-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TNlrSIaQbIuIGE3Nc2pcJezCO1WfZ0dLBjC5HqX/NTR+I+s2Pkjg5ZO8/K1MNBMa liV2u8WMCRk/H9TLpO7arw== 0000893877-97-000191.txt : 19970329 0000893877-97-000191.hdr.sgml : 19970329 ACCESSION NUMBER: 0000893877-97-000191 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MENTOR GRAPHICS CORP CENTRAL INDEX KEY: 0000701811 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 930786033 STATE OF INCORPORATION: OR FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-13442 FILM NUMBER: 97567400 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, 1996 COMMISSION FILE NUMBER 0 - 13442 MENTOR GRAPHICS CORPORATION (Exact name of registrant as specified in its charter) OREGON 93-0786033 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 8005 SW BOECKMAN ROAD 97070-7777 Wilsonville, Oregon (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code (503) 685-7000 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, without par value Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $613,647,104 on February 28, 1997, based upon the last price of the Common Stock on that date reported in the NASDAQ National Market System. On February 28, 1997 there were 64,695,122 shares of the Registrant's Common Stock outstanding. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or in any amendment to this Form 10-K. ___ DOCUMENTS INCORPORATED BY REFERENCE Part of Form 10-K into Document which incorporated -------- ---------------------- Portions of 1996 Annual Report to Shareholders Parts I, II and IV Portions of the 1997 Proxy Statement Part III 1 PART I ITEM 1. BUSINESS This Form 10-K contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those set forth under the caption "Factors That May Affect Future Results and Financial Condition" under "Management's Discussion and Analysis of Results of Operations and Financial Condition" in the Company's 1996 Annual Report to Shareholders, which is incorporated by reference in this Form 10-K. General Mentor Graphics Corporation manufactures, markets and supports software and hardware Electronic Design Automation ("EDA") products and provides related services which enable engineers to design, analyze, place and route, and test the components of electronic systems. Mentor Graphics has recently expanded its product offerings beyond traditional EDA to include (1) intellectual property ("IP") products and services intended to increase design efficiency by delivering standard, reusable functions for the design of hardware components and (2) embedded software development and system verification tools intended to shorten product time to market by allowing for simultaneous development and testing of hardware and embedded software. Mentor Graphics markets its products primarily to large companies in the communications, computer, semiconductor, consumer electronics, aerospace and transportation industries. Customers use Mentor Graphics' software in the design of such diverse products as supercomputers, automotive electronics, telephone switching systems, cellular base stations and handsets, computer network hubs and routers, signal processors and personal computers. Mentor Graphics sells and licenses its products primarily through its direct sales force in North America, Europe and Asia, and through distributors in territories where the volume of business does not warrant a direct sales presence. Mentor Graphics was incorporated in Oregon in 1981 and its common stock is traded in the NASDAQ National Market System under the symbol MENT. Mentor Graphics' executive offices are located at 8005 S.W. Boeckman Road, Wilsonville, Oregon 97070-7777. The telephone number at that address is (503) 685-7000. Products EDA Products Mentor Graphics' EDA products support the development of integrated circuits ("ICs"), application specific integrated circuits ("ASICs"), field programmable gate arrays ("FPGAs"), printed circuit boards ("PCBs") and multichip modules ("MCMs"). Mentor Graphics' IC design products allow designers to specify an IC design, add structures for testing the design to remove errors, "layout" the electrical components of the design in a way that balances IC performance and the size of the IC used, and finally, create output which is used to direct the manufacturing and testing of the IC. "ICs" are high performance circuits with customized logic layers. Mentor Graphics products within the IC design flow include IC design and layout tools such as MS Analyzer, Cell Builder, GDT, IC Station, MicroRoute, QuickHDL, FastScan, FlexTest, and SimExpress, as well as power management and analog and analog/mixed signal design solutions. Mentor Graphics is able to link its ASIC/FPGA and MCM/PCB design products with its IC design products to create a continuum of automation from the individual component level up to the fully-integrated end-product. Mentor Graphics' ASIC/FPGA design products allow designers to create and verify designs to ensure that they possess the required performance and functionality and to create output which will allow the design to be manufactured and tested. "ASICs" are special integrated circuits with 2 standard logic layers which are customized by interconnect layers. The standard logic layers allow ASICs to be designed faster and manufactured at a lower cost for smaller unit volumes than traditional ICs. "FPGAs" are circuits that can be programmed to include different functionality at the point of manufacturing or during system startup. Mentor Graphics' ASIC/FPGA products include Renoir, QuickHDL, BSD Architect, DFTAdvisor, FastScan, FlexTest, Leonardo, Galileo, SimExpress, FPGA Station and Idea Station. Mentor Graphics' PCB/MCM design tools allow designers to select from a library of parts to be included in the PCB/MCM, to simulate and test the performance of the PCB/MCM, to test for manufacturability, to analyze thermal and signal integrity, and to output data which will allow the PCB/MCM to be manufactured. "PCBs", a common way of packaging electronic circuits, are epoxy type "boards" upon which ICs, ASICs and discrete components such as resistors and capacitors are mounted. "MCMs" may be thought of as several ICs or ASICs mounted together in a single package. Products within the MCM and PCB design flows include Board Station, MCM Station, Interconnect Synthesis, AutoTherm MCM, Logical Cable, Physical Test Manager: SITE, Manufacturing Advisor/PCB and EngineerView. Intellectual Property and Embedded Software Development Products Mentor Graphics believes that the demand for tools to develop increasingly complex electronic systems cannot be entirely satisfied with traditional EDA tools. Under its Integrated System Design (ISD) strategy, Mentor Graphics supplements its EDA products with products and services which address the rapid development of complex systems through design re-use and the integration of hardware and embedded software development. Mentor Graphics' IP products and services are intended to increase engineering productivity through the use of predefined, and preverified "building blocks" of frequently used circuit functions for the design of hardware components. This so-called "design reuse" frees designers to focus on optimizing system architecture and developing proprietary functionality. Mentor Graphics believes that companies which integrate IP into their design methodology can expect better quality products at lower costs and faster time-to-market. IP now available from Mentor Graphics includes a wide variety of functions key to the design of consumer, computer and communications products. These include foundry libraries, memories, datapath elements, processors, Universal Serial Bus (USB), Viterbi and Reed-Solomon error correction decoders, MPEG-2, T1/E1 and Ethernet. Embedded software development tools are provided by Mentor Graphics' Microtec subsidiary. Embedded software controls the function of hardware components dedicated to specialized tasks of such common consumer products as VCRs, telephones and fax machines. Embedded software is used in a wide range of other products in the aerospace, communications, medical instrumentation, transportation, computer, industrial and consumer markets. Microtec's embedded software development tools include the VRTX real-time operating system, the XRAY family of debugger products and other software development tools including compilers, assemblers, linkers and simulators. Mentor Graphics' co-verification tools provide a means to verify the hardware and embedded software comprising an electronic system against each other without having to build a hardware prototype. Mentor Graphics believes this improves the efficiency of its customers' product development cycle by giving customers more time to fix software bugs and resolve hardware-software interface errors and reduce the risk that a design problem will cause a significant delay in the project schedule. The Company's co-verification products are marketed as the Seamless Co-Verification Environment family of products. 3 Platforms Mentor Graphics' software products run primarily on UNIX workstations in a broad range of price and performance levels, including workstations manufactured by Hewlett-Packard Company and Sun Microsystems, Inc. These computer manufacturers have a substantial installed base of workstations, and make frequent introductions of new products. Mentor Graphics introduced four families of products for Windows NT on personal computers in 1996. Marketing and Customers Mentor Graphics' marketing emphasizes its ISD strategy for the integration of both hardware and software development for electronic systems, its IP tools, a direct sales force and large corporate account penetration in the communications, computer, consumer electronics, semiconductor, aerospace, and transportation industries. Mentor Graphics sells and licenses its products primarily through its direct sales force in North America, Europe and Asia. Mentor Graphics also licenses its products through distributors in territories where the volume of business is not sufficient to warrant a direct sales presence. During the years ending December 31, 1996 and 1995, sales outside of North America accounted for 46 and 48 percent, respectively, of total sales. Additional information relating to foreign and domestic operations is contained in Note 14 of Notes to Consolidated Financial Statements on page 37 of the 1996 Annual Report to Shareholders and is incorporated by this reference. No material portion of Mentor Graphics' business is dependent on a single customer. Mentor Graphics has traditionally experienced some seasonal fluctuations in receipts of orders, which are typically stronger in the second and fourth quarters of the year. As is typical of many other companies in the electronics industry, Mentor Graphics generally ships its products to customers within 180 days after receipt of an order, and a substantial portion of quarterly shipments tend to be made in the last month of each quarter. Mentor Graphics' backlog of firm orders was approximately $74.0 million on December 31, 1996 as compared to $53.9 million on December 31, 1995. This backlog includes products not shipped and unfulfilled professional services and training. Mentor Graphics does not track backlog for support services. Support services are typically delivered under annual contracts which are accounted for on a prorata basis over the twelve month term of each contract. Substantially all of the December 31, 1996 backlog of orders is expected to ship during 1997. Mentor Graphics generally sells and licenses its products and some third party products pursuant to purchase and license agreements. Mentor Graphics schedules deliveries only after receipt of purchase orders under these agreements. Manufacturing Operations Mentor Graphics' manufacturing operations primarily consist of reproduction of Mentor Graphics' software and documentation. In North America, manufacturing is substantially outsourced, with distribution to Western Hemisphere customers occurring from major west coast sites. Distribution centers in The Netherlands, Japan and Singapore serve their respective regions. Mentor Graphics' SimExpress line of accelerated verification products, which is comprised of both hardware and software, is currently manufactured in France. The Company anticipates that it will also manufacture this product line in the United States in 1997. Product Development Mentor Graphics' research and development is focused on continued improvement of its existing products and the development of new products. During the years ended December 31, 1996, 1995 4 and 1994, Mentor Graphics expensed approximately $92,905,000, $86,782,000 and $81,231,000 respectively, and capitalized approximately $5,691,000, $8,129,000 and $5,718,000, respectively, related to product research and development. Mentor Graphics also seeks to expand existing product offerings and pursue new lines of business through acquisitions. Acquisitions accommodate Mentor Graphics' focused strategic requirements including filling gaps in existing products or technologies, eliminating dependencies on third parties and providing Mentor Graphics with an avenue into new lines of business. Mentor Graphics' future success depends on its ability to develop or acquire competitive new products which satisfy customer requirements. Suppliers Mentor Graphics seeks to provide its customers with software and IP that addresses customers' electronic system design processes. Supplier products fill gaps in Mentor Graphics' existing product lines and allow it to offer products which are needed by customers but which are not central to Mentor Graphics' business. Supplier agreements are also used by Mentor Graphics to explore possible new lines of business. Although Mentor Graphics has supplier agreements with several large customers who do not wish to develop a specific internal technology into a commercial product, Mentor Graphics' suppliers are typically small niche companies which do not have adequate distribution channels for their products. Mentor Graphics maintains three different types of supplier relationships: (i) a simple remarketing relationship where the supplier's product is added to Mentor Graphics' price list and drop shipped to the customer directly from the supplier; (ii) a partial integration relationship where the supplier's object code is packaged and shipped with other Mentor Graphics' products to the customer; and (iii) a fully integrated relationship where Mentor Graphics modifies or enhances the supplier's product before packaging and delivering it to the customer. Supplier agreements are typically multi-year agreements with royalty payments based on a percentage of product revenue. The agreements generally require an escrow of the supplier's source code. Customer support for supplier products is usually provided by Mentor Graphics with the supplier providing backup support and research and development in the event of a problem with the product itself. Customer Support and Consulting Mentor Graphics has a worldwide organization to meet its customers' needs for software support; the Company offers support contracts providing software updates and support. Most of Mentor Graphics' customers have entered into software support contracts. Mentor Graphics believes that consulting services is an expanding segment of its business. The Company's consulting group was established in 1987. Its mission is to team with customers' design groups to increase productivity and reduce costs by assisting customers with methodology and process changes, tool refinements, design implementation and integration services. Mentor Graphics has a worldwide team of consulting professionals available for on-site customer consultation providing software and services for design data management, electronic parts data creation, process automation, technology adoption, and ASIC, IC, MCM and PCB design implementation. 5 Competition The markets for Mentor Graphics' products are competitive and have been characterized by rapid technological advances in application software, operating systems and hardware. Mentor Graphics' principal EDA competitors are Cadence Design Systems Inc., Synopsys Inc., Avant! Corporation, Viewlogic Systems Inc., Zuken-Redac, Quickturn Design Systems, Inc. and numerous small companies. Mentor Graphics' principal competitors for embedded software development tools are Wind River Systems Inc., and Integrated Systems Inc. Some of Mentor Graphics' competitors may have greater financial and marketing resources than Mentor Graphics. However, Mentor Graphics believes the main competitive factors affecting its business are breadth and quality of application software, product integration, ability to respond to technological change, quality of a company's sales force, price, size of the installed base, level of customer support and professional services. Mentor Graphics believes that it generally competes favorably in these areas. Mentor Graphics can give no assurance, however, that it will have financial resources, marketing, distribution and service capability, depth of key personnel or technological knowledge to compete successfully in its markets. Employees Mentor Graphics and its subsidiaries employed approximately 2,500 persons full time as of December 31, 1996. Mentor Graphics' success will depend in part on its ability to attract and retain employees who are in great demand. Mentor Graphics continues to enjoy good employee relations. Patents and Licenses Mentor Graphics owns numerous United States and foreign patents covering portions of its technology. Mentor Graphics is currently seeking to patent more of the inventive technology which Mentor Graphics believes gives it a competitive advantage. Mentor Graphics presently has patent applications pending and intends to file additional patent applications in the future. While Mentor Graphics believes the pending applications relate to patentable devices, there can be no assurance that any patent will be issued or that any patent can be successfully defended. Although Mentor Graphics believes that patents are less significant to the success of its business than technical competence, management ability, marketing capability and customer support, Mentor Graphics believes that software patents are becoming increasingly important in the software industry. Mentor Graphics regards its application software as proprietary and attempts to protect it with copyrights, trade secret laws, and internal non-disclosure safeguards, as well as patents, when appropriate, as noted above. Mentor Graphics typically incorporates restrictions on disclosure, usage and transferability into its agreements with customers and other third parties. ITEM 2. PROPERTIES Mentor Graphics' Wilsonville, Oregon facilities are located in six owned buildings on about 90 acres and take up approximately 390,000 square feet. All corporate functions, as well as a majority of research and development and domestic activities, operate from this site. Mentor Graphics leases additional space in San Jose, California, and in various locations throughout the United States and in other countries, primarily for sales and customer service operations. Mentor Graphics believes that it will be able to renew or replace its existing leases as they expire and that its current facilities will be adequate through at least 1997. 6 ITEM 3. LEGAL PROCEEDINGS During 1995, Mentor Graphics filed suit in U.S. Federal District Court against Quickturn Design Systems, Inc. (Competitor) for a declarative judgment on non-infringement, invalidity and unenforceability of three of Competitor's patents as these patents relate to products of Meta System SRL (Meta), a French company acquired by Mentor Graphics in 1996 which manufactures and sells computers used for accelerated verification of hardware designs. In connection with this litigation, Competitor filed an administrative complaint with the U.S. International Trade Commission (ITC) in 1996 seeking to hinder the distribution of Meta accelerated verification products, marketed by Mentor Graphics as SimExpress, in the United States. The ITC has since issued a temporary ruling allowing the importation of Meta accelerated verification products to the U.S., provided Mentor Graphics posts a bond for each sale. Mentor Graphics believes that the ultimate resolution of its disputes with Competitor will not have a material adverse impact on the Company's financial position or results of operation. Mentor Graphics is also a party to other legal actions arising out of the normal course of business, none of which are expected to have a material effect on the Company's financial position or results of operation. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the security holders of the Company during the fourth quarter of the fiscal year ended December 31, 1996. Executive Officers of Registrant The following are the executive officers of the Company:
Has Served As An Executive Officer Name Position Age of Company Since ---- -------- --- ----------------- Walden C. Rhines President, Chief Executive Officer 50 1993 and Director Gregory K. Hinckley Executive Vice President, Chief 50 1997 Operating Officer and Chief Financial Officer G. M. "Ken" Bado Senior Vice President, World Trade 42 1996 Glenn D. House, Sr. Senior Vice President, Strategy and 35 1996 Product Operations Dean Freed Vice President, General Counsel 38 1995 and Secretary Richard Trebing Corporate Controller and Chief 37 1996 Accounting Officer
