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, 1998
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 $905,939,098 on March 4, 1999 based upon the last
price of the Common Stock on that date reported in the Nasdaq National Market.
On March 4, 1999, there were 65,588,351 shares of the Registrant's Common Stock
outstanding.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or in any amendment to
this Form 10-K. [X]
DOCUMENTS INCORPORATED BY REFERENCE
Part of Form 10-K into
Document which incorporated
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Portions of the 1999 Proxy Statement Part III
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Table of Contents Page
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Part I ......................................................................15
Item 1. Business .......................................................15
Item 2. Properties .....................................................20
Item 3. Legal Proceedings ..............................................20
Item 4. Submission of Matters to a Vote of Security Holders ............22
Part II .....................................................................23
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters ....................................23
Item 6. Selected Consolidated Financial Data ...........................23
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................24
Item 7A. Quantitative and Qualitative Disclosures About Market Risk .....33
Item 8. Financial Statements and Supplementary Data ....................34
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ............................49
Part III ....................................................................49
Item 10. Directors and Executive Officers of Registrant .................49
Item 11. Executive Compensation .........................................49
Item 12. Security Ownership of Certain Beneficial
Owners and Management ..........................................49
Item 13. Certain Relationships and Related Transactions .................49
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K ............................................50
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PART I
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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 "Item 7, Management's
Discussion and Analysis of Results of Operations and Financial Condition."
GENERAL
Mentor Graphics Corporation (the Company) manufactures, markets and supports
software and hardware Electronic Design Automation (EDA) products and provides
related services which enable engineers to design, analyze, simulate, model,
implement and verify the components of electronic systems. In addition to
traditional EDA products, the Company's product offerings 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 systems 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. The Company markets
its products primarily to large companies in the communications, computer,
consumer electronics, semiconductor, aerospace, and transportation industries.
Customers use the Company's 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. The Company licenses its products primarily through its
direct sales force in North and South America (Americas), Europe, Japan and
Pacific Rim, and through distributors where a direct sales presence is not
warranted. The Company was incorporated in Oregon in 1981 and its common stock
is traded on the Nasdaq National Market under the symbol MENT. The Company's
executive offices are located at 8005 S.W. Boeckman Road, Wilsonville, Oregon
97070-7777. The telephone number at that address is (503) 685-7000. The Company
Website address is www.mentor.com.
PRODUCTS
Customers use the Company's products in the design, analysis, simulation,
modeling, implementation and verification of electronic designs for
communications, computer, consumer electronics, semiconductor, aerospace, and
transportation products. This use is intended to make design engineers more
productive, make even complex designs more accurate and, thus, shrink
time-to-market schedules.
The electronic design process begins when an electrical engineer describes the
architectural, behavioral, functional and structural characteristics of an
integrated circuit (IC), printed circuit board (Board) or electronic system. In
this process the engineer describes the overall product system architecture and
then implements it by creating a design description, simulating the design to
reveal electrical defects and reiterating the description until it meets the
previously determined design specifications. Engineers use the Company's
products to specify the components of the IC or Board, determine the
interconnections among the components and define the components' associated
physical properties. Engineers also use the Company's simulation products
throughout the design process to identify design errors before the design is
manufactured. Simulation also gives engineers the ability to test design
alternatives. Engineers use the Company's verification products to identify
functionality and performance issues while the cost to correct is still low.
Verification
Verification of electronic designs is addressed by Company products from several
aspects, including simulation and emulation of the entire chip, execution of
software on the virtual hardware prototype, and analysis of physical
implementation effects and their impact on functionality, performance and
quality.
With advancements in IC technology, the Company believes that the fabrication of
"deep submicron" physical feature dimensions is becoming commonplace, and a new
threshold in IC complexity and system integration is being crossed. The term
"deep submicron" is generally defined as any IC manufacturing process that has
transistor gate lengths under 0.35u (microns). The Company's Calibre(R)
product line is specifically engineered for physical verification of deep
submicron circuit designs.
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xCalibre(R) is the Company's brand for deep submicron IC backend physical
extraction products. xCalibre's complete design flow provides technology for
deep submicron parasitic extraction. Parasitic extraction is the process of
creating an electrical model representation of the physical connections present
between devices in an IC. xCalibre provides the ability to organize vast amounts
of input data, extract parasitics to the desired level of accuracy, and manage
this extracted data into a form usable by post-layout analysis tools. Advances
in deep submicron process technology and IC complexity have forced designers to
seek new solutions for physical extraction. xCalibre products close the gap
between creating designs for deep submicron processes and verifying the physical
implementation of those designs at a system level. Unlike other physical
verification tools, xCalibre tools offer an open design flow that enables IC
designers to take a massive database of electronic circuit information, split it
up into manageable pieces for analysis, and reintegrate the information into the
overall chip design.
The Company's co-verification tools provide a means to verify the hardware and
embedded software comprising an electronic system without having to build a
hardware prototype. This improves the efficiency of the customers' product
development cycles by giving customers more time to fix software bugs and
resolve hardware-software interface errors.
Seamless(TM) is the Company's hardware/software co-verification product family
that enables simultaneous simulation of the hardware and software components of
a system design. These tools verify the software-hardware interface by running
the software against simulated models of the hardware. Seamless tools allow
designers to verify software much earlier in the system design process instead
of waiting until the hardware design has been completed, verified and
manufactured into a prototype. Early verification of the system identifies
functionality and performance issues while the cost to correct them is still
small and reduces the overall design cycle. Seamless tools can be applied to
Systems on Chips, application specific integrated circuits (ASICs) with embedded
microcontroller cores, or microprocessor and digital signal processor (DSP)
based board designs. Some products with embedded systems or processor-based
board designs that benefit from using Seamless tools in the design process
include cellular phones, telephone switching equipment, network hubs, routers,
wireless base stations, automobile engine management modules, aircraft avionics
and controls, and computer equipment.
The Company's design-for-test, or "DFT", product line offers products which
automate the process of making integrated circuits and systems testable and the
generation of their test programs. The Company's DFT product brands include
FastScan(TM), FlexTest(TM), DFTAdvisor(TM), DFTInsight(TM), MBISTArchitect(TM),
LBISTArchitect(TM), BSDArchitect(TM), and CTIntegrator(TM)--an automated test
solution for System on Chip designs incorporating IP products.
The Company's simulation product line gives electrical designers representative
or virtual data to reproduce conditions in a model that could occur in the
performance of a system under different operating conditions. The Company's
simulation products for system, Board, ASIC or field programmable gate array
simulation include QuickSim II(TM), Quick HDL Pro(TM) and ModelSim(TM).
As more ICs and Boards support both analog and digital circuits, designers need
a unified simulation solution that allows both analog and digital analysis
within the mixed-signal design. The Company offers a range of alternative tools
for analog and mixed-signal designers. The tools provide a flow that begins with
design entry or a language description, continues with verification and analysis
options and finishes with a physical description for fabrication of hardware
prototype. The Company's analog/mixed signal products include Analog Station
II(TM), AccuParts(TM), Eldo(TM) and Accusim II(TM).
Design Re-use and Embedded Systems Software
The Company 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 strategy, the Company has combined its EDA
products with products and services that facilitate rapid development of complex
systems through reusable design components referred to in the industry as
"intellectual property" or "IP" and the integration of hardware and embedded
systems development.
The Company's Inventra brand IP products and related services are intended to
increase engineering productivity through the use of predefined and preverified
"building blocks" or "cores" of frequently used circuit functions for the design
of hardware
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components. Use of IP products allows designers to focus on optimizing system
architecture and developing proprietary functionality. The Company believes that
companies which integrate IP products into their design methodology can expect
better quality products at lower costs and faster time-to-market. The Company
provides IP products that are used in ASIC design, IC design, embedded software
design and Board design. These products include circuit functions for a range of
electronic consumer and communications applications including microprocessors,
peripheral interface controllers, digital signal processors, and communications
controllers cores. In 1998, the Company entered into an IP alliance with
International Business Machines Corporation (IBM) under which the Company is
licensed to offer the IBM PowerPC 401 and 405 embedded processor "cores" as part
of its extensive library of proven commercial cores. The agreement is unique in
that it is the first time a 32-bit microprocessor architecture is available
through an independent IP provider.
The Company also provides embedded systems software and development tools.
Embedded systems control the function of hardware components dedicated to
specialized tasks of such common consumer products as VCRs, telephones and fax
machines. Embedded systems software is used in a range of other products in the
aerospace, communications, medical instrumentation, transportation, computer,
industrial and consumer markets. The Company's embedded systems software
products include the VRTX(R) real-time operating system, the XRAY(R) family
of debugger products and other software development tools including Microtec
brand compilers, assemblers, linkers and simulators.
System Design
The Company's Board design tools allow designers to select from a library of
parts to be included in a Board to simulate and test the performance of the
Board, to test for manufacturability, to analyze thermal and signal integrity,
and to output data which will allow the Board to be manufactured. "Boards,"
refers to a common way of packaging electronic circuits, consisting of epoxy
material upon which ICs, ASICs and discrete components such as resistors and
capacitors are mounted. Products within the Board design flow include Design
Architect(R), Board Station(R), Board Architect(TM), Hybrid Station(R) and
Library Management System.
The Company's Field Programmable Gate Array (FPGA) solutions are comprised of a
combination of products including ModelSim(TM) previously discussed, Leonardo
Spectrum(TM), the Company's FPGA Synthesis product line and Renoir(TM) Hardware
Description Language (HDL) graphical entry product line. Renoir(TM) provides a
highly automated environment for the design of electronic systems, using
graphical tools to capture or reuse high-level designs and functional behavior.
The Monet(R) behavioral synthesis product line defined a new capability for
designers, which the Company calls "architectural exploration." Architectural
exploration allows designers to rapidly explore and determine the right
architecture tradeoffs before they commit resources to creating a hardware
prototype such as an IC.
The Company's Interconnectix(TM) brand Interconnect Synthesis (IS) products
combine the disciplines of timing and signal integrity analysis with the
physical implementation of floorplanning, placement and routing for high-speed
board design. IS products reduce the time consuming iteration cycle among
placement, routing, analysis and rework.
PLATFORMS
The Company's software products are available on UNIX and Windows NT platforms
in a broad range of price and performance levels. Platforms are purchased by
customers primarily from Hewlett-Packard Company, Sun Microsystems, Inc. and
Compaq Computer Corporation. These computer manufacturers have a substantial
installed base and make frequent introductions of new products.
MARKETING AND CUSTOMERS
In 1998, the Company again focused its marketing and selling resources on a
limited number of emerging products. Those products include the Calibre physical
verification product, the xCalibre(R) physical extraction product, the
Seamless(TM) CVE hardware/software co-verification tool, the IP products of its
Inventra(TM) business unit, and the IS routing products of its Interconnectix
business unit. The SimExpress(TM)/Celaro(TM) products of the Company's Meta
Systems SRL (Meta) subsidiary are also marketed as emerging products outside of
the U.S. The Company's marketing also emphasizes its Integrated System Design
strategy for the integration of both hardware and software development for
electronic systems, a direct sales force
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and large corporate account penetration in the communications, computer,
consumer electronics, semiconductor, aerospace, and transportation industries.
The Company licenses its products primarily through its direct sales force in
the Americas, Europe, Japan and Pacific Rim. The Company also licenses its
products through distributors where a direct sales presence is not warranted.
During the years ending December 31, 1998, 1997 and 1996 sales outside of the
Americas accounted for 45 percent of total sales. The Company enters into
foreign currency forward contracts to help mitigate the impact of foreign
currency fluctuations. These contracts do not eliminate all potential impact of
foreign currency fluctuations and significant exchange rate movements may have a
material adverse impact on the Company's results. See pages 30-32, "Factors That
May Affect Future Results and Financial Condition," for a discussion of the
effect foreign currency fluctuation may have on the Company's business and
operating results. Additional information relating to foreign and domestic
operations is contained in Note 12 of Notes to Consolidated Financial Statements
beginning on Page 46, below.
No material portion of the Company's business is dependent on a single customer.
The Company has traditionally experienced some seasonal fluctuations in receipts
of orders, which are typically stronger in the second and fourth quarters of the
year. Due to the complexity of the Company's products, the selling cycle can be
three to six months or longer. During the selling cycle the Company's account
managers, application engineers and technical specialists make technical
presentations and product demonstrations to the customer. At some point during
the selling cycle, the Company's products may also be "loaned" to customers for
on-site evaluation. As is typical of many other companies in the electronics
industry, the Company 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.
The Company licenses its products and some third party products pursuant to
purchase and license agreements. The Company generally schedules deliveries only
after receipt of purchase orders under these agreements.
UNIVERSITY PROGRAMS
The Company shares its technology and expertise with universities worldwide
through its Higher Education Program (HEP). Founded in 1985 because the Company
believes the success of the electronics industry is dependent upon highly
skilled engineers, the HEP offers colleges and universities a cost-effective way
to acquire the Company's products for teaching and academic research. This
program helps to insure that engineering graduates enter industry proficient in
the use of state-of-the-art tools and techniques. Through the HEP, the Company
develops long term relationships with engineering colleges and universities
around the world. The Company has partnerships with more than 330 colleges and
universities worldwide.
BACKLOG
The Company's backlog of firm orders was approximately $77 million on December
31, 1998 as compared to $78 million on December 31, 1997. This backlog includes
products not shipped and unfulfilled professional services and training. The
Company does not track backlog for support services. Support services are
typically delivered under annual contracts that are accounted for on a pro rata
basis over the twelve-month term of each contract. Substantially all the
December 31, 1998 backlog of orders is expected to ship during 1999.
MANUFACTURING OPERATIONS
The Company's manufacturing operations primarily consist of reproduction of the
Company's software and documentation. In the Americas, manufacturing is
substantially outsourced, with distribution to Western Hemisphere customers
occurring from major West Coast sites in the U.S. Distribution centers in The
Netherlands and Singapore serve their respective regions. The Company's line of
accelerated verification products, which is comprised of both hardware and
software, is manufactured in France. In 1998 the Company established an Irish
company (Irish Company) and began transfer of its European manufacturing and
distribution from the Netherlands to Ireland. The Irish Company will be
responsible for manufacturing and distributing its products to the European,
Middle East, and African markets through the Company's established sales
channels.
PRODUCT DEVELOPMENT
The Company's research and development is focused on continued improvement of
its existing products and the development of new products. During the years
ended December 31, 1998, 1997 and 1996, the Company expensed $117,853,000,
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$112,227,000 and $92,905,000 respectively, and capitalized $0, $0, and
$5,691,000 respectively, related to product research and development. The
Company also seeks to expand existing product offerings and pursue new lines of
business through acquisitions. 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. The Company's future success depends on its
ability to develop or acquire competitive new products that satisfy customer
requirements.
SUPPLIERS
The Company seeks to provide its customers with software and IP products that
address customers' electronic system design processes. Supplier products fill
gaps in the Company's existing product lines and allow it to offer products
which are needed by customers but which are not central to the Company's
business. Supplier agreements are also used to explore possible new lines of
business. 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 the Company with the supplier providing backup
support and research and development in the event of a problem with the product
itself.
CUSTOMER SUPPORT AND CONSULTING
The Company has a worldwide organization to meet its customers' needs for
software support. The Company offers support contracts providing software
updates and support. Most of the Company's customers have entered into software
support contracts. In November of 1998, the Software Support Professionals
Association (SSPA) announced that the Company's Customer Support Division had
won its 1999 SSPA STAR (Software Technical Assistance Recognition) Award in the
Complex Support category. The STAR Awards are given annually to recognize
excellence in six areas of software and technical support. Competing companies
undergo a rigorous self-nominating process. Applicants are then evaluated by
SSPA's Advisory Board. The winner in Complex Support category must demonstrate a
consistently high level of support for mission-critical applications used in
scientific, engineering, and other highly technical environments. The Company's
Customer Support Division also won the STAR Award in 1993 and 1995.
Mentor Consulting, the Company's consulting division, is comprised of a
worldwide team of consulting professionals who provide services for
System-on-Chip, Systems to Silicon Verification, Design Reuse, and High
Performance Systems Design. The Company's consulting group was established in
1987. The services provided to customers by Mentor Consulting include advising
customers on design process, design reuse and IC verification and test. Design
process consulting helps customers improve how they design. Design reuse
consulting helps customers modify existing designs for use in new designs.
Mentor Consulting's mission is to team with customers' design groups to increase
productivity while reducing costs and time-to-market.
COMPETITION
The markets for the Company's products are competitive and are characterized by
price reductions, rapid technological advances in application software,
operating systems and hardware, and new market entrants. The EDA and IP product
industries tend to be labor intensive rather than capital intensive. This means
that the number of actual and potential competitors is significant. While many
competitors are large companies with extensive capital and marketing resources,
the Company also competes with small companies with little capital but
innovative ideas.
The Company 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. The
Company believes that it generally competes favorably in these areas. The
Company 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.
The Company's principal competitors are Cadence Design Systems Inc., Synopsys
Inc., Avant! Corporation, Quickturn Design Systems, Inc., IKOS Systems, Inc.,
Wind River Systems Inc. and numerous small companies.
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EMPLOYEES
The Company and its subsidiaries employed approximately 2,600 people full time
as of December 31, 1998. 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 satisfactory employee relations.
PATENTS AND LICENSES
The Company holds 32 United States and 9 foreign patents on various
technologies. In 1998, the Company was granted 12 patents and filed 38 patent
applications worldwide. As of January 1999, the Company has a total of 51 patent
applications filed and pending and an additional 29 in process but not yet
filed. While the Company believes the pending applications relate to patentable
technology, there can be no assurance that any patent will be issued or that any
patent can be successfully defended. Although 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
believes that software patents are becoming increasingly important in the
software industry.
The Company regards its products as proprietary and protects all products with
copyrights, trade secret laws, and internal non-disclosure safeguards, as well
as patents, when appropriate, as noted above. The Company typically includes
restrictions on disclosure, use and transferability in its agreements with
customers and other third parties.
Item 2. Properties
The Company owns six buildings on 53 acres of land in Wilsonville, Oregon. The
Company occupies 341,000 square feet, in five of those buildings, as its
corporate headquarters. The Company leases the remaining building and portions
of one headquarters building to third parties. The Company also owns an
additional 98 acres of undeveloped land adjacent to its headquarters. All
corporate functions and a majority of its domestic research and development
operations are located at the Wilsonville site.
The Company leases additional space in San Jose, California, where some of its
domestic research and development takes place, and in various locations
throughout the United States and in other countries, primarily for sales and
customer service operations. Some additional research and development is done in
locations outside the U.S. The Company believes that it will be able to renew or
replace its existing leases as they expire and that its current facilities will
be adequate through at least 1999.
Item 3. Legal Proceedings
During 1995, the Company filed suit in U.S. Federal District Court in Portland,
Oregon, against Quickturn Design Systems, Inc. (Quickturn) for a declaratory
judgment of non-infringement, invalidity and unenforceability of three of
Quickturn's patents. These patents relate to products of Meta Systems SRL
(Meta), a French company acquired by the Company in 1996 that manufactures and
sells computers used for accelerated verification of hardware designs. Quickturn
filed a counterclaim against the Company alleging infringement of six of
Quickturn's patents, including the three patents subject to the declaratory
judgment action. The counterclaim seeks a permanent injunction prohibiting sales
of the Company's SimExpress products in the U.S., compensatory and punitive
damages and attorneys' fees.
Quickturn filed an administrative complaint with the U.S. International Trade
Commission (ITC) in 1996 seeking to prohibit the distribution of SimExpress
products in the U.S. In August 1996, the ITC issued a ruling effectively
prohibiting the importation of this technology into the U.S. In August 1997, the
ITC Administrative Law Judge recommended the imposition of evidentiary and
monetary sanctions against the Company and Meta. This order has been appealed
and no dollar amount of monetary sanctions has been set. In August 1997, the
U.S. District Court in Portland, Oregon granted Quickturn a preliminary
injunction prohibiting the Company from selling its SimExpress version 1.0 and
1.5 accelerated verification systems in the U.S. The injunction also prohibits
the Company from shipping current U.S. inventory modified in the U.S. to any of
its non-U.S. locations. In October 1997, Quickturn also filed an action against
Meta and the Company in a German court alleging infringement by SimExpress of a
European patent.
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In December 1997, the ITC issued a Cease and Desist Order prohibiting the
Company from importing SimExpress products or components and from providing
repair or maintenance services to its existing U.S. customers. That order took
effect in 1998. A trial in the U.S. District Court action is scheduled in June
of 1999, in which Quickturn will seek a permanent injunction, compensatory
damages, punitive damages, and attorneys' fees. An unfavorable ruling in this
trial could involve substantial cost to the Company and effectively prevent the
Company from manufacturing and selling its existing accelerated verification of
hardware design products in the U.S. market.
In February 1998, Meta filed a patent infringement action against Quickturn in
the U.S. District Court for the Northern District of California in San Jose,
California. The complaint, which is based on a patent licensed to the Company
and Meta and which Meta has a right to enforce, seeks damages for infringement
as a result of Quickturn's manufacture and sale of certain emulation equipment.
Meta, which has been joined in the suit by Aptix Corporation of San Jose,
California, will ultimately seek an injunction prohibiting further infringement
by Quickturn. A trial date in the U.S. District Court has been set for the third
quarter of 1999. In October 1998, Quickturn filed an action against Meta and the
Company in France alleging infringement by SimExpress and Celaro of a European
patent.
On August 12, 1998 the Company commenced a $12.125 per share tender offer for
all outstanding shares of Quickturn, or approximately $216,000,000 for
approximately 17,800,000 Quickturn shares outstanding. The Company expected to
finance this offer through its available cash balances and a new bank credit
facility for which the Company had a definitive Credit Agreement. Quickturn's
management and board of directors attempted to modify their bylaws to postpone a
special shareholder meeting and attempted to install a deferred redemption
provision in Quickturn's "poison pill" to preclude the closing of the Company's
offer until at least July 1999. The Company litigated those actions in Delaware
Chancery Court. The trial was completed on October 28, 1998 and a decision in
favor of the Company was announced by the Delaware Chancery Court on December 3,
1998. On December 9, Quickturn and Cadence Design Systems, Inc. announced an
agreement to merge. The Company sought to enjoin consummation of the proposed
merger agreement and invalidate certain termination fees and stock option
provisions of that agreement in a suit filed in the Delaware Court of Chancery
on December 15, 1998. On January 8, 1999, the Company withdrew its tender offer.
On July 2, 1998, the Company filed an action for declaratory judgment in the
Federal District Court for the District of Oregon against Armagan Akar, a former
employee of Mentor Graphics Singapore Ptd. Ltd. (MG Singapore), a wholly owned
subsidiary of the Company. The declaratory judgment action requests the Oregon
federal court to determine the obligations of the Company and MG Singapore to
Mr. Akar in connection with a dispute regarding Mr. Akar's termination from MG
Singapore. On or about July 27, 1998, Mr. Akar filed an action in the Superior
Court of California for the County of Santa Clara alleging wrongful termination
of employment. The complaint alleges that Mr. Akar's employment was terminated
following his claimed notification to the Company and MG Singapore of violations
of the U.S. Foreign Corrupt Practices Act occurring in the Company's operations
located in the Peoples' Republic of China. Mr. Akar also alleges that one or
more employees of MG Singapore made defamatory statements about him in
connection with the termination of his employment. Mr. Akar seeks compensatory
and exemplary damages. The Superior Court case was removed to the U.S. District
Court for the Northern District of California and on November 2, 1998, that
court granted the Company's motion to transfer the case to the U.S. District
Court in Oregon. Mr. Akar has answered the Company's complaint in the
declaratory judgment and has included his claims as counterclaims in that case.
The Company intends to vigorously pursue its declaratory judgment action and to
contest Mr. Akar's action and allegations, and does not believe that the outcome
of the suit will have a material adverse effect on the Company's financial
condition, results of operations or liquidity.
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On or about August 6, 1998, three shareholders of Exemplar Logic, Inc.
("Exemplar"), a corporation owned more than 80% by the Company, filed an action
in the Superior Court of California for the County of Alameda against the
Company, Exemplar and certain employees of the Company who have served as
directors of Exemplar. The complaint alleged that the Company breached a
contract with Exemplar which provides that, under certain circumstances, the
Company would take reasonable steps to support Exemplar in its efforts to
complete an initial public offering of its equity, that the Company breached its
alleged fiduciary duty as a majority shareholder of Exemplar, that the Company
made false and misleading representations and concealments that defrauded
Exemplar and that the Company conducted unfair business practices against
Exemplar under California law. The Company, Exemplar and the plaintiffs
subsequently entered into a Stand Still Agreement in which the plaintiffs agreed
to dismiss their complaint without prejudice and the Company agreed to make
reasonable efforts to come to a decision to i) take Exemplar public, ii) sell
Exemplar to a third party or iii) acquire the Exemplar minority shareholders'
interests prior to October 31, 1998. The plaintiffs dismissed the complaint and
the Company and the Exemplar minority shareholders entered into a merger
agreement under which the Company acquired the minority shareholders' interest
on January 5, 1999.
In addition to the above litigation, from time to time the Company is involved
in various disputes and litigation matters that arise from the ordinary course
of business. These include disputes and lawsuits relating to intellectual
property rights, licensing, contracts, and employee relations matters. The
Company believes that final resolution of such disputes and lawsuits will not
have a material adverse effect on the Company's financial position or results of
operations.
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, 1998.
EXECUTIVE OFFICERS OF REGISTRANT
The following are the executive officers of the Company:
<TABLE>
<CAPTION>
Has Served
As An Executive
Officer of the
Name Position Age Company Since
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Walden C. Rhines President, Chief Executive 52 1993
Officer and Director
Gregory K. Hinckley Executive Vice President, 52 1997
Chief Operating Officer and
Chief Financial Officer
G. M. "Ken" Bado Senior Vice President, 44 1996
World Trade
Dean Freed Vice President, 40 1995
General Counsel and Secretary
Anne Wagner Vice President, Marketing 46 1998
Anthony B. Adrian Vice President, 56 1998
Corporate Controller
Dennis Weldon Treasurer 51 1998
- ------------------------------------------------------------------------------
</TABLE>
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 the
Company 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
22
<PAGE>
held the position of Vice President, Finance and Chief Financial Officer with
VLSI. Mr. Hinckley is a director of OEC Medical Systems, Inc., a manufacturer of
medical imaging equipment, and Amkor Technology, Inc., an IC packaging, assembly
and test services company.
Mr. Bado has served as Senior Vice President, World Trade since December 1996.
From April 1994 to December 1996 he held the position of Vice President of the
Americas. From February 1996 through December 1996 Mr. Bado also held the
position of Vice President and General Manager, Professional Services. Mr. Bado
was the Southern Area General Manager for North American Sales from January 1991
to April 1994. He has been employed by the Company since September 1988.
Mr. Freed has served as Vice President, General Counsel and Secretary of the
Company since July 1995. Mr. Freed served as Deputy General Counsel and
Assistant Secretary of the Company from April 1994 to July 1995, and was
Associate General Counsel and Assistant Secretary from 1990 to April 1994. He
has been employed by the Company since January 1989.
Ms. Wagner has served as Vice President, Marketing of Mentor Graphics since June
1998. From 1996 to 1998, Ms. Wagner was Vice President of Corporate Marketing
for the SunSoft operating company of Sun Microsystems, Inc. From 1977 to 1996,
Ms. Wagner was employed by National Semiconductor Corporation where her duties
included Vice President, Marketing and Communications.
Mr. Adrian has served as Vice President, Corporate Controller since joining the
Company in January 1998. From August to December of 1997 he held the position of
Vice President and Acting Controller for Wickland Oil Company, a petroleum
marketing and distribution company. From January 1996 to August 1997 Mr. Adrian
served as Managing Director of Wickland Terminals in Australia. From November
1992 to January 1996 Mr. Adrian served as Vice President and Controller of
Wickland Oil.
