-term debt. Interest rates are generally based on the applicable country^s prime lending rate depending on the currency borrowed. The Company has available lines of credit of approximately $25,255 as of December 31, 1993. Certain agreements require compensatory balances which the Company has met. 8. Long-Term Debt Long-term debt is comprised of the following: As of December 31, 1993 1992 Revolving term credit facility $ 55,000 $ 50,000 Bank note 2,681 2,405 Commercial paper ^ 3,096 Other 161 299 57,842 55,800 Less current portion (3,521) (91) Total $ 54,321 $ 55,709 Effective December 31, 1992, the Company amended its committed credit facility with First Interstate Bank of Oregon, N.A. Under terms of the amendment, the revolving credit facility remains in effect until July 2000 and the commitment level was established at $55,000. Interest on borrowings under the credit facility remain floating-rate based. Borrowings are collateralized by cash and investments of $30,000 and a trust deed on the Company^s headquarters site in Wilsonville, Oregon of $25,000. The amendment requires commitment reductions of $840 annually beginning in July 1994, therefore $840 is classified as current and included in short-term borrowings on the Consolidated Balance Sheet as of December 31, 1993. In conjunction with the loan amendment, the Company also modified its interest rate swap agreement with First Interstate Bank of Oregon, N.A., reducing the notional amount from $50,000 to $17,500 without any negative financial impact. The interest rate swap agreement effectively converts floating rates on $17,500 of borrowings to a fixed rate of 9.55% until expiration of the agreement in January 2000. The amendment allowed the Company to subject $32,500 of 9.55% fixed rate borrowings to more favorable floating rates. The average floating interest rate as of December 31, 1993 was approximately 5%. While the Company may be exposed to credit risk in the event of nonperformance by the counterparty to the interest rate swap agreement, the risk of incurring losses due to nonperformance by the counterparty is considered remote During 1992, the Company^s Japanese subsidiary borrowed 300 million Yen ($2,681 and $2,405 at December 31, 1993 and 1992 exchange rates, respectively) from a local bank to finance its local operations. The interest rate on these borrowings is floating-rate based with a cap of 5.95%. The effective rate on these borrowings during 1993 was approximately 4%. The entire bank note matures on July 20, 1994 and is classified as current and included in short-term borrowings on the Consolidated Balance Sheet as of December 31, 1993. The fair market value of the Company^s long-term debt approximates its carrying value as the interest rates on borrowings are floating-rate based. The Company would incur a cost of approximately $3,660 to terminate its interest rate swap agreement as of December 31, 1993. This cost is based on dealer quotes taking into consideration current interest rates and the current creditworthiness of the counterparties. 9. Incentive Stock Plan The Board of Directors has the authority to issue incentive stock in one or more series and to determine the relative rights and preferences of the incentive stock (note 10). The incentive stock is convertible into common stock upon attainment of specified objectives or upon the occurrence of certain events to be determined by the Board of Directors. 10. Employee Stock and Savings Plans The Company has five stock option plans. The three common stock option plans provide for the granting of incentive and nonqualified stock options to key employees, officers, and non- employee directors of the Company and its subsidiaries. The three stock option plans are administered by the Compensation Committee of the Board of Directors, and permit accelerated vesting of outstanding options upon the occurrence of certain changes in the control of the Company. The Company also has a stock plan which provides for the sale of common stock to key employees of the Company and its subsidiaries. Shares can be awarded under the plan at no purchase price as a stock bonus, and the stock plan also provides for the granting of nonqualified stock options. In addition, the Company has an incentive stock option plan and has reserved 600 shares of incentive stock for issuance. No options have been granted under this plan. Options under all five plans generally become exercisable over a five-year period from the date of grant or from the commencement of employment at prices generally not less than the fair market value at the date of grant. The excess, if any, of the fair market value of the shares at the measurement date over the option price is charged to operations ratably over the vesting period. At December 31, 1993, options for 2,451 shares were exercisable, 19,810 shares were reserved for issuance, and 1,674 shares were available for future grant. Stock options outstanding and transactions