7 The executive officers are elected by the Board of Directors of the Company at its annual meeting. Officers hold their positions until they resign, are terminated or their successors are elected. There are no arrangements or understandings between the officers or any other person pursuant to which officers were elected and none of the officers are related. Dr. Rhines has served as Director, President and Chief Executive Officer of Mentor Graphics since October 1993. From 1972 to 1993, Dr. Rhines was employed by Texas Instruments Incorporated, a manufacturer of electrical and electronics products, where he held a variety of technical and management positions and was most recently Executive Vice President of Texas Instruments Semiconductor Group. Dr. Rhines is currently a director of Cirrus Logic, Inc., and Triquint Semiconductor, Inc., both semiconductor manufacturers. Mr. Hinckley has served as Executive Vice President, Chief Operating Officer and Chief Financial Officer since joining the Company in January 1997. From November 1995 until December 1996 he held the position of Senior Vice President with VLSI Technology, Inc. (VLSI), a manufacturer of complex ASICs. From August 1992 until December 1996, Mr. Hinckley held the position of Vice President, Finance and Chief Financial Officer with VLSI. From December 1991 until August 1992, he was an independent consultant. Mr. Hinckley is a director of OEC Medical Systems, Inc., a manufacturer of medical imaging equipment. Mr. Bado has served as Senior Vice President, World Trade since December 1997. From April 1994 to December 1996 he held the position of Vice President of the Americas and was the Southern Area General Manager from January 1991 to April 1994. Mr. Bado has been employed by Mentor Graphics since February 1990. Mr. House has served as Senior Vice President, Strategy and Product Operations since December 1996. From November 1995 to December 1996, he served as the Vice President and General Manager of the Silicon Systems Division and from June 1995 until November 1995 as Vice President and General Manager of the IC and Mixed Signal Division. From August 1992 until June 1995, Mr. House held the position of Engineering Director with the ASIC, Programmable Logic and Test Division. He has been employed by Mentor Graphics since March 1990. Mr. Freed has served as Vice President, General Counsel and Secretary of Mentor Graphics since July 1995. Mr. Freed served as Deputy General Counsel and Assistant Secretary of Mentor Graphics from April 1994 to July 1995, and was Associate General Counsel and Assistant Secretary from 1990 to April 1994. He has been employed by Mentor Graphics since January 1989. Mr. Trebing has served as Corporate Controller and Chief Accounting Officer since February 1996. Mr. Trebing served as Financial Planning and Reporting Manager from January 1995 to February 1996 and as a Divisional Controller from January 1994 to January 1995. From February 1992 to January 1994, Mr. Trebing served as a Finance Manager and from October 1989 to February 1992, as a Planning and Analysis Manager. Mr. Trebing has been employed by Mentor Graphics since October 1989. 8 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company does not intend to pay dividends in the foreseeable future. Additional information required by this item is included under "Quarterly Financial Information" on page 38 and under the shareholder information included on page 40 of the Company's 1996 Annual Report to Shareholders. ITEM 6. SELECTED FINANCIAL DATA The information required by this item is included under "Selected Consolidated Financial Data" on page 13 of the Company's 1996 Annual Report to Shareholders. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this item is included under "Management's Discussion and Analysis of Results of Operations and Financial Condition" on pages 14-23 of the Company's 1996 Annual Report to Shareholders. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements are included in the Company's 1996 Annual Report to Shareholders on pages 24-37 and are indexed here under Item 14(a)(1). The supplementary data required by this item is included under "Quarterly Financial Information" on page 38 of the Company's 1996 Annual Report to Shareholders. See also the financial statement schedule appearing here as indexed under Item 14(a)(2). ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 9 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT The information required by this item concerning the Company's Directors is included under "Election of Directors" in the Company's 1997 Proxy Statement and is incorporated herein by reference. The information concerning the Company's Executive Officers is included herein on page 7-8 under the caption "Executive Officers of the Registrant." The information required by Item 405 of Regulation S-K is included under "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's 1997 Proxy Statement and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is included under "Compensation of Directors," and "Information Regarding Executive Officer Compensation" in the Company's 1997 Proxy Statement and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is included under "Election of Directors" and "Information Regarding Beneficial Ownership of Principal Shareholders and Management" in the Company's 1997 Proxy Statement and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is not applicable to the Company. 10 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The documents listed are included on pages indicated in the Company's 1996 Annual Report to Shareholders: Page (1) Financial Statements ---- Consolidated Statements of Operations 24 Consolidated Balance Sheets 25 Consolidated Statements of Cash Flows 26 Consolidated Statements of Stockholders' Equity 27 Notes to Consolidated Financial Statements 28-37 Independent Auditors' Report 39 (2) Financial Statement Schedules The schedule and report listed below are filed as part of this report on the pages indicated: Schedule Page -------- ---- II Valuation and Qualifying Accounts 14 Independent Auditors' Report on Financial Statement Schedule 15 All other financial statement schedules have been omitted since they are not required, not applicable or the information is included in the Consolidated Financial Statements or Notes. (3) Exhibits 3. A. 1987 Restated Articles of Incorporation. Incorporated by reference to Exhibit 4A to the Company's Registration Statement on Form S-3 (Registration No. 33-23024). B. Bylaws of the Company. Incorporated by reference to Exhibit 4B to the Company's Registration Statement on Form S-3 (Registration No. 33-56759). 10. *A. 1982 Stock Option Plan. Incorporated by reference to Exhibit 10.A to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 (1994 10-K). *B. Nonqualified Stock Option Plan. Incorporated by reference to Exhibit 10.C to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1989 (1989 10-K). *C. 1986 Stock Plan. Incorporated by reference to Exhibit 10.D to the Company's 1989 10-K. *D. 1987 Non-Employee Directors' Stock Option Plan. Incorporated by reference to Exhibit 10.D to the Company's 1994 10-K. *E. Form of Indemnity Agreement entered into between the Registrant and each of its officers and directors. Incorporated by reference to Exhibit B to the Company's 1987 Proxy Statement. 11 F. Lease dated November 20, 1991, for 999 Ridder Park Drive and 1051 Ridder Park Drive, San Jose, California. Incorporated by reference to Exhibit 10.M to the Company's Form SE dated March 25, 1992. G. Amended and Restated Loan Agreement between Mentor Graphics Corporation and First Interstate Bank of Oregon, N.A. dated December 31, 1992 as amended. Incorporated by reference to Exhibit 10.J to the Company's Form SE dated March 25, 1993. *H. Special Incentive Bonus Plan. Incorporated by reference to Exhibit 10.H to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995. 13. Portions of the 1996 Annual Report to Shareholders that are incorporated herein by reference. 21. List of Subsidiaries of the Company. 23. Consent of Accountants. - -------------- * Management contract or compensatory plan or arrangement (b) No reports on Form 8-K were filed by the Company during the last quarter of 1996. 12 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 28, 1997. MENTOR GRAPHICS CORPORATION By WALDEN C. RHINES -------------------------------------- Walden C. Rhines President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant on March 28, 1997 in the capacities indicated. Signature Title (1) Principal Executive Officer: WALDEN C. RHINES President, Chief Executive Officer --------------------------------- and Director Walden C. Rhines (2) Principal Financial Officer: GREGORY K. HINCKLEY Executive Vice President, Chief --------------------------------- Operating Officer and Chief Gregory K. Hinckley Financial Officer (3) Principal Accounting Officer: RICHARD TREBING Corporate Controller and Chief --------------------------------- Accounting Officer Richard Trebing (4) Directors: JON A. SHIRLEY Chairman of the Board --------------------------------- Jon A. Shirley MARSHA B. CONGDON Director --------------------------------- Marsha B. Congdon JAMES R. FIEBIGER Director --------------------------------- James R. Fiebiger DAVID A. HODGES Director --------------------------------- David A. Hodges FONTAINE K. RICHARDSON Director --------------------------------- Fontaine K. Richardson 13 SCHEDULE II 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, 1994: Allowance for doubtful accounts $4,484 $629 $1,559 $3,554 Allowance for obsolete inventory $8,014 $0 $7,155 $859 Year ended December 31, 1995 Allowance for doubtful accounts $3,554 $308 $571 $3,291 Allowance for obsolete inventory $859 $26 $496 $389 Year ended December 31, 1996 Allowance for doubtful accounts $3,291 $1,168 $1,296 $3,163 Allowance for obsolete inventory $389 $308 $292 $405 Deductions primarily represent accounts written off during the period. Deductions represent inventory scrapped during each period and reclassification of demonstration equipment from inventory to property plant and equipment in 1994.
14 Independent Auditors' Report - ---------------------------- The Board of Directors and Stockholders Mentor Graphics Corporation: Under date of January 30, 1997, except for note 8, which is as of February 11, 1997, we reported on the consolidated balance sheets of Mentor Graphics Corporation and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, cash flows and stockholders' equity for each of the years in the three-year period ended December 31, 1996, which are included in the 1996 annual report to stockholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year 1996. In connection with our audits of the aforementioned consolidated financial statements, we also have audited the related consolidated financial statement schedule as listed in the accompanying index. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. As discussed in note 1 to the consolidated financial statements, the Company adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities", in 1994. KPMG PEAT MARWICK LLP Portland, Oregon January 30, 1997, except for note 8, which is as of February 11, 1997 15 EX-13 2 PORTIONS OF THE 1996 ANNUAL REPORT
SELECTED CONSOLIDATED FINANCIAL DATA Year ended December 31, 1996 1995 1994 1993 1992 - ----------------------------------------------------------------------------------------------------------------------- In thousands, except per share data and percentages Statement of Operations Data Total revenues $ 447,886 $ 432,517 $ 390,119 $ 367,703 $ 373,392 - ----------------------------------------------------------------------------------------------------------------------- Research and development $ 92,905 $ 86,782 $ 81,231 $ 84,579 $ 80,578 - ----------------------------------------------------------------------------------------------------------------------- Operating income (loss) $ (9,849) $ 52,554 $ 30,980 $ (46,365) $ (40,538) - ----------------------------------------------------------------------------------------------------------------------- Net income (loss) $ (4,978) $ 50,506 $ 30,453 $ (48,367) $ (50,980) - ----------------------------------------------------------------------------------------------------------------------- Gross margin percent 70% 73% 73% 67% 58% - ----------------------------------------------------------------------------------------------------------------------- Operating income (loss) as a percent of total revenues (2%) 12% 8% (13%) (11%) - ----------------------------------------------------------------------------------------------------------------------- Per Share Data - ----------------------------------------------------------------------------------------------------------------------- Net income (loss) per common and common equivalent share $ (.08) $ .78 $ .49 $ (.88) $ (1.02) - ----------------------------------------------------------------------------------------------------------------------- Cash dividends per common share outstanding $ -- $ -- $ -- $ .16 $ .22 - ----------------------------------------------------------------------------------------------------------------------- Weighted average number of common and common equivalent shares outstanding 64,134 65,134 62,211 54,760 49,968 - ----------------------------------------------------------------------------------------------------------------------- Balance Sheet Data as of December 31, 1996 1995 1994 1993 1992 - ----------------------------------------------------------------------------------------------------------------------- Cash and short-term investments $ 197,079 $ 211,996 $ 154,255 $ 119,531 $ 117,277 - ----------------------------------------------------------------------------------------------------------------------- Cash and investments, long-term $ 30,000 $ 30,000 $ 30,000 $ 30,000 $ 30,000 - ----------------------------------------------------------------------------------------------------------------------- Working capital $ 200,848 $ 213,491 $ 150,865 $ 103,754 $ 117,203 - ----------------------------------------------------------------------------------------------------------------------- Property, plant and equipment, net $ 102,253 $ 99,605 $ 102,291 $ 108,314 $ 112,252 - ----------------------------------------------------------------------------------------------------------------------- Total assets $ 513,359 $ 495,372 $ 429,290 $ 381,583 $ 397,255 - ----------------------------------------------------------------------------------------------------------------------- Short-term borrowings $ 9,055 $ 9,358 $ 8,661 $ 6,467 $ 5,562 - ----------------------------------------------------------------------------------------------------------------------- Long-term debt and other deferrals $ 56,375 $ 55,054 $ 53,123 $ 60,182 $ 55,742 - ----------------------------------------------------------------------------------------------------------------------- Stockholders' equity $ 319,640 $ 326,226 $ 258,419 $ 204,844 $ 232,616 - -----------------------------------------------------------------------------------------------------------------------
13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION All numerical references in thousands, except percentages This Management's Discussion and Analysis of Results of Operations and Financial Condition (MD&A) should be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto. This annual report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Actual results could differ materially from the forward-looking statements as a result of the factors set forth under the heading "Factors That May Affect Future Results and Financial Condition" below. Nature of Operations Mentor Graphics Corporation (the Company) is a supplier of electronic design automation (EDA) systems -- advanced computer software, accelerated verification systems and intellectual property designs and data bases used to automate the design, analysis and testing of electronic hardware and embedded systems software in electronic systems and components. The Company markets its products and services primarily to customers in the communications, computer, semiconductor, consumer electronics, aerospace, and transportation industries. The Company sells and licenses its products primarily through its direct sales force in North America, Europe and Asia, and through distributors in territories where the volume of business does not warrant a direct sales presence. In addition to its corporate offices in Wilsonville, Oregon, the Company has sales, support, software development and professional services offices worldwide. Recent Mergers and Acquisitions Acquisitions of complementary businesses are an integral part of the Company's overall business strategy. Acquisitions accommodate the Company's focused strategic requirements by filling gaps in existing products or technologies, eliminating dependencies on third parties and providing the Company with an avenue into new lines of business and new distribution channels. The Company will continue to evaluate make-versus-buy alternatives, which may result in additional business combinations in 1997. There can be no assurance that products, technologies and businesses of acquired companies, or the technical and sales personnel of such companies, will be effectively assimilated with those of the Company. In 1996, the Company completed nine business combinations, two of which were accounted for as pooling of interests and seven of which were accounted for as purchases. The Company purchased dQdt, Inc. (dQdt), Meta Systems, (Meta), Seto Software GmbH (Seto), Royal Digital Centers, Inc. (Royal Digital), Open Networks Engineering, Inc. (ONE), Systolic Technology, LTD (Systolic), and CAE Technology, Inc. (CAE) in April 1996, May 1996, June 1996, August 1996, November 1996, November 1996 and December 1996, respectively. The total purchase price including acquisition expenses for all 1996 purchase acquisitions was $40,708. In connection with all purchase acquisitions, the Company recorded one-time charges to operations for the write-off of each enterprise's in-process product development which had not reached technological feasibility. The purchase accounting allocations resulted in charges for in-process research and development (R&D) of $26,234, goodwill capitalization of $5,517, and technology capitalization of $8,957. In January, 1996, the Company completed the acquisition of Microtec Research, Inc. (Microtec), pursuant to a merger accounted for as a pooling of interests. Accordingly, the results of Microtec are included in the Company's Consolidated Financial Statements for all periods presented. A total of 6,223 shares of the Company's common stock were issued in the transaction. Merger expenses of $4,410 were incurred associated with the elimination of duplicate facilities, severance costs, the write-off of certain property and equipment and legal and accounting fees associated with administration of the merger activities. In August, 1996, the Company completed the acquisition of Interconnectix, Inc. (Interconnectix), pursuant to a merger accounted for as a pooling of interests. Accordingly, the results of Interconnectix are included in the Company's Consolidated Financial Statements for all periods presented. A total of 2,133 shares of the Company's common stock were issued in the transaction. Merger expenses of $700 were incurred associated primarily with severance costs and legal and accounting fees associated with administration of the merger activities. In 1995, the Company completed five business combinations, two of which were accounted for as pooling of interests and three of which were accounted for as purchases. The Company purchased Axiom Datorer Scandinavian AB (Axiom), 3Soft Corporation (3Soft), and Zeelan Technology, Inc. (Zeelan) in May 1995, December 1995, and December 1995, respectively. The purchase accounting allocations resulted in charges for in-process R&D of $1,430, goodwill capitalization of $528 and technology capitalization of $892. In October 1995, the Company acquired Precedence 14 Incorporated (Precedence), pursuant to a merger accounted for as a pooling of interests. Accordingly, the results of Precedence are included in the Company's Consolidated Financial Statements for all periods presented. A total of 735 shares of the Company's common stock were issued in the transaction. Merger expenses of $210 were for services rendered to facilitate completion of the merger agreement. In May 1995, the Company acquired Exemplar Logic, Inc. (Exemplar), pursuant to a merger accounted for as a pooling of interests. Accordingly, the results of Exemplar are included in the Company's Consolidated Financial Statements for all periods presented. A total of 1,512 shares of the Company's common stock were issued in the transaction. Merger expenses of $400 were for services rendered to facilitate completion of the merger agreement and for severance costs. In 1994, the Company completed two business combinations, one of which was accounted for as a pooling of interests and the other of which was accounted for as a purchase. In September 1994, the Company completed the purchase of Anacad Electrical Engineering Software GmbH (Anacad). The purchase accounting allocation resulted in a charge for in-process R&D of $8,265, goodwill capitalization of $2,897 and technology capitalization of $4,735. In November 1994, the Company acquired Model Technology Incorporated (MTI), pursuant to a merger accounted for as a pooling of interests. A total of 2,443 shares of the Company's common stock were issued in the transaction. Merger costs of $1,000 were paid by MTI for consulting services rendered to facilitate negotiation of the various components of the merger agreement. Also, cash distributions of $2,346 were paid in 1994 by MTI to its shareholders in the normal course of S-Corporation business prior to the date of acquisition. Results of Operations
