<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to sec. 240.14a-11(c) or sec. 240.14a-12
Rational Software Corporation
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(Name of Registrant as Specified In Its Charter)
Rational Software Corporation
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(Name of Person(s) Filing Proxy Statement
Payment of Filing Fee (Check the appropriate box):
/ / $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(j)(2)
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
/X/ Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
125.00
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(2) Form, Schedule or Registration Statement No.:
Schedule 14A (Preliminary Proxy Statement)
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(3) Filing Party:
Rational Software Corporation
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(4) Date Filed:
June 27, 1996
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<PAGE> 2
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD AUGUST 27, 1996
TO THE STOCKHOLDERS:
The Annual Meeting of Stockholders of Rational Software Corporation (the
"Company") will be held at the principal offices of the Company at 2800 San
Tomas Expressway, Santa Clara, California 95051, on Tuesday, August 27, 1996 at
3:00 p.m. PST, for the following purposes:
1. To elect two Class I members of the Board of Directors (Proposal
1);
2. To approve an amendment to the Company's Certificate of
Incorporation increasing the number of authorized Common Stock from
25,000,000 to 75,000,000 shares (Proposal 2);
3. To approve an amendment to the 1994 Stock Option Plan reserving an
additional 1,000,000 shares of the Company's Common Stock for
issuance thereunder (Proposal 3);
4. To approve an amendment to the 1994 Stock Option Plan increasing
the size of the options that may be granted in any calendar year
(Proposal 4);
5. To approve an amendment to the 1994 Employee Stock Purchase Plan
reserving an additional 200,000 shares of the Company's Common
Stock for issuance thereunder (Proposal 5);
6. To approve an amendment to the Directors' Stock Option Plan
increasing the size of the annual option grant and accelerating the
date of certain initial option grants (Proposal 6);
7. To ratify the appointment of Ernst & Young LLP as the Company's
independent auditors to examine the financial statements of the
Company for fiscal year 1997 (Proposal 7); and
8. To transact such other business as may properly come before the
meeting or any adjournment thereof.
Only holders of record of the Company's Common Stock at the close of
business on June 28, 1996, the record date fixed by the Company's Board of
Directors, are entitled to notice of and to vote at the Annual Meeting.
By Order of the Board of Directors,
ROBERT T. BOND
Secretary
Santa Clara, California
July 12, 1996
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. THEREFORE, WHETHER OR
NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, PLEASE COMPLETE, DATE, SIGN AND
RETURN THE ENCLOSED PROXY IN THE ENCLOSED POSTAGE PAID ENVELOPE. YOU MAY, IF YOU
WISH, REVOKE YOUR PROXY AT ANY TIME PRIOR TO THE TIME IT IS VOTED.
<PAGE> 3
RATIONAL SOFTWARE CORPORATION
PROXY STATEMENT
FOR THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD AUGUST 27, 1996
SOLICITATION, VOTING AND REVOCABILITY OF PROXIES
This Proxy Statement is furnished to stockholders in connection with the
solicitation by the Board of Directors of Rational Software Corporation
("Rational" or the "Company") of proxies in the accompanying form for use at the
Annual Meeting of Stockholders of the Company to be held at the principal
offices of the Company at 2800 San Tomas Expressway, Santa Clara, California,
95051, at 3:00 p.m. on Tuesday, August 27, 1996, and at any adjournment thereof.
If a proxy in the accompanying form is duly executed and returned, the shares
represented thereby will be voted at the Annual Meeting and, where a choice is
specified, will be voted in accordance with the specification made. Any
stockholder who gives a proxy may revoke it at any time before it is exercised
by giving a later proxy, by attending the meeting and voting in person, or by
giving notice of revocation to the Company's Secretary.
