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, 1994
Commission file number 0 - 13442
MENTOR GRAPHICS CORPORATION
(Exact name of registrant as specified in its charter)
Oregon 93-0786033
(State or other jurisdiction of (IRS Employer
incorportation 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) the Securities Exchange Act of
1934 during the preceding twelve months (or for such short Registrant was
required to file such reports), and (2) has been subject to days.
Yes X No
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was approximately $716,668,378 on March 10, 1995, based upon the
last price of the Common Stock on that date reported in NASDAQ National
Market System. On March 10, 1995, there were 51,651,775 shares Common Stock
outstanding.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or in any
amendment to this Form 10-K X
DOCUMENTS INCORPORATED BY REFERENCE
Document Part of Form 10-K into
which incorporated
Portions of 1994 Annual Report to Shareholders Parts I, II and IV
Portions of the 1995 Proxy Statement Part III
PART I
Item 1. Business
General
Mentor Graphics Corporation (Mentor Graphics or Company), an Oregon
corporation organized in 1981, is headquartered in Wilsonville, Oregon.
The Company's common stock is traded in the NASDAQ National Market System
under the symbol MENT.
Products and Services
The Company designs, manufactures, markets and supports electronic design
automation (EDA) software for the integrated circuit (IC) and systems design
markets. The Company provides a broad range of EDA tools developed either by
the Company or together with third parties to support the entire electronic
design process. The Company's software products enable engineers and
designers to design, analyze, place and route, and test custom (ASICs),
printed circuit boards, multichip modules and other electronic systems and
subsystems. The Company's Falcon Framework software provides a common
foundation for the Company's EDA software products. Falcon Framework
software also allows for the integration of third party software tools
developed by other commercial EDA vendors and by customers for their own
internal use. The Company's products help customers reduce development
time while producing innovative hardware products of high quality. In
addition to software products, Mentor Graphics'Professional Services
Division offers consulting, support and training services to enhance
customers' success in the design and manufacture of hardware products.
Platforms
The Company's software runs on UNIX workstations in a broad range of price
and performance levels, including workstations manufactured by
Hewlett-Packard Company, Sun Microsystems, Inc., Digital Equipment
Corporation, NEC Corporation and International Business Machine
Corporation (IBM). The above major computer manufacturers have a
substantial installed base of workstations, and make frequent introductions
of new products with significant price/performance improvements.
The Company has written virtually all of its software in the high level
languages C++, C, Pascal, or Fortran to facilitate its portability to other
platforms in the future, should availability of the Company's software on
such platforms prove desirable.
Marketing and Sales
The Company's marketing strategy emphasizes customer support, professional
consulting services, a strong direct sales force and large corporate account
penetration in the semiconductor, aerospace, computer, telecommunications,
automotive and consumer electronics industries. Customers use the Company's
products in the design of such diverse products as supercomputers,
automotive electronics, missile guidance systems, signal processors,
personal computers, gallium arsenide circuits, microprocessors and
telecommunication switching systems.
Mentor Graphics sells and licenses its products primarily through its direct
sales force in the United States, through the direct sales forces of its
wholly-owned subsidiaries in Asia and Europe and through distributors.
During the years ending December 31, 1994 and 1993, sales outside of
North America accounted for 45 and 46 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 pages
37-38 of the 1994 Annual Report to Shareholders and is incorporated by this
reference. Fluctuating exchange rates and other factors beyond the
Company's control, such as tariff and trade policies, domestic and foreign
tax and economic policies and the relative stability of international
economic and monetary conditions should continue to affect the level
and profitability of sales outside the United States.
The Company's OpenDoor program coordinates and supports the integration
of third party EDA products, both commercial and internally developed
by customers, into the Falcon Framework environment. Under this program,
the Company enables OpenDoor participant companies to develop interfaces
from their products to the Company's products. OpenDoor participants can
select from a range of integration technologies to achieve an optimal
degree of integration for their products. There are now approximately 130
OpenDoor participants.
No material portion of the Company's business is dependent on a single
customer. The Company has traditionally experienced some seasonal
fluctuations in receipt of orders, which are typically stronger in the
second and fourth quarters of the year. As is typical of many other
companies in the the electronics industry, the Company generally ships
its products to customers within 10 to 90 days after receipt of an order,
and a substantial portion of quarterly shipments tend to be made in
the last month of each quarter.
