This excerpt taken from the MENT DEF 14A filed Nov 12, 2009.
STOCK OPTION EXCHANGE PROGRAM (Proposal No. 1)
Our Board of Directors has determined that it would be in the best interests of Mentor Graphics and our shareholders to amend our 1982 Stock Option Plan (the 1982 Plan) to provide for a one-time exchange (the Option Exchange) of employee stock options that have an exercise price greater than the 52-week high trading price of our common stock on the NASDAQ Global Select Market at the commencement of our offer to our employees to participate in the Option Exchange, other than options granted within the 12-month period preceding the commencement date of our tender offer and options that will expire within the 6-month period immediately following the completion of the tender offer, for restricted stock units (RSUs) with new vesting periods. An RSU is a right to receive a share of Mentor Graphics common stock on the date that the RSU is fully vested. THE COMPANYS EXECUTIVES WHO ARE SUBJECT TO THE PROVISIONS OF SECTION 16 OF THE SECURITIES EXCHANGE ACT OF 1934 (SECTION 16 OFFICERS) AND MEMBERS OF THE BOARD OF DIRECTORS WILL BE EXCLUDED FROM PARTICIPATING IN THE OPTION EXCHANGE.
We have historically granted stock options as a critical component of our employees compensation. Stock options encourage our employees to act as owners, which helps align their interests with those of shareholders. The objectives of our equity compensation plans are generally to motivate and reward personnel whose long-term employment is considered essential to our continued progress and to encourage them to continue their employment with us. Stock options encourage recipients to act in the shareholders interests and share in our success.
Like many companies, we have experienced a decline in our stock price over the last year in light of the global financial and economic crisis. In addition, the market for key employees in our highly technical business remains competitive, notwithstanding the current economic turmoil. We have made changes to improve our cost structure, focus our resources on strategic initiatives and strengthen our competitiveness, and our stock price has improved, but not to previous levels. As a result, approximately 70% of the stock options held by our employees have exercise prices that exceed both the current market price of our common stock and the average market price of our stock over the prior 12 months.
This means that the vast majority of historically granted stock options no longer are effective as incentives to motivate and retain our employees. Employees perceive that these options have little or no value. In addition, shareholders may consider the ratio of our outstanding options to total outstanding shares (Overhang) to be high. These stock options will remain on our books with the potential to dilute shareholders interests for up to the full term of the options unless they are surrendered or cancelled, while delivering little or no retentive or incentive value to our employees. The Option Exchange will allow us to recapture value from compensation costs that we already are incurring with respect to outstanding stock options with an exercise price greater than the 52-week high trading price of our common stock.
For the reasons listed above, our Board of Directors has determined it is in the best interests of Mentor Graphics and our shareholders to amend the 1982 Plan to permit the Option Exchange. Section 16 Officers and members of our Board of Directors will be excluded from participating in the Option Exchange. We may also exclude employees in certain non-U.S. jurisdictions from the Option Exchange if we determine that including these employees would have tax, regulatory or other implications that are inconsistent with the Companys compensation policies and practices. If options are exchanged, employees will receive a smaller number of newly issued RSUs, in accordance with a specified exchange ratio.
If shareholders approve the Option Exchange and the compensation committee appointed by the Board of Directors (the Compensation Committee) decides to commence the Option Exchange, the Option Exchange will begin within six months of the date shareholders approve the amendment to the 1982 Plan to permit the Option Exchange. However, if the Option Exchange does not commence within six months after the date of
shareholder approval, we will not commence an exchange or similar program without again seeking and receiving shareholder approval. Eligible employees will be offered the opportunity to participate in the Option Exchange under written materials explaining the precise terms and timing of the Option Exchange that will be filed with the SEC as part of a tender offer statement on Schedule TO and distributed to all eligible employees. Employees will be given at least twenty business days in which to accept the offer of new RSUs in exchange for the surrender of their eligible options. The surrendered options exchanged for RSUs will be cancelled on the first business day following this election period. The new RSUs will be granted on the date of the cancellation of the options which are exchanged. The remaining number of shares subject to surrendered options that are not issued as new RSUs pursuant to the Option Exchange will be cancelled and no longer be available for grants in the future.