Mr. Weldon has served as Treasurer and Director of Business Development since
February 1996. Mr. Weldon served as Director of Business Development from June
1994 to January 1996. From July 1991 to June 1994 Mr. Weldon served as Director
of Finance. Mr. Weldon has been employed by the Company since July 1988.
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters
The Company's Common Stock trades on the Nasdaq National Market under the symbol
MENT. The following sets forth for the periods indicated the high and low sales
prices for the Company's Common Stock, as reported by the Nasdaq National
Market:
<TABLE>
<CAPTION>
Quarter ended March 31 June 30 September 30 December 31
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998
High $ 11 1/8 $ 11 13/16 $ 11 1/16 $ 10 5/16
Low $ 8 1/8 $ 9 3/8 $ 6 19/32 $ 5 7/16
1997
High $ 11 $ 9 3/8 $ 12 1/2 $ 12 1/16
Low $ 8 5/8 $ 6 5/8 $ 8 1/2 $ 9
- ----------------------------------------------------------------------------
</TABLE>
As of December 31, 1998, the Company had 1,073 stockholders of record. No
dividends were paid in 1997 or 1998. The Company does not intend to pay
dividends in the foreseeable future.
<TABLE>
<CAPTION>
Item 6. Selected Consolidated Financial Data
In thousands, except per share data and percentages
Year ended December 31, 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------
Statement of Operations Data
<S> <C> <C> <C> <C> <C>
Total revenues $ 490,393 $ 454,727 $ 447,886 $ 432,517 $ 390,119
Research and development $ 117,853 $ 112,227 $ 92,905 $ 86,782 $ 81,231
Operating income (loss) $ 4,742 $ (36,370) $ (9,849) $ 52,554 $ 30,980
Net income (loss) $ (519) $ (31,307) $ (4,978) $ 50,506 $ 30,453
Gross margin percent 75% 65% 70% 73% 73%
Operating income (loss)
as a percent of revenues 1% (8)% (2)% 12% 8%
Per Share Data
Net income (loss) per
share - basic $ (0.01) $ (0.48) $ (0.08) $ 0.79 $ 0.50
Net income (loss) per
share - diluted $ (0.01) $ (0.48) $ (0.08) $ 0.78 $ 0.49
Weighted average
number of shares
outstanding - basic 65,165 64,885 64,134 63,710 60,361
Weighted average
number of shares
outstanding - diluted 65,165 64,885 64,134 65,134 62,211
Balance Sheet Data
Cash and investments,
short-term $ 137,585 $ 137,060 $ 197,079 $ 211,996 $ 154,255
Cash and investments,
long-term $ - $ - $ 30,000 $ 30,000 $ 30,000
Working capital $ 139,198 $ 148,191 $ 200,848 $ 213,491 $ 150,865
Property, plant and
equipment, net $ 95,214 $ 103,452 $ 102,253 $ 99,605 $ 102,291
Total assets $ 464,123 $ 402,302 $ 513,359 $ 495,372 $ 429,290
Short-term borrowings $ 24,000 - $ 9,055 $ 9,358 $ 8,661
Long-term debt and
other deferrals $ 1,425 $ 617 $ 56,375 $ 55,054 $ 53,123
Stockholders' equity $ 295,282 $ 277,537 $ 319,640 $ 326,226 $ 258,419
- ---------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE>
Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations
All numerical references in thousands, except percentages and per share data
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 through its direct sales force in
North and South America (Americas), Europe, Japan and Pacific Rim, and through
distributors where a direct sales presence is not warranted. In addition to its
corporate offices in Wilsonville, Oregon, the Company has sales, support,
software development and professional services offices worldwide.
RECENT DEVELOPMENTS
On August 12, 1998, the Company commenced a $12.125 per share tender offer for
all outstanding shares of Quickturn Design Systems, Inc., a Delaware corporation
(Quickturn), or approximately $216,000 for approximately 17,800 shares
outstanding. In connection with this offer, the Company purchased 591 shares of
Quickturn common stock for $4,522. The Company expected to finance this offer
through its available cash balances and a new bank credit facility for which the
Company had a definitive Credit Agreement. On January 8, 1999, the Company
withdrew its tender offer and subsequently terminated its new credit facility.
The Company incurred acquisition costs of approximately $9,000 of which $4,614
was capitalized and the remaining amount was not accrued as of December 31,
1998. Because the offer was withdrawn, these costs will be expensed and will be
partially offset by a gain on the sale of the Quickturn stock of approximately
$4,000 in the first quarter of 1999.
On January 5, 1999, the Company purchased the remaining minority interest of its
then 84% owned subsidiary, Exemplar Logic, Inc. (Exemplar) for cash and stock
options valued at approximately $14,000. This business combination will be
accounted for as a purchase. The cost of the acquisition will be allocated on
the basis of estimated fair value of assets and liabilities assumed. In
connection with the acquisition, the Company will record a charge to operations
for the write-off of Exemplar's in-process research and development (R&D) that
had not reached technological feasibility, the amount of which is yet to be
determined.
In 1998, the Company completed three business combinations which were accounted
for as purchases. In March 1998, the Company purchased an additional ownership
interest of 32% of its Korean distributor, Mentor Korea Co. LTD, for a total
ownership interest of 51%. In November 1998, the Company purchased CLK
Computer-Aided Design Inc. (CLK CAD) and OPC Technology Inc. (OPCT). The total
purchase price including acquisition expenses for these acquisitions was
$16,513. The purchase accounting allocations resulted in charges for in-process
R&D of $8,500, goodwill capitalization of $6,613, and technology capitalization
of $1,400. Results of operations of all acquisitions that were accounted for as
purchases are included in the Company's Consolidated Financial Statements only
from the date of acquisition forward.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Revenues and Gross Margins
Year ended December 31, 1998 Change 1997 Change 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
System and software revenues $ 277,396 18% $ 235,808 (3)% $ 242,147
System and software gross margins $ 250,860 38% $ 182,316 (10)% $ 202,951
Gross margin percent 90.4% 77.3% 83.8%
Service and support revenues $ 212,997 (3)% $ 218,919 6% $ 205,739
Service and support gross margins $ 116,036 2% $ 113,378 2% $ 111,119
Gross margin percent 54.5% 51.8% 54.0%
Total revenues $ 490,393 8% $ 454,727 2% $ 447,886
Total gross margins $ 366,896 24% $ 295,694 (6)% $ 314,070
Gross margin percent 74.8% 65.0% 70.1%
- --------------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE>
SYSTEM AND SOFTWARE
System and software revenues are derived from sales or licenses of software
products, third party owned software products for which the Company pays
royalties, accelerated verification systems and some workstation hardware. For
1998, the increase in software product revenues is attributable to growth of the
Company's newer product offerings. The Company's newer products primarily focus
on system verification and design re-use subsets of the EDA industry, which have
experienced above industry average growth rates over the last year. In addition,
improved demand for several of the Company's older product offerings is
primarily attributable to recent product upgrades such as Year 2000 compliance
and ports to the Windows NT platform. Accelerated verification revenue also
improved in 1998 as next generation systems began shipping in the first half of
the year. The Company's SimExpress accelerated verification product is not
available in U.S. markets due to a 1997 court ruling. See "Part I-Item 3. Legal
Proceedings" for further discussion. These increases occurred despite the
weakening of the Japanese Yen versus the U.S. dollar which negatively impacted
revenues. See "Geographic Revenues Information" for further discussion. For 1997
compared to 1996, the decrease in system and software revenue was attributable
to a decline in software product sales partially offset by increased sales of
accelerated verification systems. Software product revenues declined in 1997 due
in part to an accelerated decline of the Company's older integrated circuit (IC)
and also certain printed circuit board products.
Gross margins were significantly higher for 1998 compared to 1997 due to lower
costs for direct materials and overhead, lower third party product sales for
which royalties were paid, lower purchased technology and capitalized software
development costs amortization, and a write-down of certain previously
capitalized software development costs in 1997. For 1997 compared to 1996, the
decline in system and software gross margins as a percent of revenues was due to
higher royalty costs, one-time inventory and capitalized software development
cost adjustments and higher purchased technology amortization. Increased royalty
costs in 1997 were primarily attributable to a write-off of costs associated
with a non-refundable royalty contract where the committed costs were not
recovered. In addition, the Company incurred an inventory write-down of all U.S.
SimExpress systems inventory in 1997 as a result of the 1997 court ruling. See
"Part I-Item 3. Legal Proceedings" for further discussion.
Amortization of previously capitalized software development costs to system and
software cost of revenues was zero in 1998 compared to $5,448 and $6,215 in 1997
and 1996, respectively. In addition, the Company recognized impairment in value
of certain previously capitalized software development costs in 1997 primarily
as a result of the accelerated decline in sales of older software product
offerings. These costs, which totaled $5,358, were determined to be
unrecoverable and were charged to system and software cost of revenues in the
first quarter of 1997. Amortization of purchased technology costs to system and
software cost of revenues was $2,278, $5,484 and $3,559 for 1998, 1997 and 1996,
respectively. The decline in amortization in 1998 is attributable to a
significant decline in business acquisitions in 1998 and 1997 and accelerated
amortization of technologies in 1997 where assets were impaired or disposed of.
Purchased technology costs are amortized over a three-year period to system and
software cost of revenues.
SERVICE AND SUPPORT
Service and support revenues consist of revenues from annual software support
contracts and professional services, which includes consulting services,
training services, custom design services and other services. The decrease in
service and support revenues in 1998 is due primarily to an approximate 20%
decrease in professional service revenues offset by a slight increase in support
revenues. The increase in service and support revenues in 1997 was due primarily
to an approximate 20% increase in professional service revenues as well as a
slight increase in software support revenues.
For 1998, growth levels for software support revenues compared to software
product revenues were lower due in part to the carryover effect of the prior
year decline in software product revenues. For 1997, growth in software support
revenues occurred despite a decline in software product revenues as the
installed base of customers on support contracts increased during the year.
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.
25
<PAGE>
Professional service revenues totaled approximately $49,000, $60,000 and $50,000
in 1998, 1997 and 1996, respectively. The decrease in 1998 is due to a more
narrowly focused effort toward engagements that enable customers to better
utilize the Company's products and away from out-source custom design service
engagements. Consulting engagements with printed circuit board design customers
also declined in 1998 due in part to lower printed circuit board software
product sales in 1998. The increase in professional services in 1997 was
attributable to consulting services and custom design services as demand for
these services grew.
Service and support gross margins increased in 1998 as a result of higher
software support revenues and approximately flat software support cost of
revenues. Professional service gross margins were negative in 1998 as several
prior period contracts continued to require resources. In 1997, professional
service gross margins were negative due to unprofitable contracts, most of which
were entered into in 1996, where costs of completion exceeded the revenues. The
Company has refined its contract approval practices to reduce the likelihood of
entering into unprofitable custom design contracts.
GEOGRAPHIC REVENUES INFORMATION
Americas revenues including service and support revenues, increased by 8% from
1997 to 1998 and by 2% from 1996 to 1997. Revenues outside of the Americas
represented 45% of total revenues in 1998, 1997 and 1996. European revenues
increased by approximately 23% from 1997 to 1998 and 4% from 1996 to 1997.
Increased European revenues are attributable to improved economic conditions
primarily in the telecommunications industry and increased demand for newer
product offerings in 1998. The effects of exchange rate differences from
European currencies to the U.S. dollar for 1998 and 1997 were not significant.
Japanese revenues decreased by approximately 17% from 1997 to 1998 and 7% from
1996 to 1997. The effects of exchange rate differences from the Japanese Yen to
the U.S. dollar negatively impacted revenues by approximately 10% and 11% in
1998 and 1997, respectively. Exclusive of currency effects, lower revenue levels
in Japan are the result of continued economic difficulties in 1998. Since the
Company generates approximately half of its revenues outside of the U.S. and
expects this to continue in the future, revenue results should continue to be
impacted by the effects of future foreign currency fluctuations.
<TABLE>
<CAPTION>
OPERATING EXPENSES
Year ended December 31, 1998 Change 1997 Change 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Research and development $ 117,853 5% $ 112,227 21% $ 92,905
Percent of total revenues 24.0% 24.7% 20.7%
Marketing and selling $ 169,034 7% $ 157,343 7% $ 146,754
Percent of total revenues 34.5% 34.6% 32.8%
General and administration $ 45,825 5% $ 43,636 7% $ 40,918
Percent of total revenues 9.3% 9.6% 9.1%
Special charges $ 20,942 11% $ 18,858 57% $ 11,998
Percent of total revenues 4.3% 4.1% 2.7%
Merger and acquisition
related charges $ 8,500 - $ - (100)% $ 31,334
Percent of total revenues 1.7% - 7.0%
- ----------------------------------------------------------------------------------------------------
</TABLE>
RESEARCH AND DEVELOPMENT
As a percent of revenue, R&D costs decreased slightly from 1997 to 1998 and
increased from 1996 to 1997. During 1998, the Company disposed of several
businesses which were not core to its strategy of system verification and design
re-use which reduced R&D costs by approximately $6,000 compared to 1997.
Increased spending for activities more closely aligned to Company strategy
offset these savings. The increase in R&D spending in 1997 was also attributable
to investment in core strategy areas and merger and acquisition activity. R&D
costs increased in 1997 by approximately $8,000 as a result of prior year
business purchases. These purchases during 1996 resulted in added expenses only
from the date of acquisition and not for all prior periods presented as is the
case for pooling of interest transactions. In addition, other business
combinations accounted for as pooling of interests experienced higher R&D
investment in 1997. During 1997 and 1998, the Company capitalized software
development costs of $0, compared to $5,691 for 1996. This decrease in
capitalization is due to timing and content of product development activities
which resulted in a lower level of costs eligible for capitalization. Based on
these lower eligible costs, product development activities have been expensed on
a current basis. The Company does not expect significant capitalization in 1999.
26
<PAGE>
MARKETING AND SELLING
In 1998 the increase in marketing and selling costs was principally attributable
to increased product sales through the Company's direct sales force and third
party distributors offset in part by savings resulting from subsidiary
divestitures totaling approximately $3,000. In 1997, the increase in marketing
and selling costs was principally attributable to prior year business purchases
and increased sales through third party distributors. The year to year impact of
acquisitions on marketing and selling costs in 1997 was approximately $2,000. In
addition, selling costs increased approximately $3,000 in 1997 as a result of
increased third party sales channel revenue. A stronger U.S. dollar during 1998
and 1997 reduced expenses by approximately 10% and 11% in Japan, respectively.
GENERAL AND ADMINISTRATION
For 1998 compared to 1997 general and administrative (G&A) costs decreased as a
percent of sales due to subsidiary divestitures and higher sales volume. For
1998, the absolute dollar increase in G&A is attributable to increased headcount
to maintain and support business systems and support higher sales volume. The
increase in general and administrative costs from 1996 to 1997 was a result of
integration costs and additional headcount related to business purchases offset
by certain administrative savings subsequent to integration of Microtec
Research, Inc. (Microtec) and Interconnectix, Inc. (Interconnectix). Also in
1997, the Company experienced increased costs of information technology
personnel as the global information system reached the implementation phase
during the year.
SPECIAL CHARGES
During 1998, the Company recorded special charges of $20,942. The charges
primarily consist of four subsidiary divestitures, moving of the European
distribution center to Ireland to strengthen the Company's tax position, related
terminations arising from the divestitures and the distribution center move, and
impairment in value of certain assets. Substantially all of these costs were
expended in 1998 and the remaining amount should be expended in the first half
of 1999 and there have been no significant modifications to the amount of the
charges.
During 1997, the Company recorded special charges of $18,858. The charges
consisted of disposals of subsidiaries and related employee terminations, early
termination of an interest rate swap agreement, recognition of the impairment in
value of certain goodwill and purchased technology and some streamlining of
worldwide operations and reserves for various legal claims. Substantially all of
the costs associated with these charges were expended in 1997 and the first half
of 1998 and there have been no significant modifications to the amount of the
charges.
In 1996, the Company recorded special charges of $11,998. The Company downsized
and redirected certain operations and re-targeted 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
a $5,000 write-down for impairment in value of goodwill and certain other assets
associated with Meta Systems SRL (Meta) as the recoverability of these assets
was adversely affected by the ongoing SimExpress patent litigation.
MERGER AND ACQUISITION RELATED CHARGES
In 1998, the Company incurred merger and acquisition related charges of $8,500
for in-process R&D related to two of the three business combinations accounted
for as purchases. The charges were a result of allocating a portion of the
acquisition costs to in-process product development that had not reached
technological feasibility.
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 that resulted in charges for in-process R&D of $26,234. Two
acquisitions were accounted for as pooling of interests and resulted in merger
expenses of $4,410 and $700, respectively, which were associated with the
elimination of duplicate facilities, severance costs, the write-off of certain
property and equipment and legal and accounting fees associated with the merger
activities.
27
<PAGE>
OTHER INCOME (EXPENSE), NET
Year ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------
Other income (expense), net $ (4,721) $ 3,319 $ 8,411
- --------------------------------------------------------------------------------
Other income (expense) was negatively impacted by increased legal costs
primarily associated with the ongoing patent litigation with Quickturn which
totaled $10,301 in 1998, compared to $4,675 and $3,611 in 1997 and 1996,
respectively. The increase is attributable to license fees for certain
intellectual property rights licensed from Aptix Corporation and expenses
attributable to a patent infringement lawsuit filed jointly by a subsidiary of
the Company and Aptix against Quickturn. See "Part I-Item 3. Legal Proceedings"
for further discussion. Interest income was $7,771, $7,723 and $9,485 in 1998,
1997 and 1996, respectively. Interest expense was $768, $555 and $2,423 in 1998,
1997 and 1996, respectively. The decrease in interest income and interest
expense in 1998 and 1997 versus 1996 is primarily attributable to lower average
cash, cash equivalents, short-term investments and borrowings outstanding during
1998 and 1997 due to pay-down of short term lines of credit and the long term
revolving credit facility. For 1999, exclusive of any changes in cash balances
or interest rates, the increase in interest bearing term receivables should
favorably affect interest income. In 1996, the Company sold common stock of two
independent public companies for $6,744 that had carrying costs of $1,199,
resulting in a gain of $5,545.
PROVISION (BENEFIT) FOR INCOME TAXES
The provision (benefit) for income taxes was $540, ($1,744), and $3,540 in 1998,
1997 and 1996, respectively. The tax provision (benefit) in all periods is the
result of the mix of profits earned by the Company and its subsidiaries in tax
jurisdictions with a broad range of income tax rates.
Because 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 carryforwards and tax expense for
subsidiaries with pre-tax income, the Company's income tax position and
resultant effective tax rate is uncertain for 1999 and beyond.
EFFECTS OF FOREIGN CURRENCY FLUCTUATIONS
Approximately half of the Company's revenues are generated outside of the United
States. For 1998, 1997 and 1996, 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, which resulted in an
immaterial net effect on the Company's results of operations.
The "accumulated other comprehensive income--foreign currency translation
adjustment," as reported in the stockholders' equity section of the Consolidated
Balance Sheets, increased to $14,176 at December 31, 1998, from $7,795 at the
end of 1997. This reflects the increase in the value of net assets denominated
in foreign currencies since year-end 1997 as a result of a stronger U.S. dollar
at the close of 1997 versus 1998.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) No. 98-1, "Software for Internal Use", which
provides guidance on accounting for the cost of computer software developed or
obtained for internal use. This statement of position is effective for financial
statements for fiscal years beginning after December 15, 1998. The Company does
not expect SOP 98-1 to have a material impact on its Consolidated Financial
Statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value.
SFAS No. 133 also requires that changes in the derivative's fair value be
recognized currently in results of operations unless specific hedge accounting
criteria are met. SFAS No. 133 is effective for fiscal years beginning after
June 15, 1999. The Company does not expect SFAS No. 133 to have a material
impact on its Consolidated Financial Statements.
28
<PAGE>
In October 1998, the AICPA issued SOP 98-9, "Modification of SOP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions". This SOP amends
certain paragraphs of SOP 97-2 to require recognition of revenue using the
"residual method" in circumstances outlined in the SOP. Under the residual
method revenue is recognized as follows: (1) the total fair value of undelivered
elements, as indicated by vendor specific objective evidence, is deferred and
subsequently recognized in accordance with the relevant sections of SOP 97-2 and
(2) the difference between the total arrangement fee and the amount deferred for
the undelivered elements is recognized as revenue related to the delivered
elements. SOP 98-9 is effective for fiscal years beginning after March 15, 1999.
Also, the provisions of SOP 97-2 that were deferred by SOP 98-4 will continue to
be deferred until the date SOP 98-9 becomes effective. The Company does not
expect SOP 98-9 to have a material impact on its Consolidated Financial
Statements.
LIQUIDITY AND CAPITAL RESOURCES
Year Ended December 31, 1998 1997
- -----------------------------------------------------------------------------
Current assets $ 305,444 $ 272,339
Cash and investments, short-term $ 137,585 $ 137,060
Cash provided by operations $ 2,766 $ 13,854
Cash used for investing activities,
excluding short-term investments $ (40,651) $ (35,606)
Cash provided (used) by financing activities $ 35,261 $ (37,596)
- ------------------------------------------------------------------------------
CASH AND INVESTMENTS
Cash and short-term investments increased $525 during 1998. Cash provided by
operations was $2,766, a decrease of $11,088 from 1997. A net loss of $519 and
an increase in term receivables, long term of $32,965 negatively impacted cash
provided by operations in 1998, offset by non-cash asset write-downs and
business disposals totaling $20,828. In 1997, cash was negatively impacted by a
net loss of $31,307 offset by non-cash asset write-downs and business disposals
totaling $17,817.
Cash used for investing activities was negatively impacted by the capital
expenditures of $21,627 and $32,614 in 1998 and 1997, respectively. In 1998,
purchase of equity interests totaled $19,024, compared to zero in 1997. In 1998,
cash provided by financing activities was favorably impacted by short-term
borrowings of $24,000 to meet short-term cash demands of foreign subsidiaries.
In 1997, cash used by financing activities was negatively impacted by the
pay-down of short term lines of credit and the long term revolving credit
facility totaling $61,103 offset by the release of $30,000 in cash held as
collateral previously classified as long term on the Consolidated Balance
Sheets. 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 $11,381 and $9,447 in 1998 and 1997,
respectively. In 1997, this increase was offset by repurchases of common stock
of $15,940, compared to zero in 1998.
TRADE ACCOUNTS RECEIVABLE
The trade accounts receivable balance increased $19,834 from December 31, 1997
compared to December 31, 1998. Average days sales outstanding in accounts
receivable increased slightly from 76 days at the end of 1997 to 78 days at the
end of 1998.
PREPAID EXPENSES AND OTHER
Prepaid expenses and other increased $10,597 from December 31, 1997 to December
31, 1998. This increase is primarily due to capitalized acquisition costs
related to the unsolicited tender offer for Quickturn of $4,614, which will be
expensed in 1999 due to the Company's withdrawal of the offer. In addition, the
accelerated verification systems inventory balance increased by $5,655.
29
<PAGE>
TERM RECEIVABLES, LONG-TERM
Term receivables, long-term increased to $36,430 at December 31, 1998 from
$3,465 at December 31, 1997. The increase is primarily due to an increase in
demand for multi-year, multi-element term license and perpetual license
installment sales (term) agreements from the Company's top-rated credit
customers. Balances under term agreements that are due within one year are
included in trade accounts receivable and balances that are due in more than one
year are included in term receivables, long-term. The Company uses term
agreements as a standard business practice and has a history of successfully
collecting under the original payment terms without making concessions on
payments, products or services.
CAPITAL RESOURCES
Expenditures for property and equipment decreased to $21,627 for 1998 compared
to $32,614 for 1997. The decrease in capital expenditures is a result of fewer
individually significant projects in 1998 as compared to 1997. In 1998, the
Company completed three business acquisitions and purchased Quickturn stock,
which resulted in cash payments of $19,024. 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 report that are not statements of historical
fact, including without limitation, statements containing the words "believes,"
"expects," and words of similar import, constitute 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 industry. The
Company's success is dependent upon its ability to develop and market products
that are innovative, cost-competitive and meet customer expectations.
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.
The Company's business is largely dependent upon the success and growth of the
electronics industry. The outlook for the electronics industry for 1999 is
uncertain due in part to adverse economic conditions in Asia and to potential
slowing of growth in other regions. As a result, many companies in the
electronics industry have announced employee layoffs and will likely curtail the
number of electronic design projects and the level of demand for design
automation capital which could result in decreased spending for the Company's
products and services. In addition, there have been a number of mergers in the
electronics industry, which could result in decreased or delayed capital
spending patterns. The above business challenges for the electronics and related
industries may have a material adverse effect on the Company's financial
condition and results of operations.
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 uses term or installment sales agreements as a standard business
practice and has a history of successfully collecting under the original payment
terms without making concessions on payments, products or services. These
multi-year, multi-element term license and perpetual license term agreements are
from the Company's top-rated credit customers and average between one and three
years in length. These agreements may increase the element of risk associated
with collectibility from customers that can arise for a variety of reasons
including ability to pay, product satisfaction or disagreements
30
<PAGE>
and disputes. If collectibility for any of these multi-million dollar agreements
becomes a problem the Company's results of operations could be adversely
affected.
The Company generally realizes approximately half of its revenues outside the
U.S. and expects this to continue in the future. As such, the effects of foreign
currency fluctuations can impact the Company's business and operating results.
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.
A significant percent of the Company's sales to European customers is U.S.
dollar based. However, the Company is affected by the emergence of the new
European Monetary Unit and is currently implementing and testing system changes
to support transactions in this currency. Provided the Company's European
Monetary Unit project is completed on a timely basis, the expense of the
project, and its related effect on the Company's earnings, is not expected to be
material.
The Company is currently re-aligning its professional services business in an
attempt to improve profitability by moving toward engagements that enable
customers to better utilize the Company's products and away from out-source
custom design service engagements. Business reorganizations can increase
personnel management complexities including retention and hiring of key
technical and management personnel. While the Company will attempt to improve
the execution and pricing of its services, 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 a 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,
to meet various debt obligations used to finance acquisitions and to effectively
manage the business for long-term growth. There can be no assurance that these
challenges will be effectively met.
As a result of the acquisition of Meta Systems and its accelerated verification
products, the Company has entered the hardware development and assembly
business. Some risk factors include: 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, developing new processes to deliver customer support of the hardware
and placing new demands on the sales force. In addition, the Company is engaged
in litigation with Quickturn in which Quickturn has asserted that the Company
and Meta are infringing Quickturn's patents. A trial is scheduled in June 1999
and no assurance can be given as to the outcome of such trial. This litigation
may negatively affect demand for accelerated verification products for all
vendors worldwide until the outcome is determined. This could result in lower
sales of the Company's accelerated verification products and increase its risk
of inventory obsolescence and could have a materially adverse effect on the
Company's results of operations.
The Company has been able to recruit and retain necessary personnel to research
and develop, market, sell and service 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.
31
<PAGE>
The Company is involved in various administrative matters and litigation. There
can be no assurance that various litigation and administrative matters will not
have a material adverse impact on the Company's consolidated financial position
or results of operations. See "Part I-Item 3. Legal Proceedings" for further
discussion.
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.
YEAR 2000
The Company is aware of the potential inability of computer programs to
adequately process date information after December 31, 1999 (Year 2000). The
Company has conducted a review of its products, information technology and
facilities computer systems to identify all software that could be affected by
the Year 2000 issue and has developed or is developing implementation plans to
address this issue. The Company has announced that its current release of
software products is Year 2000 compliant. The effect of the Year 2000 issue with
regard to the Company's product offerings is not expected to have any material
adverse effect on its financial condition and results of operations.