The Annual Meeting has been called for the following purposes: (1) to elect
two Class I members of the Board of Directors; (2) to approve an amendment to
the Company's Certificate of Incorporation increasing the number of authorized
Common Stock from 25,000,000 to 75,000,000 shares; (3) to approve an amendment
to the 1994 Stock Option Plan reserving an additional 1,000,000 shares of the
Company's Common Stock for issuance thereunder; (4) to approve an amendment to
the 1994 Stock Option Plan increasing the size of the options that may be
granted in any calendar year; (5) to approve an amendment to the 1994 Employee
Stock Purchase Plan reserving an additional 200,000 shares of the Company's
Common Stock for issuance thereunder; (6) to approve an amendment to the
Directors' Stock Option Plan increasing the size of the annual option grant and
accelerating the date of certain initial option grants; (7) to ratify the
appointment of Ernst & Young LLP as the Company's independent auditors to
examine the financial statements of the Company for fiscal year 1997; and (8) to
transact such other business as may properly come before the meeting or any
adjournment thereof. Only holders of record of the Company's Common Stock at the
close of business on June 28, 1996, the record date fixed by the Company's Board
of Directors, are entitled to notice of and to vote at the Annual Meeting.
If the enclosed form of proxy is properly executed and returned to the
Company in time to be voted at the Annual Meeting, the shares represented
thereby will be voted in accordance with the instructions marked therein.
Executed but unmarked proxies will be voted FOR the election of the Company's
two nominees to the Board of Directors and FOR each of the other proposals.
The Company's capital stock consists of a single class of Common Stock, par
value $0.01 per share, of which 17,067,982 shares were outstanding at the close
of business on June 28, 1996. Stockholders of record at the close of business on
June 28, 1996, have the right to receive notice of and to vote at the Annual
Meeting. For each share held, a stockholder is entitled to one vote on each
matter to be considered and acted upon at the Annual Meeting. There are no
cumulative voting rights in the election of directors.
The presence, in person or by proxy, of at least a majority of the total
number of outstanding shares of Common Stock entitled to vote at the Annual
Meeting is necessary to constitute a quorum at the Annual Meeting. Stockholders'
votes will be tabulated by persons appointed by the Board of Directors to act as
inspectors of election for the Annual Meeting. While there is no definitive
statutory or case law authority in Delaware as to the proper treatment of
abstentions in the counting of votes, the Company believes that abstentions
should be counted for purposes of determining both (i) the presence or absence
of a quorum for the transaction of business and (ii) the total number of shares
entitled to vote. In the absence of controlling precedent to the contrary, the
Company intends to treat abstentions in this manner. In a 1988 Delaware case,
<PAGE> 4
Berlin v. Emerald Partners, the Delaware Supreme Court held that, while broker
non-votes may be counted for purposes of determining the presence or absence of
a quorum for the transaction of business, broker non-votes should not be counted
for purposes of determining the number of shares entitled to vote with respect
to the particular proposal on which the broker has expressly not voted.
A copy of the annual report to stockholders for the fiscal year ended March
31, 1996 accompanies this Proxy Statement. The Company is required to file an
annual report on Form 10-K for its 1996 fiscal year with the Securities and
Exchange Commission ("SEC"). Stockholders may obtain, free of charge, a copy of
the Form 10-K by writing: Rational Software Corporation, 2800 San Tomas
Expressway, Santa Clara, California, 95051, Attention: Investor Relations.
BENEFICIAL OWNERSHIP OF COMMON STOCK
Under the proxy rules of the Securities and Exchange Commission, a person
who directly or indirectly has or shares voting power or investment power with
respect to a security is considered a beneficial owner of the security. Voting
power is the power to vote or direct the voting of shares, and investment power
is the power to dispose of or direct the disposition of shares. Shares as to
which voting power or investment power may be acquired within 60 days are also
considered as beneficially owned under the proxy rules.
The following table sets forth certain information as of June 21, 1996,
regarding beneficial ownership of the Company's Common Stock by (i) each person
who is known to the Company to own beneficially more than five percent of the
Company's Common Stock, (ii) each director and each nominee for election as a
director of the Company, (iii) each executive officer named in the Summary
Compensation Table set forth in this Proxy Statement, and (iv) all current
directors and current executive officers of the Company as a group. The
information on beneficial ownership in the table and the footnotes thereto is
based upon the Company's records and the most recent Schedule 13D or 13G filed
by each such person or entity and information supplied to the Company by such
person or entity. Unless otherwise indicated, each person has sole voting power
and sole investment power with respect to the shares shown.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF
NAME BENEFICIALLY OWNED CLASS
---------------------------------------------------------- ------------------ ----------
<S> <C> <C>
Putnam Investments........................................ 3,395,322 19.9%
FMR Corp.................................................. 1,179,500 6.9%
The Kaufmann Fund, Inc.................................... 980,000 5.7%
AIM Management Group...................................... 973,500 5.7%
Michael T. Devlin(1)...................................... 62,500 *
Paul D. Levy(2)........................................... 62,500 *
Robert T. Bond(3)......................................... 57,485 *
David H. Bernstein(4)..................................... 28,333 *
Kevin J. Haar(5).......................................... 26,733 *
Daniel H. Case III(6)..................................... 16,524 *
Leslie G. Denend(7)....................................... 16,249 *
Allison R. Schleicher(8).................................. 10,749 *
James S. Campbell(9)...................................... 7,624 *
John E. Montague.......................................... 300 *
All current Directors and current Executive Officers as a
group (19 persons)(10).................................. 990,980 5.7%
</TABLE>
- ---------------
* Less than one percent.
