<PAGE>
[LOGO]
Dear Shareholder:
You are cordially invited to attend the 1999 Annual Meeting of Shareholders
of Mentor Graphics Corporation to be held in Wilsonville, Oregon, on Tuesday,
May 11, 1999. The attached Notice of Annual Meeting and Proxy Statement describe
the matters to be acted upon. I urge you to review them carefully.
YOUR VOTE IS IMPORTANT. Whether or not you personally plan to attend, please
take a few minutes now to sign, date and return your proxy in the enclosed
postage-paid envelope. Regardless of the number of Mentor Graphics Corporation
shares you own, your presence by proxy is important to establish a quorum and
your vote is important.
The rest of the Board and I look forward to seeing you at the meeting.
Whether or not you can attend, we greatly appreciate your continued interest in
Mentor Graphics Corporation.
Sincerely,
[SIGNATURE]
Walden C. Rhines
PRESIDENT AND CHIEF EXECUTIVE OFFICER
<PAGE>
MENTOR GRAPHICS CORPORATION
----------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
MAY 11, 1999
------------------------
To the Shareholders of Mentor Graphics Corporation:
The Annual Meeting of Shareholders of Mentor Graphics Corporation, an Oregon
corporation, will be held on Tuesday, May 11, 1999 at 5:00 p.m., Pacific Time,
at the Company's offices at 8005 S.W. Boeckman Road, Wilsonville, Oregon
97070-7777 for the following purposes, as more fully described in the
accompanying Proxy Statement:
1. To elect directors to serve for the ensuing year and until their
successors are elected.
2. To amend the Company's 1982 Stock Option Plan to increase the number of
shares of Common Stock reserved for issuance under the plan.
3. To transact any other business that may properly come before the meeting
or any adjournment of the meeting.
The above items of business are more fully described in the Proxy Statement
accompanying this Notice.
Only shareholders of record at the close of business on March 4, 1999 are
entitled to notice of and to vote at the Annual Meeting.
Sincerely,
[SIGNATURE]
Dean Freed
VICE PRESIDENT, GENERAL COUNSEL
AND SECRETARY
Wilsonville, Oregon
April 2, 1999
THE COMPANY CORDIALLY INVITES ALL SHAREHOLDERS TO ATTEND THE MEETING IN
PERSON. HOWEVER, TO ENSURE YOUR REPRESENTATION AT THE MEETING, WE URGE YOU TO
VOTE, DATE, SIGN AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE IN THE
ENCLOSED POSTAGE-PAID ENVELOPE.
<PAGE>
MAILED TO SHAREHOLDERS ON
OR ABOUT APRIL 2, 1999
MENTOR GRAPHICS CORPORATION
8005 S.W. BOECKMAN ROAD
WILSONVILLE, OREGON 97070-7777
------------------------
PROXY STATEMENT
Mentor Graphics Corporation (Mentor Graphics or Company) is soliciting the
enclosed proxy for use at its Annual Meeting of Shareholders to be held Tuesday,
May 11, 1999 at 5:00 p.m., Pacific Time, or at any adjournment of that meeting.
The Company will hold the Annual Meeting at 8005 S.W. Boeckman Road,
Wilsonville, Oregon 97070-7777.
Mentor Graphics will bear the cost of this solicitation. The Company has
retained MacKenzie Partners, Inc. to assist in soliciting proxies from brokers
and nominees for the Annual Meeting at an estimated cost of $6,500 plus
out-of-pocket expenses. In addition, Mentor Graphics may reimburse brokerage
houses and other persons representing beneficial owners of shares for their
expenses in forwarding solicitation material. The Company will furnish copies of
solicitation material to such brokerage houses and other representatives. The
Company will solicit proxies by use of the mails, and officers and employees of
the Company may, without additional compensation, also solicit proxies by
telephone or personal contact.
The mailing address of the Company's principal executive offices is 8005
S.W. Boeckman Road, Wilsonville, Oregon 97070-7777 and its telephone number is
(503) 685-7000.
UPON WRITTEN REQUEST TO THE CORPORATE SECRETARY, THE COMPANY WILL PROVIDE
WITHOUT CHARGE A COPY OF THE COMPANY'S ANNUAL REPORT/FORM 10-K TO ANY PERSON
WHOSE PROXY IS SOLICITED BY THIS PROXY STATEMENT.
PROCEDURAL MATTERS
Shareholders of record at the close of business on March 4, 1999 are
entitled to notice of and to vote at the meeting. At the record date, 65,588,351
shares of Mentor Graphics Common Stock were issued and outstanding. Each share
of Common Stock outstanding on the record date is entitled to one vote per share
at the Annual Meeting. For information regarding holders of 5% or more of the
outstanding Common Stock, see "Information Regarding Beneficial Ownership of
Principal Shareholders and Management."
Shareholders may revoke any proxy given pursuant to this solicitation by
delivering to the Corporate Secretary a written notice of revocation or a duly
executed proxy bearing a later date or by attending the meeting and voting in
person. The designated proxy holders will vote all valid, unrevoked proxies at
the Annual Meeting in accordance with the instructions given.
ELECTION OF DIRECTORS
(PROPOSAL NO. 1)
The directors of the Company are elected at the Annual Meeting to serve
until the next Annual Meeting of Shareholders and until their respective
successors are elected and qualified. Under Oregon law, if a quorum is present
at the meeting, the six nominees for election as directors who receive the
greatest number of eligible votes cast will be elected directors. Abstention
from voting or nonvoting by brokers will have no effect on the results of the
vote. Unless otherwise instructed, proxy holders will vote the proxies they
receive for the six nominees named below, who are all currently directors of the
Company. If any nominee of Mentor Graphics is unable or declines to serve as a
director at the time of the Annual Meeting, the designated proxy holders will
vote the proxies for any nominee designated by the present Board of Directors to
fill the vacancy.
<PAGE>
The nominees for director are listed below together with certain information
about each of them.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
BENEFICIALLY OWNED AS OF MARCH
4, 1999
------------------------------
PERCENT OF
NAME, PRINCIPAL OCCUPATION AND DIRECTORSHIPS AGE DIRECTOR SINCE NUMBER OF SHARES TOTAL
- -------------------------------------------------------------- --- ----------------- ----------------- -----------
<S> <C> <C> <C> <C>
JON A. SHIRLEY ............................................... 60 1989 151,542(1) *
Chairman of the Board of Directors of the Company since
1994; private investor; President and Chief Operating
Officer of Microsoft Corporation (a developer of computer
software) from 1983 to 1990; director of Microsoft
Corporation.
MARSHA B. CONGDON ............................................ 52 1991 85,336(2) *
Private investor since 1997; Vice President, Policy and
Strategy, of US West Inc. (a provider of communications
services) from 1995-1997; Regional Vice President and Chief
Executive Officer-Oregon from 1992-1995; Vice President and
Chief Executive Officer-Oregon from 1987 to 1992.