In addition to computers and related systems, the operations of the Company's
office and facilities equipment, such as fax machines, photocopiers, telephone
switched security systems, elevators and other common devices may be affected by
the Year 2000 problem. The Company is currently assessing the potential effect
of, and costs of remediating the Year 2000 problem on this equipment. The
Company estimates that its total cost of completing any required modifications,
upgrades or replacements of these internal systems should total approximately
$2,000 in 1999. Identifiable expenditures through 1998 have totaled
approximately $2,200.
In addition, the Company has developed and is implementing a program to review
the Year 2000 compliance status of computer software programs licensed from
third parties and used in its internal business processes to obtain appropriate
assurances of Year 2000 compliance from manufacturers of these products. The
Company believes that it will be able to complete its Year 2000 compliance
review and make any necessary modifications prior to the end of 1999. Provided
the Company's Year 2000 projects are completed on a timely basis, the expense of
these projects, and its related effect on the Company's financial condition and
results of operations, is not expected to be material. However, the compliance
of systems acquired from third parties is dependent on factors outside the
Company's control. If key systems, or a significant number of systems fail as a
result of Year 2000 problems, the Company could incur substantial expense and
experience a disruption of business operations, which would potentially have a
material adverse effect on the Company's financial condition and results of
operations.
Furthermore, the Company is making an assessment as to whether any of its
customers, suppliers or service providers will be affected by the Year 2000
issue. Failure of the Company's customers, suppliers or service providers to
comply with Year 2000 could have a material adverse impact on the Company's
financial condition and results of operations. The purchasing patterns of
customers and potential customers may be affected by Year 2000 issues as
companies may be required to devote significant resources to correct or patch
their current software systems for Year 2000 compliance. These expenditures may
result in reduced funds available to purchase the Company's software products
that could have a materially adverse effect on the Company's financial condition
and results of operations. There can be no assurance that Year 2000 related
operating problems or material expenses will not occur with the Company's
computer systems or in connection with the interface to the Company's major
vendors or suppliers.
The Company is currently developing contingency plans to be implemented as part
of its efforts to identify and correct Year 2000 problems affecting its internal
systems. The Company expects to complete its contingency plans by the end of the
second quarter of 1999. Depending on the systems affected, these plans could
include, (a) accelerated replacement of affected equipment and software; (b)
short to medium term use of back up equipment and software; (c) increased work
hours for the Company personnel or use of contract personnel to provide manual
workarounds for information systems; and (d) other similar approaches.
32
<PAGE>
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
All numerical references in thousands, except rate data
INTEREST RATE RISK
The Company's exposure to market risk for changes in interest rates relates
primarily to its investment portfolio. The Company does not use derivative
financial instruments for speculative or trading purposes. The Company places
its investments in instruments that meet high credit quality standards, as
specified in the Company's investment policy. The policy also limits the amount
of credit exposure to any one issuer and type of instrument. The Company does
not expect any material loss with respect to its investment portfolio.
The table below presents the carrying value and related weighted-average
interest rates for the Company's investment portfolio. The carrying value
approximates fair value at December 31, 1998. In accordance with the Company's
investment policy all investments mature in twelve months or less. A nominal
amount of non-interest bearing instruments has been
included in the table below:
Carrying Average
Principal (notional) amounts in U.S. dollars: Amount Interest Rate
- ----------------------------------------------------------------------------
Cash equivalents - fixed rate $ 118,512 4.46%
Short-term investments - fixed rate 19,073 5.70%
--------- -----
Total interest bearing instruments $ 137,585 4.63%
========= =====
- ----------------------------------------------------------------------------
FOREIGN CURRENCY RISK
The Company enters into forward foreign exchange contracts as a hedge against
foreign currency sales commitments and intercompany balances. 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. These
contracts generally have maturities which do not exceed twelve months. At
December 31, 1998 and 1997, 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
counter-parties to these contracts. Looking forward, the Company does not expect
any material adverse effect on its consolidated financial position, results of
operations, or cash flows resulting from the use of these instruments. There can
be no assurance that these strategies will be effective or that transaction
losses can be minimized or forecasted accurately.
The following table provides information about the Company's foreign exchange
forward contracts at December 31, 1998. Due to the short-term nature of these
contracts, the contract rate approximates the weighted-average contractual
foreign currency exchange rate and the amount in U.S. dollars approximates the
fair value of the contract at December 31, 1998. These forward contracts mature
in approximately thirty days. The following table presents short-term forward
contracts to sell and buy foreign currencies in U.S. dollars related to customer
receivables and intercompany balances:
Contract
Short-term forward contracts: Amount Rate
- -----------------------------------------------------------------
German mark $ 60,948 $ 1.67
French franc 19,461 5.59
Japanese yen 6,773 114.42
British pound sterling 3,304 1.67
Finnish markka 3,002 5.08
Other 6,634 -
- -----------------------------------------------------------------
The unrealized gain (loss) on the outstanding forward contracts at December 31,
1998 was not material to the Company's consolidated financial statements. The
realized gain (loss) on these contracts as they matured was not material to the
Company's consolidated financial position, results of operations, or cash flows
for the periods presented.
33
<PAGE>
Item 8. Financial Statements and Supplementary Data
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
In thousands, except per share data
Year ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
System and software $ 277,396 $ 235,808 $ 242,147
Service and support 212,997 218,919 205,739
--------- --------- ---------
Total revenues 490,393 454,727 447,886
--------- --------- ---------
Cost of revenues:
System and software 26,536 53,492 39,196
Service and support 96,961 105,541 94,620
--------- --------- ---------
Total cost of revenues 123,497 159,033 133,816
--------- --------- ---------
Gross margin 366,896 295,694 314,070
--------- --------- ---------
Operating expenses:
Research and development 117,853 112,227 92,905
Marketing and selling 169,034 157,343 146,754
General and administration 45,825 43,636 40,918
Special charges 20,942 18,858 11,998
Merger and acquisition related charges 8,500 - 31,344
--------- --------- ---------
Total operating expenses 362,154 332,064 323,919
--------- --------- ---------
Operating income (loss) 4,742 (36,370) (9,849)
Other income (expense), net (4,721) 3,319 8,411
--------- --------- ---------
Income (loss) before income taxes 21 (33,051) (1,438)
Provision (benefit) for income taxes 540 (1,744) 3,540
--------- --------- ---------
Net loss $ (519) $ (31,307) $ (4,978)
========= ========= =========
Net loss per share:
Basic $ (0.01) $ (0.48) $ (0.08)
========= ========= =========
Diluted $ (0.01) $ (0.48) $ (0.08)
========= ========= =========
Weighted average number of shares outstanding:
Basic 65,165 64,885 64,134
========= ========= =========
Diluted 65,165 64,885 64,134
========= ========= =========
- -------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
In thousands
As of December 31, 1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 118,512 $ 84,402
Short-term investments 19,073 52,658
Trade accounts receivable, net of allowance for doubtful
accounts of $2,987 in 1998 and $2,426 in 1997 125,844 106,010
Other receivables 7,575 6,282
Prepaid expenses and other 23,503 12,906
Deferred income taxes 10,937 10,081
--------- ---------
Total current assets 305,444 272,339
Property, plant and equipment, net 95,214 103,452
Term receivables, long-term 36,430 3,465
Other assets, net 27,035 23,046
--------- ---------
Total assets $ 464,123 $ 402,302
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Short-term borrowings 24,000 $ -
Accounts payable 10,101 11,125
Income taxes payable 20,408 23,000
Accrued payroll and related liabilities 41,958 31,055
Accrued liabilities 33,295 30,119
Deferred revenue 36,484 28,849
--------- ---------
Total current liabilities 166,246 124,148
Long-term debt - 120
Other long-term deferrals 1,425 497
--------- ---------
Total liabilities 167,671 124,765
--------- ---------
Minority Interest 1,170 -
Stockholders' Equity:
Common stock, no par value, authorized 100,000 shares; 65,739 and
64,367 issued and outstanding for 1998 and 1997, respectively 303,352 291,263
Incentive stock, no par value, authorized 1,200 shares; none issued - -
Accumulated deficit (22,246) (21,521)
Accumulated other comprehensive income - foreign currency
translation adjustment 14,176 7,795
--------- ---------
Commitments and contingencies
Total stockholders' equity 295,282 277,537
--------- ---------
Total liabilities and stockholders' equity $ 464,123 $ 402,302
========= =========
- -----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands
Year ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Cash Flows:
Net loss $ (519) $ (31,307) $ (4,978)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization of property, plant and equipment 27,235 27,516 21,472
Gain on sale of investments held for sale - - (5,545)
Deferred taxes (2,223) (8,434) (5,988)
Amortization of other assets 3,503 11,604 11,586
Write-down of assets 16,315 12,422 31,234
Business disposals 4,513 5,395 -
Changes in operating assets and liabilities:
Trade accounts receivable (15,210) 711 (11,201)
Prepaid expenses and other (9,580) 5,036 (5,534)
Term receivables, long-term (32,965) (3,465) -
Accounts payable (848) (3,593) 3,458
Accrued liabilities 8,484 (2,662) 1,319
Other liabilities and deferrals 4,061 631 6,491
--------- --------- ---------
Net cash provided by operating activities 2,766 13,854 42,314
--------- --------- ---------
Investing Cash Flows:
Net maturities (purchases) of short-term investments 33,585 (21,746) (5,018)
Proceeds from sale of investments held for sale - - 6,744
Purchases of property, plant and equipment, net (21,627) (32,614) (23,931)
Capitalization of software development costs - - (5,691)
Purchases of equity interests (19,024) - (32,358)
Purchases of technologies - (2,992) (2,583)
--------- --------- ---------
Net cash used by investing activities (7,066) (57,352) (62,837)
--------- --------- ---------
Financing Cash Flows:
Proceeds from issuance of common stock 11,381 9,447 12,477
Proceeds (repayment) of short-term borrowings 24,000 (8,782) (263)
Repayment of long-term debt (120) (52,321) (501)
Repurchase of common stock - (15,940) (11,507)
Decrease in cash and investments, long-term - 30,000 -
--------- --------- ---------
Net cash provided (used) by financing activities 35,261 (37,596) 206
--------- --------- ---------
Effect of exchange rate changes on cash and cash equivalents 3,149 90 (953)
--------- --------- ---------
Net change in cash and cash equivalents 34,110 (81,004) (21,270)
Cash and cash equivalents at beginning of period 84,402 165,406 186,676
--------- --------- ---------
Cash and cash equivalents at end of period $ 118,512 $ 84,402 $ 165,406
========= ========= =========
- -------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Retained Other Total
Common Stock Earnings Comprehensive Comprehensive Stockholders'
In thousands Shares Amount (Deficit) Income (Loss) Income (Loss) Equity
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 63,875 $ 294,917 $ 17,715 $ 13,594 $ 326,226
------- --------- -------- -------- ---------
Net loss - - (4,978) - (4,978) (4,978)
Change in value of investments available
for sale - - (2,951) - (2,951) (2,951)
Foreign currency translation adjustment,
net of tax benefit of $422 - - - (1,496) (1,496) (1,496)
--------
Comprehensive loss - - - - $ (9,425) -
========
Stock issued under stock option and stock
purchase plans and tax benefit associated
with options 1,428 12,477 - - 12,477
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) - - (11,507)
------- --------- -------- -------- ---------
Balance at December 31, 1996 64,608 297,756 9,786 12,098 319,640
------- --------- -------- -------- ---------
Net loss - - (31,307) - (31,307) (31,307)
Foreign currency translation adjustment,
net of tax benefit of $1,214 - - - (4,303) (4,303) (4,303)
--------
Comprehensive loss - - - - $(35,610) -
========
Stock issued under stock option and stock
purchase plans and tax benefit associated
with options 1,414 9,447 - - 9,447
Repurchase of common stock (1,655) (15,940) - - (15,940)
------- --------- -------- -------- ---------
Balance at December 31, 1997 64,367 291,263 (21,521) 7,795 277,537
------- --------- -------- -------- ---------
Net loss - - (519) - (519) (519)
Foreign currency translation adjustment,
net of tax expense of $1,800 - - - 6,381 6,381 6,381
--------
Comprehensive income - - - - $ 5,862 -
========
Stock issued under stock option and stock
purchase plans and tax benefit associated
with options 1,372 11,381 - - 11,381
Stock options issued for acquisition of business - 708 - - 708
Dividends to minority owners - - (206) - (206)
------- --------- -------- -------- ---------
Balance at December 31, 1998 65,739 $ 303,352 $(22,246) $ 14,176 $ 295,282
======= ========= ======== ======== =========
- ---------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</TABLE>
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All numerical references in thousands, except percentages and per share data
1 Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the financial statements of the
Company and its wholly owned and majority-owned subsidiaries. All significant
intercompany accounts and transactions are eliminated in consolidation.
Foreign Currency Translation
Local currencies are the functional currencies for the Company's foreign
subsidiaries except for the Netherlands and Singapore where the U.S. dollar is
used as the functional currency. Assets and liabilities of foreign operations
are translated to U.S. dollars at current rates of exchange, and revenues and
expenses are translated using weighted average rates. Gains and losses from
foreign currency translation are included as a separate component of
stockholders' equity. Foreign currency transaction gains and losses are included
as a component of other income and expense.
Financial Instruments
The Company enters into forward foreign exchange contracts as a hedge against
foreign currency sales commitments and intercompany balances. 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, 1998 and 1997, the Company had forward contracts and options
outstanding of $100,122 and $57,818, respectively, to primarily buy and sell
various foreign currencies. These contracts generally have maturities which do
not exceed twelve months. At December 31, 1998 and 1997, 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.
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. The Company does not believe it is exposed to any significant
credit risk or market risk on its financial instruments.
Cash, Cash Equivalents, and Short-Term Investments
The Company classifies highly liquid investments purchased with an original
maturity of three months or less as cash equivalents. Short-term investments
consist of certificates of deposit, commercial paper and other highly liquid
investments with original maturities in excess of three months. Short-term
investments are classified as available for sale and are recorded at amortized
cost, which approximates market value. These investments mature primarily in
less than one year.
Property, Plant and Equipment
Property, plant and equipment is stated at cost. 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.
38
<PAGE>
In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of", 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 and software licenses are recognized at the time of
shipment, except for those that include rights to future software products or
have significant other delivery requirements. Product revenues from term or
installment sales agreements which include either perpetual or term licenses are
with the Company's top-rated credit customers and are recognized upon shipment
while any maintenance revenues included in these arrangements are deferred and
recognized ratably over the contract term. Revenues from subscription-type term
license agreements, which include software, rights to future software products,
and services, are deferred and recognized ratably over the term of the
subscription period. Training and consulting contract revenues are recognized
using the percentage of completion method or as contract milestones are
achieved.
In 1997, the American Institute of Certified Public Accountants (AICPA) issued
Statement of Position (SOP) No. 97-2, "Software Revenue Recognition". In March
1998, the Financial Accounting Standards Board (FASB) approved SOP 98-4,
"Deferral of the Effective Date of a Provision of 97-2, Software Revenue
Recognition". SOP 98-4 defers for one year, the application of several
paragraphs and examples in SOP 97-2 which limits the definition of vendor
specific objective evidence (VSOE) of the fair value of various elements in a
multiple element arrangement. The provisions of SOP's 97-2 and 98-4 have been
applied to transactions entered into beginning January 1, 1998. Prior to 1997,
the Company's revenue policy was in accordance with the preceding authoritative
guidance provided by SOP 91-1, "Software Revenue Recognition".
Software Development Costs
The Company accounts for software development costs in accordance with SFAS No.
86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed." Software development costs are capitalized beginning when a
product's technological feasibility has been established by completion of a
working model of the product and ending when a product is available for general
release to customers. In 1997 and 1998, completion of a working model of the
Company's products and general release have substantially coincided. As a
result, the Company has not capitalized any software development costs during
these periods since the amounts have not been material.
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 and was $0, $5,448 and
$6,215 for the years ended December 31, 1998, 1997, and 1996, respectively.
39
<PAGE>
The Company recognized impairment in value of certain previously capitalized
software development costs in the first quarter of 1997 primarily as a result of
the accelerated decline in sales of older software product offerings. These
costs, which totaled $5,358, were determined to be unrecoverable and were
charged to system and software cost of revenues. All remaining previously
capitalized software costs were amortized evenly over the final three quarters
of 1997 to recognize the change in estimated useful lives of these older
technologies.
Goodwill and Intangibles
Goodwill represents the excess of the aggregate purchase price over the fair
value of the tangible and intangible assets acquired in the various
acquisitions. Technology and goodwill costs are being amortized over a three to
five year period to system and software cost of revenues and operating expenses,
respectively.
The Company recognized impairment in value of certain goodwill and purchased
technology, which resulted in associated write-downs of $2,732 and $2,708 in
1998 and $2,056 and $2,370 in 1997, respectively. Total goodwill and purchased
technology amortization expenses were $2,935, $6,263 and $4,190 for the years
ended December 31, 1998, 1997, and 1996, respectively.
Net Income (Loss) Per Share
In 1997, the Company adopted SFAS No. 128 "Earnings Per Share" which provides
that "basic net income (loss) per share" and "diluted net income (loss) per
share" for all prior periods presented are to be computed using the weighted
average number of common shares outstanding during each period, with diluted net
income per share including the effect of potentially dilutive common shares.
Common stock equivalents related to stock options are anti-dilutive in a net
loss year and, therefore, are not included in 1998, 1997 and 1996 diluted net
loss per share.
Comprehensive Income (Loss)
On January 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income". SFAS No. 130 establishes standards for reporting and presentation of
comprehensive income and its components in a full set of financial statements.
Comprehensive income (loss) consists of net income (loss), foreign currency
translation adjustment and net unrealized gains (losses) on securities and is
presented in the consolidated statement of stockholders' equity. The Statement
requires only additional disclosures in the consolidated financial statements;
it does not affect the Company's financial position or results of operations.
Prior year financial statements have been reclassified to conform to the
requirements of SFAS No. 130.
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 1996 and 1997 to conform with the 1998 presentation.
2 Special Charges
Following is a summary of the major elements of the special charges:
<TABLE>
<CAPTION>
Year ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Employee severance $ 4,982 $ 2,322 $ 3,486
Asset impairments 7,377 5,541 5,000
Business disposals 4,513 5,395 -
Reserves for various claims 1,860 3,950 -
Other 2,210 1,650 3,512
-------- -------- --------
Total $ 20,942 $ 18,858 $ 11,998
======== ======== ========
- ------------------------------------------------------------------------
</TABLE>
40
<PAGE>
During 1998, the Company recorded special charges of $20,942. The charges
primarily consist of four subsidiary divestitures, moving of the European
distribution center to Ireland to strengthen the Company's tax position, related
terminations arising from the divestitures and the distribution center move, and
impairment in value of certain assets. Substantially all of these costs were
expended in 1998 and the remaining amount should be expended in the first half
of 1999 and there have been no significant modifications to the amount of the
charges.
During 1997, the Company recorded special charges of $18,858. The charges
consisted of subsidiary divestitures and related employee terminations, early
termination of an interest rate swap agreement, recognition of the impairment in
value of certain goodwill and purchased technology and some streamlining of
worldwide operations and reserves for various legal claims. Substantially all of
the costs associated with these charges were expended in 1997 and the first half
of 1998 and there have been no significant modifications to the amount of the
charges.
In 1996, the Company recorded special charges of $11,998. The Company downsized
and redirected certain operations and re-targeted 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
a $5,000 write-down for impairment in value of goodwill and certain other assets
associated with its Meta Systems subsidiary, as the recoverability of these
assets was adversely affected by the ongoing SimExpress patent litigation.
3 Mergers and Acquisitions
Results of operations for all pooling of interest transactions are included in
the Company's Consolidated Financial Statements for all periods presented.
Results of operations of all acquisitions accounted for as purchases are
included in the Company's Consolidated Financial Statements only from the date
of acquisition forward.
In 1998, the Company completed three business combinations which were accounted
for as purchases. In March 1998, the Company purchased an additional ownership
interest of 32% of its Korean distributor, Mentor Korea Co. LTD (MGK) for a
total ownership interest of 51%. In November 1998, the Company purchased CLK
Computer-Aided Design Inc. (CLK CAD) and OPC Technology Inc. (OPCT). CLK CAD is
primarily engaged in developing and marketing timing driven placement and
optimization tools for deep submicron designs. OPCT is primarily engaged in
developing and marketing software, which extends the life of optical
lithography, by modifying IC physical layout to compensate for manufacturing
distortions prior to design tape out. The total purchase price including
acquisition expenses for all 1998 purchase acquisitions was $16,513. The Company
paid the purchase price in cash and notes payable for MGK and OPCT and in cash
and stock options for CLK CAD. The cost of each acquisition was allocated on the
basis of estimated fair value of assets and liabilities assumed. The purchase
accounting allocations resulted in charges for in-process research and
development (R&D) of $8,500, goodwill capitalization of $6,613, and technology
capitalization of $1,400.
In connection with these acquisitions, the Company recorded one-time charges to
operations for the write-off of OPCT's and CLK CAD's in-process R&D. The value
assigned to in-process R&D related to research projects for which technological
feasibility had not been established. The value was determined by estimating the
net cash flows from the sale of products resulting from the completion of such
projects, and discounting the net cash flows back to their present value. The
Company then estimated the stage of completion of the products at the date of
the acquisition based on R&D costs that had been expended as of the date of
acquisition as compared to total R&D costs at completion. The percentages
derived from this calculation were then applied to the net present value of
future cash flows to determine the in-process charge. The nature of the efforts
to develop the in-process technology into commercially viable products
principally related to the completion of all planning, designing, prototyping,
verification and testing activities that are necessary to establish that the
product can be produced to meet its design specification, including function,
features and technical performance requirements. The estimated net cash
41
<PAGE>
flows from these products were based on management's estimates of related
revenues, cost of sales, R&D costs, selling, general and administrative costs
and income taxes. The Company will monitor how underlying assumptions compare to
actual results. The separate results of operations of the acquisitions 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.
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 SRL, (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.
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. The purchase accounting allocations
performed on 1996 acquisitions were substantially the same as those performed on
1998 acquisitions.
In January and August of 1996, the Company completed the acquisitions of
Microtec Research, Inc. (Microtec) and Interconnectix, Inc. (Interconnectix),
respectively. These acquisitions were accounted for as pooling of interests. A
total of 6,223 and 2,133 shares of the Company's common stock were issued for
Microtec and Interconnectix, respectively. Merger expenses of $5,110 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 the merger activities.
4 Income Taxes
Domestic and foreign pre-tax income (loss) is as follows:
<TABLE>
<CAPTION>
Year ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic $ (15,759) $ (17,976) $ (10,023)
Foreign 15,780 (15,075) 8,585
--------- --------- ---------
Total $ 21 $ (33,051) $ (1,438)
========= ========= =========
- -------------------------------------------------------------------------
</TABLE>
The provision (benefit) for income taxes is as follows:
<TABLE>
<CAPTION>
Year ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 1,113 $ 3,730 $ 3,563
State 122 150 118
Foreign 1,528 2,810 5,847
--------- --------- ---------
Total current 2,763 6,690 9,528
--------- --------- ---------
Deferred:
Federal (1,308) (5,848) (6,093)
Foreign (915) (2,586) 105
--------- --------- ---------
Total deferred (2,223) (8,434) (5,988)
--------- --------- ---------
Total $ 540 $ (1,744) $ 3,540
========= ========= =========
- -------------------------------------------------------------------------
</TABLE>
The effective tax expense (benefit) differs from the statutory federal tax
expense (benefit) as follows:
<TABLE>
<CAPTION>
Year ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Federal tax $ 7 $ (11,568) $ (503)
State tax, net of Federal benefit 79 98 77
Impact of international operations (3,785) 6,485 (6,594)
Non-deductible acquisition costs 6,080 - 13,835
Other, net (1,841) 3,241 (3,275)
--------- --------- ---------
Effective tax expense (benefit) $ 540 $ (1,744) $ 3,540
========= ========= =========
- -------------------------------------------------------------------------
</TABLE>
The significant components of deferred income tax expense are as follows:
<TABLE>
<CAPTION>
Year ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net changes in deferred tax assets
and liabilities $ 362 $ (14,800) $ (3,462)
Increase (decrease) in the valuation
allowance for deferred tax assets (2,585) 6,366 (2,526)
-------- --------- ---------
Total $ (2,223) $ (8,434) $ (5,988)
======== ========= =========
- --------------------------------------------------------------------------------
</TABLE>
The tax effects of temporary differences and carryforwards which gave rise to
significant portions of deferred tax assets were as follows:
<TABLE>
<CAPTION>
As of December 31, 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Depreciation of property and equipment $ 1,859 $ 1,199
Reserves and allowances 2,436 2,235
Accrued expenses not currently deductible 5,906 9,502
Net operating loss carryforwards 31,384 29,614
Tax credit carryforwards 20,549 23,629
Purchased technology 1,858 1,540
Other, net 5,373 2,008
-------- --------
Total gross deferred tax assets 69,365 69,727
Less valuation allowance (52,303) (54,888)
-------- --------
Net deferred tax asset $ 17,062 $ 14,839
======== ========
- ------------------------------------------------------------------------------
</TABLE>
42
<PAGE>
The Company has established a valuation allowance for certain deferred tax
assets, including those for net operating loss and tax credit carryforwards.
Such a valuation allowance is 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 $13,888 as of
December 31, 1998. This amount is attributable to differences between financial
and tax reporting of employee stock option transactions.
As of December 31, 1998, the Company, for federal income tax purposes, has net
operating loss carryforwards of approximately $44,755 and research and
experimentation credit carryforwards of $13,975. For state income tax purposes,
as of December 31, 1998 the Company has net operating loss carryforwards
totaling $114,769 from multiple jurisdictions, research and experimentation
credits of $3,823 and child care and facility credits of $583. If not used by
the Company to reduce income taxes payable in future periods, net operating loss
carryforwards will expire between 2002 through 2011, and research and
experimentation credit carryforwards between 1999 through 2012.
The Company has not provided for Federal income taxes on approximately $150,968
of undistributed earnings of foreign subsidiaries at December 31, 1998, since
these earnings have been invested indefinitely in subsidiary operations. Upon
repatriation, some of these earnings would generate foreign tax credits which
will reduce the Federal tax liability associated with any future foreign
dividend.
The Company has settled its Federal income tax obligations through 1991. The
Company believes the provisions for income taxes for years since 1991 are
adequate.
5 Property, Plant and Equipment
A summary of property, plant and equipment follows:
<TABLE>
<CAPTION>
As of December 31, 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Computer equipment and furniture $ 146,683 $ 155,433
Buildings and building equipment 49,555 53,702
Land and improvements 15,560 14,658
Leasehold improvements 17,786 15,320
--------- ---------
229,584 239,113
Less accumulated depreciation and amortization (134,370) (135,661)
--------- ---------
Property, plant and equipment, net $ 95,214 $ 103,452
========= =========
- -------------------------------------------------------------------------------
</TABLE>
The Company has entered into agreements to lease portions of its facility sites
in Wilsonville, OR, Santa Clara, CA, and Warren, NJ. Under terms of these
agreements approximately 280 square feet of space was rented to third parties
and are expected to result in rental receipts of $5,253 in 1999.
6 Short-Term Borrowings
Short-term borrowings from time to time include drawings by subsidiaries under
multi-currency unsecured credit agreements. 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
1998 and 1997 was approximately 6%. The Company has available lines of credit of
approximately $15,500 as of December 31, 1998. Certain agreements require
compensatory balances, which the Company has met. No borrowings were outstanding
under these agreements at December 31, 1998.
In 1998, the Company entered into a committed revolving loan with a bank that
remains in effect until 2001, which gives the Company the ability to borrow up
to $100,000 and is available for general operating purposes. As of December 31,
1998 the Company had short-term borrowings of $24,000 outstanding on this
revolving loan. The revolving loan has a variable rate, which is calculated
based on the Company's financial position and operating performance and is
subject to certain loan covenants. The Company paid underwriting fees of $600
for this agreement, which will be amortized over its life.