The Company sells and licenses its products and some third-party products
pursuant to purchase orders and master purchase and license agreements.
The Company has corporate agreements providing the general terms and
conditions of sales and discounts to certain of its customers.
Company schedules deliveries only after receipt of purchase orders under
these agreements.
Manufacturing Operations
The Company's manufacturing operations primarily consist of reproduction
of the Company's software and documentation. In North America,
manufacturing occurs at the Company's facility in Wilsonville, Oregon.
Software and documentation distribution centers in The Netherlands
Japan and Singapore serve their respective regions. The Company uses a
manufacturing resource planning system which integrates purchasing,
inventory control and accounting in all regions.
Product Development
The EDA market is competitive and characterized by rapid technological
change, which requires continuous high expenditures for the enhancement
of existing products and the development of new products. The Company is
committed to the creation of new products and intends to continue to
enhance its existing products. During the years ended December
1992, the Company expensed approximately $72,484,000, $77,598,000
and $73,947,000 respectively, and capitalized approximately $5,156,000,
$3,609,000 and $6,120,000, respectively, related to product development.
Substantially all of these costs were related to the development
of the Company's proprietary application software.
Suppliers
The Company contracts with several suppliers who provide software products
which the Company integrates into its product line, allowing the Company
to both concentrate its development efforts on its core product line
and offer its customers a more complete design solution.
Customer Support and Professional Services
The Company has a worldwide organization to meet its customers' needs
for software support, training, consulting, custom IC design and
documentation. The Company offers support contracts providing software
updates and support. Most of the Company's customers are covered
by software support contracts. The Company provides technical support for
its products through a direct telephone support line and an electronic
communications system.
An important component of the total solution provided to customers is
professional services offered through the Company's Professional Services
Division which provides consulting and training to help the Company's
customers improve their design processes and make the most efficient use of
their EDA software tools. Professional Services consultants specialize in
providing software and services for design data management and electronic
parts data creation, co-design of ASICs, ICs, printed circuit boards
and multichip modules and EDA network and design environment management
and software integration.
Competition
The EDA industry is competitive and has been characterized by rapid
technological advances in application software, operating systems and
hardware. The Company's principal competitors are Cadence Design Systems
Inc., Synopsys Inc., Viewlogic Systems, Inc., COMPASS Design Automation,
Inc., Zuken Incorporated and Intergraph Corporation. The Company believes
that other companies may be developing EDA systems.
Some of the Company's competitors and potential competitors may have
greater financial and marketing resources than Mentor Graphics. However,
the Company believes the main competitive factors in the EDA industry are
breadth and quality of application software, product integration, ability
to respond to technological change, quality of a company's
size of the installed base, level of customer support and value added
services. The Company believes that it generally competes favorably in
these areas. The Company can give no assurance, however, that it will have
the financial resources, marketing, distribution and service capability
depth of key personnel or technological knowledge to compete successfully
in the EDA market.
Employees
The Company and its subsidiaries employed approximately 2,050 persons full
time as of December 31, 1994 compared with approximately 2,100 persons at
the end of 1993. The Company's success will depend in part on its ability
to attract and retain employees who are in great demand. The Company
continues to enjoy good employee relations. No Company employees are
represented by a collective bargaining unit.
Patents and Licenses
The Company owns United States and Canadian patents covering the technology
underlying several of its software products. The Company has also filed
other patent applications on technology it has developed and intends to file
additional patent applications in the future. While the Company believes
the pending applications relate to patentable devices, the
assurance that any patent will be issued or that any patent can be
successfully defended. The Company believes that patents are less
significant to the success of its business than technical competence,
management ability, marketing capability and customer support.
The Company regards its application software as proprietary and attempts
to protect it with copyrights, trade secret laws, and internal
non-disclosure safeguards, as well as patents, when appropriate, as noted
above. The Company typically incorporates restrictions on
usage and transferability into its agreements with customers and other
third parties.