JAMES R. FIEBIGER ............................................ 57 1994 45,825(3) *
Vice Chairman of Gatefield Corp. (a semiconductor company)
since 1997; Chairman of the Board and Managing Director of
Thunderbird Technologies, Inc. (a technology licensing
company) from 1993 to 1997; President and Chief Operating
Officer of VLSI Technology, Inc. (a manufacturer of
semiconductors) from 1988 to 1993; director of Thunderbird
Technologies, Inc. (a technology licensing company).
DAVID A. HODGES .............................................. 61 1995 24,701(4) *
Professor of Electrical Engineering and Computer Sciences at
the University of California at Berkeley (UC Berkeley) where
he has been a faculty member since 1970; Dean of College of
Engineering at UC Berkeley from 1990-1996; director of
Silicon Image, Inc. (a semiconductor company).
WALDEN C. RHINES ............................................. 52 1993 949,111(5) 1.4%
President and Chief Executive Officer of the Company since
1993; Executive Vice President, Semiconductor Group, and
Vice President of Texas Instruments Inc. (a manufacturer of
electronics products) from 1987 to 1993; director of
Triquint Semiconductor, Inc. and Cirrus Logic, Inc. (both
are manufacturers of semiconductors).
FONTAINE K. RICHARDSON ....................................... 57 1983 106,000(6) *
General Partner of Eastech Management Company (a private
venture capital firm) since 1983; director of Banyan Systems
Incorporated (a manufacturer of computer network software
products).
</TABLE>
- --------------------------
* Less than 1%
(1) Includes 96,542 shares subject to options exercisable within 60 days of
March 4, 1999 and 5,000 shares held in partnership.
(2) Includes 84,083 shares subject to options exercisable within 60 days of
March 4, 1999.
(3) Includes 37,550 shares subject to options exercisable within 60 days of
March 4, 1999.
(4) Includes 22,301 shares subject to options exercisable within 60 days of
March 4, 1999.
(5) Includes 879,998 shares subject to options exercisable within 60 days of
March 4, 1999.
(6) Includes 106,000 shares subject to options exercisable within 60 days of
March 4, 1999.
2
<PAGE>
INFORMATION REGARDING THE BOARD OF DIRECTORS
BOARD MEETINGS AND COMMITTEES
The Board of Directors of Mentor Graphics met seven times during 1998. The
standing committees of the Board of Directors are the Audit Committee, the
Compensation Committee and the Nominating Committee.
The Audit Committee of the Board of Directors, which consists of Directors
Congdon, Fiebiger and Hodges, met four times during 1998. This committee meets
from time to time with management and the Company's independent auditors to
consider financial and accounting matters. The Compensation Committee of the
Board of Directors, which consists of Directors Congdon, Richardson and Shirley,
met five times during the year. This committee recommends compensation and
fringe benefits for existing and future employees and administers the Company's
stock option and purchase plans. The Nominating Committee, which consists of
Directors Congdon, Fiebiger, Hodges, Richardson and Shirley, met once during
1998. This committee meets from time to time to administer policies and
procedures for board membership and to identify and recommend board candidates.
The Nominating Committee also considers shareholder nominations made in writing
to the Corporate Secretary.
No director attended fewer than 75% of the aggregate of all meetings of the
Board of Directors and the committees of which the director was a member during
1998.
COMPENSATION OF DIRECTORS
Directors who are not employees of the Company are paid an annual fee of
$20,000 and are reimbursed for expenses incurred in attending Board and Board
committee meetings. Any Non-Employee Director who also serves as Chairman of the
Board is paid an additional annual fee of $10,000.
1987 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
The 1987 Non-Employee Directors' Stock Option Plan (1987 Plan) was adopted
in 1987 and amended in 1994 by the Board of Directors and the shareholders. An
aggregate of 1,100,000 shares of Common Stock have been reserved for issuance
under the 1987 Plan. On the date of each Annual Meeting of shareholders, each
Non-Employee Director elected is automatically granted an option to purchase
10,000 shares of Common Stock and any Non-Employee Director elected Chairman of
the Board is automatically granted an additional option to purchase 2,500
shares. Options under the 1987 Plan are granted at exercise prices equal to the
fair market value of the Common Stock on the grant date. On the date of the 1998
Annual Meeting Directors Congdon, Fiebiger, Hodges and Richardson were
automatically granted an option for 10,000 shares each at an exercise price of
$10.875. Director Shirley, who is Chairman of the Board, was automatically
granted an option exercisable for 12,500 shares at an exercise price of $10.875.
If re-elected, Directors Congdon, Fiebiger, Richardson and Hodges will each be
automatically granted an option for 10,000 shares; Mr. Shirley, who is Chairman
of the Board, will automatically be granted an option for 12,500 shares on the
date of the Annual Meeting. All options have a ten year term from the date of
grant and are exercisable for 20 percent of the number of shares covered by the
option at the end of each of the first five years following grant. The 1987 Plan
is administered by the Compensation Committee. Director Hodges exercised an
option to acquire 2,000 shares in July of 1998. No other directors exercised
options in 1998.
3
<PAGE>
INFORMATION REGARDING BENEFICIAL OWNERSHIP
OF PRINCIPAL SHAREHOLDERS AND MANAGEMENT
The following table shows beneficial ownership of the Company's Common Stock
as of March 4, 1999 by the only shareholders known by the Company to
beneficially own 5% or more of the Common Stock, by the executive officers named
in the Summary Compensation Table and by all directors and executive officers as
a group:
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
BENEFICIAL
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP(1) PERCENT
- --------------------------------------------------------------- ---------------------- -----------
<S> <C> <C>
State of Wisconsin Investment Board ........................... 7,025,000(2) 10.7%
P.O. Box 7842
Madison, WI 53707
Merrill Lynch and Co., Inc. ................................... 4,919,699(3) 7.5%
250 Vesey Street
World Financial Center, North Tower
New York, NY 10381
Private Capital Management, Inc. .............................. 4,896,077(4) 7.5%
3003 Tamiami Trail North
Naples, FL 34103
Crabbe Huson Group, Inc. ...................................... 4,150,700(5) 6.3%
121 SW Morrison
Suite 1400
Portland, OR 97204
</TABLE>
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME OF EXECUTIVE OFFICER BENEFICIAL OWNERSHIP PERCENT
- ---------------------------------------------------------------- -------------------- -----------
<S> <C> <C>
Walden C. Rhines................................................ 949,111(6) 1.4%
Gregory K. Hinckley............................................. 200,000(7) *
G.M. "Ken" Bado................................................. 126,457(8) *
Dean Freed...................................................... 60,201(9) *
Bernd Braune.................................................... 70,000(10) *
All directors and executive officers as a group (13 persons).... 1,887,927(11) 2.9%
</TABLE>
- --------------------------
* Less than 1%
(1) Except as otherwise noted, the persons listed in the table have sole voting
and dispositive power with respect to the common stock owned by them.
(2) Information provided as of December 31, 1998 in a Schedule 13G filed by the
shareholder.
(3) Information provided as of December 31, 1998 in a Schedule 13G filed by the
shareholder. The shareholder reported shared voting and dispositive power
over 4,919,699 shares.