In 1998, the Company entered into a committed revolving loan with a bank that
gave the Company the ability to borrow up to $200,000 and was available
primarily for the unsolicited tender offer of Quickturn Design Systems Inc.
(Quickturn). In connection with this arrangement the Company paid underwriting
fees of $1,250, which were capitalized as acquisition costs as of December 31,
1998. The revolving loan had a variable rate, which was calculated based on the
Company's financial position and operating performance and was subject to
certain loan covenants. Subsequent to December 31, 1998, the Company terminated
this new credit facility and will expense the capitalized underwriting fees in
the first quarter of 1999.
43
<PAGE>
7 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.
8 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 that 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.
SFAS No. 123 "Accounting for Stock-Based Compensation" defines a fair value
based method of accounting for an employee stock option and similar equity
instrument. As is permitted under SFAS 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 1998, 1997 and 1996 using the Black-Scholes option
pricing model as prescribed by SFAS No. 123 using the following weighted average
assumptions for grants:
Year ended December 31, 1998 1997 1996
- -------------------------------------------------------------------
Risk-free interest rate 5.5% 6.25% 6%
Expected dividend yield 0% 0% 0%
Expected life (in years) 5.5 5.5 5.5
Expected volatility 61% 46% 63%
- -------------------------------------------------------------------
Using the Black-Scholes methodology, the total value of options granted during
1998, 1997 and 1996 was $29,797, $17,862 and $32,375, 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 1998, 1997 and 1996 was
$10.23, $6.43, and $6.29 per share, respectively. If the Company had accounted
for its stock-based compensation plans in accordance with SFAS No. 123, the
Company's net loss and net loss per share would approximate the pro forma
disclosures below:
Year ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------
Net loss $ (7,915) $ (37,663) $ (12,447)
Net loss per share, basic and diluted $ (0.12) $ (0.58) $ (0.19)
- ------------------------------------------------------------------------------
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply to awards prior to
January 1, 1995, and additional awards are anticipated in future years.
The following table summarizes information about options outstanding and
exercisable at December 31, 1998:
<TABLE>
<CAPTION>
----------- Outstanding ------------ ---- Exercisable ----
Range of Remaining Weighted Weighted
Exercise Number of Contractual Average Number of Average
Prices Shares Life (Years) Price Shares Price
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0.07 - 6.00 950 6.04 $ 3.87 689 $ 4.71
$ 6.68 - 7.31 214 6.49 $ 7.08 117 $ 7.03
$ 7.50 - 7.75 2,483 7.75 $ 7.74 1,204 $ 7.75
$ 8.31 - 8.81 219 9.66 $ 8.48 7 $ 8.57
$ 8.88 - 9.00 1,278 8.10 $ 9.00 336 $ 9.00
$ 9.13 - 10.00 1,079 8.05 $ 9.68 386 $ 9.66
$10.06 - 10.06 1,896 9.15 $ 10.06 2 $ 10.06
$10.13 - 15.88 1,037 5.91 $ 12.18 803 $ 12.19
$17.13 - 18.25 78 6.63 $ 17.31 48 $ 17.32
$19.76 - 19.76 32 1.36 $ 19.76 32 $ 19.76
------ ----- -------- ----- --------
$00.07 - 19.76 9,266 7.72 $ 8.84 3,624 $ 8.69
====== ===== ======== ===== ========
- ------------------------------------------------------------------------------
</TABLE>
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, 1998, 27,810 shares were reserved for issuance and 2,008 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:
44
<PAGE>
<TABLE>
<CAPTION>
Shares Price
- -----------------------------------------------------------------
<S> <C> <C>
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
Granted 2,832 9.23
Exercised (620) 5.69
Canceled (957) 9.25
-------- --------
Balance at December 31, 1997 8,105 8.65
Granted 2,995 8.77
Exercised (665) 5.86
Canceled (1,169) 9.09
-------- --------
Balance at December 31, 1998 9,266 $ 8.84
======== ========
- -----------------------------------------------------------------
</TABLE>
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 707 and 794 shares under the plan
in 1998 and 1997, respectively. At December 31, 1998, 363 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.
In 1997, the Company repurchased 1,655 shares, approximately 800 of which were
repurchased immediately prior to the Employee Stock Purchase Plan (ESPP)
purchases and then reissued to plan participants. The remaining shares were
repurchased in the fourth quarter of 1997 to be reissued to participants of the
ESPP in 1998. The market value of all repurchases was $15,940. During 1998, the
Company did not repurchase any shares.
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 $2,765, $2,730, and
$2,299, in 1998, 1997, and 1996, respectively.
9 Commitments
The Company leases a majority of its field office facilities under
non-cancelable 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 two-year cancelable leases
allowing a six-month notice of cancellation. The total remaining commitment
under these cancelable leases, which expire December 2000, is $5,145, of which
the first six months payments of $1,430 are included in the schedule below.
Future minimum lease payments under all non-cancelable operating leases are
approximately as follows:
Annual periods ending December 31,
- --------------------------------------------------------------
1999 $ 18,452
2000 13,022
2001 9,307
2002 7,912
2003 7,279
Later years 18,486
--------
Total $ 74,458
========
- --------------------------------------------------------------
Rent expense under operating leases was $21,623, $19,598, and $15,480 for the
years ended December 31, 1998, 1997, and 1996, respectively.
10 Other Income (Expense), Net
Other income (expense) is comprised of the following:
<TABLE>
<CAPTION>
Year ended December 31, 1998 1997 1996
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Interest income $ 7,771 $ 7,723 $ 9,485
Interest expense (768) (555) (2,423)
Litigation related costs (10,301) (4,675) (3,611)
Gain (loss) on sale of investments - - 5,545
Other, net (1,423) 826 (585)
-------- -------- --------
Total $ (4,721) $ 3,319 $ 8,411
======== ======== ========
- ---------------------------------------------------------------------
</TABLE>
45
<PAGE>
11 Supplemental Cash Flow Information
The following provides additional information concerning supplemental
disclosures of cash flow activities:
<TABLE>
<CAPTION>
Year ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Cash paid for:
Interest expense $ 599 $ 829 $ 2,198
Income taxes $ 2,475 $ 3,307 $ 1,984
Issuance of stock and stock options
for purchase of business $ 708 - $ 1,825
- --------------------------------------------------------------------------
</TABLE>
12 Segment Reporting
The Company operates exclusively in the EDA industry. 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 through its direct sales force in North and
South America (Americas), Europe, Japan and Pacific Rim, and through
distributors where a direct sales presence is not warranted. The Company's
reportable segments are based on geographic area.
All intercompany revenues and expenses are eliminated in computing revenues and
operating income (loss). The corporate component of operating income (loss)
represents research and development, corporate marketing and selling, corporate
general and administration, special, and merger and acquisitions related
charges. Corporate capital expenditures and depreciation and amortization are
generated from assets allotted to research and development, corporate marketing
and selling, and corporate general and administration. Reportable segment
information is as follows:
<TABLE>
<CAPTION>
Year ended December 31 1998 1997 1996
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Americas $ 271,159 $ 250,236 $ 244,972
Europe 146,559 119,501 114,678
Japan 54,582 65,662 70,902
Pacific Rim 18,093 19,328 17,334
--------- --------- ---------
Total $ 490,393 $ 454,727 $ 447,886
========= ========= =========
Operating Income (Loss)
Americas $ 174,245 $ 130,673 $ 158,974
Europe 42,631 24,132 8,229
Japan 16,697 21,575 7,541
Pacific Rim 8,209 5,377 27,436
Corporate (237,040) (218,127) (212,029)
--------- --------- ---------
Total $ 4,742 $ (36,370) $ (9,849)
========= ========= =========
Depreciation and Amortization
Americas $ 1,943 $ 2,198 $ 2,071
Europe 7,887 8,283 4,431
Japan 1,044 1,019 1,183
Pacific Rim 1,385 833 674
Corporate 18,479 26,787 24,699
--------- --------- ---------
Total $ 30,738 $ 39,120 $ 33,058
========= ========= =========
Capital Expenditures:
Americas $ 4,886 $ 4,309 $ 4,598
Europe 10,469 8,707 5,178
Japan 803 1,317 649
Pacific Rim 503 1,541 1,071
Corporate 4,966 16,740 12,435
--------- --------- ---------
Total $ 21,627 $ 32,614 $ 23,931
========= ========= =========
Identifiable Assets:
Americas $ 251,709 $ 259,417 $ 330,609
Europe 136,851 71,868 105,582
Japan 36,447 34,860 42,634
Pacific Rim 39,116 36,157 34,534
--------- --------- ---------
Total $ 464,123 $ 402,302 $ 513,359
========= ========= =========
- --------------------------------------------------------------------------
</TABLE>
46
<PAGE>
13 Subsequent Events
On August 12, 1998, the Company commenced a $12.125 per share tender offer for
all outstanding shares of Quickturn Design Systems, Inc., a Delaware corporation
(Quickturn), or approximately $216,000 for approximately 17,800 shares
outstanding. In connection with this offer, the Company purchased 591 shares of
Quickturn common stock for $4,522. The Company expected to finance this offer
through its available cash balances and a new bank credit facility for which the
Company had a definitive Credit Agreement. On January 8, 1999, the Company
withdrew its tender offer and subsequently terminated its new credit facility.
The Company incurred acquisition costs of approximately $9,000 of which $4,614
was capitalized and the remaining amount was not accrued as of December 31,
1998. Because the offer was withdrawn, these costs will be expensed and will be
partially offset by a gain on the sale of the Quickturn stock of approximately
$4,000 in the first quarter of 1999.
On January 5, 1999, the Company purchased the remaining minority interest of its
then 84% owned subsidiary, Exemplar Logic, Inc. (Exemplar) for cash and stock
options valued at approximately $14,000. This business combination will be
accounted for as a purchase. The cost of the acquisition will be allocated on
the basis of estimated fair value of assets and liabilities assumed. In
connection with the acquisition, the Company will record a charge to operations
for the write-off of Exemplar's in-process product development that had not
reached technological feasibility, the amount of which is yet to be determined.
On February 10, 1999, the Company adopted a Shareholder Rights Plan and declared
a dividend distribution of one Right for each outstanding share of Common Stock,
payable to holders of record on March 5, 1999. Under certain conditions, each
Right may be exercised to purchase 1/100 of a share of Series A Junior
Participating Incentive Stock at a purchase price of $95, subject to adjustment.
The Rights are not presently exercisable and will only become exercisable if a
person or group acquires or commences a tender offer to acquire 15% of the
Common Stock. If a person or group acquires 15% of the Common Stock, each Right
will be adjusted to entitle its holder to receive, upon exercise, Common Stock
(or, in certain circumstances, other assets of the Company) having a value equal
to two times the exercise price of the Right or each Right will be adjusted to
entitle its holder to receive, upon exercise, common stock of the acquiring
company having a value equal to two times the exercise price of the Right,
depending on the circumstances. The Rights expire on February 10, 2009 and may
be redeemed by the Company for $0.01 per Right. The Rights do not have voting or
dividend rights, and until they become exercisable, have no dilutive effect on
the earnings of the Company.
14 Quarterly Financial Information - Unaudited
A summary of quarterly financial information follows:
<TABLE>
<CAPTION>
Quarter ended March 31 June 30 September 30 December 31
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998
Total revenues $ 108,008 $ 119,117 $ 117,933 $ 145,335
Gross margin $ 77,205 $ 86,058 $ 88,605 $ 115,028
Operating income (loss) $ (6,434) $ 1,121 $ 10,179 $ (124)
Net income (loss) $ (7,454) $ 804 $ 7,703 $ (1,572)
Net income (loss) per share,
diluted and basic $ (0.12) $ 0.01 $ 0.12 $ (0.02)
1997
Total revenues $ 101,559 $ 114,638 $ 116,006 $ 122,524
Gross margin $ 53,732 $ 76,968 $ 77,642 $ 87,352
Operating income (loss) $ (32,144) $ 2,831 $ 1,059 $ (8,116)
Net income (loss) $ (28,149) $ 3,732 $ 1,901 $ (8,791)
Net income (loss) per share,
diluted and basic $ (0.43) $ 0.06 $ 0.03 $ (0.14)
- -----------------------------------------------------------------------------------
</TABLE>
47
<PAGE>
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 below.
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
Executive Vice President
and Chief Operating Officer/Chief Financial Officer
Walden C. 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, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998 in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Portland, Oregon
February 1, 1999, except for note 13, which is as of February 10, 1999
48
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
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 1999 Proxy Statement and
is incorporated herein by reference. The information concerning the Company's
Executive Officers is included herein on page 22 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 1999 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 1999 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 1999 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.
49
<PAGE>
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1 Financial Statements:
The following consolidated financial statements are included in Item 8:
Page
- ----------------- --------------------------------------------------------------
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996 ............................................34
Consolidated Balance Sheets as of December 31, 1998 and 1997 ................35
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 ............................................36
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1998, 1997 and 1996 ......................................37
Notes to Consolidated Financial Statements ..................................38
Independent Auditors' Report ................................................48
(a) 2 Financial Statement Schedule:
The schedule and report listed below are filed as part of this report on the
pages indicated:
Schedule Page
- --------------------------------------------------------------------------------
II Valuation and Qualifying Accounts .......................................52
Independent Auditors' Report on Financial Statement Schedule ................52
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.
(a) 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. Articles of Amendment of 1987 Restated Articles of Incorporation.
C. Bylaws of the Company.
4. A. Rights Agreement, dated as of February 10, 1999, between the Company
and American Stock, Transfer & Trust Co. Incorporated by reference to
Exhibit 4.1 to the Company's Current Report on Form 8-K filed on
February 19, 1999.
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.
*C. 1986 Stock 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, 1997 (1997 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 Company and each
of its executive officers and directors.
*F. Form of Severance Agreement entered into between the Company and each
of its executive officers.
G. Lease dated November 20, 1991, for 999 Ridder Park Drive and 1051 Ridder
Park Drive, San Jose, California. Incorporated by reference to Exhibit
10.M to the Company's Form SE dated March 25, 1992.
H. Credit Agreement between Mentor Graphics Corporation and Bank of America
National Trust and Savings Association, dated February 6, 1998.
Incorporated by reference to Exhibit 10.6 to the Company's 1997 10-K.
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
1998.
50
<PAGE>
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 15, 1999.
MENTOR GRAPHICS CORPORATION
By /s/ 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
15, 1999, in the capacities indicated.
Signature Title
---------------------------------------------------------------------------
(1) Principal Executive Officer:
/s/ WALDEN C. RHINES President, Chief Executive Officer
----------------------------- and Director
Walden C. Rhines
(2) Principal Financial Officer:
/s/ GREGORY K. HINCKLEY Executive Vice President, Chief Operating
----------------------------- Officer and Chief Financial Officer
Gregory K. Hinckley
(3) Principal Accounting Officer:
/s/ ANTHONY B. ADRIAN Vice President, Corporate Controller
-----------------------------
Anthony B. Adrian
(4) Directors:
/s/ JON A. SHIRLEY Chairman of the Board
-----------------------------
Jon A. Shirley
/s/ MARSHA B. CONGDON Director
-----------------------------
Marsha B. Congdon
/s/ JAMES R. FIEBIGER Director
-----------------------------
James R. Fiebiger
/s/ DAVID A. HODGES Director
-----------------------------
David A. Hodges
/s/ FONTAINE K. RICHARDSON Director
-----------------------------
Fontaine K. Richardson
51
<PAGE>
<TABLE>
<CAPTION>
Schedule II
MENTOR GRAPHICS CORPORATION AND SUBSIDIARIES
Valuation and Qualifying Accounts (In Thousands)
Beginning Ending
Description Balance Additions Deductions Balance
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended December 31, 1996
Allowance for doubtful accounts/1 $ 3,291 $ 1,168 $ 1,296 $ 3,163
Allowance for obsolete inventory/2 $ 389 $ 308 $ 292 $ 405
Year ended December 31, 1997
Allowance for doubtful accounts/1 $ 3,163 $ 1,220 $ 1,957 $ 2,426
Allowance for obsolete inventory/2 $ 405 $ 4,626 $ 500 $ 4,531
Year ended December 31, 1998
Allowance for doubtful accounts/1 $ 2,426 $ 2,578 $ 2,017 $ 2,987
Allowance for obsolete inventory/2 $ 4,531 $ - $ 162 $ 4,369
- ----------------------------------------------------------------------------------------------------------
/1 Deductions primarily represent accounts written off during the period.
/2 Deductions represent inventory scrapped during each period.
</TABLE>
Independent Auditors' Report
The Board of Directors and Stockholders
Mentor Graphics Corporation:
Under date of February 1, 1999, except for note 13, which is as of February 10,
1999, we reported on the consolidated balance sheets of Mentor Graphics
Corporation and subsidiaries as of December 31, 1998 and 1997, 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, 1998, which are
included in the annual report on Form 10-K for the year 1998. 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.
KPMG Peat Marwick LLP
Portland, Oregon
February 1, 1999, except for note 13, which is as of February 10, 1999
52
ARTICLES OF AMENDMENT
OF
MENTOR GRAPHICS CORPORATION
Pursuant to ORS 60.134, Mentor Graphics Corporation has amended its 1987
Restated Articles of Incorporation.
1. The name of the corporation is Mentor Graphics Corporation.
2. The 1987 Restated Articles of Incorporation have been amended to add a
new Section D of Article III which is attached as Exhibit A.
3. The amendment to the 1987 Restated Articles of Incorporation was adopted
on February 10, 1999.
4. The amendment to the 1987 Restated Articles of Incorporation was duly
adopted by the Board of Directors of the corporation and did not require
shareholder approval because the amendment involves the designation of a series
of Incentive Stock of the corporation as authorized by Section B of Article III
of the 1987 Restated Articles of Incorporation.
Dated: February 19, 1999.
MENTOR GRAPHICS CORPORATION
By: DEAN FREED
-------------------------------------
Dean Freed
Vice President, General Counsel
<PAGE>
EXHIBIT A
AMENDMENT
of
1987 RESTATED ARTICLES OF INCORPORATION
of
MENTOR GRAPHICS CORPORATION
-----------------------------
The following Section D is added to Article III of the 1987 Restated
Articles of Incorporation of Mentor Graphics Corporation (the "Corporation"):
D. This Article III.D sets forth the designation, preferences, limitations
and relative rights of a series of Incentive Stock of the Corporation as
determined by the Board of Directors of the Corporation (the "Board of
Directors" or the "Board") pursuant to its authority under ORS 60.134 and
Article III.B of these Articles of Incorporation.
1. Designation and Amount. The shares of such series shall be
designated as "Series A Junior Participating Incentive Stock" (the "Series A
Incentive Stock") and the number of shares constituting the Series A Incentive
Stock shall be 1,000,000.
2. Dividends and Distributions.
(A) Subject to the prior and superior rights of the holders of
any shares of any class or series of stock of this Corporation ranking prior and
superior to the Series A Incentive Stock with respect to dividends, the holders
of shares of Series A Incentive Stock, in preference to the holders of Common
Stock, no par value (the "Common Stock"), of the Corporation, and of any other
stock ranking junior to the Series A Incentive Stock, shall be entitled to
receive, when, as and if declared by the Board of Directors out of funds legally
available for the purpose, quarterly dividends payable in cash on the first day
of March, June, September and December in each year (each such date being
referred to herein as a "Quarterly Dividend Payment Date"), commencing on the
first Quarterly Dividend Payment Date after the first issuance of a share or
fraction of a share of Series A Incentive Stock, in an amount per share (rounded
to the nearest cent) equal to the greater of (a) $1.00 or (b) subject to the
provision for adjustment hereinafter set forth, 100 times the aggregate per
share amount of all cash dividends, and 100 times the aggregate per share amount
(payable in kind) of all non-cash dividends or other distributions, other than a
dividend payable in shares of Common Stock or a subdivision of the outstanding
shares of Common Stock (by reclassification or otherwise), declared on the
Common Stock since the immediately preceding Quarterly Dividend Payment Date or,
with respect to the first Quarterly Dividend Payment Date, since the first
issuance of any share or fraction of a share of Series A Incentive Stock. In the
event the Corporation shall at any time declare or pay any dividend on the
Common Stock payable in shares of Common Stock, or effect a subdivision,
combination or consolidation of the outstanding shares of Common Stock (by
reclassification
A-1
<PAGE>
or otherwise than by payment of a dividend in shares of Common Stock) into a
greater or lesser number of shares of Common Stock, then in each such case the
amount to which holders of shares of Series A Incentive Stock were entitled
immediately prior to such event under clause (b) of the preceding sentence shall
be adjusted by multiplying such amount by a fraction, the numerator of which is
the number of shares of Common Stock outstanding immediately after such event
and the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(B) The Corporation shall declare a dividend or distribution on
the Series A Incentive Stock as provided in paragraph (A) of this Section 2
immediately after it declares a dividend or distribution on the Common Stock
(other than a dividend payable in shares of Common Stock); provided that, in the
event no dividend or distribution shall have been declared on the Common Stock
during the period between any Quarterly Dividend Payment Date and the next
subsequent Quarterly Dividend Payment Date, a dividend of $1.00 per share on the
Series A Incentive Stock shall nevertheless be payable on such subsequent
Quarterly Dividend Payment Date.
(C) Dividends shall begin to accrue and be cumulative on
outstanding shares of Series A Incentive Stock from the Quarterly Dividend
Payment Date next preceding the date of issue of such shares, unless the date of
issue of such shares is prior to the record date for the first Quarterly
Dividend Payment Date, in which case dividends on such shares shall begin to
accrue from the date of issue of such shares, or unless the date of issue is a
Quarterly Dividend Payment Date or is a date after the record date for the
determination of holders of shares of Series A Incentive Stock entitled to
receive a quarterly dividend and before such Quarterly Dividend Payment Date, in
either of which events such dividends shall begin to accrue and be cumulative
from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall
not bear interest. Dividends paid on the shares of Series A Incentive Stock in
an amount less than the total amount of such dividends at the time accrued and
payable on such shares shall be allocated pro rata on a share-by-share basis
among all such shares at the time outstanding. The Board of Directors may fix a
record date for the determination of holders of shares of Series A Incentive
Stock entitled to receive payment of a dividend or distribution declared
thereon, which record date shall be not more than 60 days prior to the date
fixed for the payment thereof.
3. Voting Rights. Except as otherwise provided by law, the holders of
shares of Series A Incentive Stock shall not be entitled to vote on any matter
submitted to the vote of stockholders.
4. Certain Restrictions.
(A) Whenever quarterly dividends or other dividends or
distributions payable on the Series A Incentive Stock as provided in Section 2
are in arrears, thereafter and until all accrued and unpaid dividends and
distributions, whether or not declared, on
A-2
<PAGE>
shares of Series A Incentive Stock outstanding shall have been paid in full, the
Corporation shall not:
(i) declare or pay dividends, or make any other
distributions, on any shares of stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the Series A
Incentive Stock;
(ii) declare or pay dividends, or make any other
distributions, on any shares of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the Series A
Incentive Stock, except dividends paid ratably on the Series A Incentive
Stock and all such parity stock on which dividends are payable or in
arrears in proportion to the total amounts to which the holders of all such
shares are then entitled;
(iii) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking junior (either as to dividends or
upon liquidation, dissolution or winding up) to the Series A Incentive
Stock, provided that the Corporation may at any time redeem, purchase or
otherwise acquire shares of any such junior stock in exchange for shares of
any stock of the Corporation ranking junior (both as to dividends and upon
dissolution, liquidation or winding up) to the Series A Incentive Stock; or
(iv) redeem or purchase or otherwise acquire for
consideration any shares of Series A Incentive Stock, or any shares of
stock ranking on a parity with the Series A Incentive Stock, except in
accordance with a purchase offer made in writing or by publication (as
determined by the Board of Directors) to all holders of such shares upon
such terms as the Board of Directors, after consideration of the respective
annual dividend rates and other relative rights and preferences of the
respective series and classes, shall determine in good faith will result in
fair and equitable treatment among the respective series or classes.
(B) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares of
stock of the Corporation unless the Corporation could, under paragraph (A) of
this Section 4, purchase or otherwise acquire such shares at such time and in
such manner.
5. Reacquired Shares. Any shares of Series A Incentive Stock purchased
or otherwise acquired by the Corporation in any manner whatsoever shall be
restored to the status of authorized but unissued shares after the acquisition
thereof. All such shares shall upon any such restoration become authorized but
unissued shares of Incentive Stock and may be reissued as part of a new series
of Incentive Stock subject to the conditions and restrictions on issuance set
forth herein, in the Restated Articles of Incorporation, or in any amendment
thereto creating a series of Incentive Stock or any similar stock or as
otherwise required by law.
A-3
<PAGE>
6. Liquidation, Dissolution or Winding Up.
(A) Upon any liquidation, dissolution or winding up of the
Corporation, voluntary or otherwise no distribution shall be made (1) to the
holders of shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Incentive Stock unless,
prior thereto, the holders of shares of Series A Incentive Stock shall have
received an amount per share (the "Series A Liquidation Preference") equal to
$100 per share, plus an amount equal to accrued and unpaid dividends and
distributions thereon, whether or not declared, to the date of such payment,
provided that the holders of shares of Series A Incentive Stock shall be
entitled to receive an aggregate amount per share, subject to the provision for
adjustment hereinafter set forth, equal to 100 times the aggregate amount to be
distributed per share to holders of shares of Common Stock, or (2) to the
holders of shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A Incentive Stock,
except distributions made ratably on the Series A Incentive Stock and all such
parity stock in proportion to the total amounts to which the holders of all such
shares are entitled upon such liquidation, dissolution or winding up. In the
event the Corporation shall at any time declare or pay any dividend on the
Common Stock payable in shares of Common Stock, or effect a subdivision,
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock, then in each
such case the aggregate amount to which holders of shares of Series A Incentive
Stock were entitled immediately prior to such event under the proviso in clause
(1) of the preceding sentence shall be adjusted by multiplying such amount by a
fraction the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that are outstanding immediately prior to such
event.
(B) In the event, however, that there are not sufficient assets
available to permit payment in full of the Series A Liquidation Preference and
the liquidation preferences of all other classes and series of stock of the
Corporation, if any, that rank on a parity with the Series A Incentive Stock in
respect thereof, then the assets available for such distribution shall be
distributed ratably to the holders of the Series A Incentive Stock and the
holders of such parity shares in proportion to their respective liquidation
preferences.
(C) Neither the merger or consolidation of the Corporation into
or with another corporation nor the merger or consolidation of any other
corporation into or with the Corporation shall be deemed to be a liquidation,
dissolution or winding up of the Corporation within the meaning of this Section
6.
7. Consolidation, Merger, etc. In case the Corporation shall enter
into any consolidation, merger, combination or other transaction in which the
shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case each share of
Series A Incentive Stock shall at the same time be similarly exchanged or
changed into an amount per share, subject to the provision for
A-4
<PAGE>
adjustment hereinafter set forth, equal to 100 times the aggregate amount of
stock, securities, cash and/or any other property (payable in kind), as the case
may be, into which or for which each share of Common Stock is changed or
exchanged. In the event the Corporation shall at any time declare or pay any
dividend on the Common Stock payable in shares of Common Stock, or effect a
subdivision, combination or consolidation of the outstanding shares of Common
Stock (by reclassification or otherwise than by payment of a dividend in shares
of Common Stock) into a greater or lesser number of shares of Common Stock, then
in each such case the amount set forth in the preceding sentence with respect to
the exchange or change of shares of Series A Incentive Stock shall be adjusted
by multiplying such amount by a fraction, the numerator of which is the number
of shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
8. No Redemption. The shares of Series A Incentive Stock shall not be
redeemable by the Company.