involving the stock option plans are summarized as follows: Price per Shares Share Balance at December 31, 1991 7,886 $ .12 ^ 19.76 Granted 4,637 6.00 ^ 20.25 Exercised (1,433) .12 ^ 18.13 Canceled (4,514) 2.08 ^ 20.25 Balance at December 31, 1992 6,576 .21 ^ 19.76 Granted 1,180 .07 ^ 12.63 Exercised (1,021) .21 ^ 13.00 Canceled (834) 4.95 ^ 18.13 Balance at December 31, 1993 5,901 $ .07 ^ 19.76 In October 1992, the Board of Directors adopted a resolution to offer employees holding incentive and nonqualified stock options for 5,840 shares the opportunity to exchange their existing options for nonqualified stock options. The exchange allowed employees to receive options for the same number of shares at $6.00 per share, the then current market price. The new options vest ratably over between two to five years, depending on the vesting status of exchanged options as of January 2, 1993. The offer was made because the Board of Directors believes lower- priced options provide a greater incentive to key employees and officers. Options holders elected to exchange options covering 3,808 shares. In May 1989, the shareholders adopted the 1989 Employee Stock Purchase Plan and reserved 1,400 shares for issuance. In April 1992, the shareholders amended the plan to reserve an additional 2,000 shares for issuance. Under the plan, each eligible employee may purchase up to six hundred shares of stock per quarter at prices no less than 85% of its fair market value determined at certain specified dates. Employees purchased 605 and 569 shares under the plan in 1993 and 1992, respectively. At December 31, 1993, 1,324 shares remain available for future purchase under the plan. The plan will expire upon either issuance of all shares reserved for issuance or at the discretion of the Board of Directors. There are no plans to terminate the plan at this time. The Company has an employee savings plan (the Savings Plan) that qualifies as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. Under the Savings Plan, participating U.S. employees may defer a portion of their pretax earnings, up to the Internal Revenue Service annual contribution limit. The Company currently matches 50% of eligible employee^s contributions, up to a maximum of 6% of the employee^s earnings. Employer matching contributions vest over 5 years, 20% for each year of service completed. The Company^s matchingcontributions to the Savings Plan were $1,896, $1,989, and $2,140 in 1993, 1992, and 1991, respectively. 11. Commitments The Company leases a majority of its field office facilities under noncancellable operating leases. In addition, the Company leases certain equipment used in its research and development activities. This equipment is generally leased on a month-to-month basis after meeting a six-month lease minimum. The Company rents its Japanese facilities under a two-year cancellable lease with a six month notice of cancellation. The total commitment under this cancellable lease is $6,444, of which the first six month^s payments in 1994 of $1,878 are included in the schedule below. Future minimum lease payments under noncancellable operating leases are approximately as follows: Operating Annual periods ending Lease December 31: Payments 1994 $ 10,054 1995 6,704 1996 5,298 1997 4,258 1998 3,928 Later years 14,348 Total $ 44,590 Rent expense under operating leases was approximately $16,776, $16,156, and $16,709 for the years ending December 31, 1993, 1992, and 1991, respectively. 12. Other Expense Other expense is comprised of the following: Year ended December 31, 1993 1992 1991 Interest income $ 4,338 $ 5,284 $ 9,800 Interest expense (4,404) (5,469) (5,428) Foreign exchange gain 247 297 827 Contract settlement ^ (6,150) ^ Write-off of non- operating items ^ (1,148) (7,838) Life insurance proceeds ^ ^ 1,000 Other, net (438) (353) (863) Total $ (257) $ (7,539) $ (2,502) 13. Supplemental Cash Flow Information The following provides additional information concerning supplemental disclosures of cash flow activities: Year ended December 31, 1993 1992 1991 Cash paid (received) for: Interest expense, net of capitalized interest $ 4,042 $ 5,030 $ 4,969 Income taxes $ 2,403 $ (2,662) $ 5,936 14. Forward Foreign Exchange Contracts At December 31, 1993 and 1992, the Company had forward contracts outstanding of $13,847 and $18,899, respectively, to buy and sell various foreign currencies. These contracts generally have maturities which do not exceed six months. At December 31, 1993, the estimated fair value of these contracts was $13,797 based on dealer quotes. The Company does not anticipate non- performance by the counterparties to these contracts. 