(4) Information provided as of December 31, 1998 in Schedule 13G filed by the
shareholder. Includes shares beneficially owned by Bruce S. Sherman,
President of the Shareholder. Shareholder and Mr. Sherman reported sole
voting power by Mr. Sherman over 31,500 shares and shared dispositive power
by Mr. Sherman and Shareholder over 4,896,077 shares.
(5) Information provided as of December 31, 1998 in a Schedule 13G filed by the
shareholder. The shareholder reported shared voting power over 3,745,000
shares and shared dispositive power over 4,150,700 shares.
(6) Includes 879,998 shares subject to options exercisable within 60 days of
March 4, 1999.
(7) Includes 170,000 shares subject to options exercisable within 60 days of
March 4, 1999 and 4,000 shares held in trust for children.
(8) Includes 118,349 shares subject to options exercisable within 60 days of
March 4, 1999.
(9) Includes 47,835 shares subject to options exercisable within 60 days of
March 4, 1999 and 550 shares held by spouse.
(10) Includes 40,000 shares subject to options exercisable within 60 days of
March 4, 1999. (Mr. Braune's employment with the Company ended on February
15, 1999.)
(11) Includes 1,639,652 shares subject to options exercisable within 60 days of
March 4, 1999.
4
<PAGE>
INFORMATION REGARDING EXECUTIVE OFFICER COMPENSATION
SUMMARY COMPENSATION TABLE
The following table shows compensation paid by the Company for the last
three fiscal years to the Chief Executive Officer and the four other most highly
compensated executive officers who were serving as executive officers at
December 31, 1998 (Named Executive Officers).
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION AWARDS
--------------------
ANNUAL COMPENSATION SECURITIES
----------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS/SARs(#) COMPENSATION($)(1)
- -------------------------------------- --------- --------- ------------ -------------------- -------------------
<S> <C> <C> <C> <C> <C>
Walden C. Rhines...................... 1998 443,750 394,494 180,000 4,800
President and Chief 1997 424,999 157,950(2) 250,000 4,750
Executive Officer 1996 417,708 0 700,000(3) 4,500
Gregory K. Hinckley................... 1998 333,250 253,937 180,000 4,800
Executive Vice President, Chief 1997 296,090 0 250,000 3,717
Operating Officer and Chief 1996 -- -- -- --
Financial Officer(4)
G.M. Ken Bado......................... 1998 243,441 217,970 45,000 4,800
Senior Vice President, 1997 229,999 0 0 4,750
World Trade 1996 157,708 95,376 215,000(3) 4,500
Dean Freed............................ 1998 162,663 84,698 15,000 4,800
Vice President, General 1997 145,500 52,650(2) 26,250 4,365
Counsel and Secretary 1996 117,083 0 61,600(3) 4,500
Bernd Braune.......................... 1998 295,000 103,000 20,000 0
Senior Vice President(5) 1997 -- -- -- --
1996 -- -- -- --
</TABLE>
- ------------------------
(1) Amounts shown are Company contributions to the Individual Deferred Tax and
Savings Plan pursuant to which the Company's U.S. employees may defer
compensation under Section 401(k) of the Internal Revenue Code. The Company
contributes an amount equal to 50% of the first 6% of salary contributed
under the plan by an eligible employee.
(2) The 1997 bonuses paid to Dr. Rhines and Mr. Freed represent amounts earned
under the Special Incentive Bonus Plan for the Company's 1995 performance
that did not vest until December 31, 1997 and were paid in 1998.
(3) On November 7, 1996, the Compensation Committee approved a repricing of
outstanding options under the Company's employee stock option plans. For
purposes of the table above, repriced options are considered to be option
grants and, therefore, are included in the number of options granted in
1996. If repriced options are not counted, option grants in 1996 were made
to Dr. Rhines and Messrs. Bado and Freed for 300,000, 165,000, and 20,000
shares respectively.
(4) Mr. Hinckley became an executive officer of the Company in January 1997.
(5) Mr. Braune became an executive officer of the Company in February 1998 and
ceased employment with the Company on February 15, 1999.
5
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table provides information on option grants for the last
fiscal year to the Named Executive Officers.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
---------------------------------------------------------------------- VALUE AT ASSUMED
# OF % OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM(1)
OPTIONS VESTING EMPLOYEES IN BASE PRICE EXPIRATION ----------------------
NAME GRANTED(2) REFERENCE DATE FISCAL YEAR ($/SHARE) DATE 5%($) 10%($)
- ------------------------------ ----------- -------------- --------------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Walden C. Rhines.............. 180,000 03/26/98 5.78 10.0625 02/28/08 1,128,849 2,854,879
Gregory K. Hinckley........... 180,000 03/26/98 5.78 10.0625 02/28/08 1,128,849 2,854,879
G.M. "Ken" Bado............... 25,000 03/26/98 0.80 10.0625 02/28/08 156,785 396,511
20,000 11/05/98 0.64 8.3125 10/31/08 104,409 264,510
Dean Freed.................... 15,000 03/26/98 0.48 10.0625 02/28/08 94,071 237,907
Bernd Braune.................. 20,000 03/26/98 0.64 10.0625 02/28/08 125,428 317,209
</TABLE>
- ------------------------
(1) The 5% and 10% assumed rates of appreciation are required by the Securities
and Exchange Commission and do not represent the Company's estimate or
projection of the future Common Stock price.
(2) Each option is fully exercisable four years after the Vesting Reference Date
with 25% becoming exercisable on each of the first four anniversaries of
that date. All options become fully exercisable upon a "change in control"
of the Company as defined in the 1982 Stock Option Plan. Unless otherwise
determined by the Compensation Committee before the occurrence of the event,
a "change in control" generally includes the following events: the
acquisition by any person of 20% or more of the Company's Common Stock, the
nomination (and subsequent election) of a majority of the Company's
directors by persons other than the incumbent directors and the approval by
the Company's shareholders of a merger, share exchange, sale of
substantially all of the Company's assets or plan of liquidation.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table provides information on option exercises for the last
fiscal year by the Named Executive Officers and the value of such officers'
unexercised options as of December 31, 1998.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT FY-END (#) AT FY-END ($)
ACQUIRED ON VALUE -------------------------- --------------------------
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------- ----------------- ----------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Walden C. Rhines......... 0 0 702,498 627,502 43,749 81,251
Gregory K. Hinckley...... 0 0 62,500 367,500 0 0
G.M. "Ken" Bado.......... 0 0 102,932 146,668 57,716 31,771
Dean Freed............... 0 0 33,869 59,481 21,752 7,748
Bernd Braune............. 0 0 35,000 125,000 0 0
</TABLE>
EXECUTIVE SEVERANCE AGREEMENTS
The Board of Directors has approved the Company's entry into severance
agreements with certain employees of the Company, including all of the Company's
current executive officers. These agreements generally provide for the payment,
upon the termination of the employee's employment by the Company without cause
or by the employee for "good reason" (as defined in the severance agreement)
within in
6
<PAGE>
some cases one year, and in other cases two years, following a change of control
of the Company, of an amount equal to either 1.5 or two times the sum of the
employee's annual salary and target bonus, and also provide for accelerated
vesting of all options and either eighteen-month or two-year continuation of
various employee benefits including life, disability and health insurance
benefits and relocation and outplacement benefits. Payments to the employee are
capped as necessary to prevent any portion of the payments from being subject to
the excise tax on "parachute payments" but only if the effect would be to
increase the employee's after-tax net benefit.