9. Rank. The Series A Incentive Stock shall rank, with respect to the
payment of dividends and the distribution of assets upon liquidation,
dissolution or winding up, junior to all series of any other class of the
Corporation's Incentive Stock, except to the extent that any such other series
specifically provides that it shall rank on a parity with or junior to the
Series A Incentive Stock.
10. Amendment. The Articles of Incorporation of the Corporation shall
not be amended in any manner which would materially alter or change the powers,
preferences or special rights of the Series A Incentive Stock so as to affect
them adversely without the affirmative vote of the holders of at least
two-thirds of the outstanding shares of Series A Incentive Stock, voting
separately as a single class.
11. Fractional Shares. Series A Incentive Stock may be issued in
fractions of a share that shall entitle the holder, in proportion to such
holder's fractional shares, to receive dividends, participate in distributions
and to have the benefit of all other rights of holders of Series A Incentive
Stock.
A-5
BYLAWS
OF
MENTOR GRAPHICS CORPORATION
ARTICLE I
SHAREHOLDERS
1.1. Annual Meeting. The annual meeting of the shareholders of the corporation
for the purpose of electing directors and for the transaction of such other
business as may properly be brought before the meeting shall be held on such
date and at such time as may be designated from time to time by the Board of
Directors.
1.2 Failure to Hold Annual Meeting. If the annual meeting is not held at the
designated time, the President or the Board of Directors may call the annual
meeting at a time fixed by the calling party not more than 60 days after the
designated time by proper notice designating the meeting as the annual meeting.
If the annual meeting is not held at the designated time or during the 60-day
period thereafter, the annual meeting may be called by the holders of not less
than one-tenth of all the shares entitled to vote at the meeting. In such event,
notice shall be given not more than 15 days after the expiration of such 60-day
period. The notice shall fix the time of the meeting at the earliest date
permissible under the applicable notice requirements.
1.3 Special Meetings. Special meetings of the shareholders may be called by the
President or by the Board of Directors, and shall be called by the President or
the Board of Directors at the request of the holders of not less than one-tenth
of all the votes entitled to be cast on any issue proposed to be considered at
the meeting. A demand by shareholders to hold a special meeting shall be signed,
dated and delivered to the Secretary, and shall set forth the information
required by Section 1.13(b)(2) of these bylaws. The Board of Directors or the
President shall have the sole power to determine the place, time and date for
any special meeting of shareholders, and to set a record date for the
determination of shareholders entitled to vote at such meeting in the manner set
forth in Section 1.7 hereof. Following such determination, it shall be the duty
of the secretary to cause notice to be given to the shareholders entitled to
vote at such meeting, in the manner set forth in Section 1.5 hereof, that a
meeting will be held at the place, time and date so determined by the Board of
Directors or the President.
1.4 Place of Meetings. Meetings of the shareholders shall be held at the
principal business office of the corporation or at such other place as may be
determined by the Board of Directors.
1.5. Notice of Meetings. Written or printed notice stating the place, day and
time of the meeting and, in case of a special meeting, the purpose or purposes
for which the meeting is called, shall be mailed to each shareholder entitled to
vote at the meeting at the shareholder's address as it appears on the stock
transfer records of the corporation, with postage thereon prepaid, not less than
10 nor more than 60 days before the date of the meeting, solely by or at the
direction of the President or the Secretary of the corporation. Any previously
scheduled annual or special meeting of the shareholders may be postponed, and
any previously scheduled annual or special meeting of the shareholders called by
the Board of
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Directors may be canceled, by resolution of the Board of Directors upon public
notice given prior to the time previously scheduled for such meeting of
shareholders.
1.6 Waiver of Notice. Whenever any notice is required to be given to any
shareholder of the corporation, a waiver thereof in writing, signed by the
person or persons entitled to such notice, whether before or after the time
stated therein, shall be deemed equivalent to the giving of such notice.
1.7 Record Date.
(a) The Board of Directors may fix a record date for the purpose of
determining shareholders entitled to notice of a shareholders' meeting, to
demand a special meeting, to vote or to take any other action, which date shall
not be more than 70 days before the meeting or action requiring a determination
of shareholders.
(b) If no record date is fixed for the determination of shareholders
entitled to notice of and to vote at a shareholders' meeting, the record date
shall be the close of business on the day before the first notice is delivered
to shareholders.
(c) A determination of shareholders entitled to notice of or to vote at a
shareholders' meeting is effective for any adjournment of the meeting unless the
Board of Directors fixes a new record date, which it must do if the meeting is
adjourned to a date more than 120 days after the date fixed for the original
meeting.
1.8 Voting Records. The officer or agent having charge of the stock transfer
books for shares of the corporation shall make, at least 10 days before each
meeting of shareholders, a complete record of the shareholders entitled to vote
at such meeting, or any adjournment thereof, arranged in alphabetical order,
with the address of and the number of shares held by each, which record, for a
period of 10 days prior to such meeting, shall be kept on file at the registered
office of the corporation and shall be subject to inspection by any shareholder
at any time during usual business hours. Such record shall also be produced and
kept open at the time and place of the meeting and shall be subject to the
inspection of any shareholder during the whole time of the meeting. The original
stock transfer book shall be prima facie evidence as to who are the shareholders
entitled to examine such record or transfer books or to vote at any meeting of
shareholders. Failure to comply with the requirements of this section shall not
affect the validity of any action taken at such meeting.
1.9. Quorum; Adjournments.
(a) Shares entitled to vote as a separate voting group may take action on a
matter at a meeting only if a quorum of those shares exists with respect to that
matter. A majority of the votes entitled to be cast on the matter by the voting
group constitutes a quorum of that voting group for action on that matter.
(b) Any meeting of shareholders, annual or special, may be adjourned solely
by the chairman of the meeting from time to time to reconvene at the same or
some other time, date and place, and notice need not be given of any such
adjourned meeting if the time, date and place thereof are announced at the
meeting at which the adjournment is taken. The shareholders present at a meeting
shall not have authority to adjourn the meeting. At the adjourned meeting at
which a quorum is present, the
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shareholders may transact any business which might have been transacted at the
original meeting. If after the adjournment a new record date is fixed for the
adjourned meeting, notice of the adjourned meeting shall be given to each
shareholder of record entitled to vote at the meeting.
(c) Once a share is represented for any purpose at a meeting, it shall be
present for quorum purposes for the remainder of the meeting and for any
adjournment of that meeting unless a new record date is or must be set for the
adjourned meeting. A new record date must be set if the meeting is adjourned to
a date more than 120 days after the original date fixed for the meeting.
1.10 Manner of Acting. Unless otherwise required by law or the articles of
incorporation, any question submitted to the shareholders shall be approved if
the number of shares voted in favor of such question exceeds the number of
shares voted in opposition. Any action which is required or permitted to be
taken by the shareholders at a meeting may be taken without a meeting if a
consent in writing setting forth the action so taken is signed by all of the
shareholders entitled to vote on the matter. The action shall be effective on
the date when the last signature is placed on the consent or at such earlier
time as is set forth therein. Such consent, which shall have the same effect as
a unanimous vote of the shareholders, shall be filed with the minutes of the
corporation.
1.11 Proxies. At all meetings of shareholders, a shareholder may vote by proxy
executed in writing by the shareholder or by a duly authorized attorney in fact.
The proxy shall be filed with the Secretary of the corporation before or at the
time of the meeting. No proxy shall be valid after 11 months from the date of
its execution, unless otherwise provided in the proxy.
1.12 Voting of Shares by Certain Holders.
(a) Shares standing in the name of another corporation may be voted by such
officer, agent or proxy as the bylaws of such corporation may prescribe, or, in
the absence of such provision, as the board of directors of such corporation may
determine.
(b) Shares held by an administrator, executor, guardian or conservator may
be voted by the holder, either in person or by proxy, without a transfer of such
shares into the holder's name. Shares standing in the name of a trustee may be
voted by that trustee, either in person or by proxy, but no trustee shall be
entitled to vote shares without a transfer of such shares into the trustee's
name.
(c) Shares standing in the name of a receiver may be voted by such
receiver, and shares held by or under the control of a receiver may be voted by
such receiver without the transfer thereof into the receiver's name if authority
to do so is contained in an appropriate order of the court by which such
receiver was appointed.
(d) A shareholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee, and
thereafter the pledgee shall be entitled to vote the shares so transferred.
(e) Neither treasury shares, nor shares of its own stock held by the
corporation in a fiduciary capacity, nor shares held by another corporation if a
majority of the shares entitled to vote for the election of directors of such
other corporation is held by the corporation, shall be voted at any meeting or
counted in determining the total number of outstanding shares at any given time.
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1.13. Notice of Shareholder Business and Nominations.
(a) Annual Meetings of Shareholders. (1) Nominations of persons for
election to the Board of Directors of the corporation and the proposal of
business to be considered by the shareholders may be made at an annual meeting
of shareholders only (i) pursuant to the corporation's notice of meeting
delivered pursuant to Section 1.5 of these bylaws (or any supplement thereto),
(ii) by or at the direction of the Board of Directors or the Chairman of the
Board or (iii) by any shareholder of the corporation who was a shareholder of
record of the corporation at the time the notice provided for in this Section
1.13 is delivered to the Secretary of the corporation, who is entitled to vote
at the meeting and who complies with the notice procedures set forth in
subparagraphs (2) and (3) of this paragraph (a) in this Section 1.13.
(2) For nominations or other business to be properly brought before an
annual meeting by a shareholder pursuant to clause (iii) of paragraph (a)(1) of
this Section 1.13, the shareholder must have given timely notice thereof in
writing to the Secretary of the corporation and such other business must
otherwise be a proper matter for shareholder action as determined by the Board
of Directors. To be timely, a shareholder's notice shall be delivered to the
Secretary at the principal executive offices of the corporation not later than
the close of business on the ninetieth day nor earlier than the close of
business on the one hundred twentieth day prior to the first anniversary of the
preceding year's annual meeting (provided, however, that in the event that the
date of the annual meeting is more than thirty days before or more than seventy
days after such anniversary date, notice by the shareholder must be so delivered
not earlier than the close of business on the one hundred twentieth day prior to
such annual meeting and not later than the close of business on the later of the
ninetieth day prior to such annual meeting or the tenth day following the day on
which public announcement of the date of such meeting is first made by the
corporation). In no event shall the public announcement of an adjournment or
postponement of an annual meeting of shareholders commence a new time period (or
extend any time period) for the giving of a shareholder's notice as described
above. Such shareholder's notice shall set forth: (i) as to each person whom the
shareholder proposes to nominate for election or reelection as a director all
information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors in an election contest, or is
otherwise required, in each case pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and Rule 14a-11 thereunder
(and such person's written consent to being named in the proxy statement as a
nominee and to serving as a director if elected); (ii) as to any other business
that the shareholder proposes to bring before the annual meeting, a brief
description of the business desired to be brought before the annual meeting, the
text of the proposal or business (including the text of any resolutions proposed
for consideration and in the event that such business includes a proposal to
amend the bylaws of the corporation, the language of the proposed amendment),
the reasons for conducting such business at the annual meeting and any material
interest in such business of such shareholder and the beneficial owner, if any,
on whose behalf the proposal is made; and (iii) as to the shareholder giving the
notice and the beneficial owner, if any, on whose behalf the nomination or
proposal is made (A) the name and address of such shareholder, as they appear on
the corporation's books, and of such beneficial owner, (B) the class and number
of shares of capital stock of the corporation which are owned beneficially and
of record by such shareholder and such beneficial owner, (C) a representation
that the shareholder is a holder of record of stock of the corporation entitled
to vote at such annual meeting and intends to appear in person or by proxy at
the annual meeting to propose such business or nomination, and (D) a
representation whether the shareholder or the beneficial owner, if any, intends
or is part of a group which intends to (1) deliver a proxy statement and/or form
of proxy to holders of at least the percentage of the
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corporation's outstanding capital stock required to approve or adopt the
proposal or elect the nominee and/or (2) otherwise solicit proxies from
shareholders in support of such proposal or nomination. The corporation may
require any proposed nominee to furnish such other information as it may
reasonably require to determine the eligibility of such proposed nominee to
serve as a director of the corporation.
(3) Notwithstanding anything in the second sentence of paragraph
(a)(2) of this Section 1.13 to the contrary, in the event that the number of
directors to be elected to the Board of Directors of the corporation at an
annual meeting is increased and there is no public announcement by the
corporation naming all of the nominees for director or specifying the size of
the increased Board of Directors at least one hundred days prior to the first
anniversary of the preceding year's annual meeting, a shareholder's notice
required by this Section 1.13 shall also be considered timely, but only with
respect to nominees for any new positions created by such increase, if it shall
be delivered to the Secretary at the principal executive offices of the
corporation not later than the close of business on the tenth day following the
day on which such public announcement is first made by the corporation.
(b) Special Meetings of Shareholders. (1) Only such business shall be
conducted at a special meeting of shareholders as shall have been described in
the corporation's notice of meeting given pursuant to Section 1.5 of these
bylaws. Nominations of persons for election to the Board of Directors may be
made at a special meeting of shareholders only (i) by or at the direction of the
Board of Directors or the Chairman of the Board or (ii) by any shareholder of
the corporation who is a shareholder of record at the time the notice provided
for in this Section 1.13(b) is delivered to the Secretary of the corporation,
who is entitled to vote at the special meeting and who complies with the notice
procedures set forth in paragraph (b)(2) of this Section 1.13. In the event a
special meeting of shareholders is called for the purpose of electing one or
more directors to the Board of Directors, any such shareholder entitled to vote
in such election of directors may nominate a person or persons (as the case may
be) for election to such position(s) as specified in the corporation's notice of
meeting, if the shareholder's notice containing the information and as otherwise
required by paragraph (b)(2) of this Section 1.13 shall be delivered to the
Secretary at the principal executive offices of the corporation not later than
the close of business on the tenth day following the day on which public
announcement is first made of the date of the special meeting and of the
nominees proposed by the Board of Directors to be elected at such meeting. In no
event shall the public announcement of an adjournment or postponement of a
special meeting commence a new time period (or extend any time period) for the
giving of a shareholder's notice as described above.
(2) For nominations to be properly brought before a special meeting by
a shareholder pursuant to clause (ii) of paragraph (b)(1) of this Section 1.13,
the shareholder's notice must contain the information required by this
paragraph. For any other business to be properly brought before a special
meeting by a shareholder, such other business must be a proper matter for
shareholder action and the shareholder's demand for the special meeting pursuant
to Section 1.3 of these bylaws must contain the information required by this
paragraph. Such shareholder's notice or demand shall set forth: (i) as to each
person whom the shareholder proposes to nominate for election or reelection as a
director all information relating to such person that is required to be
disclosed in solicitations of proxies for election of directors in an election
contest, or is otherwise required, in each case pursuant to Regulation 14A under
the Exchange Act and Rule 14a-11 thereunder (and such person's written consent
to being named in the proxy statement as a nominee and to serving as a director
if elected); (ii) as to any other business that the shareholder proposes to
bring before the special meeting, a brief description of the business desired to
be brought before the special meeting, the text of the proposal or business
(including the text of any resolutions proposed for consideration and in the
event that such business includes a proposal to
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amend the bylaws of the corporation, the language of the proposed amendment),
the reasons for conducting such business at the special meeting and any material
interest in such business of such shareholder and the beneficial owner, if any,
on whose behalf the proposal is made; and (iii) as to the shareholder giving the
notice and the beneficial owner, if any, on whose behalf the nomination or
proposal is made (A) the name and address of such shareholder, as they appear on
the corporation's books, and of such beneficial owner, (B) the class and number
of shares of capital stock of the corporation which are owned beneficially and
of record by such shareholder and such beneficial owner, (C) a representation
that the shareholder is a holder of record of stock of the corporation entitled
to vote at such special meeting and intends to appear in person or by proxy at
the special meeting to propose such business or nomination, and (D) a
representation whether the shareholder or the beneficial owner, if any, intends
or is part of a group which intends to (1) deliver a proxy statement and/or form
of proxy to holders of at least the percentage of the corporation's outstanding
capital stock required to approve or adopt the proposal or elect the nominee
and/or (2) otherwise solicit proxies from shareholders in support of such
proposal or nomination. The corporation may require any proposed nominee to
furnish such other information as it may reasonably require to determine the
eligibility of such proposed nominee to serve as a director of the corporation.
(c) General. (1) Only such persons who are nominated in accordance with the
procedures set forth in this Section 1.13 shall be eligible to be elected at an
annual or special meeting of shareholders of the corporation to serve as
directors and only such business shall be conducted at a meeting of shareholders
as shall have been brought before the meeting in accordance with the procedures
set forth in this Section 1.13. Except as otherwise provided by law, the
chairman of the meeting shall have the power and duty to (i) determine whether a
nomination or any business proposed to be brought before an annual or special
meeting was made or proposed, as the case may be, in accordance with the
procedures set forth in this Section 1.13 and (ii) if any proposed nomination or
business is not in compliance with this Section 1.13 (including whether the
shareholder or beneficial owner, if any, on whose behalf the nomination or
proposal is made solicits (or is part of a group which solicits), or fails to so
solicit (as the case may be), proxies in support of such shareholder's nominee
or proposal in compliance with such shareholder's representation as required by
clause (iii)(D) of Section (a)(2) or clause (iii)(D) of Section (b)(2) of this
Section 1.13), to declare that such nomination shall be disregarded or that such
proposed business shall not be transacted.
(2) For purposes of this Section 1.13, "public announcement" shall
mean disclosure in a press release reported by the Dow Jones News Service,
Associated Press or comparable national news service or in a document publicly
filed by the corporation with the Securities and Exchange Commission pursuant to
Section 13, 14 or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this Section 1.13, a
shareholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder with respect to the matters set
forth in this Section 1.13. Nothing in this Section 1.13 shall be deemed to
affect any rights of shareholders to request inclusion of proposals in the
corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act.
1.14. Conduct of Meetings. Meetings of shareholders shall be presided over by
the President or by another chairman designated by the Board of Directors. The
date and time of the opening and the closing of the polls for each matter upon
which the shareholders will vote at a meeting shall be determined by the
chairman of the meeting and announced at the meeting. The Board of Directors may
adopt by
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resolution such rules and regulations for the conduct of the meeting of
shareholders as it shall deem appropriate. Except to the extent inconsistent
with such rules and regulations as adopted by the Board of Directors, the
chairman of any meeting of shareholders shall have the exclusive right and
authority to prescribe such rules, regulations and procedures and to do all such
acts as, in the judgment of such chairman, are appropriate for the proper
conduct of the meeting. Such rules, regulations or procedures, whether adopted
by the Board of Directors or prescribed by the chairman of the meeting, may
include, without limitation, the following: (i) the establishment of an agenda
or order of business for the meeting; (ii) rules and procedures for maintaining
order at the meeting and the safety of those present; (iii) limitations on
attendance at or participation in the meeting to shareholders of record of the
corporation, their duly authorized and constituted proxies or such other persons
as the chairman of the meeting shall determine; (iv) restrictions on entry to
the meeting after the time fixed for the commencement thereof; and (v)
limitations on the time allotted to questions or comments by participants.
Unless and to the extent determined by the Board of Directors or the chairman of
the meeting, meetings of shareholders shall not be required to be held in
accordance with the rules of parliamentary procedure.
ARTICLE II
BOARD OF DIRECTORS
2.1 General Powers. The business and affairs of the corporation shall be managed
by its Board of Directors.
2.2 Number, Tenure and Qualification. The number of directors of the corporation
shall be set by resolution of the Board or action of the company's shareholders,
and the number of directors shall be not less than 5 or more than 9. The
directors shall hold office until the next annual meeting of shareholders and
until their successors shall have been elected and qualified. Directors need not
be residents of the State of Oregon or shareholders of the corporation. The
number of directors may be increased or decreased from time to time by
resolution or by amendment to the bylaws, but no decrease shall have the effect
of shortening the term of any incumbent director.
2.3 Regular Meetings. A regular meeting of the Board of Directors shall be held
without other notice than this bylaw immediately after, and at the same place
as, the annual meeting of shareholders. The Board of Directors may provide, by
resolution, the time and place, either within or without the State of Oregon,
for the holding of additional regular meetings without other notice than the
resolution.
2.4 Special Meetings. Special meetings of the Board of Directors may be called
by or at the request of the President or by one-third of the directors. The
person or persons authorized to call special meetings of the Board of Directors
may fix any place, either within or without the State of Oregon, as the place
for holding any special meeting of the Board of Directors called by them.
2.5. Notice. Notice of the date, time and place of any special meeting of the
Board of Directors shall be given at least 48 hours prior to the meeting by
notice communicated in person, by telephone, telegraph, teletype, telecopy,
e-mail, other form of wire or wireless communication, mail or private carrier.
Notice shall be deemed effective when received by or on behalf of the director.
Notice of any regular or special meeting need not describe the purposes of the
meeting unless required by law or the Articles of Incorporation.
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2.6. Waiver of Notice. A director may at any time waive any notice required by
law, these bylaws or the Articles of Incorporation. Except as set forth below,
the waiver must be in writing, be signed by the director entitled to the notice,
specify the meeting for which notice is waived and be filed with the minutes or
corporate records. A director's attendance at or participation in a meeting
waives any required notice to the director of the meeting unless the director at
the beginning of the meeting, or promptly upon the director's arrival, objects
to holding the meeting or transacting business at the meeting and does not
thereafter vote for or assent to any action taken at the meeting.
2.7 Quorum. A majority of the number of directors fixed by Section 2.2 of this
Article II shall constitute a quorum for the transaction of business at any
meeting of the Board of Directors.
2.8 Chairman; Manner of Acting.
(a) The Board of Directors shall appoint a chairman from among the members
of the Board who shall preside at all meetings of the Board. The act of the
majority of the directors present at a meeting at which a quorum is present
shall be the act of the Board of Directors, unless a different number is
provided by law, the articles of incorporation or these bylaws.
(b) Members of the Board of Directors may hold a board meeting by
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other. Participation in such
a meeting shall constitute presence in person at the meeting.
(c) Any action which is required or permitted to be taken by the directors
at a meeting may be taken without a meeting if a consent in writing setting
forth the action so taken is signed by all of the directors entitled to vote on
the matter. The action shall be effective on the date when the last signature is
placed on the consent or at such earlier time as is set forth therein. Such
consent, which shall have the same effect as a unanimous vote of the directors,
shall be filed with the minutes of the corporation.
2.9 Vacancies. Except as hereinafter provided, any vacancy occurring in the
Board of Directors may be filled by the affirmative vote of a majority of the
remaining directors though less than a quorum of the Board of Directors, or by a
sole remaining director. Any directorship to be filled by reason of any increase
in the number of directors of the corporation fixed by the bylaws may be filled
by the affirmative vote of a majority of the number of directors fixed by the
bylaws prior to such increase; provided that not more than two such
directorships may be filled by the directors during any one period between
annual meetings of the shareholders of the corporation. Any such directorship
not so filled by the directors shall be filled by election at the next annual
meeting of shareholders or at a special meeting of shareholders called for that
purpose. A director elected to fill a vacancy shall be elected to serve until
the next annual meeting of shareholders and until a successor shall be elected
and qualified.
2.10 Compensation. By resolution of the Board of Directors, the directors may be
paid their expenses, if any, of attendance at each meeting of the Board of
Directors, and may be paid a fixed sum for attendance at each meeting of the
Board of Directors or a stated salary as director. No such payment shall
preclude any director from serving the corporation in any other capacity and
receiving compensation therefor.
2.11 Presumption of Assent. A director of the corporation who is present at a
meeting of the Board of Directors at which action on any corporate matter is
taken shall be presumed to have assented to the
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<PAGE>
action taken unless the director's dissent to the action is entered in the
minutes of the meeting or unless a written dissent to the action is filed with
the person acting as the secretary of the meeting before the adjournment thereof
or forwarded by certified or registered mail to the Secretary of the corporation
immediately after the adjournment of the meeting. The right to dissent shall not
apply to a director who voted in favor of the action.
2.12 Transactions with Directors.
(a) Any contract or other transaction or determination between the
corporation and one or more of its directors, or between the corporation and
another party in which one or more of its directors are interested, shall be
valid notwithstanding the relationship or interest or the presence or
participation of such director or directors in a meeting of the Board of
Directors or a committee thereof which acts upon or in reference to such
contract, transaction, or determination, if: the fact of such relationship or
interest is disclosed or known to the Board of Directors or committee and it
authorizes, approves or ratifies the contract, transaction or determination by a
vote or consent sufficient for the purpose without counting the votes or
consents of such interested directors; or the fact of such relationship or
interest is disclosed or known to the shareholders entitled to vote and they
authorize, approve or ratify such contract, transaction or determination by vote
or written consent; or the contract, transaction or determination is fair and
reasonable to the corporation.
(b) Common or interested directors may be counted in determining the
presence of a quorum at a meeting of the Board of Directors or committee which
authorizes or ratifies such contract, transaction or determination. The
interested directors shall not be disqualified from voting as shareholders for
ratification or approval of such contract, transaction or determination.
(c) None of the provisions of this section shall invalidate any contract,
transaction or determination which would otherwise be valid under applicable
law.
2.13 Removal. All or any number of the directors may be removed, with or without
cause, at a meeting called expressly for that purpose, by a vote of the holders
of a majority of the shares then entitled to vote at an election of directors.
ARTICLE III
EXECUTIVE COMMITTEE
3.1 Designation. The Board of Directors may designate two or more directors to
constitute an executive committee. The designation of an executive committee,
and the delegation of authority to it, shall not operate to relieve the Board of
Directors, or any member thereof, of any responsibility imposed by law. No
member of the executive committee shall continue to be a member thereof after
ceasing to be a director of the corporation. The Board of Directors shall have
the power at any time to increase or decrease the number of members of the
executive committee, to fill vacancies thereon, to change any member thereof and
to change the functions or terminate the existence thereof.
3.2 Powers. During the interval between meetings of the Board of Directors, and
subject to such limitations as may be imposed by resolution of the Board of
Directors, the executive committee may have and may exercise all the authority
of the Board of Directors in the management of the corporation,
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provided that the executive committee shall not have the authority of the Board
of Directors in reference to amending the articles of incorporation; adopting a
plan of merger or consolidation; recommending to the shareholders the sale,
lease, exchange, mortgage, pledge or other disposition of all or substantially
all the property and assets of the corporation otherwise than in the usual
regular course of its business; recommending to the shareholders a voluntary
dissolution of the corporation or a revocation thereof; or amending the bylaws
of the corporation.
3.3 Procedures; Meetings; Quorum.
(a) The Board of Directors shall appoint a chairman from among the members
of the executive committee and shall appoint a secretary who may, but need not,
be a member of the executive committee. The chairman shall preside at all
meetings of the executive committee and the secretary of the executive committee
shall keep a record of its acts and proceedings.
(b) Regular meetings of the executive committee, of which no notice shall
be necessary, shall be held on such days and at such places as shall be fixed by
resolution adopted by the executive committee. Special meetings of the executive
committee shall be called at the request of the President or of any member of
the executive committee, and shall be held upon such notice as is required by
these bylaws for special meetings of the Board of Directors, provided that
notice by word of mouth or telephone shall be sufficient if received not later
than the day immediately preceding the day of the meeting.
(c) Attendance of any member of the executive committee at a meeting shall
constitute a waiver of notice of the meeting. A majority of the executive
committee, from time to time, shall be necessary to constitute a quorum for the
transaction of any business, and the act of a majority of the members present at
a meeting at which a quorum is present shall be the act of the executive
committee. Members of the executive committee may hold a meeting of such
committee by means of conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear each other,
and participation in such a meeting shall constitute presence in person at the
meeting.
(d) Any action which may be taken at a meeting of the executive committee
may be taken without a meeting if a consent in writing setting forth the actions
so taken shall be signed by all members of the executive committee entitled to
vote with respect to the subject matter thereof. The action shall be effective
on the date when the last signature is placed on the consent or at such earlier
time as is set forth therein. The consent shall have the same effect as a
unanimous vote of the executive committee.