15. Industry and Geographic Information The Company designs, manufactures, markets and provides related service for electronic design automation software for the integrated circuit (IC) and systems design markets. The Company^s software products enable engineers and designers to design, analyze, place, route, layout and test custom ICs, application specific ICs (ASIC), printed circuit boards, multichip modules and other electronic systems and subsystems Foreign operations consist of offices whose principal activities are the sale, distribution, and service of the Company^s products. Foreign offices purchase the computer workstations on which the Company^s software operates principally from suppliers located in each respective geographic area. Software reproduction facilities operate in both Europe and Asia-Pacific to supply the Company^s software directly to these market areas. Intercompany transfers are accounted for at amounts generally above cost. Corporate expenses are general expenses which are not allocated to the operations of each geographic area. For the purposes of determining operating income, research and development and certain marketing expenses are allocated based on each region^s percentage of total revenue contribution. Corporate assets are comprised of capital assets used in research and development activities, short-term investments, and cash and investments classified as long-term in the consolidated balance sheets. Geographic information for 1993, 1992 and 1991 is set forth in the table below. Geographic Information N. America Europe Asia-Pacific 1993 Revenues from unaffiliated customers $184,303 $ 87,178 $68,294 Intercompany transfers 1,282 5,016 20,948 Total revenues $185,585 $ 92,194 $89,242 Operating income (loss) $ (195) $(14,564) $ 1,678 Identifiable assets $152,514 $124,956 $64,271 1992 Revenues from unaffiliated customers $180,716 $ 99,481 $ 70,569 Intercompany transfers 1,611 11,849 15,187 Total revenues $182,327 $111,330 $ 85,756 Operating income (loss) $(21,151) $ (7,267) $ 735 Identifiable assets $164,614 $116,174 $ 53,518 1991 Revenues from unaffiliated customers $195,796 $110,203 $ 94,128 Intercompany transfers 6,254 9,700 20,087 Total revenues $202,050 $119,903 $114,215 Operating income (loss) $(51,876) $ (5,082) $ 7,454 Identifiable assets $193,001 $117,597 $ 77,692 Geographic Information Eliminations Corporate Consolidated 1993 Revenues from unaffiliated customers $ ^ $ ^ $339,775 Intercompany transfers (27,246) ^ ^ Total revenues $(27,246) $ ^ $339,775 Operating income (loss) $ (2,939) $(13,372) $(29,392) Identifiable assets $(92,258) $104,101 $353,584 1992 Revenues from unaffiliated customers $ ^ $ ^ $350,766 Intercompany transfers (28,647) ^ ^ Total revenues $(28,647) $ ^ $350,766 Operating income (loss $(1,538) $(11,511) $(40,732) Indentifiable assets $(60,471) $104,730 $378,565 1991 Revenues from unaffiliated customers $ ^ $ ^ $400,127 Intercompany transfers (36,041) ^ ^ Total revenues $(36,041) $ ^ 400,127 Operating income (loss) $ 985 $(11,982) $(60,501) Identifiable assets $(54,147) $111,518 $445,661 Quarterly Financial Information (Unaudited) Quarter ended March 31 June 30 September 30 December 31 In thousands, except per share and shareholders of record data 1993 Total revenues $ 82,639 $ 88,416 $ 84,950 $ 83,770 Gross margin $ 52,371 $ 56,214 $ 56,378 $ 54,620 Operating income (loss) $ (3,317) $ 633 $ 1,888 $(28,596) Net income (loss) $ (4,298) $ 290 $ 1,490 $(29,555) Net income (loss) per common and common equivalent share $ (.09) $ .01 $ .03 $ (.63) 1992 Total revenues $ 100,115 $ 89,085 $ 77,540 $ 84,026 Gross margin $ 55,660 $ 50,690 $ 39,385 $ 52,063 Operating income (loss) $ 491 $ (6,819) $(35,720) $ 1,316 Net income (loss) $ 1,227 $ (6,885) $(45,550) $ 347 Net income (loss) per common and common equivalent share$ .03 $ (.15) $ (1.01) $ .01 Common stock market price: Quarter ended March 31 June 30 September 30 December 31 1993 High $ 11 $ 12 $ 11 1/2 $ 15 1/2 Low $ 7 7/8 $ 7 7/8 $ 8 3/8 $ 10 1992 High $ 22 1/4 $ 16 1/2 $ 10 1/4 $ 9 1/2 Low $ 14 1/4 $ 9 1/2 $ 6 1/2 $ 5 1/4 The table above sets forth for the quarters indicated the high and low sales prices for the common stock as reported on the NASDAQ National Market System. As of December 31, 1993, the Company had 1,843 shareholders of record. Report of Management Management of Mentor Graphics Corporation is responsible for the preparation of the accompanying consolidated financial statements. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles appropriate in the circumstances and necessarily include some amounts which represent the best estimates and judgments of management. The consolidated financial statements have been audited by KPMG Peat Marwick, independent auditors, whose report is included on this page. The Audit Committee of the Board of Directors is comprised of two directors who are not officers or employees of Mentor Graphics Corporation or its subsidiaries. These directors meet with management and the independent auditors in connection with their review of matters relating to the Company^s annual financial statements, the Company^s system of internal accounting controls, and the services of the independent auditors. The Committee meets with the independent auditors, without