REPORT OF THE BOARD OF DIRECTORS' COMPENSATION COMMITTEE
The philosophy of the Company's executive compensation plan is to:
(a) attract highly talented executives;
(b) motivate executives to high levels of performance;
(c) retain needed executive resources; and
(d) recognize the differing impact that various executives have on the
achievement of corporate goals.
To achieve these objectives, the Company pays executive officers on a total
compensation approach that includes base salary, "at risk" compensation that is
dependent on corporate performance, and stock options. The Compensation
Committee of the Board of Directors, which is comprised of non-employee
directors, reviews and approves the compensation to be paid to executive
officers.
Compensation of executive officers consists of the following components:
BASE SALARY: Salaries for executive officers are reviewed on an annual
basis. In reviewing executive salaries, data from a third party survey is
considered. In using the third party survey, the Company compares itself to
other high-technology companies with annual revenues of $200 million to $500
million, and generally establishes salaries in the third quartile (50th to 75th
percentile) for the group. This group of comparable companies differs from the
companies in the Media General index used for the performance graph that follows
this report, which consists of companies in the computer software and services
businesses without regard to annual revenue. The salary survey group may include
those companies in the Media General index with annual revenues of $200 million
to $500 million, while it does not include companies in the Media General index
with revenues outside of the $200 million to $500 million range. Nonetheless,
the Company believes that the salary survey group is an appropriate peer group
for compensation purposes.
VARIABLE COMPENSATION: The Compensation Committee annually establishes a
Variable Incentive Plan to provide for the payment of a portion of compensation
to executive officers and other employees based on corporate performance. Under
the Variable Incentive Plan, each year the Compensation Committee approves a
target variable compensation amount for each executive officer to be paid based
on achievement of the target net income from the annual business plan approved
by the Board of Directors (Annual Plan). For this purpose, the Company's
reported net income may be adjusted by the Compensation Committee to exclude
unusual items such as acquisition-related expenses, one-time charges and
reversals. The potential variable compensation increases or decreases based on
the achievement of higher or lower net income. The potential variable
compensation for executive officers other than the Chief Executive Officer is
then subject to further adjustment up or down based on individual performance.
For 1998, target variable compensation for executive officers ranged from 30
percent to 70 percent of base salary, with 100 percent of the target payable
upon attainment of the target net income from the Annual Plan and no variable
compensation payable unless 76% of the target net income from the Annual Plan
was achieved. In 1998 the Company's net income, after adjustments approved by
the Compensation Committee, was 108% of the target net income and variable
compensation was paid out to executive officers under the Variable Incentive
Plan.
7
<PAGE>
In addition, certain executives with sales responsibility receive variable
pay based on sales performance of their divisions.
STOCK OPTIONS: The Company believes that stock options granted to key
employees, including executive officers, provide such persons with significant
compensation based on overall Company performance as reflected in the stock
price, create a valuable retention device through standard four-year vesting
schedules and help align employees' and shareholders' interests. Stock options
are typically granted at the time of hire to key new employees and annually to a
broad group of existing key employees including executive officers. Most
executive officers received stock option grants as part of the 1998 annual
option grant program for key employees. The 1998 annual option program for all
employees involved a total pool of approximately 1,600,000 shares. During 1998,
individual award levels were determined primarily by a matrix that allocated the
available shares based on position within the Company, with some discretionary
adjustments based on subjective performance factors. Third party survey data was
considered in establishing the upper levels of the matrix with the Company
seeking to grant options in the middle range of comparable companies.
DEDUCTIBILITY OF COMPENSATION: Section 162(m) of the Internal Revenue Code
limits to $1,000,000 per person the amount that the Company may deduct for
compensation paid to any of its most highly compensated officers in any year.
The levels of salary and bonus generally paid by the Company do not exceed this
limit. Upon the exercise of nonqualified stock options the excess of the current
market price over the option price (option spread) is treated as compensation
and, therefore, it may be possible for option exercises by an officer in any
year to cause the officer's total compensation to exceed $1,000,000. Under IRS
regulations, option spread compensation from options that meet certain
requirements will not be subject to the $1,000,000 cap on deductibility, and it
is the Company's current policy generally to grant options that meet those
requirements.
COMPENSATION OF CHIEF EXECUTIVE OFFICER: Dr. Rhines' base salary was
increased from $425,000 to $450,000 in April 1998. This salary level is in the
third quartile of CEO salaries among comparable companies from the third party
survey used by the Company. Dr. Rhines received a Variable Incentive Plan bonus
of $394,494 for 1998. Dr. Rhines was granted an option to purchase 180,000
shares of Company stock in March 1998, which was in the middle range of CEO
option grants for comparable companies.
COMPENSATION COMMITTEE
Fontaine K. Richardson
Jon A. Shirley
Marsha B. Congdon
8
<PAGE>
PERFORMANCE GRAPH
Note: The stock price performance shown on the graph below is not
necessarily indicative of future price performance.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
AMONG MENTOR GRAPHICS CORPORATION, S&P 500 INDEX
AND MEDIA GENERAL COMPUTER SOFTWARE AND SERVICES GROUP INDEX(1)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
DOLLARS MENTOR GRAPHICS CORPORATION S&P 500 INDEX MG GROUP INDEX
<S> <C> <C> <C>
12/31/93 $100.00 $100.00 $100.00
12/31/94 $110.91 $101.32 $122.65
12/31/95 $132.73 $139.40 $176.16
12/31/96 $70.91 $171.41 $221.06
12/31/97 $70.45 $228.29 $266.71
12/31/98 $61.82 $293.92 $398.05
</TABLE>
ASSUMES $100 INVESTED ON DEC. 31, 1993
ASSUMES DIVIDEND REINVESTED
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) MENTOR GRAPHICS S & P 500 INDEX MEDIA GENERAL INDEX
- ----------------------- ---------------- --------------- -------------------
<S> <C> <C> <C>
Measurement Point:
12/31/93 $ 100.00 $ 100.00 $ 100.00
Fiscal Year Ending:
12/31/94 $ 110.91 $ 101.32 $ 122.65
12/31/95 $ 132.73 $ 139.40 $ 176.16
12/31/96 $ 70.91 $ 171.41 $ 221.06
12/31/97 $ 70.45 $ 228.59 $ 266.71
12/31/98 $ 61.82 $ 293.92 $ 398.05
</TABLE>
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(1) This is an industry group index published by Media General Financial
Services. In prior years the Company's performance graph compared the
Company's performance to a different industry group index published by Media
General Financial Services entitled "Computer Software, Data Processing." As
a result of a 1998 internal restructuring by Media General Financial
Services of its industry group classification system, Media General
Financial Services no longer supports that industry group. Media General
Financial Services now classifies the company in a similar industry group
entitled "Computer Software & Services."