(e) The Board of Directors may vote to pay the members of the executive
committee a reasonable fee as compensation for attendance at meetings of the
executive committee.
ARTICLE IV
OFFICERS
4.1 Number. The officers of the corporation shall be a President and Chief
Executive Officer, one or more Senior Vice Presidents, one or more Vice
Presidents, a Secretary, and a Treasurer. Such other officers and assistant
officers as may be deemed necessary may be appointed by the Board of Directors
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<PAGE>
and shall have such powers and duties as may be prescribed by the Board of
Directors. Any two or more offices may be held by the same person.
4.2 Election and Term of Office. The officers of the corporation shall be
appointed annually by the Board of Directors at the first meeting of the Board
of Directors held after the annual meeting of the shareholders. If the
appointment of officers shall not be held at the meeting, it shall be held as
soon thereafter as is convenient. Each officer shall hold office until a
successor shall have been duly appointed and shall have qualified or until the
officer's death, resignation or removal in the manner hereinafter provided.
4.3 Removal. Any officer or agent appointed by the Board of Directors may be
removed by the Board of Directors whenever in its judgment the best interests of
the corporation would be served thereby, but removal shall be without prejudice
to the contract rights, if any, of the person so removed. Appointment of an
officer or agent shall not of itself create contract rights.
4.4 Vacancies. A vacancy in any office because of death, resignation, removal,
disqualification or otherwise, may be filled by the Board of Directors for the
unexpired portion of the term.
4.5 President and Chief Executive Officer. The President and Chief Executive
Officer (herein referred to as the "President") shall be the chief executive
officer of the corporation and shall be in general charge of its business and
affairs, subject to the control of the Board of Directors. The President shall
preside at all meetings of the shareholders. The President may execute on behalf
of the corporation all contracts, agreements, stock certificates and other
instruments, including all contracts, agreements and instruments calling for the
signature of the president of the corporation. The President shall from time to
time report to the Board of Directors all matters within the President's
knowledge affecting the corporation which should be brought to the attention of
the Board. The President may vote all shares of stock in other corporations
owned by the corporation and shall be empowered to execute proxies, waivers of
notice, consents and other instruments in the name of the corporation with
respect to such stock. The President shall perform such other duties as may be
required by the Board of Directors.
4.6 Senior Vice President. In the absence of the President, or in the event of
the President's death, inability or refusal to act, the Senior Vice President
(or, if there is more than one Senior Vice President, the Senior Vice
Presidents, in the order designated by the Board of Directors, or in the absence
of any designation, then in the order of their appointment) shall perform the
duties of the President, and when so acting, shall have all of the powers of and
be subject to all restrictions upon the President. The Senior Vice Presidents
may vote all shares of stock in other corporations owned by the corporation and
shall be empowered to execute proxies, waivers of notice, consents and other
instruments in the name of the corporation with respect to such stock. The
Senior Vice Presidents shall perform such other duties as may be assigned from
time to time by the President or by the Board of Directors.
4.7 Vice Presidents. In the absence of the Senior Vice President or in the event
of the death, inability or refusal to act of the Senior Vice President, the Vice
President (or in the event there be more than one Vice President, the Vice
Presidents in the order designated at the time of their appointment, or in the
absence of any designation, then in the order of their appointment) shall
perform the duties of the President, and when so acting shall have all of the
powers of, and be subject to all the restrictions upon, the President. Any Vice
President shall perform such other duties as may be assigned from time to time
by the President or the Board of Directors.
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4.8 Secretary. The Secretary shall keep the minutes of all meetings of the
directors and shareholders, and shall have custody of the minute books and other
records pertaining to the corporate business. The Secretary may vote all shares
of stock in other corporations owned by the corporation and shall be empowered
to execute proxies, waivers of notice, consents and other instruments in the
name of the corporation with respect to such stock. The Secretary shall
countersign all stock certificates and other instruments requiring the seal of
the corporation and shall perform such other duties as may be required by the
Board of Directors. In the absence of the Secretary, an Assistant Secretary may
perform the duties of the Secretary.
4.9 Treasurer. Subject to the direction and control of the Senior Vice President
and Chief Financial Officer, the Treasurer shall be legal custodian of all
moneys, notes, securities and other valuables that may come into the possession
of the corporation. The Treasurer shall deposit all funds of the corporation
which come into the Treasurer's hands in depositories which the Board of
Directors may designate. The Treasurer shall pay the funds out only on the check
of the corporation signed in the manner authorized by the Board of Directors.
The Treasurer shall perform such other duties as the Senior Vice President and
Chief Financial Officer may require. In the absence of the Treasurer, an
Assistant Treasurer may perform the duties of the Treasurer.
4.10 Salaries. The salaries of officers shall be fixed from time to time by the
Board of Directors and no officer shall be prevented from receiving such salary
because the officer is also a director of the corporation.
ARTICLE V
INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES
AND OTHER AGENTS
5.1 Directors and Officers. The corporation shall indemnify its directors and
officers to the fullest extent permitted by the Oregon Business Corporation Act
(Act), as the same exists or may hereafter be amended (but, in the case of
alleged occurrences of actions or omissions preceding any such amendment, only
to the extent that such amendment permits the corporation to provide broader
indemnification rights than the Act permitted the corporation to provide prior
to such amendment).
5.2 Employees and Other Agents. The corporation shall have power to indemnify
its employees and other agents as set forth in the Act.
5.3 No Presumption of Bad Faith. The termination of any proceeding by judgment,
order, settlement, conviction or upon a plea of nolo contendere or its
equivalent shall not, of itself, create a presumption that the person did not
act in good faith and in a manner which the person reasonably believed to be in
or not opposed to the best interests of the corporation, and, with respect to
any criminal proceeding, that the person had reasonable cause to believe that
the conduct was unlawful.
5.4 Advances of Expenses. The expenses incurred by a director or officer in any
proceeding shall be paid by the corporation in advance at the written request of
the director or officer, if the director or officer:
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(a) furnishes the corporation a written affirmation of such person's good
faith belief that such person is entitled to be indemnified by the corporation;
and
(b) furnishes the corporation a written undertaking to repay such advance
to the extent that it is ultimately determined by a court that such person is
not entitled to be indemnified by the corporation. Such advances shall be made
without regard to the person's ability to repay such expenses and without regard
to the person's ultimate entitlement to indemnification under this bylaw or
otherwise.
5.5 Enforcement. Without the necessity of entering into an express contract, all
rights to indemnification and advances under this bylaw shall be deemed to be
contractual rights and be effective to the same extent and as if provided for in
a contract between the corporation and the director or officer who serves in
such capacity at any time while this bylaw and relevant provisions of the Act
and other applicable law, if any, are in effect. Any right to indemnification or
advances granted by this bylaw to a director or officer shall be enforceable by
or on behalf of the person holding such right in any court of competent
jurisdiction if (a) the claim for indemnification or advances is denied, in
whole or in part, or (b) no disposition of such claim is made within ninety (90)
days of request therefor. The claimant in such enforcement action, if successful
in whole or in part, shall be entitled to be paid also the expense of
prosecuting a claim. It shall be a defense to any such action (other than an
action brought to enforce a claim for expenses incurred in connection with any
proceeding in advance of its final disposition when the required affirmation and
undertaking have been tendered to the corporation) that the claimant has not met
the standards of conduct which make it permissible under the Act for the
corporation to indemnify the claimant for the amount claimed, but the burden of
proving such defense shall be on the corporation. Neither the failure of the
corporation (including its Board of Directors, independent legal counsel or its
shareholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because the claimant has met the applicable standard of conduct set forth in the
Act, nor an actual determination by the corporation (including its Board of
Directors, independent legal counsel or its shareholders) that the claimant has
not met such applicable standard of conduct, shall be a defense to the action or
create a presumption that the claimant has not met the applicable standard of
conduct.
5.6 Non-Exclusivity of Rights. The rights conferred on any person by this bylaw
shall not be exclusive of any other right which such person may have or
hereafter acquire under any statute, provision of the Articles of Incorporation,
bylaws, agreement, vote of shareholders or disinterested Directors or otherwise,
both as to action in the person's official capacity and as to action in another
capacity while holding office. The corporation is specifically authorized to
enter into individual contracts with any or all of its directors, officers,
employees or agents respecting indemnification and advances, to the fullest
extent permitted by the law.
5.7 Survival of Rights. The rights conferred on any person by this bylaw shall
continue as to a person who has ceased to be a director, officer, employee or
other agent and shall inure to the benefit of the heirs, executors and
administrators of such a person.
5.8 Insurance. To the fullest extent permitted by the Act, the corporation, upon
approval by the Board of Directors, may purchase insurance on behalf of any
person required or permitted to be indemnified pursuant to this bylaw.
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5.9 Amendments. Any repeal of this bylaw shall only be prospective and no repeal
or modification hereof shall adversely affect the rights under this bylaw in
effect at the time of the alleged occurrence of any action or omission to act
that is the cause of any proceeding against any agent of the corporation.
5.10 Savings Clause. If this bylaw or any portion hereof shall be invalidated on
any ground by any court of competent jurisdiction, the corporation shall
indemnify each director, officer or other agent to the fullest extent permitted
by any applicable portion of this bylaw that shall not have been invalidated, or
by any other applicable law.
5.11 Certain Definitions. For the purposes of this bylaw, the following
definitions shall apply:
(a) The term "proceeding" shall be broadly construed and shall include,
without limitation, the investigation, preparation, prosecution, defense,
settlement and appeal of any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative.
(b) The term "expenses" shall be broadly construed and shall include,
without limitation, expense of investigations, judicial or administrative
proceedings or appeals, attorneys fees and disbursements and any expenses of
establishing a right to indemnification under Section 5.5 of this bylaw, but
shall not include amounts paid in settlement, judgments or fines.
(c) The term "corporation" shall include, in addition to the resulting or
surviving corporation, any constituent corporation (including any constituent of
a constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors, officers, employees or agents, so that any person who is or was a
director, officer, employee or agent of such constituent corporation, or is or
was serving at the request of such constituent corporation as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, shall stand in the same position under the provisions
of this bylaw with respect to the resulting or surviving corporation as the
person would have with respect to such constituent corporation if its separate
existence had continued.
(d) References to a "director," "officer," "employee," or "agent" of the
corporation shall include, without limitation, situations where such person is
serving at the request of the corporation as a director, officer, employee,
trustee or agent of another corporation, partnership, joint venture, trust or
other enterprise.
(e) References to "other enterprises" shall include employee benefit plans;
references to "fines" in the Act shall include any excise taxes assessed on a
person with respect to an employee benefit plan; and references to "serving at
the request of the corporation" shall include any service as a director,
officer, employee or agent of the corporation which imposes duties on, or
involves services by, such director, officer, employee, or agent with respect to
an employee benefit plan, its participants, or beneficiaries; and a person who
acted in good faith and in a manner the person reasonably believed to be in the
interest of the participants and beneficiaries of an employee benefit plan shall
be deemed to have acted in a manner "not opposed to the best interests of the
corporation" as referred to in this bylaw.
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ARTICLE VI
CERTIFICATES FOR SHARES AND THEIR TRANSFER
6.1 Certificates for Shares.
(a) Certificates representing shares of the corporation shall be in such
form as shall be determined by the Board of Directors. Such certificates shall
be signed by the President or a Vice President and by the Secretary or an
Assistant Secretary and may be sealed with the seal of the corporation or a
facsimile thereof. All certificates for shares shall be consecutively numbered
or otherwise identified.
(b) The name and address of the person to whom the shares represented
thereby are issued, with the number of shares and date of issue, shall be
entered on the stock transfer books of the corporation. All certificates
surrendered to the corporation for transfer shall be cancelled and no new
certificate shall he issued until the former certificate for a like number of
shares shall have been surrendered and cancelled, except that in case of a lost,
destroyed or mutilated certificate a new one may be issued therefor upon such
terms and indemnity to the corporation as the Board of Directors may prescribe.
6.2 Transfer of Shares. Transfer of shares of the corporation shall be made only
on the stock transfer books of the corporation by the holder of record thereof
or by the holder's legal representative, who shall furnish proper evidence of
authority to transfer, or by the holder's attorney thereunto authorized by power
of attorney duly executed and filed with the Secretary of the corporation. The
person in whose name shares stand on the books of the corporation shall he
deemed by the corporation to be the owner thereof for all purposes.
6.3 Transfer Agent and Registrar. The Board of Directors may from time to time
appoint one or more Transfer Agents and one or more Registrars for the shares of
the corporation, with such powers and duties as the Board of Directors shall
determine by resolution. The signatures of the President or Vice President and
the Secretary or Assistant Secretary upon a certificate may be facsimiles if the
certificate is manually signed on behalf of a Transfer Agent or by a Registrar
other than the corporation itself or an employee of the corporation.
6.4 Officer Ceasing to Act. In case any officer who has signed or whose
facsimile signature has been placed upon a stock certificate shall have ceased
to be such officer before such certificate is issued, it may be issued by the
corporation with the same effect as if the signer were such officer at the date
of its issuance.
6.5 Fractional Shares. The corporation shall not issue certificates for
fractional shares.
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ARTICLE VII
CONTRACTS, LOANS, CHECKS AND OTHER INSTRUMENTS
7.1 Contracts. The Board of Directors may authorize any officer or officers and
agent or agents to enter into any contract or execute and deliver any instrument
in the name of and on behalf of the corporation, and such authority may be
general or confined to specific instances.
7.2 Loans. No loans shall he contracted on behalf of the corporation and no
evidence of indebtedness shall be issued in its name unless authorized by a
resolution of the Board of Directors. Such authority may be general or confined
to specific instances.
7.3 Checks, Drafts, etc. All checks, drafts or other orders for the payment of
money and notes or other evidences of indebtedness issued in the name of the
corporation shall be signed by such officer or officers and agent or agents of
the corporation and in such manner as shall from time to time be determined by
resolution of the Board of Directors.
ARTICLE VIII
SEAL
The seal of the corporation shall be circular in form and shall have inscribed
thereon the name of the corporation and the state of incorporation and the words
"Corporate Seal."
ARTICLE IX
AMENDMENTS
These bylaws may be altered, amended or repealed and new bylaws may be adopted
by the Board of Directors at any regular or special meeting, subject to repeal
or change by action of the shareholders of the corporation.
Page 16 - Bylaws of Mentor Graphics Corporation
INDEMNITY AGREEMENT
THIS AGREEMENT is made as of ___________, by and between Mentor Graphics
Corporation, an Oregon corporation (Company), and ___________(Indemnitee), an
officer or director of the Company.
RECITALS
WHEREAS, highly competent persons have become more reluctant to serve
publicly-held corporations as directors or in other capacities unless they are
provided with adequate protection through insurance or adequate indemnification
against inordinate risks of claims and actions against them arising out of their
service to and activities on behalf of the Company; and
WHEREAS, the Board of Directors of the Company (the "Board") has determined
that, in order to attract and retain qualified individuals, the Company will
attempt to maintain on an ongoing basis, at its sole expense, liability
insurance to protect persons serving the Company and its subsidiaries from
certain liabilities. The bylaws of the Company require indemnification of the
officers and directors of the Company to the fullest extent permitted by the
Oregon Business Corporation Act (the "Act"). The Act expressly provides that the
indemnification provisions set forth in the Act are not exclusive, and thereby
contemplates that contracts may be entered into between the Company and members
of the board of directors and officers with respect to indemnification of
directors and officers.
WHEREAS, the uncertainties relating to such insurance and to
indemnification have increased the difficulty of attracting and retaining such
persons; and
WHEREAS, the Board has determined that the increased difficulty in
attracting and retaining such persons is detrimental to the best interests of
the Company's stockholders and that the Company should act to assure such
persons that there will be increased certainty of such protection in the future;
and
WHEREAS, it is reasonable, prudent and necessary for the Company
contractually to obligate itself to indemnify, and to advance expenses on behalf
of, such persons to the fullest extent permitted by applicable law so that they
will serve or continue to serve the Company free from undue concern that they
will not be so indemnified; and
WHEREAS, this Agreement is a supplement to and in furtherance of the Bylaws
of the Company and any resolutions adopted pursuant thereto, and shall not be
deemed a substitute therefore, nor to diminish or abrogate any rights of
Indemnitee thereunder; and
WHEREAS, Indemnitee does not regard the protection available under the
Company's Bylaws and insurance adequate in the present circumstances, and may
not be willing to serve as an officer or director without adequate protection,
and the Company desires Indemnitee to serve in such
<PAGE>
capacity. Indemnitee is willing to serve, continue to serve and to take on
additional service for or on behalf of the Company on the condition that he be
so indemnified;
NOW, THEREFORE, in consideration of the premises and the covenants
contained herein, the Company and Indemnitee do hereby covenant and agree as
follows:
1. Services to the Company. Indemnitee will serve or continue to serve, at
the will of the Company, as an officer or director of the Company for so long as
Indemnitee is duly elected or appointed or until Indemnitee tenders his or her
resignation in writing.
2. Definitions. As used in this Agreement:
(a) A "Change in Control" shall be deemed to occur upon the earliest
to occur after the date of this Agreement of any of the following events:
(i) Acquisition of Stock by Third Party. Any Person (as defined
below) is or becomes the Beneficial Owner (as defined below), directly or
indirectly, of securities of the Company representing twenty percent (20%) or
more of the combined voting power of the Company's then outstanding securities;
(ii) Change in Board of Directors. During any period of two (2)
consecutive years (not including any period prior to the execution of this
Agreement), individuals who at the beginning of such period constitute the
Board, and any new director (other than a director designated by a person who
has entered into an agreement with the Company to effect a transaction described
in Sections 2(a)(i), 2(a)(iii) or 2(a)(iv)) whose election by the Board or
nomination for election by the Company's shareholders was approved by a vote of
at least two-thirds of the directors then still in office who either were
directors at the beginning of the period or whose election or nomination for
election was previously so approved, cease for any reason to constitute a least
a majority of the members of the Board;
(iii) Corporate Transactions. The effective date of a merger or
consolidation of the Company with any other entity, other than a merger or
consolidation which would result in the voting securities of the Company
outstanding immediately prior to such merger of consolidation continuing to
represent (either by remaining outstanding or by being converted into voting
securities of the surviving entity) more than 51% of the combined voting power
of the voting securities of the surviving entity outstanding immediately after
such merger or consolidation and with the power to elect at least a majority of
the board of directors or other governing body of such surviving entity;
(iv) Liquidation. The approval by the shareholders of the Company
of a complete liquidation of the Company or an agreement for the sale or
disposition by the Company of all or substantially all of the Company's assets;
and
(v) Other Events. There occurs any other event of a nature that
would be required to be reported in response to Item 6(e) of Schedule 14A of
Regulation 14A (or a response
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<PAGE>
to any similar item on any similar schedule or form) promulgated under the
Exchange Act (as defined below), whether or not the Company is then subject to
such reporting requirement.
(vi) Certain Definitions. For purposes of this Section 2(a), the
following terms shall have the following meanings:
(A) "Exchange Act" shall mean the Securities
Exchange Act of 1934, as amended.
(B) "Person" shall have the meaning as set forth
in Sections 13(d) and 14(d) of the Exchange Act;
provided, however, that Person shall exclude (i) the
Company, (ii) any trustee or other fiduciary holding
securities under an employee benefit plan of the
Company, and (iii) any corporation owned, directly or
indirectly, by the shareholders of the Company in
substantially the same proportions as their ownership
of stock of the Company.
(C) "Beneficial Owner" shall have the meaning
given to such term in Rule 13d-3 under the Exchange
Act; provided, however, that Beneficial Owner shall
exclude any Person otherwise becoming a Beneficial
Owner by reason of the shareholders of the Company
approving a merger of the Company with another entity.
(b) "Corporate Status" describes the status of a person who is or was
a director, officer, employee or agent of the Company or of any other
corporation, partnership or joint venture, trust, employee benefit plan or other
enterprise which such person is or was serving at the request of the Company.
(c) "Disinterested Director" means a director of the Company who is
not and was not a party to the Proceeding in respect of which indemnification is
sought by Indemnitee.
(d) "Enterprise" shall mean the Company and any other
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise of which Indemnitee is or was serving at the request of the Company
as a director, officer, employee, agent or fiduciary.
(e) "Expenses" shall include all reasonable attorneys' fees,
retainers, court costs, transcript costs, fees of experts, witness fees, travel
expenses, duplicating costs, printing and binding costs, telephone charges,
postage, delivery service fees, and all other disbursements or expenses of the
types customarily incurred in connection with prosecuting, defending, preparing
to prosecute or defend, investigating, being or preparing to be a witness in, or
otherwise participating in, a
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<PAGE>
Proceeding. Expenses, however, shall not include amounts paid in settlement by
Indemnitee or the amount of judgments or fines against Indemnitee.
(f) Reference to "other enterprise" shall include employee benefit
plans; references to "fines" shall include any excise tax assessed with respect
to any employee benefit plan; references to "serving at the request of the
Company" shall include any service as a director, officer, employee or agent of
the Company which imposes duties on, or involves services by, such director,
officer, employee or agent with respect to an employee benefit plan, its
participants or beneficiaries; and a person who acted in good faith and in a
manner he reasonably believed to be in the best interests of the participants
and beneficiaries of an employee benefit plan shall be deemed to have acted in
manner "not opposed to the best interests of the Company" as referred to in this
Agreement.
(g) The term "Proceeding" shall include any threatened, pending or
completed action, suit, arbitration, alternate dispute resolution mechanism,
investigation, inquiry, administrative hearing or any other actual, threatened
or completed proceeding, whether brought in the right of the Company or
otherwise and whether of a civil, criminal, administrative or investigative
nature, in which Indemnitee was, is or will be involved as a party or otherwise
by reason of the fact that Indemnitee is or was a director or officer of the
Company, by reason of any action taken by him or of any action on his part while
acting as director or officer of the Company, or by reason of the fact that he
is or was serving at the request of the Company as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, in each case whether or not serving in such capacity at the time any
liability or expense is incurred for which indemnification, reimbursement, or
advancement of expenses can be provided under this Agreement.
(h) "Independent Counsel" means a law firm, or a member of a law firm,
that is experienced in matters of corporation law and neither presently is, nor
in the past five years has been, retained to represent: (i) the Company or
Indemnitee in any matter material to either such party (other than with respect
to matters concerning the Indemnitee under this Agreement, or of other
indemnitees under similar indemnification agreements), or (ii) any other party
to the Proceeding giving rise to a claim for indemnification hereunder.
Notwithstanding the foregoing, the term "Independent Counsel" shall not include
any person who, under the applicable standards of professional conduct then
prevailing, would have a conflict of interest in representing either the Company
or Indemnitee in an action to determine Indemnitee's rights under this
Agreement. The Company agrees to pay the reasonable fees and expenses of the
Independent Counsel referred to above and to fully indemnify such counsel
against any and all Expenses, claims, liabilities and damages arising out of or
relating to this Agreement or its engagement pursuant hereto.
3. Indemnity in Third-Party Proceedings. The Company shall indemnify
Indemnitee in accordance with the provisions of this Section 3 if Indemnitee is
a party to or threatened to be made a party in any Proceeding, other than a
Proceeding by or in the right of the Company to procure a judgment in its favor.
Pursuant to this Section 3, Indemnitee shall be indemnified against all
Expenses, judgments, fines and amounts paid in settlement actually and
reasonably incurred by Indemnitee or on his behalf in connection with such
Proceeding or any claim, issue or matter therein, if Indemnitee acted in good
faith and in a manner he reasonably believed to be in or not opposed to
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<PAGE>
the best interests of the Company and, in the case of a criminal proceeding had
no reasonable cause to believe that his conduct was unlawful.
4. Indemnity in Proceedings by or in the Right of the Company. The Company
shall indemnify Indemnitee in accordance with the provisions of this Section 4
if Indemnitee is, or threatened to be made, a party to or participant in any
Proceeding by or in the right of the Company to procure a judgment in its favor.
Pursuant to this Section 4, Indemnitee shall be indemnified against all Expenses
actually and reasonably incurred by him or on his behalf in connection with such
Proceeding if Indemnitee acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the Company. No
indemnification for Expenses shall be made under this Section 4 in respect of
any claim, issue or matter as to which Indemnitee shall have been finally
adjudged by a court to be liable to the Company, unless and only to the extent
that any court in which the Proceeding was brought shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, Indemnitee is fairly and reasonably entitled to
indemnification.
5. Indemnification for Expenses of a Party Who is Wholly or Partly
Successful. Notwithstanding any other provisions of this Agreement, to the
extent that Indemnitee is a party to (or a participant in) and is successful, on
the merits or otherwise, in any Proceeding or in defense of any claim, issue or
matter therein, in whole or in part, the Company shall indemnify Indemnitee
against all Expenses actually and reasonably incurred by him in connection
therewith. If Indemnitee is not wholly successful in such Proceeding but is
successful, on the merits or otherwise, as to one or more but less than all
claims, issues or matters in such Proceeding, the Company shall indemnify
Indemnitee against all Expenses actually and reasonably incurred by him or on
his behalf in connection with each successfully resolved claim, issue or matter.
If the Indemnitee is not wholly successful in such Proceeding, the Company also
shall indemnify Indemnitee against all Expenses reasonably incurred in
connection with a claim, issue or matter related to any claim, issue, or matter
on which the Indemnitee was successful. For purposes of this Section and without
limitation, the termination of any claim, issue or matter in such a Proceeding
by dismissal, with or without prejudice, shall be deemed to be a successful
result as to such claim, issue or matter.
6. Indemnification For Expenses of a Witness. Notwithstanding any other
provision of this Agreement, to the extent that Indemnitee is, by reason of his
Corporate Status, a witness in any Proceeding to which Indemnitee is not a
party, he shall be indemnified against all Expenses actually and reasonably
incurred by him or on his behalf in connection therewith.
7. Additional Indemnification.
(a) Notwithstanding any limitation in Sections 3, 4, or 5, the Company
shall indemnify Indemnitee to the fullest extent permitted by law if Indemnitee
is a party to or threatened to be made a party to any Proceeding (including a
Proceeding by or in the right of the Company to procure a judgment in its favor)
against all Expenses, judgments, fines and amounts paid in settlement actually
and reasonably incurred by Indemnitee in connection with the Proceeding. No
indemnity shall be made under this Section 7(a) on account of Indemnitee's
conduct which
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<PAGE>
constitutes a breach of Indemnitee's duty of loyalty to the Company or its
shareholders or is an act or omission not in good faith or which involves
intentional misconduct or a knowing violation of the law.
(b) Notwithstanding any limitation in Sections 3, 4, 5 or 7(a), the
Company shall indemnify Indemnitee to the fullest extent permitted by law if
Indemnitee is a party to or threatened to be made a party to any Proceeding
(including a Proceeding by or in the right of the Company to procure a judgement
in its favor) against all Expenses, judgments, fines and amounts paid in
settlement actually and reasonably incurred by Indemnitee in connection with the
Proceeding.
(c) For purposes of Sections 7(a) and 7(b), the meaning of the phrase
"to the fullest extent permitted by law" shall include, but not be limited to:
i. to the fullest extent permitted by the provision of the Act
that authorizes or contemplates additional indemnification by agreement, or the
corresponding provision of any amendment to or replacement of the Act, and
ii. to the fullest extent authorized or permitted by any
amendments to or replacements of the Act adopted after the date of this
Agreement that increase the extent to which a corporation may indemnify its
officers and directors.