management present, to discuss appropriate matters. The Committee reports its findings to the Board of Directors and also recommends the selection and engagement of independent auditors. R. Douglas Norby Senior Vice President and Chief Financial Officer Walden C. Rhines President and Chief Executive Officer Independent Auditors^ Report To the Stockholders and Board of Directors of Mentor Graphics Corporation: We have audited the accompanying consolidated balance sheets of Mentor Graphics Corporation and subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of operations, stockholders^ equity, and cash flows for each of the years in the three-year period ended December 31, 1993. These consolidated financial statements are the responsibility of the Company^s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Mentor Graphics Corporation and subsidiaries as of December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1993, in conformity with generally accepted accounting principles. As discussed in Notes 1 and 4 to the consolidated financial statements, the Company adopted the provisions of the Financial Accounting Standards Board^s Statement of Financial Accounting Standards No. 109, ^Accounting for Income Taxes^ in 1993. Portland, Oregon February 1, 1994 Shareholders' Information Directors Thomas H. Bruggere Chairman of the Board of Directors Mentor Graphics Corporation Walden C. Rhines President and Chief Executive Officer Mentor Graphics Corporation Marsha B. Congdon Vice President, Policy and Strategy US West Communications David R. Hathaway General Partner Venrock Associates Fontaine K. Richardson General Partner Eastech Management Company, Inc. Jon A. Shirley Private Investor David N. Strohm General Partner Greylock Management Corporation Corporate Office Mentor Graphics Corporation 8005 S.W. Boeckman Road Wilsonville, Oregon 97070-7777 (503) 685-7000 Executive Officers Walden C. Rhines President and Chief Executive Officer Mentor Graphics Corporation Waldo J Richards Senior Vice President Product Operations R. Douglas Norby Senior Vice President and Chief Financial Officer Frank S. Delia Vice President Chief Administrative Officer General Counsel and Secretary Patricia J. O^Connor Vice President Human Resources James J. Luttenbacher Corporate Controller and Chief Accounting Officer Counsel Stoel Rives Boley Jones & Grey Attorneys-at-Law 900 S.W. Fifth Avenue, Suite 2300 Portland, Oregon 97204 Independent Certified Public Accountants KPMG Peat Marwick 1211 S.W. Fifth Avenue Suite 2000 Portland, Oregon 97204 Transfer Agent and Registrar First Interstate Bank Security Holder Relations Division 26610 West Agoura Road Calabasas, CA 91302 1-800-522-6645 Annual Meeting The Annual Meeting of shareholders will be held at 5:00 p.m., Pacific Time, on April 26, 1994 at: Mentor Graphics Corporation 8005 S.W. Boeckman Road Wilsonville, Oregon 97070-7777 Investor Relations For additional information on the Company, or to obtain a copy of Mentor Graphics^ Annual Report on Form 10-K filed with the Securities and Exchange Commission, contact: Investor Relations Manager Mentor Graphics Corporation 8005 S.W. Boeckman Road Wilsonville, Oregon 97070-7777 For financial and company information, call 1-800-546-4628. Stock Trading Mentor Graphics Corporation^s common stock traded publicly in the NASDAQ National Market System under the symbol MENT. All references to market share in this report are based upon Dataquest preliminary 1993 EDA market share and growth estimates. EX-21 5 EXHIBIT 21 EXHIBIT 21 LIST OF SUBSIDIARIES OF MENTOR GRAPHICS CORPORATION Jurisdiction of Name Organization Mentor Graphics (UK) Limited England Mentor Graphics (France) SARL France Mentor Graphics Italia SpA Italy Mentor Graphics (Deutschland) GmbH West Germany Mentor Graphics (Denmark) Denmark Mentor Graphics (Netherlands) B.V. Netherlands Mentor Graphics Finance B.V. Netherlands Mentor Graphics (Singapore) Pte., Ltd. Singapore Mentor Graphics Japan Co., Ltd. Japan Mentor Graphics (Scandinavia) AB Sweden Mentor Graphics (Finland) AB Finland Mentor Graphics (Canada) Ltd. Canada Mentor Graphics (Schweiz) AG Switzerland European Development Center Belgium EX-23 6 EXHIBIT 23 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 and 33-30774) and on Form S-3 (33-52419) of Mentor Graphics Corporation and subsidiaries of our reports dated February 1, 1994, relating to the consolidated balance sheets of Mentor Graphics Corporation and subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of operations, cash flows and stockholders' equity and related schedules for each of the years in the three-year period ended December 31, 1993, which reports appear or are incorporated by reference in the December 31, 1993 annual report on Form 10-K of Mentor Graphics Corporation and subsidiaries. Our reports refer to a change in the method of accounting for income taxes. KPMG PEAT MARWICK Portland, Oregon March 30, 1994 -----END PRIVACY-ENHANCED MESSAGE-----