Revenues and Gross Margins Year ended December 31, 1996 Change 1995 Change 1994 - -------------------------------------------------------------------------------------------------------------- System and software revenues $ 242,147 5% $ 230,533 2% $ 225,306 - -------------------------------------------------------------------------------------------------------------- System and software gross margins $ 202,951 4% $ 194,657 4% $ 186,954 - -------------------------------------------------------------------------------------------------------------- Percentage of revenues 83.8% 84.4% 83.0% - -------------------------------------------------------------------------------------------------------------- Service and support revenues $ 205,739 2% $ 201,984 23% $ 164,813 - -------------------------------------------------------------------------------------------------------------- Service and support gross margins $ 111,119 (8)% $ 120,656 24% $ 97,100 - -------------------------------------------------------------------------------------------------------------- Percentage of revenues 54.0% 59.7% 58.9% - -------------------------------------------------------------------------------------------------------------- Total revenues $ 447,886 4% $ 432,517 11% $ 390,119 - -------------------------------------------------------------------------------------------------------------- Total gross margins $ 314,070 -- $ 315,313 11% $ 284,054 - -------------------------------------------------------------------------------------------------------------- Percentage of revenues 70.1% 72.9% 72.8% - --------------------------------------------------------------------------------------------------------------
System and Software System and software revenues are derived from software products owned by the Company, software products owned by third parties for which the Company pays royalties, some workstation hardware and some accelerated verification system sales as a result of the Meta acquisition in 1996. Software product revenues accounted for approximately 85% of the 1996 increase in system and software revenues, while a decline in workstation hardware product revenues was more than offset by added accelerated verification system revenues. For 1995, software product revenues increased by approximately 4%, while a decline in workstation hardware product revenues partially offset this growth. The primary factor contributing to the software product growth for 1996 and 1995 was increased product offerings as a result of internal development and acquisitions over the last several years. During 1996, the Company added new hardware/software co-verification, re-usable intellectual property designs, library and data management products and products that operate on Windows 95 and Windows NT operating systems. The Company added many new products through business combinations accounted for as purchases during 1996 and 1995, with such purchases resulting in added revenues only from the date of acquisition and not for all prior periods presented as is the case for pooling of interest transactions. Revenues from the Company's older product offerings declined in 1996 and 1995, partially offsetting the volume increases of newer product offerings. In the fourth quarter of 1996, revenues from product offerings introduced prior to 1993 were less than 50% of total revenues for the first time. The rate of decline for these older product offerings is expected to continue to negatively impact the Company's future software product revenue performance. Also, 1996 software product revenues have been adverse- 15 ly affected by turnover of Microtec sales personnel. Sales in Japan were negatively affected by a strengthening of the U.S. dollar as compared to the yen in 1996. In 1995 sales were positively affected by a weakening of the U.S. dollar against the yen. See "Geographic Revenues Information" below for further details of the effects of foreign currencies on revenues. System and software gross margins as a percent of revenues declined from 1995 to 1996 due to higher costs for royalties related to third party contracts and higher costs for amortization of previously capitalized software development and purchased technology, offset by volume increases in system and software revenues year to year. The Company continues to enter into and maintain third party contracts that contribute varying levels of revenues and cost of revenues quarter to quarter. Future trends of third party revenue content are difficult to predict since they are dependent on such variables as new third party agreements, potential acquisitions of third parties where existing agreements are in place, and varying levels of customer demand for third party product offerings. The improvement in gross margins from 1994 to 1995 was primarily a result of increased software product versus workstation hardware sales year to year, lower amortization cost for previously capitalized software development offset by higher costs for amortization of purchased technology. Software product gross margins are much higher than workstation hardware gross margins and the mix shift in 1995 favorably impacted gross margins. Amortization of previously capitalized software development costs to system and software cost of revenue was $6,215, $5,511, and $6,785 for 1996, 1995, and 1994, respectively. Amortization increased slightly in 1996 as the Company's capitalization level increased in 1995 and to a lesser extent in 1994 as more resources were directed to the development of new products and enhancement of existing products. The 1995 decline in amortization is attributable to several capitalized projects completing amortization schedules during 1994. Amortization of purchased technology costs to system and software cost of revenues was $3,559, $2,418 and $760 for 1996, 1995 and 1994, respectively. The increase in 1996 and 1995 is attributable to the purchase of seven and three companies in 1996 and 1995, respectively. Capitalized software development costs and purchased technology costs are amortized over a three year period to system and software cost of revenues. Due to the acquisitions previously discussed, amortization of purchased technology is expected to continue to increase in 1997. [graphic bar chart depicting the following: Revenues (dollar figures are in millions) ----------------------------------------------------------- System & Software Service & Support ------------------------ ------------------------ 1994 1995 1996 1994 1995 1996 ---- ---- ---- ---- ---- ---- $225 $231 $242 $165 $202 $206] Sales of accelerated verification systems, which are the result of the Company's acquisition of Meta, are expected to have a negative impact on system and software product gross margins over time. Meta products include hardware, which does not yield gross margins as high as software product sales. The impact of accelerated verification systems sales on system and software cost of revenues and gross margins was offset by the decline in workstation hardware revenues during 1996 compared to the same period last year. Sales volumes for accelerated verification systems were not material to the Company's system and software revenue levels in 1996. Service and Support Service and support revenues consist of revenues from annual software support maintenance contracts, hardware support, and professional services, which includes consulting services, training services, and custom design services. The increase in service and support revenues in 1996 is due primarily to a 4% increase in software support revenues, partially offset by a 6% decline in professional service revenues. The increase in service and support revenues in 1995 is due to increases of 18% and 44% in software support and professional service revenues, respectively. The 1996 decline in growth levels of software support is due in part to the decline in revenues from the Company's older product offerings in 1996 resulting in a slower rate of increase to the Company's installed base of customers and in part to the unfavorable effects of foreign currency fluctuations discussed below. Factors contributing to the growth in software support revenues in 1995 included the effect of increased software product sales in prior years, a focused effort to increase the acceptance rate of the Company's software support offerings and favorable effects of foreign currency fluctuations. 16 The Company is currently unbundling maintenance services in response to customer requests. This change will allow customers to choose varying levels of phone support and software update support. The effect of this change may result in lower revenue levels as some customers could choose less than full support from available options. Since growth in software support is dependent on continued success of the software product offerings, increases in the Company's installed customer base, and the impact of acquisitions, future software support revenue levels are difficult to predict. Professional service revenues totaled approximately $50,500, $53,800 and $37,300 in 1996, 1995 and 1994, respectively. The decline in professional service revenues in 1996 was attributable in part to a process of realigning the core consulting business in an attempt to better support ASIC and IC design methodologies. This realignment resulted in start-up difficulties such as proper scoping of personnel requirements to meet engagement deliverables and recruiting and hiring of additional personnel qualified to meet such deliverables, all of which delayed conversion of order backlog into revenue. This decline was partially offset by increased custom design professional service revenues as customer demand for such services continued to grow. The increase in 1995 was primarily attributable to strong demand for both consulting services and custom design services. Service and support gross margins decreased in 1996 as a result of negative professional service gross margins, partially offset by slightly improved software support gross margins. The negative professional service gross margins are the result of the start-up difficulties discussed above and unexpected costs to complete certain custom design contracts. Service and support gross margins improved in 1995 as a result of higher software maintenance revenues volume and slightly improved professional service gross margins. [graphic bar chart depicting the following: Gross Margins ----------------------------------------------------------- System & Software Service & Support ------------------------ ------------------------ 1994 1995 1996 1994 1995 1996 ---- ---- ---- ---- ---- ---- 83.0% 84.4% 83.8% 58.9% 59.7% 54.0%] Consistent with EDA consulting and training business models, gross margins generated by the Company's professional service activities have been, and are expected to continue to be, lower than software support. As a result, service and support gross margins may continue to decline as growth in the professional service business is expected to be higher than growth in software support. Geographic Revenues Information Domestic revenues from unaffiliated customers including service and support revenues increased by 7% from 1995 to 1996 and 7% from 1994 to 1995. International revenues from unaffiliated customers including service and support revenues represented 46%, 48% and 46% of total revenues in 1996, 1995 and 1994, respectively. European revenues decreased by 3% from 1995 to 1996 and increased by 17% from 1994 to 1995. Japanese revenues decreased by 1% from 1995 to 1996 and increased by 11% from 1994 to 1995. The effects of exchange rate differences from the Japanese Yen to the U.S. dollar negatively impacted revenues by approximately 14% in 1996 and positively impacted revenues by approximately 7% in 1995. The effects of exchange rate differences from European currencies to the U.S. dollar for 1996 and 1995 were not significant as approximately half of European revenues are booked in U.S. dollars and movements of such currencies against the U.S. dollar were not significant. For 1996, European revenues were unfavorably impacted by a slowdown in spending by telecommunication customers while Japanese revenues were favorably impacted by new product offerings previously discussed. For 1995, European revenues were favorably impacted by improving economic conditions while Japan's results reflected economic weakness. Since the Company generates approximately half of its revenues outside of the United States and expects this to continue in the future, revenue results should continue to be impacted by the effects of future foreign currency fluctuations. 17
Operating Expenses Year ended December 31, 1996 Change 1995 Change 1994 - -------------------------------------------------------------------------------------------------------------- Gross research and development $ 98,596 4% $ 94,911 9% $ 86,949 - -------------------------------------------------------------------------------------------------------------- Percentage of total revenues 22.0% 21.9% 22.3% - -------------------------------------------------------------------------------------------------------------- Capitalized software development $ 5,691 (30)% $ 8,129 42% $ 5,718 - -------------------------------------------------------------------------------------------------------------- Percentage of total revenues 1.3% 1.9% 1.5% - -------------------------------------------------------------------------------------------------------------- Net research and development $ 92,905 7% $ 86,782 7% $ 81,231 - -------------------------------------------------------------------------------------------------------------- Percentage of total revenues 20.7% 20.1% 20.8% - -------------------------------------------------------------------------------------------------------------- Marketing and selling $ 146,754 7% $ 137,771 7% $ 129,119 - -------------------------------------------------------------------------------------------------------------- Percentage of total revenues 32.8% 31.9% 33.1% - -------------------------------------------------------------------------------------------------------------- General and administration $ 40,918 7% $ 38,206 (3)% $ 39,504 - -------------------------------------------------------------------------------------------------------------- Percentage of total revenues 9.1% 8.8% 10.1% - -------------------------------------------------------------------------------------------------------------- Special charges $ 11,998 --- $ (2,040) --- $ (6,045) - -------------------------------------------------------------------------------------------------------------- Percentage of total revenues 2.7% (0.5)% (1.5)% - --------------------------------------------------------------------------------------------------------------
Research and Development As a percent of revenue, gross R&D costs were approximately flat from 1995 to 1996 and decreased slightly from 1994 to 1995. In 1996, gross R&D costs increased due, in part, to the purchases of 3Soft late in 1995 and Seto and Meta in 1996, which resulted in a year to year increase of approximately $5,000. In 1995, gross R&D costs increased due to the purchases of Anacad and Axiom, which resulted in a year to year increase of approximately $4,000. In addition, other business combinations accounted for as pooling of interests including Microtec, MTI, Exemplar, Precedence and Interconnectix, which were included in 1996 and 1995 results, experienced higher R&D investment in 1996 and 1995. Offsetting these increases, was a reduction in spending for base business product lines. During 1996, the Company capitalized software development costs of $5,691, compared to $8,129 and $5,718 for 1995 and 1994, respectively. The Company will continue to evaluate make-versus-buy alternatives in 1997 which may result in more acquisitions. Overall, management's goal, which may not be acheived, is to maintain or reduce the ratio of R&D expense as a percent of revenues from 1996 levels. Achievement of this goal is not guaranteed. See "Factors That May Affect Future Results and Financial Condition" discussion below. Marketing and Selling In 1996 and 1995, the increase in marketing and selling expenses was principally attributable to merger and acquisition activity discussed above and revenue growth year to year. The year to year impact of acquisitions on marketing and selling costs in 1996 was approximately $6,000. In addition, the Company incurred higher selling costs due to higher revenue levels year to year and higher marketing costs due to increased new product introductions. In 1995, marketing and selling expenses increased due to the purchases of Anacad and Axiom which resulted in a year to year increase of approximately $3,700. A stronger U.S. dollar during 1996 reduced expenses by approximately 7% and 19% in Europe and Japan, respectively. For 1995, a weaker U.S. dollar increased expenses by approximately 3% and 17% in Europe and Japan, respectively. General and Administrative The increase in general and administrative costs from 1995 to 1996 was a result of integration costs and additional headcount related to business purchases previously discussed. For 1995, the decrease from 1994 was due to a focused effort to reduce administrative expenses during the year. Special Charges In the fourth quarter of 1996, the Company recorded special charges of $11,998. The Company downsized and redirected certain operations and retargeted an incentive compensation program resulting in severance costs, facility lease and equipment abandonment costs and other costs totaling approximately $7,000. The Company also recognized an impairment in value of goodwill and certain other assets associated with its Meta subsidiary which resulted in a write-down of $5,000. During 1995, the Company filed suit in United States (U.S.) Federal District Court against Quickturn Design Systems, Inc. (competitor) for declarative judgment on non-infringement, invalidity and unenforceability of three of the competitor's patents in anticipation of acquiring Meta. In January 1996, the competitor filed an administrative complaint with the International Trade Commission (ITC), a federal administrative agency, seeking to hinder the distribution of the Meta technology in the United States. Early in the third 18 quarter of 1996, the ITC issued a temporary ruling allowing the importation of this technology to the U.S., but requiring posting of a bond for each sale. Subsequent to the ITC temporary ruling, domestic orders for Meta products were not as strong as expected. While the Company continues to expect the Meta technologies to perform favorably over a longer term, the near-term outlook is not positive enough to support reasonable recoverability of the carrying amounts of these assets. During the second quarter of 1995, the Company recorded a $2,040 special charge adjustment. The adjustment was primarily associated with the 1993 charge and was mainly the result of reduced estimates for severance costs associated with replacement and globalization of the Company's information systems. Information system implementation delays culminated when a key project plan milestone was missed during the second quarter, resulting in lower estimated costs for write-offs of old equipment due to prolonged in-service periods. In addition, certain actions associated with a product discontinuance plan were not taken when management determined that the technology could be used by the Company's consulting organization and sold as a custom integrated service rather than as a commercial design tool. During 1994, the Company recorded a special charge credit of $10,045 offset by an accrual of $4,000. The credit was primarily associated with the 1993 and to a lesser extent the 1992 special charges and was the result of reduced estimates for severance costs due to greater than anticipated employee attrition among the product development and field selling organizations and lower costs of executing the plan. In the third quarter of 1994 the Company lowered its estimate of the cost of the 1993 plan by $5,600 mainly as a result of lower than anticipated costs associated with completion of the first phase of the Company's Japanese subsidiary re-alignment. Estimated costs of executing the plan were lowered by an additional $4,445 in the fourth quarter of 1994 due to several changes in circumstances. In the third and fourth quarters of 1994, the Company exceeded its goal for reducing operating expenses, exclusive of recent acquisitions. In addition, senior management changes subsequent to the initial 1993 charge resulted in re-evaluating and revising certain planned actions, such as the relocation of European headquarters and the out-sourcing of European order fulfillment. These elements of the plan were revised because lower head count through attrition and efficiencies through centralization made them financially less attractive. In the fourth quarter of 1994, an additional accrual of $4,000 was established primarily to reduce a recently acquired subsidiary's engineering staff and management team and to further streamline the Company's core product development activities, including elimination of certain product offerings and reductions in engineering staff. All of the $3,751 special charge accrual as of December 31, 1995 resulted in cash outflows in 1996. The remaining accrual of $5,340 as of December 31, 1996 is expected to be disbursed in 1997. Merger and Acquisition Related Charges In 1996, the Company incurred merger and acquisition related charges of $31,344 as a result of nine business combinations. Seven acquisitions were accounted for as purchases which resulted in charges for in-process R&D of $26,234. The charges were a result of allocating a portion of the acquisition costs to in-process product development that had not reached technological feasibility. The acquisitions of Microtec and Interconnectix were accounted for as pooling of interests which resulted in merger expenses of $4,410 and $700, respectively. These costs were for services rendered to facilitate completion of the merger agreements, severance costs to eliminate redundant management positions and facilities closure costs to eliminate redundant sales offices. In 1995 the Company incurred merger related charges of $2,040. The purchases of Axiom, 3Soft and Zeelan resulted in charges for in-process R&D of $400, $850, and $180, respectively. The acquisitions of Precedence and Exemplar were accounted for as pooling of interests which resulted in merger expenses of $400 and $210, respectively. These costs were for services rendered to facilitate completion of the merger agreements and severance costs to eliminate redundant management positions. In 1994 the Company incurred acquisition related charges of $9,265. The purchase of Anacad resulted in a charge for in-process R&D of $8,265. In addition, merger expenses of $1,000 were paid by MTI for consulting services rendered to facilitate negotiation of the various components of the merger agreement. 