(1) Includes 62,500 shares purchasable by Mr. Devlin within 60 days of June 21,
1996 pursuant to outstanding options.
(2) Includes 62,500 shares purchasable by Mr. Levy within 60 days of June 21,
1996 pursuant to outstanding options.
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(3) Includes 47,249 shares purchasable by Mr. Bond within 60 days of June 21,
1996 pursuant to outstanding options.
(4) Includes 13,333 shares purchasable by Mr. Bernstein within 60 days of June
21, 1996 pursuant to outstanding options.
(5) Includes 24,916 shares purchasable by Mr. Haar within 60 days of June 21,
1996 pursuant to outstanding options.
(6) Includes 16,249 shares purchasable by Mr. Case within 60 days of June 21,
1996 pursuant to outstanding options.
(7) Includes 16,249 shares purchasable by Mr. Denend within 60 days of June 21,
1996 pursuant to outstanding options.
(8) Includes 10,749 shares purchasable by Mr. Schleicher within 60 days of June
21, 1996 pursuant to outstanding options. Mr. Schleicher, who is an
employee of IBM Corporation ("IBM"), currently serves on the Board of
Directors in his individual capacity and not as a representative of IBM.
(9) Includes 7,291 shares purchasable by Mr. Campbell within 60 days of June
21, 1996 pursuant to outstanding options.
(10) Includes an aggregate of 416,426 shares that may be acquired within 60 days
of June 21, 1996 pursuant to outstanding options.
ELECTION OF DIRECTORS
(PROPOSAL 1)
The Company's bylaws provide for a Board of seven directors. The Company's
Certificate of Incorporation provides that the Board of Directors be divided
into three classes as nearly equal in number as possible. The term of Class I
directors expires in 1996, the term of Class II directors expires in 1997, and
the term Class III directors expires in 1998. The two Class I directors who were
serving as directors at the end of fiscal year 1996 are nominated for
reelection. Directors elected at the Annual Meeting will hold office for a
three-year term expiring in 1999 or until their successors are elected and
qualified. The other directors will continue in office for the remainder of
their terms as indicated below. Unless authority so to vote is withheld, proxies
received pursuant to this solicitation will be voted for the election of the two
nominees named below. If any of the nominees should for any reason not be
available for election, proxies will be voted for the election of the remaining
nominees and such substitute nominees as may be designated by the Board of
Directors.
NOMINEES FOR ELECTION AS DIRECTORS FOR TERMS EXPIRING IN 1999
MICHAEL T. DEVLIN, age 41, has been a director of the Company since 1994
and since 1981, was a director of a privately held California corporation named
Rational ("old Rational"), which merged with the Company on March 31, 1994. He
co-founded old Rational in 1981 and is currently Chairman of the Board of the
Company.
LESLIE G. DENEND, age 55, has been a director of the Company since 1994 and
was a director of old Rational since 1993. Since 1993, he has been the President
and Chief Executive Officer of Network General Corporation, a supplier of local
and wide area computer network communications management systems. From 1990 to
1992, he was President of Vitalink Communications. He is a director of Network
General Corporation, McAfee Associates, Inc., and Proxim, Inc.
DIRECTORS CONTINUING IN OFFICE IN THE CLASS OF 1998
JAMES S. CAMPBELL, age 69, has been a director of the Company since 1990.
Since 1987, he has been the Managing Director of Management Partners
International Corporation, a management and consulting firm specializing in
technology companies. He is a Director of Applied Voice Technology, Inc. Mr.
Campbell is the father-in-law of Mr. Levy.