9
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APPROVAL OF AMENDMENT TO 1982 PLAN
(PROPOSAL NO. 2)
Mentor Graphics' 1982 Stock Option Plan (1982 Plan) was adopted by the Board
of Directors and the shareholders in 1982. An aggregate of 18,670,000 shares are
currently reserved for issuance under the plan.
AMENDMENT
On March 4, 1999, only 689,823 shares of Common Stock were available for
future grants under the 1982 Plan. An additional 893,540 shares of Common Stock
were available for future grants under the Company's 1986 Stock Plan, but Nasdaq
and tax rules limit the Company's ability to grant options to officers of the
Company under that plan. The Board of Directors believes that additional shares
must be reserved for use under the 1982 Plan to enable the Company to attract
and retain officers and other key employees through the granting of options
under the plan. Accordingly, in February 1999, the Board of Directors approved
an amendment to the 1982 Plan, subject to shareholder approval, to reserve an
additional 3,000,000 shares for issuance under the plan. In addition,
shareholder approval of this proposal will constitute reapproval of the
per-employee limit on grants of options under the 1982 Plan of 500,000 shares
annually. This reapproval is required every five years for continued compliance
with regulations under Section 162(m) of the Internal Revenue Code of 1986. See
"Tax Consequences."
DESCRIPTION OF THE 1982 PLAN
A copy of the 1982 Plan, as proposed to be amended, is attached to this
Proxy Statement as Exhibit A. The essential features of the 1982 Plan, as
currently in effect, are outlined below.
GENERAL
The 1982 Plan provides for grant of incentive stock options (ISOs) within
the meaning of Section 422 of the Internal Revenue Code, and nonqualified stock
options (NQSOs). See "Tax Consequences" below for information concerning the tax
treatment of ISOs and NQSOs. The plan permits stock appreciation rights (SARs)
to be granted in tandem with or independent of ISOs and NQSOs. Cash bonus rights
may also be granted under the 1982 plan.
ADMINISTRATION
The 1982 Plan is administered by the Compensation Committee. The
Compensation Committee determines the officers and key employees to whom options
and SARs will be granted, the exercise prices, the number of shares covered by
each grant and all other terms and conditions of the grants.
GRANT OF OPTIONS
The option price of ISOs cannot be less than the fair market value of the
Common Stock on the date the option is granted. The plan provides that the
option price of NQSOs cannot be less than 50% of the fair market value. On March
4, 1999, the closing price of Common Stock on the Nasdaq National Market was
$13.875 per share. No employee may be granted options or stock appreciation
rights under the plan for more than an aggregate of 500,000 shares in any
calendar year. In addition, no employee may be granted ISOs under the 1982 Plan
such that the fair market value of stock (determined on the grant date) subject
to ISOs that first become exercisable in any year exceeds $100,000. Options may
be granted under the 1982 Plan in exchange for outstanding options.
EXERCISE OF OPTIONS
At the date of exercise, the optionee may pay the full option price in cash
or in shares of Company stock previously acquired by the optionee valued at fair
market value. The use of previously acquired
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shares to pay the option price enables the optionee to avoid the need to fund
the entire purchase with cash. Upon exercise of an option, the number of shares
subject to the option and the number of shares available under the plan for
future grants are reduced by the number of shares with respect to which the
option is exercised.
Options may be exercised only while the holder is in the employ of the
Company or a subsidiary, within 30 days after either the date of termination of
employment or another date set by the Company, or within one year after the
death or disability of the holder. During the optionee's lifetime, an option is
exercisable only by the optionee. Options are not transferable except upon the
death of the optionee or pursuant to a qualified domestic relations order as
defined under the Internal Revenue Code or Title I of the Employee Retirement
Income Security Act. Terminated or expired options become available for future
grants.
Options are generally not exercisable until one year from the date of grant
or from the commencement of employment. Options typically become exercisable
over a period of time, generally set at four years, in accordance with the terms
of option agreements entered into at the time of grant.
STOCK APPRECIATION RIGHTS
The Committee determines the terms and conditions of SARs granted under the
1982 Plan, including the schedule under which SARs vest and become exercisable.
SARs granted with an option may be exercised only to the extent the related
option could be exercised. SARs entitle the holder, upon exercise, to receive
without payment to the Company (except for applicable withholding taxes) an
amount equal to the excess of the fair market value of the Company's Common
Stock on the exercise date over the SAR exercise price. Payment may be made in
cash, shares or any combination thereof. No SARs have been granted under the
1982 Plan.
CHANGE IN CONTROL PROVISION
The 1982 Plan authorizes the Compensation Committee to accelerate the
vesting of all outstanding options and SARs upon a change in control of the
Company. The plan allows the Compensation Committee to authorize the issuance
and exercise of "limited" SARs in connection with options granted or previously
granted under the plan. Limited rights are payable in connection with, and
exercisable only during the 60 days immediately following, a change in control
of the Company. A "change in control" is defined to include the following
events, unless otherwise determined by the Compensation Committee prior to the
occurrence of the event: the acquisition by any person of 20% or more of the
Company's Common Stock, the nomination (and subsequent election) of a majority
of the Company's directors by persons other than the incumbent directors, or the
approval by the Company's shareholders of a merger, consolidation, share
exchange, sale of substantially all of the Company's assets or plan of
liquidation. Limited SARs are payable only in cash and are exercisable only if
the immediate resale of an optionee's shares would subject the optionee to
liability under Section 16(b) of the Securities Exchange Act of 1934.
CASH BONUS RIGHTS
Under the 1982 Plan, cash bonus rights may be granted in connection with
NQSOs. Bonus rights entitle the optionee to a cash bonus if and when the related
NQSO is exercised and may be used for the payment of income taxes resulting from
the exercise. The amount of the bonus will generally be equal to the difference
between the aggregate exercise price of the NQSO and the fair market value of
the shares subject to the NQSO on the exercise date, multiplied by the bonus
percentage, determined by the Compensation Committee and not to exceed 100
percent. The Compensation Committee may set a maximum dollar limit on the amount
of cash to be paid under any bonus right. No bonus rights have been granted
under the 1982 Plan.
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DURATION
Options and SARs may be granted for varying periods not to exceed
approximately ten years from the date of grant. The 1982 Plan will be in effect
until options and SARs have been granted with respect to all shares available
for the plan. The Board of Directors may terminate the plan at any time, but
termination will not affect options or SARs already outstanding.
TAX CONSEQUENCES
ISOs granted under the 1982 Plan are intended to qualify as "incentive stock
options" for federal income tax purposes. Under federal income tax law currently
in effect, the optionee will recognize no income upon grant or exercise of the
ISO. Federal income tax upon any gain resulting from exercise of an ISO is
deferred until the optioned shares are sold by the optionee. The gain resulting
from the exercise of any ISO is included in the alternative minimum taxable
income of the optionee and may, under certain conditions, be taxed under the
alternative minimum tax.