19 Other Income (Expense) Year ended December 31, 1996 1995 1994 - --------------------------------------------------------------------------- Other income, net $ 8,411 $ 6,494 $ 3,238 - --------------------------------------------------------------------------- Interest income was $9,485, $9,194, and $5,247 in 1996, 1995 and 1994, respectively. The improvement in interest income is attributable to higher average cash balances due to earnings in 1995 and 1994. Interest expense was $2,423, $2,585, and $2,826 in 1996, 1995 and 1994, respectively. In 1996, the Company sold common stock of two independent public companies for $6,744 which had carrying costs of $1,199, resulting in a gain of $5,545. Other income was adversely affected by legal costs related to the litigation with a competitor of $3,611 in 1996. Provision for Income Taxes The provision for income taxes was $3,540, $8,542 and $3,765 in 1996, 1995 and 1994, respectively. The $3,540 tax provision in 1996 despite a $1,438 pre-tax loss for the year is primarily due to one-time non-tax deductible in process R&D charges and other non-tax deductible costs related to acquisitions. These increases to the tax provision were partially offset due to the reversal of the valuation allowance for certain current deferred tax assets and due to significant pre-tax income in certain jurisdictions where lower tax rates apply. Based on the Company's operating income levels before tax in the United States (U.S.), it was determined that it was more likely than not that certain of its current deferred tax assets in the U.S. would be realized. As such, the tax provision for 1996 was reduced for the reversal of the valuation allowance for those deferred tax assets. The Company incurred a lower effective tax rate in 1995 compared to 1994 primarily due to the reversal of the valuation allowance related to deferred tax assets of the Company's Japanese subsidiary. Based on operating income levels before tax for this subsidiary, it was determined that it was more likely than not that its deferred tax assets would be realized. As such, the tax provision for 1995 was reduced for the reversal of the valuation allowance for the Japanese deferred tax assets. The Company's income tax position for each year combines the effects of available tax benefits in certain countries where the Company does business, benefits from available net operating loss carry forwards, and tax expense for subsidiaries with pre-tax income. As such, the Company's income tax position and resultant effective tax rate is uncertain for 1997 and beyond. Effects of Foreign Currency Fluctuations Approximately half of the Company's revenues are generated outside of the United States. For 1996 and 1995, approximately half of European and all of Japanese revenues were subject to exchange rate fluctuations as they were booked in local currencies. The effects of these fluctuations were substantially offset by local currency cost of revenues and operating expenses resulting in an immaterial net effect on the Company's results of operations. The "foreign currency translation adjustment," as reported in the stockholders' equity section of the consolidated balance sheets, decreased to $12,098 at December 31, 1996, from $13,594 at the end of 1995. This reflects the decrease in the value of net assets denominated in foreign currencies since year-end 1995 as a result of a stronger U.S. dollar at the close of 1996. During 1995, the Company entered into a three year forward contract to stabilize the currency effects on a portion of the Company's net investment in its Japanese subsidiary. The contract to sell Yen 2.2 billion will guarantee the Company $24,900 at the contract's expiration. Any differences between the contracted currency rate and the currency rate at each balance sheet date will impact the foreign currency translation adjustment component of the stockholders' equity section of the consolidated balance sheet. The result is a partial offset of the effect of Japanese currency changes on stockholders' equity during the contract term. This forward contract should not impact current or future consolidated statements of operations. 20 Liquidity and Capital Resources
Year ended December 31, 1996 1995 - ----------------------------------------------------------------------------- Current assets $ 338,192 $ 327,583 - ----------------------------------------------------------------------------- Cash and short term investments $ 197,079 $ 211,996 - ----------------------------------------------------------------------------- Cash and investments, long-term $ 30,000 $ 30,000 - ----------------------------------------------------------------------------- Cash provided by operations $ 42,314 $ 82,253 - ----------------------------------------------------------------------------- Cash used for investment activities, excluding short-term investments $ (57,819) $ (38,442) - ----------------------------------------------------------------------------- Cash provided by financing activities $ 206 $ 14,894 - -----------------------------------------------------------------------------
Cash and Investments Total cash and investments decreased $14,917 during 1996. Cash provided by operations was $42,314, a decrease of $39,939 from 1995. A net loss of $4,978 negatively impacted cash provided by operations in 1996. In addition, the Company completed nine business combinations, six of which required cash payments of $32,358. In 1995, cash was positively impacted by the net profit earned of $50,506 for the year. This source of cash was offset by an increase in trade accounts receivables and a decrease in accrued liabilities associated with the special charges accrual. Cash and short-term investments were positively impacted by the proceeds from issuance of common stock upon exercise of stock options and employee stock plan purchases in the amount of $12,477 and $17,429 in 1996 and 1995, respectively. This increase was offset by investment in property, plant and equipment of $23,931 in 1996 and $22,653 in 1995 and repurchases of common stock of $11,507 in 1996 and $2,250 in 1995. Trade Accounts Receivable The trade accounts receivable balance increased $11,995 from December 31, 1995. The increase is primarily attributable to an increase in shipments late in the quarter versus a more evenly distributed shipment pattern. The Company has historically realized a majority of revenues in the last month of each quarter due to the timing of orders and experienced an increase in this trend in 1996. Future trade receivable trends are difficult to predict due to this relationship. [graphic bar chart depicting the following: Cash & Investments Cash Provided by Operations ------------------------ --------------------------- 1994 1995 1996 1994 1995 1996 ---- ---- ---- ---- ---- ---- $184 $242 $227 $ 53 $ 82 $ 42 (dollar figures are in millions)] Other Assets Other assets increased to $42,914 at December 31, 1996 from $38,184 at December 31, 1995. Net capitalized software development costs decreased by $524 in 1996. Seven acquisitions accounted for as purchases in 1996 resulted in goodwill capitalization of $5,517 and technology capitalization of $8,957, partially offset by amortization of $6,998 and a goodwill write-down of $2,747. In addition, the Company sold common stock of two independent public companies in 1996. In 1995, net capitalized software development costs increased by $2,618. Three acquisitions accounted for as purchases in 1995 resulted in goodwill capitalization of $528 and technology capitalization of $892. Goodwill costs are being amortized over a three year period to R&D expense and technology costs are being amortized over a three year period to system and software cost of revenues. Long-term Debt Long-term debt decreased $501 from December 31, 1995. The Company had total borrowings outstanding of $52,480 and $53,320 under its $55,000 committed revolving credit facility as of December 31, 1996 and 1995, respectively. As of December 31, 1996, the Company maintained an interest rate swap agreement associated with the revolving credit facility debt which effectively converts floating rates on $17,500 of the debt to a fixed rate of 9.55%. Effective February 11, 1997, the Company terminated its interest rate swap agreement at a cost of $1,650. In addition, in the first quarter of 1997, the Company approved a plan to pay down the committed revolving credit facility to 21 zero by the end of the March 1997. The Company expects to use its cash and short term investments and its long-term cash to complete this pay-down. Capital Resources Total capital expenditures increased to $58,872 for 1996, compared to $30,313 for 1995. Nine business combinations were completed in 1996, of which six resulted in cash payments of $32,358. The Company also acquired a number of technologies, primarily software source code, totaling $2,583 in 1996. In addition, the Company purchased technologies totaling $1,444 during 1995. The Company will continue to evaluate make-versus-buy alternatives which should result in additional capital expenditures in 1997. Expenditures for property and equipment were $23,931 and $22,653 in 1996 and 1995, respectively. Future capital expenditure plans include maintaining current design environment equipment and sales demonstration equipment and continuing the implementation of a new global information system. The Company anticipates that current cash balances, anticipated cash flows from operating activities, and existing credit facilities will be sufficient to meet its working capital needs for at least the next twelve months. Factors That May Affect Future Results And Financial Condition The statements contained in this annual report that are not statements of historical fact are forward looking statements that involve a number of risks and uncertainties. Moreover, from time to time the Company may issue other forward looking statements. The following discussion highlights factors that could cause actual results to differ materially from the forward looking statements. The forward looking statements should be considered in light of these factors. The Company competes in the highly competitive and dynamic EDA (electronic design automation) and integrated systems design industries. The Company's success is dependent upon its ability to develop and market products that are innovative, cost-competitive and that meet customers' expectations, and to deliver those products to its customers in a timely manner. Competition in the EDA industry is intense, which can create adverse effects including, but not limited to, price reductions, lower product margins, loss of market share and additional working capital requirements. A material amount of the Company's software product revenue is usually the result of current quarter order performance of which the majority is usually booked in the last month of each quarter. In addition, the Company's revenue often includes multi-million dollar contracts. The timing of the completion of these contracts and the terms of delivery of software, hardware and other services can have a material impact on revenue recognition for a given quarter. The combination of these factors impairs and delays the Company's ability to identify shortfalls or overages from quarterly revenue targets. The Company generally realizes approximately half of its revenues outside the United States and expects this to continue in the future. As such, the Company's business and operating results can be impacted by the effects of foreign currency fluctuations. In order to hedge the impact of foreign currency fluctuations, the Company enters into foreign currency forward contracts. However, significant changes in exchange rates may have a material adverse impact on the Company's results of operations. International operations subject the Company to other risks including, but not limited to, changes in regional or worldwide economic or political conditions, government trade restrictions, limitations on repatriation of earnings, licensing and intellectual property rights protection. The Company is currently reorganizing its professional services business to better support its integrated systems design strategy which focuses on ASIC and IC design methodologies. This resulted in lower billable hours for revenue generating services in 1996. In addition, business reorganizations can increase personnel management complexities including retention and hiring of key technical and management positions. While the Company will look to improve the utilization of its consultants, there can be no assurance that the challenges will be effectively met. The Company's operating expenses are generally committed in advance of revenue and are based to a large degree on future revenue expectations. Operating expenses are incurred in order to generate and sustain higher future revenue levels. If the revenue does not materialize as expected, the Company's results of operations can be adversely impacted. Acquisitions of complementary businesses are an integral part of the Company's overall business strategy. There are several risks associated with this strategy including integration of sales channels, training and education of the sales force for new product offerings, integration of product development efforts, retention of key employees, integration of systems of internal controls, and integration of information systems. All of these factors can impair the Company's ability to forecast, to meet quarterly revenue and earnings targets, and to effectively manage the business for long-term growth. 22 While the Company is aware of and is addressing such issues, there can be no assurance that these challenges will be effectively met. As a result of the acquisition of Meta, the Company has entered the hardware development and assembly business. Some additional issues must be managed by the Company, such as: procuring hardware components on a timely basis, assembling and shipping systems on a timely basis with appropriate quality control, developing new distribution and shipment processes, managing inventory and placing new demands on the sales force. The Company has recently added new re-usable intellectual property products and services to its portfolio of offerings to address this emerging market. As with all emerging markets, there is inherent uncertainty regarding the overall rate of growth. Specifically, growth in the re-usable intellectual property market is subject to significant uncertainties and risks as market participants, including the Company, seek to gain customer acceptance for the overall concept of incorporating these intellectual property designs into their products, identify and develop the correct products to meet evolving customer demands, and identify and implement effective distribution models for this new class of products. The Company is currently involved in the replacement of its financial information systems, based primarily on software from SAP. The implementation phase of new information systems can cause significant disruptions to the Company's work efficiency. There can be no assurance that the project will be completed within budgeted time or dollar parameters. The Company believes it has been successful at recruiting and retaining necessary personnel to research and develop products that satisfy customers needs. There can be no assurance that the Company can continue to recruit and retain such personnel. Generally accepted accounting principles require management to make estimates and assumptions that affect the reported amounts of assets, liabilities and contingencies at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates. Due to the factors above, as well as other market factors outside the Company's control, the Company's future earnings and stock price may be subject to significant volatility. Past financial performance should not be considered a reliable indication of future performance. The investment community should use caution in using historical trends to estimate future results or trends. In addition, if future results vary significantly from expectations of analysts, the Company's stock price could be adversely impacted. 23
CONSOLIDATED STATEMENTS OF OPERATIONS Year ended December 31, 1996 1995 1994 - ---------------------------------------------------------------------------------------- In thousands, except per share data Revenues: - ---------------------------------------------------------------------------------------- System and software $ 242,147 $ 230,533 $ 225,306 - ---------------------------------------------------------------------------------------- Service and support 205,739 201,984 164,813 - ---------------------------------------------------------------------------------------- Total revenues 447,886 432,517 390,119 - ---------------------------------------------------------------------------------------- Cost of revenues: - ---------------------------------------------------------------------------------------- System and software 39,196 35,876 38,352 - ---------------------------------------------------------------------------------------- Service and support 94,620 81,328 67,713 - ---------------------------------------------------------------------------------------- Total cost of revenues 133,816 117,204 106,065 - ---------------------------------------------------------------------------------------- Gross Margin 314,070 315,313 284,054 - ---------------------------------------------------------------------------------------- Operating expenses: - ---------------------------------------------------------------------------------------- Research and development 92,905 86,782 81,231 - ---------------------------------------------------------------------------------------- Marketing and selling 146,754 137,771 129,119 - ---------------------------------------------------------------------------------------- General and administration 40,918 38,206 39,504 - ---------------------------------------------------------------------------------------- Special charges 11,998 (2,040) (6,045) - ---------------------------------------------------------------------------------------- Merger and acquisition related charges 31,344 2,040 9,265 - ---------------------------------------------------------------------------------------- Total operating expenses 323,919 262,759 253,074 - ---------------------------------------------------------------------------------------- Operating income (loss) (9,849) 52,554 30,980 - ---------------------------------------------------------------------------------------- Other income, net 8,411 6,494 3,238 - ---------------------------------------------------------------------------------------- Income (loss) before income taxes (1,438) 59,048 34,218 - ---------------------------------------------------------------------------------------- Provision for income taxes 3,540 8,542 3,765 - ---------------------------------------------------------------------------------------- Net income (loss) $ (4,978) $ 50,506 $ 30,453 - ---------------------------------------------------------------------------------------- Net income (loss) per common and common equivalent share $ (0.08) $ 0.78 $ 0.49 - ---------------------------------------------------------------------------------------- Weighted average number of common and common equivalent shares outstanding 64,134 65,134 62,211 - ---------------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements.