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<PAGE> 6
ALLISON R. SCHLEICHER, age 52, has been a director of the Company since
1994 and was a director of old Rational since 1990. Since 1967, he has been with
IBM Corporation in various executive and management positions. Most recently in
1994, he was appointed Vice President, Finance of IBM Credit Corporation. Mr.
Schleicher previously served on the old Rational Board of Directors as a
representative of IBM, but currently serves on the Company's Board of Directors
in his individual capacity.
DIRECTORS CONTINUING IN OFFICE IN THE CLASS OF 1997
DANIEL H. CASE III, age 38, has been a director since 1994 and was a
director of old Rational since 1993. Since 1994, he has been President and Chief
Executive Officer of Hambrecht & Quist Group, an investment banking firm. From
1992 to 1994 he served as president and Co-Chief Executive Officer of Hambrecht
& Quist Group. Previously he held various positions with Hambrecht & Quist
Group. He is a director of Hambrecht & Quist Group and Electronics Arts, Inc.
PAUL D. LEVY, age 40, has been a director of the Company since 1994 and was
a director of old Rational since 1981. He co-founded old Rational in 1981 and is
currently President and Chief Executive Officer. Mr. Levy is the son-in-law of
Mr. Campbell.
JOHN E. MONTAGUE, age 42, has been a director of the Company since 1994.
Since March 15, 1995, he has been Vice President, Financial Strategies at
Lockheed Martin Corporation ("Lockheed Martin"). Previously, he was Vice
President, Corporate Development and Investor Relations at Martin Marietta
Corporation. From 1988 to 1991, he was Director, Corporate Development at Martin
Marietta Corporation. Mr. Montague served on the Board of Directors of the
Company as a representative of Lockheed Martin until October 1995, at which time
he began serving in his individual capacity.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE NOMINATED DIRECTORS.
Because the two nominees who receive the greatest number of votes will be
elected to serve as Class I directors, abstentions and broker non-votes will
have no effect on the outcome of the election of directors.
BOARD OF DIRECTORS AND COMMITTEES
The Company's Board of Directors held four regular meetings (and had four
actions by unanimous written consent) and one special meeting during fiscal year
1996. Each incumbent director attended at least 75 percent of the meetings held
during the part of fiscal year 1996 during which he was a director, in the
aggregate, by the Board and each committee of the Board of which he was a
member. The Company's Board of Directors has a Compensation Committee and Audit
Committee. The Company does not have a Nominating Committee.
The Compensation Committee (consisting of Messrs. Denend and Schleicher)
reviews and recommends to the Board appropriate action with respect to the
compensation of and benefits granted to officers and other key employees of the
Company and administers the Company's two 1983 Incentive Stock Option Plans,
1986 Stock Option Plan, 1993 Stock Option Plan, and the 1994 Stock Option Plan
and the 1994 Employee Stock Purchase Plan. The Compensation Committee held four
meetings during fiscal year 1996. The Audit Committee (consisting of Messrs.
Case, Campbell, and Montague) nominates the Company's independent auditors,
reviews with the Company's independent auditors matters relating to the scope
and plan of the audit, the adequacy of internal controls, and the preparation of
the Company's financial statements, reports and makes recommendations to the
Board with respect thereto, and reviews related party transactions for conflicts
of interest. The Audit Committee held one meeting during fiscal year 1996.
The Company pays directors' fees only to directors who are neither
employees of the Company nor serving on the Board pursuant to contractual
arrangements with the Company. Directors' fees are paid at the rate of $1,250
per Board meeting attended, with no additional fee being payable for attendance
at committee meetings. Directors are also reimbursed reasonable out-of-pocket
expenses in connection with attending meetings. Directors who are not employees
of the Company participate in the Directors' Stock Option Plan described in
Proposal 6.
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<PAGE> 7
AMENDMENT TO THE COMPANY'S CERTIFICATE OF INCORPORATION
INCREASING THE NUMBER OF AUTHORIZED COMMON STOCK
FROM 25,000,000 TO 75,000,000 SHARES
(PROPOSAL 2)
The stockholders are being asked to approve an amendment to the Company's
Certificate of Incorporation that would increase the number of shares of
authorized Common Stock from 25,000,000 to 75,000,000. The amendment to the
Company's Certificate of Incorporation called for by this Proposal 2 would
increase the ratio of Common Stock authorized to Common Stock outstanding from
approximately 1.5 to approximately 4.4. The amendment to the Company's
Certificate of Incorporation was adopted by the Board of Directors on June 14,
1996, in substantially the form attached as Exhibit A, subject to stockholder
approval.