If an employee exercises an ISO and does not dispose of any of the optioned
shares within two years following the date of grant and within one year follow
the date of exercise, then any gain upon subsequent disposition will be treated
as long-term capital gain for federal income tax purposes. If an employee
disposes of shares acquired upon exercise of an ISO before expiration of either
the one-year or the two-year holding period, any amount realized will be taxable
for federal income tax purposes as ordinary income in the year of such
disqualifying disposition to the extent that the lesser of the fair market value
of the shares on the exercise date or the fair market value of the shares on the
date of disposition exceeds the exercise price.
The Company will not be allowed any deduction for federal income tax
purposes either at the time of the grant or exercise of an ISO. Upon any
disqualifying disposition by an employee, the Company will generally be entitled
to a deduction to the extent the employee realizes ordinary income.
NQSOs granted under the 1982 Plan are intended to be "nonqualified stock
options" for federal income tax purposes. Under federal income tax law presently
in effect, no income is realized by the grantee of an NQSO until the option is
exercised. At the time of exercise of an NQSO, the optionee will realize
ordinary income, and the Company will generally be entitled to a deduction, in
the amount by which the market value of the shares subject to the option at the
time of exercise exceeds the exercise price (Option Spread Amount). The
Company's deduction is conditioned upon withholding on the Option Spread Amount.
Upon sale of shares acquired upon exercise of an NQSO, the excess of the amount
realized from the sale over the market value of the shares on the date of
exercise will constitute long-term capital gain if the shares have been held for
the required holding period. An optionee who receives a cash bonus right under
the 1982 Plan will generally recognize ordinary income equal to the amount of
the cash bonus at the time of receipt and the Company will be entitled to a
deduction in the same amount.
On exercise of a SAR, the amount realized by the holder will, for federal
tax purposes, be taxed as ordinary income, and the Company will be allowed to
take a deduction for such amount. The SAR holder is subject to withholding on
such income. Under current accounting principles, the Company will be required
to account for the increase in value of an outstanding SAR as compensation
expense (and may take a credit to compensation expense for a decrease in such
value to the extent a prior expense has been recorded) over the period the SAR
holder provides services to the Company. Current financial accounting principles
do not require similar ongoing charges to earnings in connection with options.
Section 162(m) of the Internal Revenue Code limits to $1,000,000 per person
the amount that the Company may deduct for compensation paid to any of its most
highly compensated officers in any year. Under IRS regulations, compensation
received through the exercise of an option will not be subject to the $1,000,000
limit if the option and the plan meet certain requirements. One such requirement
is shareholder approval at least once every five years of a per-employee limit
on the number of shares as to which
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<PAGE>
options may be granted. Approval of this Proposal No. 2 will constitute
reapproval of the per-employee limit under the 1982 Plan previously approved by
the shareholders. Other requirements are that the option be granted by a
committee of at least two outside directors and that the exercise price of the
option be not less than fair market value of the Common Stock on the date of
grant. Accordingly, the Company believes that if this proposal is approved by
shareholders, compensation received on exercise of options granted under the
1982 Plan in compliance with all of the above requirements will continue to be
exempt from the $1,000,000 deduction limit.
VOTE REQUIRED FOR APPROVAL
The affirmative vote of the holders of at least a majority of the Common
Stock present at the Annual Meeting in person or by proxy and entitled to vote
on the matter is required for adoption of Proposal No. 2. Abstentions will
therefore have the same effect as "no" votes in determining whether the proposal
is approved. Broker non-votes are counted for purposes of determining whether a
quorum exists at the Annual Meeting but are not counted and have no effect on
the results of the vote on Proposal No. 2. All valid proxies will be voted FOR
Proposal No. 2 unless a contrary choice is indicated.
THE BOARD HAS UNANIMOUSLY APPROVED PROPOSAL NO. 2. MANAGEMENT AND THE BOARD
RECOMMEND ITS APPROVAL BY THE SHAREHOLDERS.
13
<PAGE>
INDEPENDENT AUDITORS
The Board of Directors has selected KPMG Peat Marwick LLP as the Company's
independent auditors for 1999. KPMG Peat Marwick LLP has examined the financial
statements of the Company and its subsidiaries each year since the inception of
the Company in 1981. Representatives of KPMG Peat Marwick LLP will be present at
the Annual Meeting, will have the opportunity to make a statement if they so
desire and will be available to respond to appropriate questions.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers, directors and persons who own more than ten percent of the
Common Stock to file reports of ownership and changes in ownership with the
Securities and Exchange Commission ("SEC"). Executive officers, directors and
beneficial owners of more than ten percent of the Common Stock are required by
SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file. Based solely on a review of the copies of such forms received by the
Company and on written representations from certain reporting persons that they
have complied with the relevant filing requirements, the Company believes that
all Section 16(a) filing requirements applicable to its executive officers and
directors were complied with in 1998.
DISCRETIONARY AUTHORITY
While the Notice of Annual Meeting of Shareholders provides for transaction
of such other business as may properly come before the meeting, the Board of
Directors has no knowledge of any matters to be presented at the meeting other
than those referred to in this Proxy Statement. However, the enclosed proxy
gives discretionary authority in the event any other matters should be
presented.
SHAREHOLDER PROPOSALS
The Company's bylaws require shareholders to give the Company advance notice
of any proposal or director nomination to be submitted at any meeting of
shareholders. The bylaws prescribe the information to be contained in any such
notice. For any shareholder proposal or nomination to be considered at the 2000
Annual Meeting of Shareholders, the shareholder's notice must be received at the
Company's principal executive office no later than February 11, 2000. In
addition, SEC rules require that any shareholder proposal to be considered for
inclusion in the Company's proxy statement for the 2000 Annual Meeting of
Shareholders must be received at the Company's principal executive office no
later than December 4, 1999.
By Order of the Board of Directors
[SIGNATURE]
Dean Freed
VICE PRESIDENT, GENERAL COUNSEL
AND SECRETARY
April 2, 1999
14
<PAGE>
EXHIBIT A
MENTOR GRAPHICS CORPORATION
1982 STOCK OPTION PLAN
Mentor Graphics recognizes that its continuing success depends upon the
initiative, ability and significant contributions of officers and key employees.
Mentor Graphics believes that by affording such employees the opportunity to
purchase shares in Mentor Graphics it will enhance its ability to attract and
retain such employees and will provide an incentive for them to exert their best
efforts on its behalf.
The Plan is as follows:
1. SHARES SUBJECT TO OPTION.
1.1 Options granted under this Plan shall be for authorized but unissued or
reacquired common stock of Mentor Graphics.
1.2 Options may be granted under paragraph 4 of the Plan and stock
appreciation rights may be granted under paragraph 8.2 of the Plan for a total
of not more than 21,670,000 [18,670,000]* shares of common stock, subject to
adjustment under paragraph 9. Shares subject to options and to stock
appreciation rights granted under paragraph 8.2 that are terminated or expire
without being exercised, other than options that are surrendered on exercise of
a stock appreciation right granted under paragraph 8.1, shall be added to the
shares remaining for future options and stock appreciation rights.
