-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Gx4/Tu5zlFgQxvBqAq4Td6jDjR1adHBNAoE8ywAcbKplRglJbW0T3MLUkA7pBefA fLfk7IzL4uMJEfqGM5s+Mw== 0000893877-99-000204.txt : 19990402 0000893877-99-000204.hdr.sgml : 19990402 ACCESSION NUMBER: 0000893877-99-000204 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MENTOR GRAPHICS CORP CENTRAL INDEX KEY: 0000701811 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 930786033 STATE OF INCORPORATION: OR FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-13442 FILM NUMBER: 99579747 BUSINESS ADDRESS: STREET 1: 8005 SW BOECKMAN RD CITY: WILSONVILLE STATE: OR ZIP: 97070-7777 BUSINESS PHONE: 5036857000 10-K 1 ANNUAL REPORT 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 ------------------------------------ ---------------------- Portions of the 1999 Proxy Statement Part III 13 Table of Contents Page - -------------------------------------------------------------------------------- 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 14 PART I - -------------------------------------------------------------------------------- Item 1. Business This Form 10-K contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those set forth under the caption "Factors That May Affect Future Results and Financial Condition" under "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. 15 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 16 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 17 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, 18 $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. 19 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. 20 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. 21 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:
Has Served As An Executive Officer of the Name Position Age Company Since - ------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------
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 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:
Quarter ended March 31 June 30 September 30 December 31 - ---------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------
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.
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 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 - ---------------------------------------------------------------------------------------------
23 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
Revenues and Gross Margins Year ended December 31, 1998 Change 1997 Change 1996 - -------------------------------------------------------------------------------------------------- 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% - --------------------------------------------------------------------------------------------------
24 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 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.
OPERATING EXPENSES Year ended December 31, 1998 Change 1997 Change 1996 - ---------------------------------------------------------------------------------------------------- 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% - ----------------------------------------------------------------------------------------------------
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 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 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 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 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 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 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 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 Item 8. Financial Statements and Supplementary Data
CONSOLIDATED STATEMENTS OF OPERATIONS In thousands, except per share data Year ended December 31, 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------- 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.
34
CONSOLIDATED BALANCE SHEETS In thousands As of December 31, 1998 1997 - ----------------------------------------------------------------------------------------------------------- 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.
35
CONSOLIDATED STATEMENTS OF CASH FLOWS In thousands Year ended December 31, 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------- 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.
36
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 - --------------------------------------------------------------------------------------------------------------------------------- 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.
37 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 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 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:
Year ended December 31, 1998 1997 1996 - ------------------------------------------------------------------------ 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 ======== ======== ======== - ------------------------------------------------------------------------
40 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 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:
Year ended December 31, 1998 1997 1996 - ------------------------------------------------------------------------- Domestic $ (15,759) $ (17,976) $ (10,023) Foreign 15,780 (15,075) 8,585 --------- --------- --------- Total $ 21 $ (33,051) $ (1,438) ========= ========= ========= - -------------------------------------------------------------------------
The provision (benefit) for income taxes is as follows:
Year ended December 31, 1998 1997 1996 - ------------------------------------------------------------------------- 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 ========= ========= ========= - -------------------------------------------------------------------------
The effective tax expense (benefit) differs from the statutory federal tax expense (benefit) as follows:
Year ended December 31, 1998 1997 1996 - ------------------------------------------------------------------------- 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 ========= ========= ========= - -------------------------------------------------------------------------
The significant components of deferred income tax expense are as follows:
Year ended December 31, 1998 1997 1996 - -------------------------------------------------------------------------------- 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) ======== ========= ========= - --------------------------------------------------------------------------------
The tax effects of temporary differences and carryforwards which gave rise to significant portions of deferred tax assets were as follows:
As of December 31, 1998 1997 - ------------------------------------------------------------------------------ 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 ======== ======== - ------------------------------------------------------------------------------
42 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:
As of December 31, 1998 1997 - ------------------------------------------------------------------------------- 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 ========= ========= - -------------------------------------------------------------------------------
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 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:
----------- Outstanding ------------ ---- Exercisable ---- Range of Remaining Weighted Weighted Exercise Number of Contractual Average Number of Average Prices Shares Life (Years) Price Shares Price - ------------------------------------------------------------------------------ $ 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 ====== ===== ======== ===== ======== - ------------------------------------------------------------------------------
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
Shares Price - ----------------------------------------------------------------- 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 ======== ======== - -----------------------------------------------------------------
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:
Year ended December 31, 1998 1997 1996 - --------------------------------------------------------------------- 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 ======== ======== ======== - ---------------------------------------------------------------------
45 11 Supplemental Cash Flow Information The following provides additional information concerning supplemental disclosures of cash flow activities:
Year ended December 31, 1998 1997 1996 - -------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------
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:
Year ended December 31 1998 1997 1996 - -------------------------------------------------------------------------- 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 ========= ========= ========= - --------------------------------------------------------------------------
46 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:
Quarter ended March 31 June 30 September 30 December 31 - ----------------------------------------------------------------------------------- 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) - -----------------------------------------------------------------------------------
47 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 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 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 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
Schedule II MENTOR GRAPHICS CORPORATION AND SUBSIDIARIES Valuation and Qualifying Accounts (In Thousands) Beginning Ending Description Balance Additions Deductions Balance - ---------------------------------------------------------------------------------------------------------- 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.