The Company's Board of Directors believes that the proposed increase in the
number of shares of authorized Common Stock is desirable to enhance the
Company's flexibility in connection with possible future actions, such as stock
splits, stock dividends, financings, corporate mergers, acquisitions of
property, use in employee benefit plans and for other general corporate
purposes. In addition, elimination of the delay occasioned by the necessity of
obtaining stockholder approval will better enable the Company to engage in
future financing transactions and acquisitions that take full advantage of
changing market conditions.
It should be noted that while the Company's Board of Directors has
discussed the possibility of effecting a stock split or stock dividend, the
Board has made no decision regarding any stock split or stock dividend at this
time. It should be further noted that while the Board of Directors and Company
management do not have specific acquisition plans at this time, Company
management frequently evaluates the strategic opportunities available to it and
may in the near-term or long-term future pursue acquisitions of complementary
products, technologies or businesses.
The proposed amendment to the Company's Certificate of Incorporation is not
part of a plan by the Board of Directors to adopt anti-takeover measures. This
increase could, however, result in certain anti-takeover effects. Although the
Board of Directors has no present intention of doing so, it could use the
increased number of authorized shares of Common Stock to make more difficult or
discourage an attempt to obtain control of the Company, such as by issuing
additional shares of Common Stock to purchasers who might side with the Board of
Directors in opposing a takeover attempt. The existence of the additional
authorized shares of Common Stock could have the effect of discouraging an
attempt by any person or entity, through the acquisition of a substantial number
of shares of Common Stock, to acquire control of the Company with a view to
imposing a merger, sale of all or any part of the Company's assets or a similar
transaction, since the issuance of the additional shares of Common Stock could
be used to dilute the stock ownership of a takeover bidder. To the extent that
takeovers are thereby discouraged, stockholders may not have the opportunity to
dispose of all or a part of their stock at a price that may be higher than that
prevailing in the market. However, it also is possible that making shares of
authorized, but unissued, Common Stock available for issuance may have the
effect of increasing the price offered to stockholders of the Company in a
tender or exchange offer, by encouraging potential bidders to negotiate with the
Board of Directors rather than engaging in abusive takeover practices such as
partial takeovers and front-end loaded, two-step takeovers and freeze-outs.
In addition, the Company's Certificate of Incorporation provides for a
classified Board of Directors, which could have the effect of delaying or
discouraging a change in control of the Company by increasing the length of time
that would be required for a potential acquiror to gain control of the Board of
Directors.
The Company is subject to Section 203 of the Delaware Code ("Section 203")
which, subject to certain exceptions, prohibits a Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years following the time that such stockholder became an
interested stockholder, unless (i) prior to such time, the board of directors of
the corporation approved either the business combination or the transaction
which resulted in the stockholder becoming an interested stockholder, (ii) upon
consummation of the transaction which resulted in the stockholder becoming an
interested stockholder, the interested stockholder (as defined below) owned at
least 85% of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding for purposes of determining the number of
shares outstanding those shares owned (x) by persons who are directors and also
officers and (y) by employee stock plans in which employee participants do not
have the right to determine confidentially whether
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<PAGE> 8
shares held subject to the plan will be tendered in a tender or exchange offer;
or (ii) at or subsequent to such time, the business combination is approved by
the board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at least
sixty-six and two-thirds percent of the outstanding voting stock which is not
owned by the interested stockholder. Section 203 defines a business combination
to include: (i) any merger or consolidation involving the corporation and the
interested stockholder; (ii) any sale, transfer, pledge or other disposition
involving the interested stockholder of 10% or more of the assets of the
corporation; (iii) subject to certain exceptions, any transaction which results
in the issuance or transfer by the corporation of any stock of the corporation
to the interested stockholder; (iv) any transaction involving the corporation
which has the effect of increasing the proportionate share of the stock of any
class or series of the corporation beneficially owned by the interested
stockholder; or (v) the receipt by the interested stockholder of the benefit of
any loans, advances, guarantees, pledges or other financial benefits provided by
or through the corporation. In general, Section 203 defines an "interested
stockholder" as any entity or person beneficially owning 15% or more of the
outstanding voting stock of the corporation and any entity or person affiliated
with or controlling or controlled by such entity or person. A Delaware
corporation may elect not to be subject to Section 203 by having its
stockholders approve an amendment to its certificate or incorporation or bylaws
to such effect. The Company has not made such election and, therefore, Section
203 may have an anti-takeover effect with respect to the Company.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL 2. Approval will
require a majority vote of the Company's outstanding Common Stock. An abstention
or a broker non-vote is not an affirmative vote and, therefore, will have the
same effect as a vote against the proposal.