24
CONSOLIDATED BALANCE SHEETS As of December 31, 1996 1995 - ------------------------------------------------------------------------------------------------------------ In thousands Assets Current assets: - ------------------------------------------------------------------------------------------------------------ Cash and cash equivalents $ 165,406 $ 186,676 - ------------------------------------------------------------------------------------------------------------ Short-term investments 31,673 25,320 - ------------------------------------------------------------------------------------------------------------ Trade accounts receivable, net of allowance for doubtful accounts of $3,163 in 1996 and $3,291 in 1995 108,957 96,962 - ------------------------------------------------------------------------------------------------------------ Other receivables 6,697 3,464 - ------------------------------------------------------------------------------------------------------------ Prepaid expenses and other 15,937 14,394 - ------------------------------------------------------------------------------------------------------------ Deferred income taxes 9,522 767 - ------------------------------------------------------------------------------------------------------------ Total current assets 338,192 327,583 - ------------------------------------------------------------------------------------------------------------ Property, plant and equipment, net 102,253 99,605 - ------------------------------------------------------------------------------------------------------------ Cash and investments, long-term 30,000 30,000 - ------------------------------------------------------------------------------------------------------------ Other assets 42,914 38,184 - ------------------------------------------------------------------------------------------------------------ Total assets $ 513,359 $ 495,372 - ------------------------------------------------------------------------------------------------------------ Liabilities and Stockholders' Equity Current liabilities: - ------------------------------------------------------------------------------------------------------------ Short-term borrowings $ 9,055 $ 9,358 - ------------------------------------------------------------------------------------------------------------ Accounts payable 15,003 9,589 - ------------------------------------------------------------------------------------------------------------ Income taxes payable 19,598 14,542 - ------------------------------------------------------------------------------------------------------------ Accrued payroll and related liabilities 28,592 26,883 - ------------------------------------------------------------------------------------------------------------ Accrued and other liabilities 33,031 26,137 - ------------------------------------------------------------------------------------------------------------ Deferred revenue 32,065 27,583 - ------------------------------------------------------------------------------------------------------------ Total current liabilities 137,344 114,092 - ------------------------------------------------------------------------------------------------------------ Long-term debt 52,441 52,942 - ------------------------------------------------------------------------------------------------------------ Other long-term deferrals 3,934 2,112 - ------------------------------------------------------------------------------------------------------------ Total liabilities 193,719 169,146 - ------------------------------------------------------------------------------------------------------------ Stockholders' equity: - ------------------------------------------------------------------------------------------------------------ Common stock, no par value, authorized 100,000 shares; 64,608 and 63,875 issued and outstanding for 1996 and 1995, respectively 297,756 294,917 - ------------------------------------------------------------------------------------------------------------ Incentive stock, no par value, authorized 1,200 shares; none issued -- -- - ------------------------------------------------------------------------------------------------------------ Retained earnings 9,786 17,715 - ------------------------------------------------------------------------------------------------------------ Foreign currency translation adjustment 12,098 13,594 - ------------------------------------------------------------------------------------------------------------ Total stockholders' equity 319,640 326,226 - ------------------------------------------------------------------------------------------------------------ Commitments and Contingencies - ------------------------------------------------------------------------------------------------------------ Total liabilities and stockholders' equity $ 513,359 $ 495,372 - ------------------------------------------------------------------------------------------------------------ See accompanying notes to consolidated financial statements.
25
CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended December 31, 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------- In thousands Operating Cash Flows: - ------------------------------------------------------------------------------------------------------------------- Net income (loss) $ (4,978) $ 50,506 $ 30,453 - ------------------------------------------------------------------------------------------------------------------- Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization of property, plant and equipment 21,472 25,955 25,923 - ------------------------------------------------------------------------------------------------------------------- Gain on sale of investments held for sale (5,545) -- -- - ------------------------------------------------------------------------------------------------------------------- Deferred taxes (5,988) (1,338) (290) - ------------------------------------------------------------------------------------------------------------------- Amortization 11,586 10,037 8,147 - ------------------------------------------------------------------------------------------------------------------- Write-down of assets 31,234 1,430 8,265 - ------------------------------------------------------------------------------------------------------------------- Changes in operating assets and liabilities: Trade accounts receivable (11,201) (4,205) (4,096) - ------------------------------------------------------------------------------------------------------------------- Prepaid expenses and other assets (5,534) 500 (2,207) - ------------------------------------------------------------------------------------------------------------------- Accounts payable 3,458 (4,549) (1,598) - ------------------------------------------------------------------------------------------------------------------- Accrued liabilities 1,319 1,378 (11,968) - ------------------------------------------------------------------------------------------------------------------- Other liabilities and deferrals 6,491 2,539 661 - ------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 42,314 82,253 53,290 - ------------------------------------------------------------------------------------------------------------------- Investing Cash Flows: - ------------------------------------------------------------------------------------------------------------------- Net maturities (purchases) of short-term investments (5,018) (14,430) 8,549 - ------------------------------------------------------------------------------------------------------------------- Proceeds from sale of investments held for sale 6,744 -- -- - ------------------------------------------------------------------------------------------------------------------- Purchases of property, plant and equipment (23,931) (22,653) (16,209) - ------------------------------------------------------------------------------------------------------------------- Capitalization of software development costs (5,691) (8,129) (5,718) - ------------------------------------------------------------------------------------------------------------------- Purchase of businesses (32,358) (6,216) (10,050) - ------------------------------------------------------------------------------------------------------------------- Purchase of technologies (2,583) (1,444) (1,700) - ------------------------------------------------------------------------------------------------------------------- Net cash used by investing activities (62,837) (52,872) (25,128) - ------------------------------------------------------------------------------------------------------------------- Financing Cash Flows: - ------------------------------------------------------------------------------------------------------------------- Proceeds from issuance of common stock 12,477 17,429 17,479 - ------------------------------------------------------------------------------------------------------------------- Proceeds (repayment) of short-term borrowings (263) 868 (282) - ------------------------------------------------------------------------------------------------------------------- Repayment of long-term debt (501) (1,153) (3,998) - ------------------------------------------------------------------------------------------------------------------- Cash distribution -- -- (2,346) - ------------------------------------------------------------------------------------------------------------------- Adjustment for pooling of interests -- -- 899 - ------------------------------------------------------------------------------------------------------------------- Repurchase of common stock (11,507) (2,250) -- - ------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 206 14,894 11,752 - ------------------------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash and cash equivalents (953) (1,261) 2,383 - ------------------------------------------------------------------------------------------------------------------- Net change in cash and cash equivalents (21,270) 43,014 42,297 - ------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at beginning of period 186,676 143,662 101,365 - ------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 165,406 $ 186,676 $ 143,662 - ------------------------------------------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements.
26
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Foreign Retained Currency Total Common Stock Earnings Translation Stockholders' In thousands Shares Amount Deficit Adjustment Equity - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1993, as previously reported 54,343 $252,363 $(62,517) $7,670 $197,516 - ----------------------------------------------------------------------------------------------------------------------------------- Adjustment for acquisition of business 2,011 8,556 (2,069) -- 6,487 - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1993, as restated 56,354 260,919 (64,586) 7,670 204,003 - ----------------------------------------------------------------------------------------------------------------------------------- Stock issued under stock option and stock purchase plans 1,451 10,963 -- -- 10,963 - ----------------------------------------------------------------------------------------------------------------------------------- Stock issued for acquisition of business 2,443 1 899 -- 900 - ----------------------------------------------------------------------------------------------------------------------------------- Stock issued, net of issuance costs 693 6,515 -- -- 6,515 - ----------------------------------------------------------------------------------------------------------------------------------- Compensation related to nonqualified stock options granted -- 114 -- -- 114 - ----------------------------------------------------------------------------------------------------------------------------------- Accretion of redeemable preferred stock -- -- (160) -- (160) - ----------------------------------------------------------------------------------------------------------------------------------- Conversion of redeemable convertible preferred stock 554 1,122 -- -- 1,122 - ----------------------------------------------------------------------------------------------------------------------------------- Foreign currency translation adjustment -- -- -- 5,043 5,043 - ----------------------------------------------------------------------------------------------------------------------------------- Change in value of investments available for sale -- -- 1,812 -- 1,812 - ----------------------------------------------------------------------------------------------------------------------------------- Net income -- -- 30,453 -- 30,453 - ----------------------------------------------------------------------------------------------------------------------------------- Cash distribution -- -- (2,346) -- (2,346) - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1994 61,495 279,634 (33,928) 12,713 258,419 - ----------------------------------------------------------------------------------------------------------------------------------- Stock issued under stock option and stock purchase plans 2,490 17,429 -- -- 17,429 - ----------------------------------------------------------------------------------------------------------------------------------- Compensation related to nonqualified stock options granted -- 104 -- -- 104 - ----------------------------------------------------------------------------------------------------------------------------------- Repurchase of common stock (110) (2,250) -- -- (2,250) - ----------------------------------------------------------------------------------------------------------------------------------- Foreign currency translation adjustment -- -- -- 881 881 - ----------------------------------------------------------------------------------------------------------------------------------- Change in value of investments available for sale -- -- 1,137 -- 1,137 - ----------------------------------------------------------------------------------------------------------------------------------- Net income -- -- 50,506 -- 50,506 - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1995 63,875 294,917 17,715 13,594 326,226 - ----------------------------------------------------------------------------------------------------------------------------------- Stock issued under stock option and stock purchase plans 1,428 12,477 -- -- 11,622 - ----------------------------------------------------------------------------------------------------------------------------------- Stock issued for acquisition of businesses 138 1,825 -- -- 1,825 - ----------------------------------------------------------------------------------------------------------------------------------- Compensation related to nonqualified stock options granted -- 44 -- -- 44 - ----------------------------------------------------------------------------------------------------------------------------------- Repurchase of common stock (833) (11,507) -- -- (10,652) - ----------------------------------------------------------------------------------------------------------------------------------- Foreign currency translation adjustment -- -- -- (1,496) (1,496) - ----------------------------------------------------------------------------------------------------------------------------------- Change in value of investments available for sale -- -- (2,951) -- (2,951) - ----------------------------------------------------------------------------------------------------------------------------------- Net loss -- -- (4,978) -- (4,978) - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1996 64,608 $297,756 $9,786 $12,098 $319,640 - ----------------------------------------------------------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements.