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 EX-3.B 2 ARTICLES OF AMENDMENT 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 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 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 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 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 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 EX-3.C 3 BYLAWS 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 Page 1 - Bylaws of Mentor Graphics Corporation 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 Page 2 - Bylaws of Mentor Graphics Corporation 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. Page 3 - Bylaws of Mentor Graphics Corporation 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 Page 4 - Bylaws of Mentor Graphics Corporation 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 Page 5 - Bylaws of Mentor Graphics Corporation 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 Page 6 - Bylaws of Mentor Graphics Corporation 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. Page 7 - Bylaws of Mentor Graphics Corporation 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 Page 8 - Bylaws of Mentor Graphics Corporation 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, Page 9 - Bylaws of Mentor Graphics Corporation provided that the executive committee shall not have the authority of the Board of Directors in reference to amending the articles of incorporation; adopting a plan of merger or consolidation; recommending to the shareholders the sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all the property and assets of the corporation otherwise than in the usual regular course of its business; recommending to the shareholders a voluntary dissolution of the corporation or a revocation thereof; or amending the bylaws of the corporation. 3.3 Procedures; Meetings; Quorum. (a) The Board of Directors shall appoint a chairman from among the members of the executive committee and shall appoint a secretary who may, but need not, be a member of the executive committee. The chairman shall preside at all meetings of the executive committee and the secretary of the executive committee shall keep a record of its acts and proceedings. (b) Regular meetings of the executive committee, of which no notice shall be necessary, shall be held on such days and at such places as shall be fixed by resolution adopted by the executive committee. Special meetings of the executive committee shall be called at the request of the President or of any member of the executive committee, and shall be held upon such notice as is required by these bylaws for special meetings of the Board of Directors, provided that notice by word of mouth or telephone shall be sufficient if received 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 Page 10 - Bylaws of Mentor Graphics Corporation 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. Page 11 - Bylaws of Mentor Graphics Corporation 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: Page 12 - Bylaws of Mentor Graphics Corporation (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. Page 13 - Bylaws of Mentor Graphics Corporation 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. Page 14 - Bylaws of Mentor Graphics Corporation 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. Page 15 - Bylaws of Mentor Graphics Corporation 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 EX-10.E 4 INDEMNITY AGREEMENT 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 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 -2- 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 -3- 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 -4- 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 -5- 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 -6- (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 -7- 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. -8- (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. -9- (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. -10- 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. -11- (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 -12- 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. -13- 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. -14- 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. -15- 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: -16- EX-10.F 5 FORM OF SEVERANCE AGREEMENT [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 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). Page 3 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 Page 4 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. Page 5 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 Page 6 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; Page 7 (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 Page 8 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 Page 9 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 Page 10 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 Page 11 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 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] EX-21 6 LIST OF SUBSIDIARIES OF THE COMPANY 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. EX-23 7 CONSENT OF ACCOUNTANTS 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 EX-27 8 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1998 DEC-31-1998 118,512 19,073 125,844 2,987 0 305,444 95,214 134,370 464,123 166,246 0 0 0 303,352 (8,070) 464,123 490,393 490,393 123,497 123,497 362,154 2,578 768 21 540 (519) 0 0 0 (519) (.01) (.01)
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