AMENDMENT TO THE 1994 STOCK OPTION PLAN RESERVING AN ADDITIONAL
1,000,000 SHARES OF THE COMPANY'S COMMON STOCK
(PROPOSAL 3)
PROPOSED AMENDMENT
The stockholders are being asked to approve an amendment to the 1994 Stock
Option Plan reserving an additional 1,000,000 shares of the Company's Common
Stock, which if approved would result in a total of 2,500,000 shares being
issuable under the 1994 Stock Option Plan. Currently, there are 1,500,000 shares
reserved under the 1994 Stock Option Plan, of which there are 1,343,887 subject
to outstanding options and 64,536 still available for grant. If this amendment
is approved, there will be a total of 2,500,000 shares reserved under the 1994
Stock Option Plan, of which 1,343,887 will be subject to outstanding options and
1,064,536 will be available for grant. The amendment to the 1994 Stock Option
Plan was adopted by the Board of Directors on April 23, 1996 for the benefit of
employees of Rational and its subsidiaries, subject to stockholder approval.
There are approximately 560 employees of Rational and its subsidiaries who are
eligible to participate in the 1994 Stock Option Plan.
The Rational Board of Directors believes that the amendment to the 1994
Stock Option Plan is important to facilitate the continued functioning of the
1994 Stock Option Plan, which has proved an effective means of motivating and
encouraging the continued employment of the employees of Rational and its
subsidiaries.
DESCRIPTION OF THE 1994 STOCK OPTION PLAN
The 1994 Stock Option Plan provides for the grant of options that are
intended to qualify as Incentive Stock Options, as well as the grant of
nonqualifying options. The number of shares that may be issued pursuant to
options granted under the 1994 Stock Option Plan may not exceed 1,500,000 shares
(or 2,500,000 shares if this amendment is approved). The 1994 Stock Option Plan
is administered by the Compensation Committee of the Rational Board of Directors
which consists of not fewer than two directors appointed by the Rational Board
of Directors (the "Committee"). See "Board of Directors and Committees." The
Committee selects the eligible persons to whom options may be granted, and has
delegated to Paul D. Levy and Michael T. Devlin the authority to make grants of
up to 10,000 shares to non-executive officers. Non-employee directors are not
eligible to receive option grants under the 1994 Stock Option Plan. The maximum
number of
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shares subject to options that may be granted under the 1994 Stock Option Plan
to any executive officer or other employee is 83,333 in any calendar year (or
100,000 if Proposal 4 is approved).
The option exercise price under the 1994 Stock Option Plan may not be less
than 100 percent of the fair market value of Rational Common Stock on the date
of grant of the option. The maximum option term is 10 years. Options may be
exercised at any time after grant, except as otherwise provided in the option
agreement executed by an optionee, which option agreement may provide for
vesting over a period of time. Options granted by the Company typically vest
over a period of four years, at a rate of 25% per year. No person may receive
any Incentive Stock Option if, at the time of grant, such person owns directly
or indirectly more than 10% of the total combined voting power of Rational
unless the option price is at least 110% of the fair market value of Rational
Common Stock and the exercise period of such Incentive Stock Option is by its
terms limited to five years. There is also a $100,000 limit on the value of
stock (determined at the time of grant) covered by Incentive Stock Options that
first become exercisable by an optionee in any calendar year. No option may be
granted more than 10 years after February 6, 1994, the effective date of the
1994 Stock Option Plan.
Payment for shares purchased under the 1994 Stock Option Plan may be made
either in cash or by exchanging shares of Rational Common Stock with a fair
market value equal to or less than the total option price plus cash for any
difference. Options granted may be exercised by directing that certificates for
the shares purchased be delivered to a licensed broker as agent for the
optionee, provided that the broker tenders to Rational cash or cash equivalents
equal to the option exercise price plus the amount of any taxes that Rational
may be required to withhold in connection with the exercise of the option.