27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS All numerical references in thousands, except percentages and per share data 1. Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the financial statements of the Company and its wholly owned and majority-owned subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation. Foreign Currency Translation Local currencies are the functional currencies for the Company's foreign subsidiaries except for the Netherlands and Singapore where the U.S. dollar is used as the functional currency. Assets and liabilities of foreign operations are translated to U.S. dollars at current rates of exchange, and revenues and expenses are translated using weighted average rates. Gains and losses from foreign currency translation are included as a separate component of stockholders' equity. Foreign currency transaction gains and losses are included as a component of other income and expense. Financial Instruments The Company enters into forward foreign exchange contracts as a hedge against foreign currency sales commitments. To hedge its foreign currency against highly anticipated sales transactions, the Company also purchases foreign exchange options which permit but do not require foreign currency exchanges at a future date with another party at a contracted exchange price. Remeasurement gains and losses on forward and option contracts are deferred and recognized when the sale occurs. All subsequent remeasurement gains and losses are recognized as they occur to offset remeasurement gains and losses recognized on the related foreign currency accounts receivable balances. At December 31, 1996 and 1995, the Company had forward contracts and options outstanding of $39,058 and $38,069, respectively, to primarily sell various foreign currencies. These contracts generally have maturities which do not exceed twelve months. At December 31, 1996 and 1995, the difference between the recorded value and the fair value of the Company's foreign exchange position related to these contracts was approximately zero. The fair value of these contracts was calculated based on dealer quotes. The Company does not anticipate non-performance by the counterparties to these contracts. During 1995, the Company entered into a three year forward contract to stabilize the currency effects on a portion of the Company's net investment in its Japanese subsidiary. The contract was amended in 1996, reducing some portions to a shorter term. The revised contract to sell Yen 2.2 billion will guarantee the Company $24,900 at the contract's expiration. Any differences between the contracted currency rate and the currency rate at each balance sheet date will impact the foreign currency translation adjustment component of the stockholders' equity section of the Consolidated Balance Sheets. The result is a partial offset of the effect of Japanese currency changes on stockholders' equity during the contract term. This forward contract should not impact current or future consolidated statements of operations. At December 31, 1996, the difference between the recorded value and the fair value of the Company's foreign exchange position related to this contract was approximately zero. The fair value of this contract was calculated based on dealer quotes. The Company does not anticipate non-performance by the counterparty to this contract. The fair market value of the Company's long-term debt approximates its carrying value as the interest rates on borrowings are floating rate based. The Company has entered into an interest rate swap agreement to manage exposure to interest rate fluctuations. The differential to be paid or received is accrued and is recognized over the life of the agreement as an adjustment to interest expense. The Company places its cash equivalents and short-term investments with major banks and financial institutions. The Company's investment policy limits its credit exposure to any one financial institution. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising the Company's customer base, and their dispersion across different businesses and geographic areas. The carrying amounts of cash equivalents, short-term investments, trade receivables, accounts payable, and short term borrowings approximate fair value because of the short-term nature of these instruments. Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" requires reporting of investments as either held to maturity, available for sale or trading. Under Statement No. 115, the securities held had been classified as available for sale, which requires the difference between original carrying cost and market value to be recognized as a separate component of stockholders' equity. Cash, Cash Equivalents, and Short-Term Investments The Company classifies highly liquid investments purchased with an original maturity of three months or less as cash equivalents. As of December 31, 1996 and 1995, the Company held $41,211 and $41,716, of short term securities under agreements to resell on January 1, 1997 and 1996, respectively. Due to the short-term nature of these investments, 28 the Company did not take possession of the securities. The Company does not believe it is exposed to any significant credit risk or market risk on cash and cash equivalent balances. Short-term investments consist of certificates of deposit, commercial paper and other highly liquid investments with original maturities in excess of three months. These investments mature primarily in less than one year. Property, Plant and Equipment Property, plant and equipment is stated at cost and consists of land and land improvements, buildings and building equipment, computer equipment, information systems and furniture, leasehold improvements, and service spare parts. Expenditures for additions to property, plant and equipment are capitalized. The cost of repairs and maintenance is expensed as incurred. Depreciation of buildings and building equipment, and land improvements, is computed on a straight-line basis over lives of forty and twenty years, respectively. Depreciation of computer equipment and furniture is computed principally on a straight-line basis over the estimated useful lives of the assets, generally three to five years. Leasehold improvements are amortized on a straight-line basis over the lesser of the term of the lease or estimated useful lives of the improvements. Service spare parts are amortized on a straight-line basis over their estimated useful lives, generally four years. Effective January 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Statement No. 121 provides specific guidance regarding when impairment of long-lived assets such as plant, equipment and certain intangibles including goodwill and capitalized technology should be recognized and how impairment losses of such assets should be measured. Initial adoption of Statement No. 121 did not have a material effect on the Company's consolidated financial statements. Management reviews long-lived assets and the related intangible assets for impairment whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable. Recoverability of these assets is determined by comparing the forecasted undiscounted net cash flows of the operation to which the assets relate, to the carrying amount including associated intangible assets of such operation. If the operation is determined to be unable to recover the carrying amount of its assets, then intangible assets are written down first, followed by the other long-lived assets of the operation, to fair value. Fair value is determined based on discounted cash flows or appraised values, depending upon the nature of the assets. Income Taxes The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts and tax balances of existing assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Revenue Recognition Revenues from system sales and software licenses are recognized at the time of shipment. Contract service revenues are billed in advance and recorded as deferred revenue. Service revenues are then recognized ratably over the contractual period as the services are performed. Training and consulting revenues are recognized as the related services are performed. Custom design and software porting revenues are recognized using the percentage of completion method or as contract milestones are achieved. Software Development Costs The Company accounts for software development costs in accordance with Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed." The Company capitalizes certain costs incurred in the production of computer software once technological feasibility of the product to be marketed has been established. Capitalization of these costs ceases when the product is considered available for general release to customers. Costs incurred prior to technological feasibility, including amounts attributable to in-process research and development in business acquisitions, are expensed as incurred. Amortization of capitalized software development costs is calculated as the greater of the ratio that the current product revenues bear to estimated future revenues or the straight-line method over the expected product life cycle of approximately three years. Amortization is included in system and software cost of revenues in the Consolidated Statements of Operations. Stockholders' Equity In August 1995, the Company's Board of Directors approved a plan to repurchase, from time to time over the next eighteen months on the open market, up to $50,000 in market value of the Company's common shares. During 1996, the Company repurchased 833 shares, approximately 500 of 29 which were repurchased immediately prior to Employee Stock Purchase Plan purchases and then reissued to the plan participants. The remaining shares were repurchased in the first quarter of 1996 and subsequently reissued through stock option exercises prior to consummation of the August 1996 acquisition of Interconnectix, Inc. The market value of all shares repurchased in 1996 was $11,507. In the third quarter of 1996, the Company's Board of Directors rescinded the share repurchase plan except that the Board authorized the continued repurchase of shares for purposes of immediate reissuance under the Employee Stock Purchase Plan. During the third quarter of 1995, the Company repurchased 110 shares on the open market with a market value of $2,250. These shares were subsequently reissued through the stock option exercises prior to consummation of the October 1995 acquisition of Precedence Incorporated. Net Income (Loss) per Common and Common Equivalent Share For 1996, net loss per common and common equivalent share was calculated using only the weighted average of common shares outstanding. Common stock equivalents related to stock options are anti-dilutive in a net loss situation and, therefore, were not included in 1996. For 1995 and 1994, net income per common and common equivalent share was calculated on the basis of the weighted average number of common shares outstanding plus dilutive common stock equivalents related to stock options outstanding. Use of Estimates Generally accepted accounting principles require management to make estimates and assumptions that affect the reported amount of assets, liabilities and contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Reclassifications and Restatements Certain reclassifications have been made in the accompanying consolidated financial statements for 1994 and 1995 to conform with the 1996 presentation. As discussed in Note 3, certain acquisitions have resulted in the Company's restatement of its consolidated financial statements. 2. Special Charges Following is a summary of the major elements of the special charges:
Year ended December 31, 1996 1995 1994 - ------------------------------------------------------------------------------------------- Additional charges: - ------------------------------------------------------------------------------------------- Employee severance $ 3,486 $ -- $ 2,430 - ------------------------------------------------------------------------------------------- Asset impairment 5,000 -- -- - ------------------------------------------------------------------------------------------- Other 3,512 -- 1,570 - ------------------------------------------------------------------------------------------- Total additions 11,998 -- 4,000 - ------------------------------------------------------------------------------------------- Adjustment of charges: Employee severance -- (1,540) (3,324) - ------------------------------------------------------------------------------------------- Employee relocation -- -- (2,600) - ------------------------------------------------------------------------------------------- Asset write-offs and product discontinuance costs -- (500) (2,060) - ------------------------------------------------------------------------------------------- Facilities closure and consolidation -- -- (2,061) - ------------------------------------------------------------------------------------------- Total adjustments -- (2,040) (10,045) - ------------------------------------------------------------------------------------------- Net special charges $ 11,998 $ (2,040) $ (6,045) - -------------------------------------------------------------------------------------------
In the fourth quarter of 1996, the Company recorded special charges of $11,998. The Company downsized and redirected certain operations and retargeted an incentive compensation program resulting in severance costs, facility lease and equipment abandonment costs and other costs totaling approximately $7,000. The Company also recognized an impairment in value of goodwill and certain other assets associated with its Meta subsidiary which resulted in a write-down of $5,000. During 1995, the Company filed suit in United States (U.S.) Federal District Court against Quickturn Design Systems, Inc. (competitor) for declarative judgment on non-infringement, invalidity and unenforceability of three of the competitor's patents in anticipation of acquiring Meta. In January 1996, the competitor filed an administrative complaint with the International Trade Commission (ITC), a federal administrative agency, seeking to hinder the distribution of the Meta technology in the United States. Early in the third quarter of 1996, the ITC issued a temporary ruling allowing the importation of this technology to the U.S., but requiring posting of a bond for each sale. Subsequent to the ITC temporary ruling, domestic orders for Meta products were not as strong as expected. While the Company continues to expect the Meta technologies to perform favorably over a longer term, the near-term outlook is not positive enough to support reasonable recoverability of the carrying amounts of these assets. During the second quarter of 1995, the Company recorded a $2,040 special charge adjustment. The adjustment was primarily associated with the 1993 charge and was mainly the 30 result of reduced estimates for severance costs associated with replacement and globalization of the Company's information systems. Information system implementation delays culminated when a key project plan milestone was missed during the second quarter, resulting in lower estimated costs for write-offs of old equipment due to prolonged in-service periods. In addition, certain actions associated with a product discontinuance plan were not taken when management determined that the technology could be used by the Company's consulting organization and sold as a custom integrated service rather than as a commercial design tool. During 1994, the Company recorded a special charge credit of $10,045 offset by an accrual of $4,000. The credit was primarily associated with the 1993 and to a lesser extent the 1992 special charges and was the result of reduced estimates for severance costs due to greater than anticipated employee attrition among the product development and field selling organizations and lower costs of executing the plan. In the third quarter of 1994 the Company lowered its estimate of the cost of the 1993 plan by $5,600 mainly as a result of lower than anticipated costs associated with completion of the first phase of the Company's Japanese subsidiary re-alignment. Estimated costs of executing the plan were lowered by an additional $4,445 in the fourth quarter of 1994 due to several changes in circumstances. In the third and fourth quarters of 1994, the Company exceeded its goal for reducing operating expenses, exclusive of recent acquisitions. In addition, senior management changes subsequent to the initial 1993 charge resulted in re-evaluating and revising certain planned actions, such as the relocation of European headquarters and the out-sourcing of European order fulfillment. These elements of the plan were revised because lower head count through attrition and efficiencies through centralization made them financially less attractive. In the fourth quarter of 1994, an additional accrual of $4,000 was established primarily to reduce a recently acquired subsidiary's engineering staff and management team and to further streamline the Company's core product development activities, including elimination of certain product offerings and reductions in engineering staff. All of the $3,751 special charge accrual as of December 31, 1995 resulted in cash outflows in 1996. The remaining accrual of $5,340 as of December 31, 1996 is expected to be disbursed in 1997. 3. Business Acquisitions In 1996, the Company completed nine business combinations: two were accounted for as pooling of interests and seven were accounted for as purchases. The Company purchased dQdt, Inc. (dQdt), Meta Systems (Meta), Seto Software Gmbh (Seto), Royal Digital Centers, Inc. (Royal Digital), Open Networks Engineering Inc. (ONE), Systolic Technology, LTD (Systolic), and CAE Technology, Inc. (CAE) in April 1996, May 1996, June 1996, August 1996, November 1996, November 1996 and December 1996, respectively. The results of operations of each acquisition accounted for as a purchase are included in the Company's results of operations from the date of acquisition. dQdt is primarily engaged in developing and marketing intellectual property (IP) related to advanced digital signal processor design for communication and multimedia applications. Meta is primarily engaged in developing and marketing accelerated verification products. Seto is primarily engaged in developing and marketing personal computer-based layout tools used in the printed circuit board design process. Royal Digital is primarily engaged in developing and marketing printed circuit board computer-aided design tools that enhance design-for-manufacturability. ONE is primarily engaged in developing and marketing telecommunication management network stack, packaged as reusable IP. Systolic and CAE are primarily engaged in developing and marketing of IP for telecommunications, data communications and computer peripheral interfaces. The total purchase price including acquisition expenses for all 1996 purchase acquisitions was $40,708. The Company paid the purchase price in cash for each transaction except for dQdt in which the Company paid the purchase price in its common stock with a market value on the purchase date of $1,825. The cost of each acquisition was allocated on the basis of estimated fair value of the assets and liabilities assumed. In connection with all purchase acquisitions, the Company recorded one-time charges to operations for the write-off of each enterprises' in-process product development that had not reached technological feasibility. The purchase accounting allocations resulted in charges for in-process R&D of $26,234, goodwill capitalization of $5,517, and technology capitalization of $8,957. The separate operational results of all acquisitions accounted for as purchases were not material compared to the Company's overall results of operations, and accordingly pro-forma financial statements of the combined entities have been omitted. On January 31, 1996, the Company issued 6,223 shares of its common stock for all outstanding common stock of Microtec Research, Inc. (Microtec). In addition, the Company reserved 688 shares of its common stock for previously outstanding options to purchase Microtec common stock. These options vest and become exercisable under the 31 terms of the respective, original Microtec stock option agreements. The Company accounted for this transaction as a pooling of interests and accordingly, the Company's consolidated financial statements have been restated to include the results of Microtec for all periods presented. Microtec is primarily engaged in developing and marketing embedded systems and products to optimize the development and operation of embedded systems across hardware/software boundaries. Merger expenses of $4,410 were incurred associated with the elimination of duplicate facilities, severance costs, the write-off of certain property and equipment and legal and accounting fees associated with administration of the merger. On August 30, 1996, the Company issued 2,133 shares of its common stock for all outstanding common stock of Interconnectix, Inc. (Interconnectix). In addition, the Company reserved 112 shares of its common stock for previously outstanding options to purchase Interconnectix common stock. These options vest and become exercisable under the terms of the respective, original Interconnectix stock option agreements. The Company accounted for this transaction as a pooling of interests and accordingly, the Company's consolidated financial statements have been restated to include the results of Interconnectix for all periods presented. Interconnectix is primarily engaged in developing and marketing interconnect synthesis software for the design of high-speed, high-performance printed circuit boards. Merger expenses of $700 were incurred associated with severance costs and legal and accounting fees associated with administration of the merger. The Company purchased Axiom Datorer Scandinavian AB (Axiom), 3Soft Corporation (3Soft), and Zeelan Technology, Inc. (Zeelan) in May 1995, December 1995, and December 1995, respectively. Axiom and Zeelan are primarily engaged in developing, marketing and supporting software library tools used to model electronic components for the printed circuit board and the application specific integrated circuit markets of the EDA industry. 3Soft is primarily engaged in developing, marketing and supporting a library of pre-designed and tested standard logic functions or blocks which are process technology independent. The purchase accounting allocations resulted in charges for in-process R&D of $1,430, goodwill capitalization of $528 and technology capitalization of $892. In May 1995, the Company issued 1,512 shares of its common stock for all outstanding common stock of Exemplar Logic, Inc. (Exemplar). Exemplar develops, markets and supports a family of software tools for high level design automation for the application specific integrated circuit and field programmable gate array markets. The Company accounted for this transaction as a pooling of interests and accordingly, the results of Exemplar are included in the Company's consolidated financial statements for all periods presented. Merger expenses of $400 were for services rendered to facilitate completion of the merger agreement and severance costs. In October 1995, the Company issued 735 shares of its common stock for all outstanding common stock of Precedence Incorporated (Precedence). Precedence is primarily engaged in developing, marketing and supporting simulation backplane technology and co-simulation solutions for the electronic design automation industry. The Company accounted for this transaction as a pooling of interests and accordingly, the results of Precedence are included in the Company's consolidated financial statements for all periods presented. Merger expenses of $210 were for services rendered to facilitate completion of the merger agreement. In September 1994, the Company completed the purchase of Anacad Electrical Engineering Software GmbH (Anacad). Anacad is primarily engaged in developing, marketing and supporting analog and mixed signal simulation and optimization software for the integrated circuit and printed circuit board markets of the EDA industry. The total purchase price of $12,000 was financed with cash of $10,050 and the issuance of a short-term obligation classified under accrued liabilities totaling $1,950, which was fully paid by December 31, 1995. The purchase accounting allocation resulted in a charge for in-process R&D of $8,265, goodwill capitalization of $2,897 and technology capitalization of $4,735. In December 1994, the Company issued 2,443 shares of its common stock for all outstanding common stock of Model Technology Incorporated (MTI). MTI is a developer of VHDL and Verilog simulation point tools using direct compile technology to design and test components and boards. The Company accounted for this transaction as a pooling of interests and accordingly, the results of MTI are included in the Company's consolidated financial statements for 1994 and 1995. Merger costs of $1,000 were paid by MTI for consulting services rendered to facilitate negotiation of the various components of the merger agreement. Also, cash distributions of $2,346 were paid in 1994 by MTI to its shareholders in the normal course of S-Corporation business prior to the date of acquisition. 32 4. Income Taxes Domestic and foreign pre-tax income (loss) is as follows:
Year ended December 31, 1996 1995 1994 - ------------------------------------------------------------------------------------------ Domestic $ (10,023) $ 25,826 $ 8,569 - ------------------------------------------------------------------------------------------ Foreign 8,585 33,222 25,649 - ------------------------------------------------------------------------------------------ Total $ (1,438) $ 59,048 $ 34,218 - ------------------------------------------------------------------------------------------
The provision for income taxes is as follows:
Year ended December 31, 1996 1995 1994 - ------------------------------------------------------------------------------------------- Current: - ------------------------------------------------------------------------------------------- Federal $ 3,563 $ 1,511 $ (269) - ------------------------------------------------------------------------------------------- State 118 413 63 - ------------------------------------------------------------------------------------------- Foreign 5,847 7,956 4,261 - ------------------------------------------------------------------------------------------- Total current 9,528 9,880 4,055 - ------------------------------------------------------------------------------------------- Deferred: - ------------------------------------------------------------------------------------------- Federal (6,093) 251 (347) - ------------------------------------------------------------------------------------------- Foreign 105 (1,589) 57 - ------------------------------------------------------------------------------------------- Total deferred (5,988) (1,338) (290) - ------------------------------------------------------------------------------------------- Total $ 3,540 $ 8,542 $ 3,765 - -------------------------------------------------------------------------------------------
The effective tax rate differs from the federal tax rate as follows:
Year ended December 31, 1996 1995 1994 - ------------------------------------------------------------------------------------------ Federal tax rate (35.0%) 35.0% 35.0% - ------------------------------------------------------------------------------------------ State taxes, net (5.0) 5.0 3.5 - ------------------------------------------------------------------------------------------ Foreign tax rate differential (435.4) (4.8) 9.2 - ------------------------------------------------------------------------------------------ Income and losses of foreign subsidiaries 457.4 7.2 6.4 - ------------------------------------------------------------------------------------------ Foreign tax credits (480.5) (7.6) -- - ------------------------------------------------------------------------------------------ Change in valuation allowance (212.6) (22.4) (42.1) - ------------------------------------------------------------------------------------------ Write-off of non-deductible acquisition cost 961.8 -- -- - ------------------------------------------------------------------------------------------ Other, net (4.6) 1.5 (1.8) - ------------------------------------------------------------------------------------------ Effective tax rate 246.1% 13.9% 10.2% - ------------------------------------------------------------------------------------------
The significant components of deferred income tax expense are as follows:
Year ended December 31, 1996 1995 1994 - -------------------------------------------------------------------------------- Net changes in deferred tax assets and liabilities $ (3,462) $ (358) $ 12,197 - -------------------------------------------------------------------------------- Increase(decrease) in beginning-of-year balance of the valuation allowance for deferred tax assets $ (2,526) $ (980) $ (12,487) - -------------------------------------------------------------------------------- Total $ (5,988) $ (1,338) $ (290) - --------------------------------------------------------------------------------
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, 1996 1995 - ---------------------------------------------------------------------------------------------- Deferred tax assets: Depreciation of property and equipment $ 696 $ 1,788 - ---------------------------------------------------------------------------------------------- Reserves and allowances 498 674 - ---------------------------------------------------------------------------------------------- Accrued expenses not currently deductible 6,338 5,899 - ---------------------------------------------------------------------------------------------- Net operating loss carryforwards 27,654 26,969 - ---------------------------------------------------------------------------------------------- Tax credit carryforwards 21,713 17,513 - ---------------------------------------------------------------------------------------------- Purchased technology 1,217 848 - ---------------------------------------------------------------------------------------------- Other, net 1,284 2,590 - ---------------------------------------------------------------------------------------------- Total gross deferred tax assets 59,400 56,281 - ---------------------------------------------------------------------------------------------- Less valuation allowance (48,522) (51,048) - ---------------------------------------------------------------------------------------------- Net deferred tax assets 10,878 5,233 - ---------------------------------------------------------------------------------------------- Deferred tax liabilities: Capitalization of software development costs (4,473) (4,816) - ---------------------------------------------------------------------------------------------- Net deferred tax asset $ 6,405 $ 417 - ----------------------------------------------------------------------------------------------
The Company has established a valuation allowance for certain deferred tax assets, including those for net operating loss and tax credit carryforwards. Statement No. 109 requires that such a valuation allowance be recorded when it is more likely than not that some portion of the deferred tax assets will not be realized. The portion of the valuation allowance for deferred tax assets for which subsequently recognized tax benefits will be applied directly to contributed capital is $16,207 as of December 31, 1996. This amount is attributable to differences between financial and tax reporting of employee stock option transactions. As of December 31, 1996, the Company, for income tax purposes, has net operating loss carryforwards of approximately $65,075, research and experimentation credits carryforwards of $12,523 and a foreign tax credit carryforward of 33 $6,910. If not used by the Company to reduce income taxes payable in future periods, net operating loss carryforwards will expire between 1999 through 2011, research and experimentation credit carryforwards between 1998 through 2011 and the foreign tax credit carryforward in the year 2001. The Company has not provided for Federal income taxes on approximately $130,905 of undistributed earnings of foreign subsidiaries at December 31, 1996, since these earnings have been invested indefinitely in subsidiary operations. Upon repatriation, some of these earnings would generate foreign tax credits which will reduce the Federal tax liability associated with any future foreign dividend. The Company has settled its Federal income tax obligations through 1991. The Company believes the provisions for income taxes for years since 1991 are adequate. 5. Property, Plant and Equipment A summary of property, plant and equipment follows:
As of December 31, 1996 1995 - ----------------------------------------------------------------------------------- Computer equipment and furniture $ 162,248 $ 152,662 - ----------------------------------------------------------------------------------- Buildings and building equipment 53,891 53,638 - ----------------------------------------------------------------------------------- Land and improvements 14,650 14,641 - ----------------------------------------------------------------------------------- Leasehold improvements 8,282 10,723 - ----------------------------------------------------------------------------------- Service spare parts 167 207 - ----------------------------------------------------------------------------------- 239,238 231,871 - ----------------------------------------------------------------------------------- Less accumulated depreciation and amortization (136,985) (132,266) - ----------------------------------------------------------------------------------- Property, plant and equipment, net $ 102,253 $ 99,605 - -----------------------------------------------------------------------------------
The Company has entered into agreements to lease portions of its headquarters site in Wilsonville, Oregon. Under terms of these agreements approximately 180 square feet of space was made available to a third party on a firm take-down schedule. These agreements result in rental payments of $2,540, extending through 1998. 6. Other Assets A summary of other assets follows:
As of December 31, 1996 1995 - ----------------------------------------------------------------------------------- Software development costs, net $ 10,806 $ 11,330 - ----------------------------------------------------------------------------------- Purchased technology, net 13,190 5,841 - ----------------------------------------------------------------------------------- Goodwill, net 3,195 3,864 - ----------------------------------------------------------------------------------- Investment in real estate 2,935 2,935 - ----------------------------------------------------------------------------------- Investments available for sale --- 4,150 - ----------------------------------------------------------------------------------- Other 12,788 10,064 - ----------------------------------------------------------------------------------- Total $ 42,914 $ 38,184 - -----------------------------------------------------------------------------------
The Company capitalized software development costs amounting to $5,691 and $8,129 in 1996 and 1995, respectively. Related amortization expense of $6,215, $5,511, and $6,785 was recorded for the years ended December 31, 1996, 1995, and 1994, respectively. Acquisitions accounted for as purchases in 1996 and 1995, resulted in goodwill capitalization of $5,517 and $528, and technology capitalization of $8,957 and $892, respectively. Total purchased technology amortization expense of $3,559, $2,418, and $760 was recorded for the years ended December 31, 1996, 1995, and 1994, respectively. Also, the Company recognized an impairment in value of goodwill associated with its Meta subsidiary which resulted in a write-down of $2,747. Goodwill costs are being amortized over a three year period to R&D expense and technology costs are being amortized over a three year period to system and software cost of revenues. During 1996, the Company sold common stock of two independent public companies. 7. Short-Term Borrowings Short-term borrowings represent drawings by subsidiaries under multi-currency unsecured credit agreements and the current portion of long-term debt. Interest rates are generally based on the applicable country's prime lending rate depending on the currency borrowed. The weighted average interest rate on short term borrowings during 1996 and 1995 was approximately 6%. The Company has available lines of credit of approximately $30,506 as of December 31, 1996. Certain agreements require compensatory balances which the Company has met. 8. Long-Term Debt Long-term debt is comprised of the following:
As of December 31, 1996 1995 - ----------------------------------------------------------------------------------- Revolving term credit facility $ 52,480 $ 53,320 - ----------------------------------------------------------------------------------- Other 801 462 - ----------------------------------------------------------------------------------- 53,281 53,782 - ----------------------------------------------------------------------------------- Less current portion (840) (840) - ----------------------------------------------------------------------------------- Total $ 52,441 $ 52,942 - -----------------------------------------------------------------------------------
At December 31, 1996 and 1995, the Company had a committed credit facility with a bank which remains in effect until July 2000. The commitment level at December 31, 1996 was $52,480. The agreement requires commitment reductions of $840 annually which began in July 1994, therefore the debt was reduced by $840 in 1996 and 1995. Also, $840 of the debt is classified as current in short-term borrowings on the consolidated balance sheets as of December 31, 1996 and 1995. Interest on borrowings under the credit facility is floating rate based. Borrowings are collateralized by 34 cash and investments of $30,000 and a trust deed on the Company's headquarters site in Wilsonville, Oregon of $25,000. At December 31, 1996 and 1995, the Company had an interest rate swap agreement with a bank, which effectively converts floating rates on $17,500 of borrowings to a fixed rate of 9.55% until expiration of the agreement in January 2000. The average floating interest rate as of December 31, 1996 was approximately 6%. Effective February 11, 1997, the Company terminated its $17.5 million interest rate swap agreement at a cost of $1,650. In addition, in the first quarter of 1997, the Company approved a plan to pay down the committed revolving credit facility to zero by the end of the March 1997. 9. Incentive Stock The Board of Directors has the authority to issue incentive stock in one or more series and to determine the relative rights and preferences of the incentive stock. The incentive stock is convertible into common stock upon attainment of specified objectives or upon the occurrence of certain events to be determined by the Board of Directors. 10. Employee Stock and Savings Plans The Company has three common stock option plans which provide for the granting of incentive and nonqualified stock options to key employees, officers, and non-employee directors of the Company and its subsidiaries. The three stock option plans are administered by the Compensation Committee of the Board of Directors, and permit accelerated vesting of outstanding options upon the occurrence of certain changes in control of the Company. The Company also has a stock plan which provides for the sale of common stock to key employees of the Company and its subsidiaries. Shares can be awarded under the plan at no purchase price as a stock bonus and the stock plan also provides for the granting of nonqualified stock options. During 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation", which defines a fair value based method of accounting for an employee stock option and similar equity instrument. As is permitted under Statement No. 123, the Company has elected to continue to account for its stock-based compensation plans under APB Opinion No. 25. The Company has computed, for pro forma disclosure purposes, the value of all options granted during 1996 and 1995 using the Black-Scholes option pricing model as prescribed by Statement No. 123 using the following weighted average assumptions for grants: Year Ended December 31, 1996 1995 - ------------------------------------------------------------ Risk-free interest rate 6% 6% - ------------------------------------------------------------ Expected dividend yield 0% 0% - ------------------------------------------------------------ Expected lives 5.5 5.5 - ------------------------------------------------------------ Expected volatility 91% 94% - ------------------------------------------------------------ Using the Black-Scholes methodology, the total value of options granted during 1996 and 1995 was $41,018 and $19,848, respectively, which would be amortized on a pro forma basis over the vesting period of the options. The weighted average fair value of options granted during 1996 and 1995 was $8.02 per share and $12.94 per share, respectively. If the Company had accounted for its stock-based compensation plans in accordance with Statement No. 123, the Company's net income (loss) and net income (loss) per share would approximate the pro forma disclosures below:
Year Ended December 31, - ----------------------------------------------------------------------------------------------- 1996 1995 ----------------------- ------------------------ As Pro As Pro Reported Forma Reported Forma - ----------------------------------------------------------------------------------------------- Net income (loss) $ (4,978) $ (14,496) $ 50,506 $ 47,933 - ----------------------------------------------------------------------------------------------- Net income (loss) per share $ (.08) $ (.23) $ .78 $ .75 - -----------------------------------------------------------------------------------------------
The effects of applying Statement No. 123 in this pro forma disclosure are not indicative of future amounts. Statement No. 123 does not apply to awards prior to January 1, 1995, and additional awards are anticipated in future years. Options under all four plans generally become exercisable over a four to five-year period from the date of grant or from the commencement of employment at prices generally not less than the fair market value at the date of grant. The excess of the fair market value of the shares at the date of grant over the option price, if any, is charged to operations ratably over the vesting period. At December 31, 1996, options for 2,517 shares were exercisable, with a weighted average exercise price of $7.87, 22,310 shares were reserved for issuance and 3,593 shares were available for future grant. Stock options outstanding, the weighted average exercise price and transactions involving the stock option plans are summarized as follows: 35
Price Per Shares Share - --------------------------------------------------------------------------- Balance at December 31, 1994 6,830 $ 8.27 - --------------------------------------------------------------------------- Granted 1,534 13.87 - --------------------------------------------------------------------------- Exercised (1,870) 7.10 - --------------------------------------------------------------------------- Canceled (421) 10.18 - --------------------------------------------------------------------------- Balance at December 31, 1995 6,073 $ 9.17 - --------------------------------------------------------------------------- Granted 5,113 9.83 - --------------------------------------------------------------------------- Exercised (1,013) 5.38 - --------------------------------------------------------------------------- Canceled (3,323) 13.27 - --------------------------------------------------------------------------- Balance at December 31, 1996 6,850 $ 8.23 - ---------------------------------------------------------------------------
At December 31, 1996, the range of exercise prices and weighted average remaining contractual life of outstanding options was $.07 - $19.76 and 8 years, respectively. In November 1996, the Compensation Committee of the Board of Directors adopted a resolution to offer employees holding nonqualified stock options for 2,595 shares the opportunity to exchange their existing stock options for new nonqualified stock options. The exchange allowed employees to receive options for the same number of shares at $7.75 per share, the then current market price, instead of an average original exercise price of $14.17. The new options vest over two to six years. The offer was made because the Board of Directors believes lower-priced options provide a greater retention advantage and incentive to key employees and officers. Option holders elected to exchange options covering 1,791 shares. In May 1989, the shareholders adopted the 1989 Employee Stock Purchase Plan and reserved 1,400 shares for issuance. The shareholders have subsequently amended the plan to reserve an additional 4,000 shares for issuance. Under the plan, each eligible employee may purchase up to six hundred shares of stock per quarter at prices no less than 85% of its fair market value determined at certain specified dates. Employees purchased 516 and 382 shares under the plan in 1996 and 1995, respectively. At December 31, 1996, 1,899 shares remain available for future purchase under the plan. The plan will expire upon either issuance of all shares reserved for issuance or at the discretion of the Board of Directors. There are no plans to terminate the plan at this time. The Company has an employee savings plan (the Savings Plan) that qualifies as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. Under the Savings Plan, participating U.S. employees may defer a portion of their pretax earnings, up to the Internal Revenue Service annual contribution limit. The Company currently matches 50% of eligible employee's contributions, up to a maximum of 6% of the employee's earnings. Employer matching contributions vest over 5 years, 20% for each year of service completed. The Company's matching contributions to the Savings Plan were $2,299, $2,220, and $1,997 in 1996, 1995, and 1994, respectively. 11. Commitments The Company leases a majority of its field office facilities under noncancellable operating leases. In addition, the Company leases certain equipment used in its research and development activities. This equipment is generally leased on a month-to-month basis after meeting a six-month lease minimum. The Company rents its Japanese facilities under a two year cancelable lease with a six month notice of cancellation. The total commitment under this cancelable lease, which expires in December 1998, is $5,382, of which the first six months payments of $1,345 are included in the schedule below. Future minimum lease payments under all noncancellable operating leases are approximately as follows: Operating Annual periods ending Lease December 31, Payments - ------------------------------------------------------------------- 1997 $ 11,615 - ------------------------------------------------------------------- 1998 9,211 - ------------------------------------------------------------------- 1999 7,932 - ------------------------------------------------------------------- 2000 6,290 - ------------------------------------------------------------------- 2001 3,872 - ------------------------------------------------------------------- Later years 16,443 - ------------------------------------------------------------------- Total $ 55,363 - ------------------------------------------------------------------- Rent expense under operating leases was approximately $15,480, $16,181, and $15,821 for the years ended December 31, 1996, 1995, and 1994, respectively. 12. Other Income (Expense) Other income (expense) is comprised of the following:
Year ended December 31, 1996 1995 1994 - ----------------------------------------------------------------------------------------------- Interest income $ 9,485 $ 9,194 $ 5,247 - ----------------------------------------------------------------------------------------------- Interest expense (2,423) (2,585) (2,826) - ----------------------------------------------------------------------------------------------- Foreign exchange gain (loss) (468) (506) 626 - ----------------------------------------------------------------------------------------------- Litigation costs (3,611) --- --- - ----------------------------------------------------------------------------------------------- Gain on sale of investments 5,545 --- --- - ----------------------------------------------------------------------------------------------- Other, net (117) 391 191 - ----------------------------------------------------------------------------------------------- Total $ 8,411 $ 6,494 $ 3,238 - -----------------------------------------------------------------------------------------------
Included in other income (expense) are legal costs related to certain litigation. In addition, the Company sold common stock of two independent public companies. 36 13. Supplemental Cash Flow Information The following provides additional information concerning supplemental disclosures of cash flow activities:
Year ended December 31, 1996 1995 1994 - -------------------------------------------------------------------------------------- Cash paid for: Interest expense $ 2,198 $ 2,317 $ 2,374 - -------------------------------------------------------------------------------------- Income taxes $ 1,984 $ 7,611 $ 3,364 - -------------------------------------------------------------------------------------- Issuance of common stock for purchase of business $ 1,825 -- -- - --------------------------------------------------------------------------------------
14. Industry and Geographic Information The Company is a supplier of EDA systems - advanced computer software, accelerated verification systems and intellectual property designs and data bases used to automate the design, analysis and testing of electronic hardware and embedded systems software in electronic systems and components. System and software revenues comprise more than half of the Company's revenues and are derived primarily from software products owned by the Company and by third parties for which royalties are paid by the Company. Service and support revenues are derived primarily from annual software support maintenance contracts and professional services. The Company markets its products primarily to customers in the communications, computer, semiconductor, consumer electronics, aerospace and transportation industries. The Company sells and licenses its products primarily through its direct sales force in North America, Europe and Asia, and through distributors in territories where the volume of business does not warrant a direct sales presence. In addition to its corporate offices in Wilsonville, Oregon, the Company has sales, support, software development and professional services offices worldwide. Intercompany transfers are accounted for at amounts generally above cost. Corporate expenses are general expenses included in the United States and are allocated to the operations of each geographic area. For the purposes of determining operating income, corporate administration expenses, corporate marketing expenses and research and development costs are allocated to each region. In addition, special and merger related charges are included in the respective region where the costs were incurred. Corporate assets of cash and investments and the Company's headquarter facilities in Wilsonville, Oregon are included in the United States. Geographic information for 1996, 1995 and 1994 is set forth in the table below.