Item 2. Properties
The Company's Wilsonville, Oregon facilities are located in six owned
buildings of approximately 420,000 total square feet located on about 90
acres. All corporate functions, as well as a majority of research and
development and domestic activities, operate from this site.
The Company leases additional space in San Jose, California, and in various
locations throughout the United States and in foreign countries, primarily
for sales and customer service operations. The Company believes that it will
be able to renew or replace its existing leases as they
that its current facilities will be adequate through at least 1995.
Item 3. Legal Proceedings
There are no material legal proceedings pending against the Company.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the security holders of the Company
during the fourth quarter of the fiscal year ended December 31, 1994.
Executive Officers of Registrant
The following are the executive officers of the Company:
Name Position Age Has Served As
An Officer
of Company Since
Walden C.Rhines President, Chief Executive
Officer and Director 48 1993
R.Douglas Norby Senior Vice President and
Chief Financial Officer 59 1993
Frank S.Delia Vice President, Chief
Administrative Officer,
General Counsel and Secretary 48 1983
Patricia J.O'Connor Vice President, Human
Resources 39 1990
James J.Luttenbacher Corporate Controller and
Chief Accounting Officer 39 1993
Bob van Leyen Treasurer 51 1994
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
All of the officers named have been employed by Mentor Graphics for the last
five years except:
1) Dr. Rhines, who was employed from 1972 to 1993 by Texas
Instruments, Incorporated in a variety of technical and management
positions and was most recently Executive Vice President of
Texas Instruments Semiconductor Group;
2) Mr. Norby, who was employed from 1992 to 1993 by Pharmetrix
Corporation as President and Chief Executive Officer and from 1985
to 1992 by Lucasfilm, Ltd. where he last held the position of
President and Chief Operating Officer;
3) Mr. Luttenbacher, who was employed from 1981-1992 by
Hewlett-Packard Company in a variety of accounting positions,
the most recent of which was Manager of the North American
Financial Services Group; and
4) Mr. van Leyen, who has been employed by the Company since 1986 and,
before becoming Treasurer, was based in Paris, France with finance
and operations responsibilities for the Company's European
subsidiaries.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The Company paid a quarterly dividend of $0.06 per share during the first
three quarters of 1993. The Company ceased payment of the dividend in the
fourth quarter of 1993 and does not intend to pay dividends in the
foreseeable future. Additional information required by this item
under "Quarterly Financial Information" on page 39 and under the shareholder
information included on page 41 of the Company's 1994 Annual Report to
Shareholders.
Item 6. Selected Financial Data
The information required by this item is included under "Selected
Consolidated Financial Data" on page 16 of the Company's 1994 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 17-24 of the Company's 1994 Annual Report to Shareholders.
Item 8. Financial Statements and Supplementary Data
The financial statements are included in the Company's 1994 Annual Report
to Shareholders on pages 25-40 and are indexed here under Item 14(a)(1).
The supplementary data required by this item is included under
"Quarterly Financial Information" on page 39 of the Company's 1994
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.
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 1995 Proxy Statement
and is incorporated herein by reference. The information concerning the
Company's Executive Officers is included herein on page 6 under the caption
"Executive Officers of the Registrant." No information response to Item 405
of Regulation S-K.
Item 11. Executive Compensation
The information required by this item is included under "Compensation of
Directors," "Information Regarding Executive Officer Compensation" in the
Company's 1995 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 1995 Proxy Statement and is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information required by this item is included under
"Certain Transactions" in the Company's 1995 Proxy Statement and is
incorporated herein by reference.
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
1994 Annual Report to Shareholders:
Page
(1) Financial Statements
Consolidated Statements of Operations 25
Consolidated Balance Sheets 26
Consolidated Statements of Cash Flows 27
Consolidated Statements of Stockholders' Equity 28
Notes to Consolidated Financial Statements 29-38
Independent Auditors' Report 40
(2) Financial Statement Schedules
The documents and schedule listed below are filed as part of this report on
the pages indicated:
Schedule Page
II Valuation and Qualifying Accounts 11
Independent Auditors' Report on Financial Statement Schedule 12
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.
*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.
*E. Stock Option Agreement under the 1986 Stock Plan dated
October 15, 1993 between the Company and Walden C.
Rhines. Incorporated by reference to Exhibit 10.E to
the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1993.