Unless otherwise provided in the optionee's option agreement, (i) if an
optionee's employment or service with Rational or a subsidiary terminates by
reason of death, his or her options may be exercised within one year thereafter;
(ii) if the optionee's employment terminates by reason of permanent and total
disability or retirement under an approved retirement plan of Rational or a
subsidiary, his or her options may be exercised within three months after such
termination; and (iii) if the optionee's employment terminates for any reason
other than death, disability or retirement, options held by such optionee
terminate on the date of such termination. Pursuant to its discretion to change
these post-termination exercise periods, the Committee typically provides (i) a
twelve month exercise period in the case of terminations resulting from death or
total and permanent disability; (ii) a ninety day exercise period in the case of
retirements; and (iii) a 30 day exercise period in the case of all other
terminations.
If the outstanding shares of Rational Common Stock are increased or
decreased or changed into or exchanged for a different number or kind of shares
or securities of Rational, by reason of merger, consolidation, reorganization,
recapitalization, reclassification, stock split-up, combination of shares,
exchange of shares, stock dividend or other distribution payable in capital
stock, or other increase or decrease in such shares without receipt of
consideration by Rational, an appropriate and proportionate adjustment will be
made in the number and kinds of shares subject to the 1994 Stock Option Plan,
and in the number, kinds, and per share exercise price of shares subject to the
unexercised portion of options granted before any such change. Any such
adjustment in an outstanding option, however, will be made without a change in
the total price applicable to the unexercised portion of the option but with a
corresponding adjustment in the per share option price.
Upon any dissolution or liquidation of Rational, or upon a reorganization,
merger or consolidation in which Rational is not the surviving corporation, or
upon the sale of substantially all of the assets of Rational to another
corporation, or upon any transaction (including, without limitation, a merger or
reorganization in which the Company is the surviving corporation) approved by
the Rational Board of Directors that results in any person or entity owning 50%
or more of the total combined voting power of all classes of stock of Rational,
the 1994 Stock Option Plan and the options issued thereunder will terminate,
unless provision is made in connection with such transaction for the
continuation of the 1994 Stock Option Plan and/or the assumption of the options
or for the substitution for such options of new options covering the stock of a
successor corporation or a parent or subsidiary thereof, with appropriate
adjustments as to the number and kinds of shares and the per share exercise
price. In the event of such termination, all outstanding options shall be
exercisable in full
7
<PAGE> 10
during such period immediately prior to the occurrence of such termination as
the Rational Board of Directors in its discretion shall determine.
The Rational Board of Directors may at any time amend the 1994 Stock Option
Plan with respect to shares of Rational Common Stock as to which options have
not been granted. However, Rational stockholders must approve any amendment that
would (i) change the requirements as to eligibility to receive options; (ii)
increase the maximum number of shares in the aggregate for which options may be
granted (except for adjustments upon changes in capitalization); or (iii)
materially increase the benefits accruing to eligible individuals under the 1994
Stock Option Plan. However, no termination, suspension, or amendment of the 1994
Stock Option Plan may, without the consent of the optionee to whom an option has
been granted, adversely affect the rights of such optionee. Unless previously
terminated, the 1994 Stock Option Plan will terminate automatically on February
6, 2004, the tenth anniversary of the effective date of the 1994 Stock Option
Plan.
FEDERAL INCOME TAX CONSEQUENCES
The grant of an option under the 1994 Stock Option Plan is not a taxable
event for the optionee or Rational.
With respect to Incentive Stock Options, an optionee will not recognize
taxable income upon exercise of the option, although exercise may subject the
optionee to the alternative minimum tax. Upon sale or exchange of the shares
received pursuant to the exercise of the option any gain realized upon such
disposition will be taxed as long-term capital gain if the optionee holds the
shares for at least two years after the date of grant and for one year after the
date of exercise. Rational will not be entitled to any deduction with respect to
the grant or exercise of an Incentive Stock Option, except as discussed below.