8. Exclusions. Notwithstanding any provision in this Agreement, the Company
shall not be obligated under this Agreement to make any indemnity in connection
with any claim made against Indemnitee:
(a) for which payment has actually been made to or on behalf of
Indemnitee under any insurance policy or other indemnity provision, except with
respect to any excess beyond the amount paid under any insurance policy or other
indemnity provision;
(b) for any transaction from which Indemnitee derived an improper
personal benefit;
(c) for an accounting of profits made from the purchase and sale (or
sale and purchase) by Indemnitee of securities of the Company within the meaning
of Section 16(b) of the Securities Exchange Act of 1934, as amended, or similar
provisions of state statutory law or common law;
(d) if a court having jurisdiction in the matter shall finally
determine that such indemnification is not lawful under any applicable statute
or public policy (and, in this respect, both the Company and Indemnitee have
been advised that the Securities and Exchange Commission believes that
indemnification for liabilities arising under the federal securities laws is
against public policy and is, therefore, unenforceable and that claims for
indemnification should be submitted to appropriate courts for adjudication); or
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<PAGE>
(e) in connection with any Proceeding (or part of any Proceeding)
initiated by Indemnitee, or any Proceeding by Indemnitee against the Company or
its directors, officers, employees or other indemnitees, unless (i) the Company
is expressly required by law to make the indemnification, (ii) the Proceeding
was authorized by the Board of Directors of the Company, (iii) the Company
provides the indemnification, in its sole discretion, pursuant to the powers
vested in the Company under applicable law, or (iv) Indemnitee initiated the
Proceeding pursuant to Section 13 of this Agreement and Indemnitee is successful
in whole or in part in the Proceeding.
9. Advances of Expenses. Notwithstanding any provision of this Agreement to
the contrary, the Company shall advance the expenses incurred by Indemnitee in
connection with any Proceeding within 30 days after the receipt by the Company
of a statement or statements requesting such advances from time to time, whether
prior to or after final disposition of any Proceeding. Advances shall be
unsecured and interest free. Advances shall be made without regard to
Indemnitee's ability to repay the expenses and without regard to Indemnitee's
ultimate entitlement to indemnification under the other provisions of this
Agreement. Advances shall include any and all reasonable Expenses incurred
pursuing an action to enforce this right of advancement, including Expenses
incurred preparing and forwarding statements to the Company to support the
advances claimed. The Indemnitee shall qualify for advances solely upon the
execution and delivery to the Company of an undertaking providing that the
Indemnitee undertakes to repay the advance to the extent that it is ultimately
determined that Indemnitee is not entitled to be indemnified by the Company.
10. Procedure for Notification and Defense of Claim.
(a) To obtain indemnification under this Agreement, Indemnitee shall
submit to the Company a written request, including therein or therewith such
documentation and information as is reasonably available to Indemnitee and is
reasonably necessary to determine whether and to what extent Indemnitee is
entitled to indemnification, not later than thirty (30) days after receipt by
Indemnitee of notice of the commencement of any Proceeding. The omission to
notify the Company will not relieve the Company from any liability which it may
have to Indemnitee otherwise than under this Agreement. The Secretary of the
Company shall, promptly upon receipt of such a request for indemnification,
advise the Board in writing that Indemnitee has requested indemnification.
(b) The Company will be entitled to participate in the Proceeding at
its own expense.
(c) Except as otherwise provided below, the Company may, at its option
and jointly with any other indemnifying party similarly notified and electing to
assume such defense, assume the defense of the Proceeding, with legal counsel
reasonably satisfactory to the Indemnitee. Indemnitee shall have the right to
use separate legal counsel in the Proceeding, but the Company shall not be
liable to Indemnitee under this Agreement, including Section 9 above, for the
fees and expenses of separate legal counsel incurred after notice from the
Company of its assumption of the defense, unless (i) Indemnitee reasonably
concludes that there may be a conflict of interest between the Company and
Indemnitee in the conduct of the defense of the Proceeding or (ii) the Company
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<PAGE>
does not use legal counsel to assume the defense of such Proceeding. The Company
shall not be entitled to assume the defense of any Proceeding brought by or on
behalf of the Company or as to which Indemnitee shall have made the conclusion
provided for in (i) above.
(d) If two or more persons who may be entitled to indemnification from
the Company, including the Indemnitee, are parties to any Proceeding, the
Company may require Indemnitee to use the same legal counsel as the other
parties. Indemnitee shall have the right to use separate legal counsel in the
Proceeding, but the Company shall not be liable to Indemnitee under this
Agreement, including Section 9 above, for the fees and expenses of separate
legal counsel incurred after notice from the Company of the requirement to use
the same legal counsel as the other parties, unless the Indemnitee reasonably
concludes that there may be a conflict of interest between Indemnitee and any of
the other parties required by the Company to be represented by the same legal
counsel.
(e) The Company shall not be liable to indemnify Indemnitee under this
Agreement for any amounts paid in settlement of any Proceeding effected without
its written consent, which shall not be unreasonably withheld. Indemnitee shall
permit the Company to settle any Proceeding the defense of which it assumes,
except that the Company shall not settle any action or claim in any manner which
would impose any penalty or limitation on Indemnitee without Indemnitee's
written consent, which may be given or withheld in Indemnitee's sole discretion.
11. Procedure Upon Application for Indemnification.
(a) Upon written request by Indemnitee for indemnification pursuant to
the first sentence of Section 10(a), a determination, if required by applicable
law, with respect to Indemnitee's entitlement thereto shall be made in the
specific case: (i) if a Change in Control shall have occurred, by Independent
Counsel in a written opinion to the Board of Directors, a copy of which shall be
delivered to Indemnitee; or (ii) if a Change in Control shall not have occurred,
(A) by a majority vote of the Disinterested Directors, even though less than a
quorum of the Board, or (B) if there are no such Disinterested Directors or, if
such Disinterested Directors so direct, by Independent Counsel in a written
opinion to the Board, a copy of which shall be delivered to Indemnitee or (C) if
so directed by the Board, by the stockholders of the Company; and, if it is so
determined that Indemnitee is entitled to indemnification, payment to Indemnitee
shall be made within ten (10) days after such determination. Indemnitee shall
cooperate with the person, persons or entity making such determination with
respect to Indemnitee's entitlement to indemnification, including providing to
such person, persons or entity upon reasonable advance request any documentation
or information which is not privileged or otherwise protected from disclosure
and which is reasonably available to Indemnitee and reasonably necessary to such
determination. Any costs or expenses (including attorneys' fees and
disbursements) incurred by Indemnitee in so cooperating with the person, persons
or entity making such determination shall be borne by the Company (irrespective
of the determination as to Indemnitee's entitlement to indemnification) and the
Company hereby indemnifies and agrees to hold Indemnitee harmless therefrom.
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<PAGE>
(b) In the event the determination of entitlement to indemnification
is to be made by Independent Counsel pursuant to Section 11(a) hereof, the
Independent Counsel shall be selected as provided in this Section 11(b). If a
Change in Control shall not have occurred, the Independent Counsel shall be
selected by the Board of Directors, and the Company shall give written notice to
Indemnitee advising him of the identity of the Independent Counsel so selected.
If a Change in Control shall have occurred, the Independent Counsel shall be
selected by Indemnitee (unless Indemnitee shall request that such selection be
made by the Board of Directors, in which event the preceding sentence shall
apply), and Indemnitee shall give written notice to the Company advising it of
the identity of the Independent Counsel so selected. In either event, Indemnitee
or the Company, as the case may be, may, within 10 days after such written
notice of selection shall have been given, deliver to the Company or to
Indemnitee, as the case may be, a written objection to such selection; provided,
however, that such objection may be asserted only on the ground that the
Independent Counsel so selected does not meet the requirements of "Independent
Counsel" as defined in Section 2 of this Agreement, and the objection shall set
forth with particularity the factual basis of such assertion. Absent a proper
and timely objection, the person so selected shall act as Independent Counsel.
If such written objection is so made and substantiated, the Independent Counsel
so selected may not serve as Independent Counsel unless and until such objection
is withdrawn or a court has determined that such objection is without merit. If,
within 20 days after submission by Indemnitee of a written request for
indemnification pursuant to Section 10(a) hereof, no Independent Counsel shall
have been selected and not objected to, either the Company or Indemnitee may
petition a court of competent jurisdiction for resolution of any objection which
shall have been made by the Company or Indemnitee to the other's selection of
Independent Counsel and/or for the appointment as Independent Counsel of a
person selected by the Court or by such other person as the Court shall
designate, and the person with respect to whom all objections are so resolved or
the person so appointed shall act as Independent Counsel under Section 11(a)
hereof. Upon the due commencement of any judicial proceeding or arbitration
pursuant to Section 13(a) of this Agreement, Independent Counsel shall be
discharged and relieved of any further responsibility in such capacity (subject
to the applicable standards of professional conduct then prevailing).
12. Presumptions and Effect of Certain Proceedings.
(a) In making a determination with respect to entitlement to
indemnification hereunder, the person or persons or entity making such
determination shall presume that Indemnitee is entitled to indemnification under
this Agreement if Indemnitee has submitted a request for indemnification in
accordance with Section 10(a) of this Agreement, and the Company shall have the
burden of proof to overcome that presumption in connection with the making by
any person, persons or entity of any determination contrary to that presumption.
Neither the failure of the Company (including by its directors or independent
legal counsel) to have made a determination prior to the commencement of any
action pursuant to this Agreement that indemnification is proper in the
circumstances because Indemnitee has met the applicable standard of conduct, nor
an actual determination by the Company (including by its directors or
independent legal counsel) that Indemnitee has not met such applicable standard
of conduct, shall be a defense to the action or create a presumption that
Indemnitee has not met the applicable standard of conduct.
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<PAGE>
(b) If the person, persons or entity empowered or selected under
Section 11 of this Agreement to determine whether Indemnitee is entitled to
indemnification shall not have made a determination within sixty (60) days after
receipt by the Company of the request therefor, the requisite determination of
entitlement to indemnification shall be deemed to have been made and Indemnitee
shall be entitled to such indemnification, absent (i) a misstatement by
Indemnitee of a material fact, or an omission of a material fact necessary to
make Indemnitee's statement not materially misleading, in connection with the
request for indemnification, or (ii) a prohibition of such indemnification under
applicable law; provided, however, that such 60-day period may be extended for a
reasonable time, not to exceed an additional thirty (30) days, if the person,
persons or entity making the determination with respect to entitlement to
indemnification in good faith requires such additional time for the obtaining or
evaluating of documentation and/or information relating thereto; and provided,
further, that the foregoing provisions of this Section 12(b) shall not apply (i)
if the determination of entitlement to indemnification is to be made by the
stockholders pursuant to Section 11(a) of this Agreement and if (A) within
fifteen (15) days after receipt by the Company of the request for such
determination the Board of Directors has resolved to submit such determination
to the stockholders for their consideration at an annual meeting thereof to be
held within seventy five (75) days after such receipt and such determination is
made thereat, or (B) a special meeting of stockholders is called within fifteen
(15) days after such receipt for the purpose of making such determination, such
meeting is held for such purpose within sixty (60) days after having been so
called and such determination is made thereat, or (ii) if the determination of
entitlement to indemnification is to be made by Independent Counsel pursuant to
Section 11(a) of this Agreement.
(c) The termination of any Proceeding or of any claim, issue or matter
therein, by judgment, order, settlement or conviction, or upon a plea of nolo
contendere or its equivalent, shall not (except as otherwise expressly provided
in this Agreement) of itself adversely affect the right of Indemnitee to
indemnification or create a presumption that Indemnitee did not act in good
faith and in a manner which he reasonably believed to be in or not opposed to
the best interests of the Company or, with respect to any criminal Proceeding,
that Indemnitee had reasonable cause to believe that his conduct was unlawful.
(d) Reliance as Safe Harbor. For purposes of any determination of good
faith, Indemnitee shall be deemed to have acted in good faith if Indemnitee's
action is based on the records or books of account of the Enterprise, including
financial statements, or on information supplied to Indemnitee by the officers
of the Enterprise in the course of their duties, or on the advice of legal
counsel for the Enterprise or on information or records given or reports made to
the Enterprise by an independent certified public accountant or by an appraiser
or other expert selected with the reasonable care by the Enterprise. The
provisions of this Section 12(d) shall not be deemed to be exclusive or to limit
in any way the other circumstances in which the Indemnitee may be deemed to have
met the applicable standard of conduct set forth in this Agreement.
(e) Actions of Others. The knowledge and/or actions, or failure to
act, of any director, officer, agent or employee of the Enterprise shall not be
imputed to Indemnitee for purposes of determining the right to indemnification
under this Agreement.
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<PAGE>
13. Remedies of Indemnitee.
(a) In the event that (i) a determination is made pursuant to Section
11 of this Agreement that Indemnitee is not entitled to indemnification under
this Agreement, (ii) advancement of Expenses is not timely made pursuant to
Section 9 of this Agreement, (iii) no determination of entitlement to
indemnification shall have been made pursuant to Section 11(a) of this Agreement
within 90 days after receipt by the Company of the request for indemnification,
(iv) payment of indemnification is not made pursuant to Section 5, 6, 7 or the
last sentence of Section 11(a) of this Agreement within ten (10) days after
receipt by the Company of a written request therefor, or (v) payment of
indemnification pursuant to Section 3 or 4 of this Agreement is not made within
ten (10) days after a determination has been made that Indemnitee is entitled to
indemnification, Indemnitee shall be entitled to an adjudication by a court of
his entitlement to such indemnification or advancement of Expenses.
Alternatively, Indemnitee, at his option, may seek an award in arbitration to be
conducted by a single arbitrator pursuant to the Commercial Arbitration Rules of
the American Arbitration Association. Indemnitee shall commence such proceeding
seeking an adjudication or an award in arbitration within 180 days following the
date on which Indemnitee first has the right to commence such proceeding
pursuant to this Section 13(a); provided, however, that the foregoing clause
shall not apply in respect of a proceeding brought by Indemnitee to enforce his
rights under Section 5 of this Agreement. The Company shall not oppose
Indemnitee's right to seek any such adjudication or award in arbitration.
(b) In the event that a determination shall have been made pursuant to
Section 11(a) of this Agreement that Indemnitee is not entitled to
indemnification, any judicial proceeding or arbitration commenced pursuant to
this Section 13 shall be conducted in all respects as a de novo trial, or
arbitration, on the merits and Indemnitee shall not be prejudiced by reason of
that adverse determination.
(c) If a determination shall have been made pursuant to Section 11(a)
of this Agreement that Indemnitee is entitled to indemnification, the Company
shall be bound by such determination in any judicial proceeding or arbitration
commenced pursuant to this Section 13, absent (i) a misstatement by Indemnitee
of a material fact, or an omission of a material fact necessary to make
Indemnitee's statement not materially misleading, in connection with the request
for indemnification, or (ii) a prohibition of such indemnification under
applicable law.
(d) In the event that Indemnitee, pursuant to this Section 13, seeks a
judicial adjudication of or an award in arbitration to enforce his rights under,
or to recover damages for breach of, this Agreement, Indemnitee shall be
entitled to recover from the Company, and shall be indemnified by the Company
against, any and all Expenses actually and reasonably incurred by him in such
judicial adjudication or arbitration, but only if he prevails therein. If it
shall be determined in said judicial adjudication or arbitration that Indemnitee
is entitled to receive part but not all of the indemnification or advancement of
Expenses sought, the Indemnitee shall be entitled to recover from the Company,
and shall be indemnified by the Company against, any and all Expenses reasonably
incurred by Indemnitee in connection with such judicial adjudication or
arbitration.
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<PAGE>
(e) The Company shall be precluded from asserting in any judicial
proceeding or arbitration commenced pursuant to this Section 13 that the
procedures and presumptions of this Agreement are not valid, binding and
enforceable and shall stipulate in any such court or before any such arbitrator
that the Company is bound by all the provisions of this Agreement.
14. Non-exclusivity; Survival of Rights; Insurance; Subrogation.
(a) The rights of indemnification and to receive advancement of
Expenses as provided by this Agreement shall not be deemed exclusive of any
other rights to which Indemnitee may at any time be entitled under applicable
law, the Company's Articles of Incorporation, the Company's Bylaws, any
agreement, a vote of stockholders or a resolution of directors, or otherwise. No
amendment, alteration or repeal of this Agreement or of any provision hereof
shall limit or restrict any right of Indemnitee under this Agreement in respect
of any action taken or omitted by such Indemnitee in his Corporate Status prior
to such amendment, alteration or repeal. To the extent that a change in the Act,
whether by statute or judicial decision, permits greater indemnification or
advancement of Expenses than would be afforded currently under the Company's
Bylaws and this Agreement, it is the intent of the parties hereto that
Indemnitee shall enjoy by this Agreement the greater benefits so afforded by
such change. No right or remedy herein conferred is intended to be exclusive of
any other right or remedy, and every other right and remedy shall be cumulative
and in addition to every other right and remedy given hereunder or now or
hereafter existing at law or in equity or otherwise. The assertion or employment
of any right or remedy hereunder, or otherwise, shall not prevent the concurrent
assertion or employment of any other right or remedy.
(b) To the extent that the Company maintains an insurance policy or
policies providing liability insurance for directors, officers, employees, or
agents of the Company or of any other corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise which such person serves at the
request of the Company, Indemnitee shall be covered by such policy or policies
in accordance with its or their terms to the maximum extent of the coverage
available for any such director, officer, employee or agent under such policy or
policies.
(c) In the event of any payment under this Agreement, the Company
shall be subrogated to the extent of such payment to all of the rights of
recovery of Indemnitee, who shall execute all papers required and take all
action necessary to secure such rights, including execution of such documents as
are necessary to enable the Company to bring suit to enforce such rights.
(d) The Company shall not be liable under this Agreement to make any
payment of amounts otherwise indemnifiable (or for which advancement is provided
hereunder) hereunder if and to the extent that Indemnitee has otherwise actually
received such payment under any insurance policy, contract, agreement or
otherwise.
(e) The Company's obligation to indemnify or advance Expenses
hereunder to Indemnitee who is or was serving at the request of the Company as a
director, officer, employee or agent of any other corporation, partnership,
joint venture, trust, employee benefit plan or other
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<PAGE>
enterprise shall be reduced by any amount Indemnitee has actually received as
indemnification or advancement of expenses from such other corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise.
15. Duration of Agreement. This Agreement shall continue until and
terminate upon the later of: (a) 10 years after the date that Indemnitee shall
have ceased to serve as a director or officer of the Company or as a director,
officer, employee or agent of any other corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise which Indemnitee served at the
request of the Company; or (b) the final termination of any Proceeding then
pending in respect of which Indemnitee is granted rights of indemnification or
advancement of Expenses hereunder and of any proceeding commenced by Indemnitee
pursuant to Section 13 of this Agreement relating thereto. This Agreement shall
be binding upon the Company and its successors and assigns and shall inure to
the benefit of Indemnitee and his heirs, executors and administrators.
16. Severability. If any provision or provisions of this Agreement shall be
held to be invalid, illegal or unenforceable for any reason whatsoever: (a) the
validity, legality and enforceability of the remaining provisions of this
Agreement (including without limitation, each portion of any Section of this
Agreement containing any such provision held to be invalid, illegal or
unenforceable, that is not itself invalid, illegal or unenforceable) shall not
in any way be affected or impaired thereby and shall remain enforceable to the
fullest extent permitted by law; (b) such provision or provisions shall be
deemed reformed to the extent necessary to conform to applicable law and to give
the maximum effect to the intent of the parties hereto; and (c) to the fullest
extent possible, the provisions of this Agreement (including, without
limitation, each portion of any Section of this Agreement containing any such
provision held to be invalid, illegal or unenforceable, that is not itself
invalid, illegal or unenforceable) shall be construed so as to give effect to
the intent manifested thereby.
17. Enforcement.
(a) The Company expressly confirms and agrees that it has entered into
this Agreement and assumed the obligations imposed on it hereby in order to
induce Indemnitee to serve as a director or officer of the Company, and the
Company acknowledges that Indemnitee is relying upon this Agreement in serving
as a director or officer of the Company.
(b) This Agreement constitutes the entire agreement between the
parties hereto with respect to the subject matter hereof and supersedes all
prior agreements and understandings, oral, written and implied, between the
parties hereto with respect to the subject matter hereof.
18. Modification and Waiver. No supplement, modification or amendment of
this Agreement shall be binding unless executed in writing by the parties
thereto. No waiver of any of the provisions of this Agreement shall be deemed or
shall constitute a waiver of any other provisions of this Agreement nor shall
any waiver constitute a continuing waiver.
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<PAGE>
19. Notice by Indemnitee. Indemnitee agrees promptly to notify the Company
in writing upon being served with any summons, citation, subpoena, complaint,
indictment, information or other document relating to any Proceeding or matter
which may be subject to indemnification or advancement of Expenses covered
hereunder. The failure of Indemnitee to so notify the Company shall not relieve
the Company of any obligation which it may have to the Indemnitee under this
Agreement or otherwise.
20. Notices. All notices, requests, demands and other communications under
this Agreement shall be in writing and shall be deemed to have been duly given
(a) if delivered by hand and receipted for by the party to whom said notice or
other communication shall have been directed, or (b) mailed by certified or
registered mail with postage prepaid, on the third business day after the date
on which it is so mailed:
(a) If to Indemnitee, at the address indicated on the signature page
of this Agreement, or such other address as Indemnitee shall provide to the
Company.
(b) If to the Company to
Mentor Graphics Corporation
8005 SW Boeckman Road
Wilsonville, OR 97070-7777
Attention: Secretary
or to any other address as may have been furnished to Indemnitee by the Company.
21. Contribution. To the fullest extent permissible under applicable law,
if the indemnification provided for in this Agreement is unavailable to
Indemnitee for any reason whatsoever, the Company, in lieu of indemnifying
Indemnitee, shall contribute to the amount incurred by Indemnitee, whether for
judgments, fines, penalties, excise taxes, amounts paid or to be paid in
settlement and/or for Expenses, in connection with any claim relating to an
indemnifiable event under this Agreement, in such proportion as is deemed fair
and reasonable in light of all of the circumstances of such Proceeding in order
to reflect (i) the relative benefits received by the Company and Indemnitee as a
result of the event(s) and/or transaction(s) giving cause to such Proceeding;
and/or (ii) the relative fault of the Company (and its directors, officers,
employees and agents) and Indemnitee in connection with such event(s) and/or
transaction(s).
22. Applicable Law. This Agreement shall be governed by and construed in
accordance with the law of the state of Oregon, without regard to its conflict
of laws rules.
23. Identical Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall for all purposes be deemed to be an original
but all of which together shall constitute one and the same Agreement. Only one
such counterpart signed by the party against whom enforceability is sought needs
to be produced to evidence the existence of this Agreement.
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<PAGE>
24. Miscellaneous. Use of the masculine pronoun shall be deemed to include
usage of the feminine pronoun where appropriate. The headings of the paragraphs
of this Agreement are inserted for convenience only and shall not be deemed to
constitute part of this Agreement or to affect the construction thereof.
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IN WITNESS WHEREOF, the parties have caused this Agreement to be signed as
of the day and year first above written.
MENTOR GRAPHICS CORPORATION INDEMNITEE
By: DEAN FREED
------------------------------- -----------------------------------------
Dean Freed, Vice President and -----------------------------------------
General Counsel Address:
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[Date]
[Officer name]
[Address]
Dear [Name]:
The Board of Directors (the "Board") of Mentor Graphics Corporation
(the "Corporation") has determined that it is in the best interests of the
Corporation and its shareholders to assure that the Corporation will continue to
have your dedication and services notwithstanding the possibility, threat or
occurrence of a Change in Control (as defined herein). The Board believes it is
imperative to diminish the distraction that you would face by virtue of the
personal uncertainties created by a pending or threatened Change in Control and
to encourage your full attention and dedication to the Corporation currently and
in the event of any threatened or pending Change in Control. Further, the Board
desires to provide you with compensation and benefits arrangements upon a Change
in Control which ensure that your compensation and benefits expectations will be
satisfied and which are competitive with those of other corporations. Therefore,
in order to accomplish these objectives, the Board has caused the Corporation to
enter into this Agreement (the "Agreement").
1. Term of Agreement. The terms of this Agreement shall become
effective upon the execution hereof by the Corporation and shall continue unless
terminated by written agreement between you and the Corporation; provided, that
if a Change in Control occurs, then the term of this Agreement shall continue in
effect for a period of not less than [twelve (12)][twenty-four (24)] months
beyond the date (the "Change in Control Date") on which a Change in Control
occurs. No benefits shall be payable hereunder unless there has been a Change in
Control.
2. Change in Control. A Change in Control shall be deemed to occur
upon the earliest to occur after the date of this Agreement of any of the
following events:
2.1. Acquisition of Stock by Third Party. Any Person (as defined
below) is or becomes the Beneficial Owner (as defined below), directly or
indirectly, of securities of the Corporation representing twenty percent (20%)
or more of the combined voting power of the Corporation's then outstanding
securities;
2.2. Change in Board of Directors. During any period of two (2)
consecutive years (not including any period prior to the execution of this
Agreement), individuals who at the beginning of such period constitute the
Board, and any new director (other than a director designated by a person who
has entered into an agreement with the Corporation to effect a transaction
described in
<PAGE>
Page 2
Sections 2.1, 2.3 or 2.4) whose election by the Board or nomination for election
by the Corporation's shareholders was approved by a vote of at least two-thirds
of the directors then still in office who either were directors at the beginning
of the period or whose election or nomination for election was previously so
approved, cease for any reason to constitute at least a majority of the members
of the Board;
2.3. Corporate Transactions. The effective date of a merger or
consolidation of the Corporation with any other entity, other than a merger or
consolidation which would result in the voting securities of the Corporation
outstanding immediately prior to such merger or consolidation continuing to
represent (either by remaining outstanding or by being converted into voting
securities of the surviving entity) more than 51% of the combined voting power
of the voting securities of the surviving entity outstanding immediately after
such merger or consolidation and with the power to elect at least a majority of
the board of directors or other governing body of such surviving entity;
2.4. Liquidation. The approval by the shareholders of the
Corporation of a complete liquidation of the Corporation or an agreement for the
sale or disposition by the Corporation of all or substantially all of the
Corporation's assets; or
2.5. Other Events. There occurs any other event of a nature that
would be required to be reported in response to Item 6(e) of Schedule 14A of
Regulation 14A (or a response to any similar item on any similar schedule or
form) promulgated under the Exchange Act (as defined below), whether or not the
Corporation is then subject to such reporting requirement.
2.6. Certain Definitions. For purposes of this Section 2, the
following terms shall have the following meanings:
"Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
"Person" shall have the meaning as set forth in Sections
13(d) and 14(d) of the Exchange Act; provided, however, that Person shall
exclude (i) the Corporation, (ii) any trustee or other fiduciary holding
securities under an employee benefit plan of the Corporation and (iii) any
corporation owned, directly or indirectly, by the shareholders of the
Corporation in substantially the same proportions as their ownership of stock of
the Corporation.
"Beneficial Owner" shall have the meaning given to such term
in Rule 13d-3 under the Exchange Act; provided, however, that Beneficial Owner
shall exclude any Person otherwise becoming a Beneficial Owner by reason of the
shareholders of the Corporation approving a merger of the Corporation with
another entity.
3. Termination Following a Change in Control.
3.1. General. You shall be entitled to the benefits provided in
Section 4 upon the termination of your employment, provided (a) that such
termination occurs after the date on which the shareholders of the Corporation
approve a transaction the consummation of which would result in the occurrence
of a Change in Control (the "Approval Date") and (b) the Change in Control
actually occurs, unless such termination is (x) because of your death or
Disability (as defined in Section 3.2), (y) by the Corporation for Cause (as
defined in Section 3.3), or (z) by you other than for Good Reason (as defined in
Section 3.4).
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3.2. Definition of Disability. If, as a result of your incapacity
due to physical or mental illness, you shall have been absent from the full-time
performance of your duties with the Corporation for six (6) consecutive months,
and within thirty (30) days after written notice of termination is given you
shall not have returned to the full-time performance of your duties, your
employment may be terminated for "Disability."