1.3 No employee may be granted options or stock appreciation rights under
the Plan for more than an aggregate of 500,000 shares of Common Stock in any
calendar year.
2. EFFECTIVE DATE; DURATION.
This Plan shall be effective January 1, 1982 and shall continue until all
shares available for issuance under the Plan have been issued, unless sooner
terminated by the Board of Directors of Mentor Graphics (Board of Directors).
Expiration or termination of the Plan shall not affect outstanding options,
bonus rights or stock appreciation rights.
3. ADMINISTRATION.
3.1 The Plan shall be administered by a compensation committee appointed by
the Board of Directors (Committee). The Committee may delegate any of its
administrative duties to one or more agents and may retain advisors to assist
it.
3.2 The Committee shall have general responsibility to interpret and
administer the Plan. Any decision by the Committee shall be final and bind all
parties. Notwithstanding the foregoing, the Committee's exclusive power to make
final and binding interpretations of the Plan shall immediately terminate upon
the occurrence of a Change in Control (as defined in paragraph 7.2). The
Committee shall keep adequate records of options, bonus rights and stock
appreciation rights granted under the Plan and shall be responsible for
communication with optionees.
3.3 No Committee member shall participate in the decision of any question
relating exclusively to an option, bonus right or stock appreciation right
granted to the member.
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*Matter in BOLDFACE is new; matter [BRACKETED AND IN ITALICS] has been deleted.
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4. GRANT OF OPTIONS.
4.1 Options granted under the Plan may be either incentive stock options
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the Code), or options other than incentive stock options (nonqualified
stock options). No incentive stock options may be granted under the Plan on or
after the tenth anniversary of the last action by the Board of Directors
approving an increase in the number of shares available for issuance under the
Plan, which action was subsequently approved within 12 months by the
shareholders.
4.2 Options may be granted to any officer or key employee of Mentor Graphics
and any subsidiary of Mentor Graphics and may be granted in substitution for
outstanding options of another corporation by reason of merger, consolidation,
acquisition of property or stock, or other reorganization between such other
corporation and Mentor Graphics or any subsidiary of Mentor Graphics. Additional
options may be granted to existing optionees and may be granted in exchange for
outstanding options.
4.3 The Committee shall designate persons to receive grants, and as to each
option shall specify the number of shares, the option price and term, the time
or times at which the option may be exercised, whether the option is an
incentive stock option or a nonqualified stock option and all other terms and
conditions of the option.
4.4 No employee may be granted incentive stock options under the Plan such
that the aggregate fair market value, on the date of grant, of the shares with
regard to which incentive stock options are exercisable for the first time by
that employee during any calendar year under the Plan and under any other stock
option plan of Mentor Graphics or any parent or subsidiary of Mentor Graphics
exceeds $100,000. Fair market value shall be determined under subparagraph
5.1(c) as of the date of each grant.
5. OPTION TERMS.
5.1 The option price shall be fixed by the Committee as follows:
(a) Subject to (b) the option price for an incentive stock option shall
be not less than the fair market value of the shares on the date of grant.
The option price for a nonqualified stock option shall be not less than 50%
of the fair market value of the shares on the date of grant.
(b) If the optionee at the time of grant owns stock possessing more than
10 percent of the combined voting power of all classes of stock of Mentor
Graphics, the option price for an incentive stock option shall be not less
than 110 percent of the fair market value of the shares on the date of
grant. Stock owned by the optionee shall include for this purpose, and for
purposes of paragraph 5.2, stock attributed to the optionee pursuant to
applicable provisions of the Code.
(c) "Fair market value" means an amount determined by, or in an manner
approved by, the Committee. The Committee may appoint and rely on one or
more qualified independent appraisers to value the stock or use such other
evaluation as it considers appropriate.
5.2 The Committee shall fix a time limit of not over 10 years after the date
of grant for exercise of an incentive stock option. The Committee shall fix a
time limit of not over 10 years plus seven days after the date of grant for
exercise of a nonqualified stock option. For a more than 10 percent shareholder
the maximum limit for exercise of an incentive stock option shall be 5 years.
The Committee may make the option exercisable in full immediately or in
graduated amounts over the option term.
5.3 The option shall be evidenced by a stock option agreement executed by
Mentor Graphics and the optionee in a form prescribed by the Committee.
5.4 The option may not be assigned or transferred except on death, by will
or operation of law, or pursuant to a qualified domestic relations order as
defined under the Code or Title I of the Employee
A-2
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Retirement Income Security Act. The option may be exercised only by the optionee
or by a successor or representative after death.
5.5 Unless otherwise determined by the Committee, if an officer of Mentor
Graphics subject to Section 16 of the Securities Exchange Act of 1934 (1934 Act)
exercises an option within six months of the grant of the option, the shares
acquired upon exercise of the option may not be sold until six months after the
date of grant of the option.
6. BONUS RIGHTS.
6.1 The Committee may grant bonus rights in connection with nonqualified
stock options granted under the Plan. Bonus rights may be granted with the
related option or at a later time. A bonus right may not be assigned or
transferred except on death, by will or operation of law, or pursuant to a
qualified domestic relations order as defined under the Code or Title I of the
Employee Retirement Income Security Act. Bonus rights will be subject to such
rules, terms, and conditions as the Committee may prescribe.
6.2 A bonus right will entitle an optionee to a cash bonus in connection
with the exercise in whole or in part of the related option. Subject to
paragraph 6.3, the amount of the bonus shall be determined by multiplying the
applicable bonus percentage by the amount by which the fair market value, on the
exercise date, of the shares received on exercise of the related option exceeds
the option price. The cash bonus will be payable within 30 days following the
date as of which its amount is determined. For the purpose of this paragraph,
fair market value shall be determined according to subparagraph 5.1(c). The
bonus percentage applicable to a bonus right shall be determined by the
Committee, but shall in no event exceed 100 percent.
6.3 The Committee may set a maximum dollar limit on the amount of cash to be
paid under any bonus right.
7. ACCELERATION UPON CHANGE IN CONTROL.
7.1 The Committee may grant acceleration rights to holders of options or
stock appreciation rights which will provide that the options or stock
appreciation rights will become exercisable in full for the remainder of their
terms upon the occurrence of a Change in Control. Acceleration rights may be
granted with an option or stock appreciation right or at a later time by
amendment of outstanding options or stock appreciation rights.