Geographic Information U.S. Europe Japan Other Intl. Eliminations Consolidated - ----------------------------------------------------------------------------------------------------------------------------------- 1996 - ----------------------------------------------------------------------------------------------------------------------------------- Revenues from unaffiliated customers $ 239,972 $ 113,678 $ 67,902 $ 26,334 $ -- $ 447,886 - ----------------------------------------------------------------------------------------------------------------------------------- Intercompany transfers -- -- -- 17,136 (17,136) -- - ----------------------------------------------------------------------------------------------------------------------------------- Total revenues $ 239,972 $ 113,678 $ 67,902 $ 43,470 $ (17,136) $ 447,886 - ----------------------------------------------------------------------------------------------------------------------------------- Operating income (loss) $ (9,712) $ (16,337) $ 10,917 $ 5,283 $ -- $ (9,849) - ----------------------------------------------------------------------------------------------------------------------------------- Identifiable assets $ 330,609 $ 105,582 $ 42,634 $ 34,534 $ -- $ 513,359 - ----------------------------------------------------------------------------------------------------------------------------------- 1995 - ----------------------------------------------------------------------------------------------------------------------------------- Revenues from unaffiliated customers $ 223,962 $ 117,159 $ 68,650 $ 22,746 $ -- $ 432,517 - ----------------------------------------------------------------------------------------------------------------------------------- Intercompany transfers -- -- -- 18,524 (18,524) -- - ----------------------------------------------------------------------------------------------------------------------------------- Total revenues $ 223,962 $ 117,159 $ 68,650 $ 41,270 $ (18,524) $ 432,517 - ----------------------------------------------------------------------------------------------------------------------------------- Operating income $ 31,500 $ 6,263 $ 9,940 $ 4,851 $ -- $ 52,554 - ----------------------------------------------------------------------------------------------------------------------------------- Identifiable assets $ 303,725 $ 110,834 $ 52,047 $ 28,766 $ -- $ 495,372 - ----------------------------------------------------------------------------------------------------------------------------------- 1994 - ----------------------------------------------------------------------------------------------------------------------------------- Revenues from unaffiliated customers $ 209,114 $ 99,906 $ 61,762 $ 19,337 $ -- $ 390,119 - ----------------------------------------------------------------------------------------------------------------------------------- Intercompany transfers -- -- -- 13,618 (13,618) -- - ----------------------------------------------------------------------------------------------------------------------------------- Total revenues $ 209,114 $ 99,906 $ 61,762 $ 32,955 $ (13,618) $ 390,119 - ----------------------------------------------------------------------------------------------------------------------------------- Operating income (loss) $ 17,296 (939) $ 12,328 $ 2,295 $ -- $ 30,980 - ----------------------------------------------------------------------------------------------------------------------------------- Identifiable assets $ 268,703 $ 94,325 $ 46,606 $ 19,656 $ -- $ 429,290 - -----------------------------------------------------------------------------------------------------------------------------------
37
QUARTERLY FINANCIAL INFORMATION - UNAUDITED Quarter ended March 31 June 30 September 30 December 31 - ---------------------------------------------------------------------------------------------------------------------- in thousands, except per share data 1996 - ---------------------------------------------------------------------------------------------------------------------- Total revenues $ 109,053 $ 117,279 $ 100,793 $ 120,761 - ---------------------------------------------------------------------------------------------------------------------- Gross margin $ 75,492 $ 83,890 $ 68,934 $ 85,754 - ---------------------------------------------------------------------------------------------------------------------- Operating income (loss) $ 2,806 $ 4,062 $ (64) $ (16,653) - ---------------------------------------------------------------------------------------------------------------------- Net income (loss) $ 3,771 $ 2,526 $ 74 $ (11,349) - ---------------------------------------------------------------------------------------------------------------------- Net income (loss) per common and common equivalent share $ 0.06 $ 0.04 $ 0.00 $ (0.18) - ---------------------------------------------------------------------------------------------------------------------- 1995 - ---------------------------------------------------------------------------------------------------------------------- Total revenues $ 98,914 $ 106,088 $ 107,421 $ 120,094 - ---------------------------------------------------------------------------------------------------------------------- Gross margin $ 70,936 $ 76,534 $ 77,617 $ 90,226 - ---------------------------------------------------------------------------------------------------------------------- Operating income (loss) $ 8,541 $ 11,306 $ 13,482 $ 19,225 - ---------------------------------------------------------------------------------------------------------------------- Net income (loss) $ 7,706 $ 11,890 $ 12,379 $ 18,531 - ---------------------------------------------------------------------------------------------------------------------- Net income (loss) per common and common equivalent share $ 0.12 $ 0.18 $ 0.19 $ 0.29 - ---------------------------------------------------------------------------------------------------------------------- Common stock market price: Quarter ended March 31 June 30 September 30 December 31 - ---------------------------------------------------------------------------------------------------------------------- 1996 - ---------------------------------------------------------------------------------------------------------------------- High $ 18 1/4 $ 18 3/8 $ 16 1/4 $ 10 5/8 - ---------------------------------------------------------------------------------------------------------------------- Low $ 12 3/8 $ 13 3/8 $ 8 7/8 $ 7 3/8 - ---------------------------------------------------------------------------------------------------------------------- 1995 - ---------------------------------------------------------------------------------------------------------------------- High $ 16 3/8 $ 18 1/2 $ 21 3/8 $ 22 7/8 - ---------------------------------------------------------------------------------------------------------------------- Low $ 12 3/8 $ 14 7/8 $ 16 1/8 $ 16 1/8 - ---------------------------------------------------------------------------------------------------------------------- The table above sets forth for the quarters indicated the high and low sales prices for the common stock as reported on the NASDAQ National Market System. As of December 31, 1996, the Company had 1,381 stockholders of record.
38 REPORTS OF MANAGEMENT AND INDEPENDENT AUDITORS Report of Management Management of Mentor Graphics Corporation is responsible for the preparation of the accompanying consolidated financial statements. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles appropriate in the circumstances and necessarily include some amounts which represent the best estimates and judgments of management. The consolidated financial statements have been audited by KPMG Peat Marwick LLP, independent auditors, whose report is included on this page. The Audit Committee of the Board of Directors is comprised of three directors who are not officers or employees of Mentor Graphics Corporation or its subsidiaries. These directors meet with management and the independent auditors in connection with their review of matters relating to the Company's annual financial statements, the Company's system of internal accounting controls, and the services of the independent auditors. The Committee meets with the independent auditors, without management present, to discuss appropriate matters. The Committee reports its findings to the Board of Directors and also recommends the selection and engagement of independent auditors. GREGORY K. HINCKLEY Gregory K. Hinckley Executive Vice President and Chief Operating Officer/Chief Financial Officer WALDEN RHINES Walden Rhines President and Chief Executive Officer Independent Auditors' Report To the Stockholders and Board of Directors Mentor Graphics Corporation: We have audited the accompanying consolidated balance sheets of Mentor Graphics Corporation and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Mentor Graphics Corporation and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996 in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, the Company adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities" in 1994. KPMG Peat Marwick LLP Portland, Oregon January 30, 1997, except for note 8, which is as of February 11, 1997 39
SHAREHOLDERS' INFORMATION Directors Corporate Headquarters Investor Relations Jon A. Shirley Mentor Graphics Corporation For additional information on the Chairman of the Board of Directors 8005 S.W. Boeckman Road Company, or to obtain a copy of Mentor Private Investor Wilsonville, Oregon 97070-7777 U.S.A. Graphics' Annual Report on Form 10-K Phone: 503-685-7000 filed with the Securities and Exchange Walden C. Rhines Fax: 503-685-1202 Commission, contact: President and Chief Executive Officer Mentor Graphics Corporation Silicon Valley Headquarters Investor Relations Mentor Graphics Corporation Marsha B. Congdon Mentor Graphics Corporation 8005 S.W. Boeckman Road Private Investor 1001 Ridder Park Driver Wilsonville, Oregon 97070-7777 San Jose, California 95131-2314 U.S.A. James R. Fiebiger Phone: 408-436-1500 For financial and company information, Chairman of the Board and Managing Fax: 408-436-1501 call 1-800-546-4628. Director Thunderbird Technologies, Inc. European Headquarters Stock Trading David A. Hodges Mentor Graphics Corporation Mentor Graphics Corporation's Professor, College of Engineering 49, Avenue de l'Europe BP22 common stock traded publicly in the The University of California at Berkeley 78142-Velizy Cedex, France NASDAQ National Market System under Phone: 33-1-30-67-18-18 the symbol MENT. Fontaine K. Richardson Fax: 33-1-34-65-19-44 General Partner Visit Mentor Graphics on the Eastech Management Company, Inc. Pacific Rim Headquarters World Wide Web Executive Officers Mentor Graphics Singapore PTE, LTD. http://www.mentorg.com 2 Science Park Driver Hex 51 & 53A Walden C. Rhines The Faraday President and Chief Executive Officer Singapore Science Park Mentor Graphics Corporation Singapore 0511 Phone: 65-779-0075 Gregory K. Hinckley Fax: 65-870-2799 Executive Vice President, Chief Operating Officer and Japanese Headquarters Chief Financial Officer Mentor Graphics Japan Co., Ltd. G.M. "Ken" Bado Gotenyama Hills Senior Vice President, World Trade 7-35, Kita-Shinagawa 4-chome Shinagawa-Ku, Tokyo 140 Japan Glenn D. House, Sr. Phone: 81-3-5488-3030 Senior Vice President, Strategy and Fax: 81-3-5488-3031 Product Operations Dean Freed Vice President, General Counsel and Secretary Richard Trebing Corporate Controller and Chief Accounting Officer
EX-21 3 LIST OF SUBSIDIARIES OF THE COMPANY EXHIBIT 21 List of Subsidiaries of the Company - ----------------------------------- The following is a list of Mentor Graphics Corporation operating subsidiaries. Mentor Graphics has no parent companies. SUBSIDIARY PERCENT OWNED Anacad Electrica Engineering Egypt 100% Anacad Electrical Engineering SARL (France) 100% Antares Corporation 100% CAE Technology, Inc. 100% dQdt, Inc. 100% European Development Center 74% Exemplar Logic, Inc. 100% Interconnectix, Inc. 100% Mentor Graphics (Canada) Ltd. 100% Mentor Graphics (Denmark) A/S 100% Mentor Graphics (Finland) OY 100% Mentor Graphics (France) SARL 100% Mentor Graphics (Schweiz) AG Switzerland 100% Mentor Graphics (Singapore) PTE. LTD. 100% Mentor Graphics (Taiwan) Co. Ltd. 100% Mentor Graphics (United Kingdom) Ltd. 100% Mentor Graphics Design S.A. (Spain) SA 100% Mentor Graphics Deutschland (GmBH) 100% Mentor Graphics Israel Ltd. 100% Mentor Graphics Japan Co. Ltd. 100% Mentor Graphics Netherlands BV 100% Mentor Graphics Scandinavia AB 100% Meta Systems S.A. 100% Microtec Research Japan Co. Ltd. 100% Microtec Research, Inc. 100% Model Technology Inc. 100% Open Networks Engineering, Inc. 100% Precedence Incorporated 100% Royal Digital Centers, Inc. 100% Seto Software GmbH 100% EX-23 4 CONSENT OF ACCOUNTANTS EXHIBIT 23 Consent of Accountants - ---------------------- The Board of Directors and Shareholders Mentor Graphics Corporation: We consent to incorporation by reference in the registration statements on Form S-8 (Nos. 33-11291, 33-18259, 2-90577, 33-30036, 2-99251, 33-30774, 33-57147, 33-57149, 33-57151, and 33-64717) and on Form S-3 (Nos. 33-52419, 33-56759, 33-60129, 333-277, 333-2883 and 333-11601) of Mentor Graphics Corporation and subsidiaries of our reports dated January 30, 1997, except for note 8, which is as of February 11, 1997, relating to the consolidated balance sheets of Mentor Graphics Corporation and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, cash flows and stockholders' equity and related schedule for each of the years in the three-year period ended December 31, 1996, which reports appear or are incorporated by reference in the December 31, 1996 annual report on Form 10-K of Mentor Graphics Corporation and subsidiaries. Our reports refer to a change in the method of accounting for certain investments in debt and equity securities. KPMG PEAT MARWICK LLP Portland, Oregon March 28, 1997 EX-27 5 FINANCIAL DATA SCHEDULE
5 1,000 YEAR YEAR YEAR DEC-31-1994 DEC-31-1995 DEC-31-1996 DEC-31-1994 DEC-31-1995 DEC-31-1996 0 186,676 165,406 0 25,320 31,673 0 96,962 108,957 0 3,291 3,163 0 0 0 0 327,583 338,192 0 99,605 102,253 25,923 25,955 21,472 0 495,372 513,359 0 114,092 137,344 0 0 0 0 0 0 0 0 0 0 294,917 297,756 0 31,309 21,884 0 495,372 513,359 390,119 432,517 447,886 390,119 432,517 447,886 106,065 117,204 133,816 106,065 117,204 133,816 253,074 262,759 323,919 629 308 1,168 2,826 2,585 2,423 34,218 59,048 (1,438) 3,765 8,542 3,540 30,453 50,506 (4,978) 0 0 0 0 0 0 0 0 0 30,453 50,506 (4,978) .49 .78 (.08) .49 .78 (.08) The restated balance sheet as of December 31, 1994 is not included in this report.
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