3.3. Definition of Cause. Termination by the Corporation of your
employment for "Cause" shall mean termination (a) upon your willful and
continued failure to perform substantially your duties with the Corporation
(other than any such failure resulting from your incapacity due to physical or
mental illness or any such actual or anticipated failure after your issuance of
a Notice of Termination (as defined in Section 3.5) for Good Reason), after a
written demand for substantial performance is delivered to you by the Board
which demand specifically identifies the manner in which the Board believes that
you have not substantially performed your duties, (b) upon your willful and
continued failure to follow and comply substantially with the specific and
lawful directives of the Board, as reasonably determined by the Board (other
than any such failure resulting from your incapacity due to physical or mental
illness or any such actual or anticipated failure after your issuance of a
Notice of Termination for Good Reason), after a written demand for substantial
performance is delivered to you by the Board, which demand specifically
identifies the manner in which the Board believes that you have not
substantially followed or complied with the directives of the Board, (c) upon
your willful commission of an act of fraud or dishonesty resulting in material
economic or financial injury to the Corporation, or (d) upon your willful
engagement in illegal conduct which is materially and demonstrably injurious to
the Corporation. For purposes of this Section 3.3, no act, or failure to act, on
your part shall be deemed "willful" unless done, or omitted to be done, by you
not in good faith. Notwithstanding the foregoing, you shall not be deemed
terminated for Cause pursuant to Sections 3.3(a), (b), (c) or (d) hereof unless
and until there shall have been delivered to you a copy of a resolution duly
adopted by the affirmative vote of not less than three-quarters of the entire
membership of the Board at a meeting of the Board (after reasonable notice to
you, an opportunity for you, together with your counsel, to be heard before the
Board and a reasonable opportunity to cure), finding that in the Board's good
faith opinion you were guilty of conduct set forth above in Section 3.3(a), (b),
(c) or (d) and specifying the particulars thereof in reasonable detail. In the
event of a Change in Control under Section 2.3 pursuant to which the Corporation
is not the surviving entity, then on and after the Change in Control Date all
determinations and actions required to be taken by the Board under this Section
3.3 shall be made or taken by the board of directors of the surviving entity, or
if the surviving entity is a subsidiary, then by the board of directors of the
ultimate parent corporation of the surviving entity.
3.4. Good Reason. You shall be entitled to terminate your
employment for Good Reason. For purposes of this Agreement, "Good Reason" shall
mean, without your express written consent, the occurrence after the Approval
Date of any of the following circumstances unless, in the case of Sections
3.4(a), (f), (g), or (h), such circumstances are fully corrected (provided such
circumstances are capable of correction) prior to the Date of Termination (as
defined in Section 3.6) specified in the Notice of Termination given in respect
thereof:
(a) the assignment to you of any duties inconsistent with
the position in the Corporation that you held immediately prior to the
Approval Date, a significant adverse alteration in the nature or status of
your responsibilities or the conditions of your employment from those in
effect immediately prior to the Approval Date, or any other action by
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the Corporation that results in a material diminution in your position,
authority, title, duties or responsibilities;
(b) the Corporation's reduction of your annual base salary
as in effect on the Approval Date or as the same may be increased from time
to time;
(c) the relocation of the Corporation's offices at which you
are principally employed immediately prior to the Approval Date (your
"Principal Location") to a location more than twenty-five (25) miles from
such location or the Corporation's requiring you, without your written
consent, to be based anywhere other than your Principal Location, except
for required travel on the Corporation's business to an extent
substantially consistent with your present business travel obligations;
(d) the Corporation's failure to pay to you any portion of
your current compensation or to pay to you any portion of an installment of
deferred compensation under any deferred compensation program of the
Corporation within seven (7) days of the date such compensation is due;
(e) the Corporation's failure to continue in effect any
material compensation or benefit plan or practice in which you are eligible
to participate in on the Approval Date (other than any equity based plan),
unless an equitable arrangement (embodied in an ongoing substitute or
alternative plan) has been made with respect to such plan, or the
Corporation's failure to continue your participation therein (or in such
substitute or alternative plan) on a basis not materially less favorable,
both in terms of the amount of benefits provided and the level of your
participation relative to other participants, as existed at the time of the
Approval Date;
(f) the Corporation's failure to continue to provide you
with benefits substantially similar in the aggregate to those enjoyed by
you under any of the Corporation's life insurance, medical, health and
accident, disability, pension, retirement, or other benefit plans or
practices in which you and your eligible family members were eligible to
participate in on the Approval Date (other than any equity based plans),
the taking of any action by the Corporation which would directly or
indirectly materially reduce any of such benefits, or the failure by the
Corporation to provide you with the number of paid vacation days to which
you are entitled on the basis of years of service with the Corporation in
accordance with the Corporation's normal vacation policy in effect on the
Approval Date;
(g) the Corporation's failure to obtain a satisfactory
agreement from any successor to assume and agree to perform this Agreement,
as contemplated in Section 6 hereof; or
(h) any purported termination of your employment that is not
effected pursuant to a Notice of Termination satisfying the requirements of
Section 3.6 hereof (and, if applicable, the requirements of Section 3.3
hereof), which purported termination shall not be effective for purposes of
this Agreement.
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Your right to terminate your employment pursuant to this Section 3.4 shall not
be affected by your incapacity due to physical or mental illness. Your continued
employment shall not constitute consent to, or a waiver of rights with respect
to, any circumstance constituting Good Reason hereunder.
3.5. Notice of Termination. Any purported termination of your
employment by the Corporation or by you (other than termination due to death
which shall terminate your employment automatically) shall be communicated by
written Notice of Termination to the other party hereto in accordance with
Section 7. "Notice of Termination" shall mean a notice that shall indicate the
specific termination provision in this Agreement relied upon and shall set forth
in reasonable detail the facts and circumstances claimed to provide a basis for
termination of your employment under the provision so indicated.
3.6. Date of Termination, Etc. "Date of Termination" shall mean
(a) if your employment is terminated due to your death, the date of your death;
(b) if your employment is terminated for Disability, thirty (30) days after
Notice of Termination is given (provided that you shall not have returned to the
full-time performance of your duties during such thirty (30) day period), and
(c) if your employment is terminated pursuant to Section 3.3 or Section 3.4 or
for any other reason (other than death or Disability), the date specified in the
Notice of Termination (which, in the case of a termination for Cause shall not
be less than thirty (30) days from the date such Notice of Termination is given,
and in the case of a termination for Good Reason shall not be less than fifteen
(15) nor more than sixty (60) days from the date such Notice of Termination is
given). Notwithstanding anything to the contrary contained in this Section 3.6,
if within fifteen (15) days after any Notice of Termination is given, the party
receiving such Notice of Termination notifies the other party that a dispute
exists concerning the termination, then the Date of Termination shall be the
date on which the dispute is finally determined, either by mutual written
agreement of the parties, or otherwise; provided, however, that (i) the Date of
Termination shall be extended by a notice of dispute only if such notice is
given in good faith and the party giving such notice pursues the resolution of
such dispute with reasonable diligence; and (ii) in the event of your death
pending a dispute, and the resolution of such dispute is ultimately in your
favor, then the Date of Termination shall be the date specified in the Notice of
Termination.
4. Compensation Upon Termination. The benefits to which you are
entitled upon termination of your employment, subject to Section 3 and the other
terms and conditions of this Agreement, are:
4.1. Cause or Voluntary Termination. If your employment shall be
terminated by the Corporation for Cause or voluntarily terminated by you other
than for Good Reason, the Corporation shall pay you your full base salary
through the Date of Termination at the rate in effect at the time Notice of
Termination is given, plus all other amounts to which you are entitled under any
compensation plan or practice of the Corporation, and the Corporation shall have
no further obligations to you under this Agreement.
4.2. Good Reason or Termination By Corporation Without Cause. If
your employment by the Corporation shall be terminated by you for Good Reason,
or by the Corporation other than for Cause, Disability or death, then you shall
be entitled to the benefits provided below:
(a) the Corporation shall pay to you your full base salary,
when due, through the Date of Termination at the rate in effect at the time
Notice of Termination is given, at the time specified in Section 4.3, plus
(i) that portion of your targeted cash bonuses prorated
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through the Date of Termination, (ii) all accrued but unused vacation time
through the Date of Termination and (iii) all other amounts to which you
are entitled under any compensation plan or practice of the Corporation at
the time such payments are due;
(b) in lieu of any further salary payments to you for
periods subsequent to the Date of Termination, the Corporation shall pay as
severance pay to you, at the time specified in Section 4.3, a lump sum
payment equal to the sum of the following:
(1) [one and one-half (1.5)][two (2)] times your annual
base salary as in effect at the time the Notice of Termination is
given or immediately prior to the Change in Control Date (or the
Approval Date if the Date of Termination is prior to the Change in
Control Date), whichever is greater; and
(2) [one and one-half (1.5)][two (2)] times your
targeted annual bonus as in effect at the time the Notice of
Termination is given or immediately prior to the Change in Control
Date (or the Approval Date if the Date of Termination is prior to the
Change in Control Date), whichever is greater;
(c) for a period of two (2) years following the Date of
Termination, the Corporation shall, at its sole expense as incurred,
provide you with outplacement services, the scope and provider of which
shall be consistent with your status at the Corporation on the Date of
Termination;
(d) for a [eighteen (18)][twenty-four (24)] month period
after such termination, the Corporation shall continue to provide you and
your eligible family members, based on the cost sharing arrangement between
you and the Corporation at the time the Notice of Termination is given,
with medical and dental health benefits and life and disability benefits at
least equal to those which would have been provided to you and them if your
employment had not been terminated or, if more favorable to you, as in
effect generally at any time thereafter; provided, however, that if you
become re-employed with another employer and are eligible to receive such
benefits under another employer's plans, the Corporation's obligations
under this Section 4.2(d) shall be reduced to the extent comparable
benefits are actually received by you during the [eighteen
(18)][twenty-four (24)] month period following your termination, and any
such benefits actually received by you shall be reported to the
Corporation. In the event you are ineligible under the terms of such
benefit plans or programs to continue to be so covered, the Corporation
shall provide you with substantially equivalent coverage through other
sources or will provide you with a lump-sum payment in such amount that,
after all taxes on that amount, shall be equal to the cost to you of
providing yourself such benefit coverage. At the termination of the medical
and dental benefits coverage under the second preceding sentence, you, your
spouse and your dependents shall be entitled to continuation coverage
pursuant to section 4980B of the Internal Revenue Code of 1986, as amended
(the "Code"), sections 601-608 of the Employee Retirement Income Security
Act of 1974, as amended, and under any other applicable law, to the extent
required by such laws, as if you had terminated employment with the
Corporation on the date such benefits coverage terminates. The lump-sum
shall be determined on a present value basis using the interest rate
provided in section 1274(b)(2)(B) of the Code on the Date of Termination;
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(e) the Corporation shall furnish you for six (6) years
following the Date of Termination (without reference to whether the term of
this Agreement continues in effect) with directors' and officers' liability
insurance insuring you against insurable events which occur or have
occurred while you were a director or officer of the Corporation, such
insurance to have policy limits aggregating not less than the amount in
effect immediately prior to the Change in Control or the Approval Date
(whichever is more favorable to you), and otherwise to be in substantially
the same form and to contain substantially the same terms, conditions and
exceptions as the liability issuance policies provided for officers and
directors of the Corporation in force from time to time, provided, however,
that (i) such terms, conditions and exceptions shall not be, in the
aggregate, materially less favorable to you than those in effect on the
date hereof and (ii) if the aggregate annual premiums for such insurance at
any time during such period exceed two hundred percent (200%) of the per
annum rate of premium currently paid by the Corporation for such insurance,
then the Corporation shall provide the maximum coverage that will then be
available at an annual premium equal to two hundred percent (200%) of such
rate;
(f) you shall be fully vested in your accrued benefits under
all qualified or nonqualified pension, profit sharing, deferred
compensation or supplemental plans maintained by the Corporation for your
benefit, and the Corporation shall provide you with additional fully vested
benefits under all defined benefit and cash balance plans in an amount
equal to the benefits which you would have accrued had you continued your
employment with the Corporation until the second anniversary of your Date
of Termination; provided, however, that to the extent that the acceleration
of vesting or enhanced accrual of such benefits would violate any
applicable law or require the Corporation to accelerate the vesting of the
accrued benefits of all participants in such plan or plans or to provide
additional benefit accruals to such participants, the Corporation shall pay
you a lump-sum payment at the time specified in Section 4.3 in an amount
equal to the value of such benefits;
(g) in the event you relocate during the period of [twelve
(12)][twenty-four (24)] months following the Date of Termination in order
to begin new employment, your costs (grossed up for taxes) of such
relocation shall be provided by the Corporation as if the Corporation had
(i) hired you as of the date of this Agreement and provided you with its
"B+" relocation package or (ii) hired you on the Date of Termination,
whichever is greater; and
(h) all unvested stock options held by you on the Date of
Termination shall immediately vest and become exercisable in full and shall
remain exercisable for the period specified in such options,
notwithstanding any vesting schedule or other provisions to the contrary in
the agreements or plans evidencing such options.
4.3. Timing of Payments under Sections 4.1 and 4.2. The payments
provided for in (a) Section 4.1 and (b) Sections 4.2(a), (b) and (f) shall be
made not later than the fifth day following the Date of Termination; provided,
however, that if the amounts of such payments cannot be finally determined on or
before such day, the Corporation shall pay to you on such day an estimate, as
determined in good faith by the Corporation, of the minimum amount of such
payments and shall pay the remainder of such payments (together with interest at
the rate provided in section 1274(b)(2)(B) of the Code) from the Date of
Termination as soon as the amount thereof can be determined but in no event
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later than the thirtieth day after the Date of Termination. In the event that
the amount of the estimated payments exceeds the amount subsequently determined
to have been due, such excess shall constitute a loan by the Corporation to you,
payable on the fifth day after demand by the Corporation (together with interest
at the rate provided in section 1274(b)(2)(B) of the Code) from the date such
payment was made by the Corporation.
4.4. Death or Disability. If your employment by the Corporation
shall be terminated by reason of death or Disability, the Corporation shall
continue payment of your annual base salary, at the rate then in effect on the
date of such termination, for a period of one year.
4.5. No Mitigation. You shall not be required to mitigate the
amount of any payment provided for in this Section 4 by seeking other employment
or otherwise nor, except as provided in Section 4.2(d), shall the amount of any
payment or benefit provided for in this Section 4 be reduced by any compensation
earned by you as the result of employment by another employer or
self-employment, by retirement benefits, by offset against any amount claimed to
be owed by you to the Corporation, or otherwise.
5. Taxes. You shall bear all expense of, and be solely responsible
for, all federal, state, local or foreign taxes due with respect to any payment
received hereunder, including, without limitation, any excise tax imposed by
Section 4999 of the Code; provided, however, that any payment or benefit
received or to be received by you in connection with a Change in Control or the
termination of your employment (whether payable pursuant to the terms of this
Agreement ("Contract Payments") or any other plan, arrangements or agreement
with the Corporation or an affiliate (collectively with the Contract Payments,
the "Total Payments")) that would constitute a "parachute payment" within the
meaning of Section 280G of the Code, shall be reduced to the extent necessary so
that no portion thereof shall be subject to the excise tax imposed by Section
4999 of the Code but only if, by reason of such reduction, the net after-tax
benefit received by you shall exceed the net after-tax benefit received by you
if no such reduction was made. For purposes of this Section 5, "net after-tax
benefit" shall mean (i) the Total Payments which you receive or are then
entitled to receive from the Corporation that would constitute "parachute
payments" within the meaning of Section 280G of the Code, less (ii) the amount
of all federal, state and local income and employment taxes payable by you with
respect to the foregoing calculated at the highest marginal income tax rate for
each year in which the foregoing shall be paid to you (based on the rate in
effect for such year as set forth in the Code as in effect at the time of the
first payment of the foregoing), less (iii) the amount of excise taxes imposed
with respect to the payments and benefits described in (i) above by Section 4999
of the Code. The foregoing determination will be made by the Corporation's
independent certified public accountants serving immediately prior to the Change
in Control (the "Accountants"). In the event that the Accountants are also
serving as accountant or auditor for the individual, group or entity effecting
the Change in Control you may appoint another nationally recognized public
accounting firm to make the determination required hereunder (which firm shall
then be referred to as the Accountants hereunder). All fees and expenses of the
Accountants shall be borne by the Corporation. You will direct the Accountants
to submit their determination and detailed supporting calculations to both you
and the Corporation within fifteen (15) days of receipt from you or the
Corporation that you have received or will receive the Total Payments. If the
Accountants determine that such reduction is required by this Section 5, you, in
your sole and absolute discretion, may determine which Total Payments shall be
reduced to the extent necessary so that no portion thereof shall be subject to
the excise tax imposed by Section 4999 of the Code, and the Corporation shall
pay such reduced amount to you. You and the Corporation will each provide the
Accountants access to and copies of any
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books, records, and documents in the possession of you or the Corporation, as
the case may be, reasonably requested by the Accountants, and otherwise
cooperate with the Accountants in connection with the preparation and issuance
of the determinations and calculations contemplated by this Section 5.
6. Successors; Binding Agreement.
6.1. Successor to Assume Agreement. The Corporation shall require
any successor (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of the
Corporation to expressly assume and agree to perform this Agreement. Failure of
the Corporation to obtain such assumption and agreement prior to the Change in
Control Date shall be a breach of this Agreement and shall entitle you to
terminate your employment and receive compensation from the Corporation in the
same amount and on the same terms to which you would be entitled hereunder if
you terminate your employment for Good Reason following the Approval Date,
except that for purposes of implementing the foregoing, the Change in Control
Date shall be deemed the Date of Termination. Unless expressly provided
otherwise, "Corporation" as used herein shall mean the Corporation as defined in
this Agreement and any successor to its business and/or assets as aforesaid.
6.2. Binding Agreement. This Agreement shall inure to the benefit
of and be enforceable by you and your personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees and
legatees. If you should die while any amount would still be payable to you
hereunder had you continued to live, all such amounts, unless otherwise provided
herein, shall be paid in accordance with the terms of this Agreement to your
devisee, legatee or other designee or, if there is no such designee, to your
estate.
7. Notice. All notices, requests, demands and other communications
which are required or may be given under this Agreement shall be in writing and
shall be deemed to have been duly given when received if personally delivered;
when transmitted if transmitted by telecopy; the day after it is sent, if sent
for next day delivery to a domestic address by recognized overnight delivery
service (e.g., Federal Express); and upon receipt, if sent by certified or
registered mail, return receipt requested. All notices, requests, demands and
other communications shall be addressed to the respective addresses set forth on
the first page of this Agreement, provided that all notices to the Corporation
shall be directed to the attention of the Board with a copy to the Secretary of
the Corporation, or to such other address as either party may have furnished to
the other in writing in accordance herewith, except that notice of change of
address shall be effective only upon receipt.
8. Miscellaneous. No provision of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing and signed by you and such officer as may be specifically designated
by the Board. No waiver by either party hereto at any time of any breach by the
other party hereto of or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time. No agreements or representations, oral or otherwise, express or
implied, with respect to the subject matter hereof have been made by either
party which are not expressly set forth in this Agreement. All references to
sections of the Exchange Act or the Code shall be deemed also to refer to any
successor provisions to such sections. Any payments provided for hereunder shall
be paid net of any applicable withholding required under federal, state or local
law. The obligations of the Corporation under Section 4 shall survive the
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expiration of the term of this Agreement. The section headings contained in this
Agreement are for convenience only, and shall not affect the interpretation of
this Agreement.
9. Severability. The invalidity or unenforceability of any provision
of this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
10. Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument.
11. Suits, Actions, Proceedings, Etc.
11.1. Compensation During Dispute, Etc. Your compensation during
any disagreement, dispute, controversy, claim, suit, action or proceeding
(collectively, a "Dispute"), arising out of or relating to this Agreement or the
interpretation of this Agreement shall be as follows: If there is a termination
followed by a Dispute as to whether you are entitled to the payments and other
benefits provided under this Agreement, then, during the period of that Dispute
the Corporation shall pay you fifty percent (50%) of the amount specified in
Sections 4.2(a) and 4.2(b) hereof, and the Corporation shall provide you with
the other benefits provided in Section 4.2 of this Agreement, if, but only if,
you agree in writing that if the Dispute is resolved against you, you shall
promptly refund to the Corporation all payments you receive under Sections
4.2(a) and 4.2(b) of this Agreement plus interest at the rate provided in
Section 1274(d) of the Code, compounded quarterly. If the Dispute is resolved in
your favor, promptly after resolution of the dispute the Corporation shall pay
you the sum that was withheld during the period of the Dispute plus interest at
the rate provided in Section 1274(d) of the Code, compounded quarterly.
11.2. Legal Fees. The Corporation shall pay to you all legal fees
and expenses incurred by you in connection with any Dispute arising out of or
relating to this Agreement or the interpretation thereof in which you are the
prevailing party (including, without limitation, all such fees and expenses, if
any, incurred in contesting or disputing any termination of your employment or
in seeking to obtain or enforce any right or benefit provided by this Agreement,
or in connection with any tax audit or proceeding to the extent attributable to
the application of section 4999 of the Code to any payment or benefit provided
hereunder).
11.3. Choice of Law; Arbitration. The internal laws of the State
of Oregon, United States of America, applicable to contracts entered into and
wholly to be performed in Oregon by Oregon residents, without reference to any
principles concerning conflicts of law, shall govern the validity of this
Agreement, the construction of its terms and the interpretation of the rights
and duties of the parties hereunder; provided, however, that this Section 11.3
and the parties' rights under this Section 11.3 shall be governed by and
construed in accordance with the Federal Arbitration Act, 9 U.S.C. ss. 1 et.
sec. Any controversy or claim arising out of or relating to this Agreement, or
the breach thereof, shall be settled by the following procedures: Either party
may send the other written notice identifying the matter in dispute and
involving the procedures of this Section 11.3. Within fourteen (14) days after
such written notice is given, one or more principals of each party shall meet at
a mutually agreeable location in Portland, Oregon, for the purpose of
determining whether they can resolve the dispute themselves by written
agreement, and, if not, whether they can agree upon a third-party impartial
arbitrator (the "Arbitrator") to whom to submit the matter in dispute for final
and binding arbitration. If the parties fail
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to resolve the dispute by written agreement or agree on the Arbitrator within
such twenty-one (21) day period, either party may make written application to
the Judicial Arbitration and Mediation Services ("JAMS"), 600 University Street,
Suite 1910, Seattle, Washington 98101, for the appointment of a single
Arbitrator to resolve the dispute by arbitration and at the request of JAMS, the
parties shall meet with JAMS at its offices or confer with JAMS by telephone
within ten (10) calendar days of such request to discuss the dispute and the
qualifications and experience which each party respectively believes the
Arbitrator should have; provided, however, the selection of the Arbitrator shall
be the exclusive decision of JAMS and shall be made within thirty (30) days of
the written application to JAMS. Within 30 days of the selection of the
Arbitrator, the parties shall meet in Portland, Oregon with such Arbitrator at a
place and time designated by the Arbitrator after consultation with the parties
and present their respective positions on the dispute. Each party shall have no
longer than one day to present its position, the entire proceedings before the
Arbitrator shall be on no more than three consecutive days, and the award shall
be made in writing no more than 30 days following the end of the proceeding.
Such award shall be a final and binding determination of the dispute and shall
be fully enforceable as an arbitration award in any court having jurisdiction
and venue over the parties. The prevailing party (as determined by the
Arbitrator) shall in addition be awarded by the Arbitrator such party's own
attorneys' fees and expenses in connection with such proceeding. The
non-prevailing party (as determined by the Arbitrator) shall pay the
Arbitrator's fees and expenses.
12. Effect on Other Agreements. In the event that you are a party to
any employment agreement ("Employment Agreement") with the Corporation, it is
the intention that this Agreement provide benefits which are not otherwise
provided by any Employment Agreement. Therefore, in the event that during the
term of this Agreement you are entitled to payment under both this Agreement and
any Employment Agreement, then you shall only receive the greater of the
benefits provided under either this Agreement or such Employment Agreement, but
not both. In the event you receive benefits under this Agreement, you waive all
rights to receive any benefits under such Employment Agreement, and vice versa.
13. Entire Agreement. This Agreement sets forth the entire agreement
of the parties hereto in respect of the subject matter contained herein and
supersedes all other prior agreements, promises, covenants, arrangements,
communications, representations or warranties, whether oral or written, by any
officer, employee or representative of any party hereto; and any prior agreement
of the parties hereto in respect of the subject matter contained herein,
including, without limitation, any prior severance agreements, is hereby
terminated and canceled; provided, however, that any Employment Agreement as
amended by Section 12 hereof shall remain in full force and effect and shall,
pursuant to the terms and conditions thereof, provide certain severance benefits
to you upon certain terminations of employment. Any of your rights hereunder
shall be in addition to any rights you may otherwise have under benefit plans or
agreements of the Corporation to which you are a party or in which you are a
participant, including, but not limited to, any Corporation sponsored employee
benefit plans and stock options plans. Provisions of this Agreement shall not in
any way abrogate your rights under such other plans and agreements.
<PAGE>
Page 12
If this letter sets forth our agreement on the subject matter hereof,
kindly sign and return to the Corporation the enclosed copy of this letter. A
duly authorized officer of the Corporation will sign this letter and a fully
executed copy will be returned to you, constituting our agreement on this
subject. Unless and until accepted in writing by the Corporation, this Agreement
is deemed to be neither executed nor effective.
Sincerely,
MENTOR GRAPHICS CORPORATION
By: _____________________________________
Its: ____________________________________
Agreed and Accepted,
this _____ day of _______________, 199__.
_______________________________________
[Officer signature]
EXHIBIT 21
MENTOR GRAPHICS' SUBSIDIARIES
The following is a list of wholly owned direct or indirect subsidiaries of
Mentor Graphics Corporation as of December 31, 1998.
Anacad Electrical Engineering S.a.r.l (France)
Antares Corporation
Exemplar Logic, Inc.
Exemplar Logic (Europe) Limited
Mentor Graphics (Canada) Ltd.
Mentor Graphics (Denmark) A/S
Mentor Graphics (Finland) OY
Mentor Graphics (France) S.a.r.l.
Mentor Graphics (Egypt)
Mentor Graphics (Schweiz) AG Switzerland
Mentor Graphics (Singapore) PTE. LTD.
Mentor Graphics (Taiwan) Co. Ltd.
Mentor Graphics (UK) Ltd.
Mentor Graphics Design S.A. (Spain) SA
Mentor Graphics Deutschland (GmbH)
Mentor Graphics (Finance) B.V.
Mentor Graphics Israel Ltd.
Mentor Graphics Japan Co. Ltd.
Mentor Graphics Netherlands B.V.
Mentor Graphics Scandinavia AB
Mentor Graphics (Sophia-Antipolis) EURL
Mentor Graphics (India) Pvt. Ltd.
Mentor Graphics (Ireland) Limited
Mentor Korea Company
Meta Systems S.A.
Model Technology Inc.
Consent of Accountants
The Board of Directors
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, 33-64717, 333-49579 and 333-69223) and on Form S-3 (Nos.
33-52419, 33-56759, 33-60129, 333-277, 333-2883 and 333-11601) of Mentor
Graphics Corporation of our reports dated February 1, 1999, except for note 13,
which is as of February 10, 1999, relating to the balance sheets of Mentor
Graphics Corporation as of December 31, 1998 and 1997, and the related
statements of operations, cash flows and stockholders' equity and related
schedule for each of the years in the three-year period ended December 31, 1998,
which reports appear in the December 31, 1998 annual report on Form 10-K of
Mentor Graphics Corporation.
KPMG Peat Marwick LLP
Portland, Oregon
March 30, 1999
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