*F. Employment Agreement dated July 7, 1993, as amended
July 5, 1994, between the Company and R. Douglas Norby.
*G. 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.
H. 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.
I. Amended and Restated Loan Agreement between Mentor Graphics
Corporation and First Interstate Bank of Oregon, N.A. dated
December 31, 1992 as amended. Incorporated by reference
to Exhibit 10.J to the Company's Form SE dated March 25,1993.
13. Portions of the 1994 Annual Report to Shareholders that are
incorporated herein by reference.
21. List of Subsidiaries of the Company.
23. Consent of Accountants.
* Management contract or compensatory plan or arrangement
(b) No reports on Form 8-K have been filed during the last quarter
of the period covered by this Report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized,
on March 30, 1995.
MENTOR GRAPHICS CORPORATION
By _________________________
Walden C. Rhines
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant
on March 30, 1995 in the capacities indicated.
Signature Title
(1) Principal Executive Officer President, Chief Executive Officer
Walden C. Rhines and Director
(2) Principal Financial Officer: Senior Vice President and Chief
R. Douglas Norby Financial Officer
(3) Principal Accounting Of Corporate Controller and
James J. Luttenbacher Chief Accounting Officer
(4) Directors:
Chairman of the Board
Jon A. Shirley
Director
Marsha B. Congdon
Director
James R. Fiebiger
Director
David R. Hathaway
Director
Fontaine K. Richardson
Director
David N. Strohm
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, 1992:
Allowance for deferred tax
assets $ 0 $ 0 $ 0 $ 0
Allowance for doubtful
accounts $ 3,736 $ 1,282 $ 642 (1) $ 4,376
Allowance for obsolete
inventory $15,639 $ 2,665 $ 5,868 (2) $12,436
Accrued restructure costs $10,233 $14,500 $12,463 (3) $12,270
Year ended December 31, 1993:
Allowance for deferred tax
assets $ 0 $58,495(4) $ 0 $58,495
Allowance for doubtful
accounts $ 4,376 $ 508 $ 956 (1) $ 3,928
Allowance for obsolete
inventory $12,436 $ 1,924 $ 6,346 (2) $ 8,014
Accrued restructure costs $12,270 $26,200 $10,096 (3) $28,374
Year ended December 31, 1994:
Allowance for deferred tax
assets $58,495 $ 0 $12,282 (4) $46,213
Allowance for doubtful
accounts $ 3,928 $ 478 $ 1,559 (1) $ 2,847
Allowance for obsolete
inventory $ 8,014 $ 0 $ 7,155 (2) $ 859
Accrued restructure costs $28,374 $ 4,000 $20,477 (3) $11,897
(1) Deductions primarily represent accounts written off during the period.
(2) Deductions represent inventory scrapped during each period and
reclassification of demonstration equipment from inventory to
property plan and equipment in 1994.
(3) Deductions primarily represent payments made to carry out
restructure plans and reversals of accrued restructure charges due
to changes in estimates of $10,045, $1,400 and $1,600
for the years ended December 31, 1994, 1993 and 1992, respectively.
(4) Addition represents adoption of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" on January 1, 1993
and increases to the valuation allowance during the year. As such,
the Company established a valuation allowance for certain deferred
tax assets, including net operating loss and tax credit carryforwards.
statements 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 deduction in 1994
primarily represents the realization of net operating loss
carryforwards for the year.
Independent Auditors' Report
The Board of Directors and Stockholders
Mentor Graphics Corporation:
Under date of January 31, 1995, we reported on the consolidated balance
sheets of Mentor Graphics Corporation and subsidiaries as of December 31,
1994 and 1993, and the related consolidated statements of operations,
cash flows and stockholders' equity for each of the years in the
three-year period ended December 31, 1994, which are included in the 1994
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 1994. In connection with our
audits of the aforementioned consolidated financial statements
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 notes 1 and 4 to the consolidated financial statements,
the Company adopted the provisions of the Financial Accounting Standards
Board's Statement of Financial Accounting Standards (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities",
in 1994 and SFAS No. 109, "Accounting for Income Taxes", in 1993.
KPMG PEAT MARWICK LLP
January 31, 1995