7.2 "Change in Control" means the occurrence of any of the following events,
unless prior to the occurrence of the event, the Committee determines that the
specific event shall not be considered a Change in Control:
(a) the shareholders of Mentor Graphics shall approve:
(i) any consolidation, merger or plan of share exchange involving
Mentor Graphics (Merger) in which Mentor Graphics is not the continuing
or surviving corporation or pursuant to which shares of common stock
would be converted into cash, securities or other property, other than a
Merger involving Mentor Graphics in which the holders of Mentor Graphics'
common stock immediately prior to the Merger have the same proportionate
ownership of common stock of the surviving corporation immediately after
the Merger;
(ii) any sale, lease, exchange or other transfer (in one transaction
or a series of related transactions) of all, or substantially all, the
assets of Mentor Graphics; or
(iii) the adoption of any plan or proposal for the liquidation or
dissolution of Mentor Graphics;
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(b) at any time during a period of two consecutive years, individuals
who at the beginning of such period constituted the Board of Directors
(Incumbent Directors) shall cease for any reason to constitute at least a
majority thereof, unless each new director elected during such two-year
period was nominated or elected by two-thirds of the Incumbent Directors
then in office and voting (new directors nominated or elected by two-thirds
of the Incumbent Directors shall also be deemed to be Incumbent Directors);
or
(c) any person (as such term is used in Section 13(d) of the 1934 Act)
shall, as a result of a tender or exchange offer, open market purchases,
privately negotiated purchases or otherwise, have become the beneficial
owner (within the meaning of Rule 13d-3 under the 1934 Act), directly or
indirectly, of securities of Mentor Graphics ordinarily having the right to
vote in the election of directors (Voting Securities) representing twenty
percent (20%) or more of the combined voting power of the then outstanding
Voting Securities.
8. STOCK APPRECIATION RIGHTS.
8.1 (a) The Committee, in its sole discretion, may grant both "general" and
"limited" stock appreciation rights with all or any part of an incentive stock
option or a nonqualified stock option granted under the Plan. Stock appreciation
rights may be granted with the related option or at any later time during the
term of the option.
(b) A general stock appreciation right granted with all or any part of an
option shall be exercisable only at the time or times established by the
Committee and only to the extent that the related option could be exercised. A
limited stock appreciation right shall be exercisable only during the 60
calendar days immediately following a Change in Control and only if the
immediate resale of shares acquired upon exercise of the related option would
subject the optionee to liability under Section 16(b) of the 1934 Act; provided,
however, that a limited stock appreciation right may not be exercised within six
months of its date of grant. Upon exercise of a stock appreciation right, the
option or portion thereof to which the stock appreciation right relates must be
surrendered. The shares subject to an option or portion thereof that is
surrendered upon exercise of a stock appreciation right shall not be available
for future option or stock appreciation right grants under the Plan.
(c) Each stock appreciation right granted with all or any part of an option
shall entitle the holder to receive from Mentor Graphics an amount equal to the
excess of the fair market value at the time of exercise of one share of Mentor
Graphics common stock over the option price per share under the related option,
multiplied by the number of shares covered by the related option or portion of
the related option.
(d) The terms of a limited stock appreciation right granted with a
nonqualified stock option may provide, if so determined by the Committee, that
the fair market value of the common stock for purposes of subparagraph 8.1(c)
shall be equal to the higher of:
(i) the highest reported sales price of the common stock during the
60-day period ending on the date the limited stock appreciation right is
exercised;
(ii) the highest per share price paid for shares of common stock
purchased in any tender or exchange offer during the 60 calendar days
preceding the exercise of the limited stock appreciation right;
(iii) the fixed or formula price to be received by holders of shares of
common stock in or as a result of any transaction described in subparagraph
7.2(a) if such price is determinable on the date of exercise, provided that
any securities or other property that are part of the fixed or formula price
shall be valued at the highest valuation placed on the securities or
property in any communication to the shareholders of Mentor Graphics by any
party to the transaction; and
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(iv) the highest price per share shown on a Schedule 13D, or any
amendment thereto, filed by the holder or holders of the specified
percentage of common stock whose acquisition gives rise to the
exercisability of the limited stock appreciation right.
8.2 (a) The Committee may grant general stock appreciation rights without
related options under the Plan to any officer or key employee of Mentor Graphics
and any subsidiary of Mentor Graphics. Such stock appreciation rights may be
granted in substitution for outstanding stock appreciation rights of another
corporation by reason of merger, consolidation, acquisition of property or
stock, or other reorganization between such other corporation and Mentor
Graphics or any subsidiary of Mentor Graphics. Additional stock appreciation
rights may be granted to existing holders of stock appreciation rights and may
be granted in exchange for outstanding stock appreciation rights.
(b) The Committee shall designate persons to receive grants of stock
appreciation rights, and as to each stock appreciation right shall specify the
number of shares, the stock appreciation right price, the term, the time or
times at which the stock appreciation right may be exercised and all other terms
and conditions of the stock appreciation right. The stock appreciation right
price shall not be less than 50% of the fair market value of the shares on the
date of grant.
(c) Each stock appreciation right granted without a related option shall
entitle the holder to receive from Mentor Graphics an amount equal to the excess
of the fair market value at the time of exercise of one share of Mentor Graphics
common stock over the stock appreciation right price, multiplied by the number
of shares covered by the stock appreciation right or portion thereof that is
exercised. The shares subject to a stock appreciation right or portion thereof
that is exercised shall not be available for future option or stock appreciation
right grants under the Plan.
8.3 (a) Payment upon exercise of a general stock appreciation right by
Mentor Graphics may be made in shares of Mentor Graphics common stock valued at
fair market value, or in cash, or partly in shares and partly in cash. The
Committee shall either specify the form of payment or retain the power to
disapprove any election by a holder to receive cash on exercise of a stock
appreciation right. For the purpose of this paragraph, fair market value shall
be determined according to subparagraph 5.1(c).
(b) Payment upon exercise of a limited stock appreciation right by Mentor
Graphics may be made only in cash.
8.4 No fractional shares shall be issued upon exercise of a stock
appreciation right. In lieu thereof, cash may be paid in an amount equal to the
value of the fraction or, in the discretion of the Committee, the number of
shares may be rounded to the next whole share.
8.5 Stock appreciation rights will be subject to such rules, terms, and
conditions, and shall be evidenced by an agreement in such form, as the
Committee may prescribe prior to the occurrence of a Change in Control.
8.6 Stock appreciation rights may not be assigned or transferred except on
death, by will or operation of law, or pursuant to a qualified domestic
relations order as defined under the Code or Title I of the Employee Retirement
Income Security Act. Stock appreciation rights may be exercised only by the
holder or by a successor or representative after death.
8.7 Unless otherwise determined by the Committee, no stock appreciation
right may be exercised by an officer of Mentor Graphics subject to Section 16 of
the 1934 Act during the first six months following the date of grant.
9. CHANGES IN CAPITAL STRUCTURE.
If any change is made in the outstanding common stock without Mentor
Graphics' receiving any consideration, such as a stock split, reverse stock
split, stock dividend, or combination or reclassification of the common stock, a
corresponding change shall be made in the number of shares remaining available
for
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grants of options or stock appreciation rights under paragraph 1, disregarding
fractional shares, without any further approval of the shareholders. The
adjustment shall be made by the Committee whose determination shall be
conclusive.
10. AMENDMENT OR TERMINATION OF THE PLAN.
10.1 The Board of Directors may amend or terminate this Plan at any time
subject to paragraph 10.2.
10.2 Unless the amendment is approved by the shareholders, no amendment
shall be made in the Plan that would:
(a) Increase the total number of shares available for options or stock
appreciation rights;
(b) Increase the maximum option term; or
(c) Modify the requirements for eligibility under the Plan.
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