If all of the requirements for Incentive Stock Option treatment are met
except for the special holding period rules set forth above, the optionee will
recognize ordinary income upon the disposition of the Rational Common Stock in
an amount equal to the excess of the fair market value of the Rational Common
Stock at the time the option was exercised over the option exercise price (but
not in excess of the gain realized on the sale). The balance of the realized
gain, if any will be long or short-term capital gain, depending upon whether or
not the stock was sold more than one year after the option was exercised.
Rational will be allowed a deduction to the extent the optionee recognizes
ordinary income at the time of such disposition.
Upon exercising a nonqualifying option, an optionee generally will
recognize ordinary income in an amount equal to the difference between the
exercise price and the fair market value of the Rational Common Stock on the
date of exercise. Rational will be entitled to a deduction in the same amount
that the optionee recognizes as ordinary income. Any ordinary income recognized
in connection with the exercise of a nonqualifying option by an optionee who is
also an employee of Rational will be subject to tax withholding by Rational.
Upon a subsequent sale of the shares, the optionee will have short-term or
long-term capital gain or loss (depending on the holding period), measured by
the difference between the amount realized on the disposition and the tax basis
of the shares (generally, the amount paid for the shares plus the amount treated
as ordinary income at the time the option was exercised).
The foregoing is only a summary of the effect of federal income taxation
upon the optionee and Rational with respect to the grant and exercise of options
under the 1994 Stock Option Plan. It does not purport to be complete, and it
does not discuss the tax consequences of the optionee's death or the income tax
laws of any municipality, state, or foreign country in which an optionee may
reside.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL 3. Directors who
are employees of the Company may benefit from adoption of this amendment, and to
that extent may have a conflict of interest in recommending the amendment.
Because the affirmative vote of the holders of a majority of the shares of
Common Stock present or represented at the Annual Meeting and entitled to vote
is required to approve the proposal, abstentions will have the same effect as a
vote against the proposal, and broker non-votes will have no effect on the
outcome of the proposal.
8
<PAGE> 11
AMENDMENT TO THE 1994 STOCK OPTION PLAN INCREASING THE SIZE OF THE OPTIONS THAT
MAY BE GRANTED IN ANY CALENDAR YEAR
(PROPOSAL 4)
PROPOSED AMENDMENT
The stockholders are being asked to approve an amendment to the 1994 Stock
Option Plan that would increase the maximum number of shares of the Company's
Common Stock for which options could be granted to employees in any calendar
year from 83,333 to 100,000. The amendment was adopted by the Board of Directors
on April 23, 1996, subject to stockholder approval.
The Rational Board of Directors believes the amendment to the 1994 Stock
Option Plan is an important addition to the Company's efforts to encourage
employee equity participation in order to increase worker retention and align
employee interests with those of the stockholders. The Board is pleased with the
success of the 1994 Stock Option Plan in motivating and encouraging the
continued employment of the employees of Rational and its subsidiaries, and has
proposed this amendment in order to provide the Company greater flexibility in
pursuing these goals in the future.
DESCRIPTION OF THE 1994 STOCK OPTION PLAN AND FEDERAL INCOME TAX CONSEQUENCES
For a description of the 1994 Stock Option Plan and Federal Income Tax
consequences, see Proposal 3 above.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL 4. Directors who
are employees of the Company may benefit from adoption of this amendment, and to
that extent may have a conflict of interest in recommending the amendment.
Because the affirmative vote of the holders of a majority of the shares of
Common Stock present or represented at the Annual Meeting and entitled to vote
is required to approve the proposal, abstentions will have the same effect as a
vote against the proposal, and broker non-votes will have no effect on the
outcome of the proposal.
AMENDMENT TO THE 1994 EMPLOYEE STOCK PURCHASE PLAN RESERVING AN ADDITIONAL
200,000 SHARES OF THE COMPANY'S COMMON STOCK
(PROPOSAL 5)
PROPOSED AMENDMENT
The stockholders are being asked to approve an amendment to the 1994
Employee Stock Purchase Plan (the "Purchase Plan") reserving an additional
200,000 shares of the Company's Common Stock for issuance thereunder. Currently
there are 400,000 shares reserved under the Purchase Plan, of which 258,713 have
been purchased and 141,287 are still available for purchase. If this amendment
is approved there will be a total of 600,000 shares reserved under the Purchase
Plan, of which 258,713 have been purchased and 341,287 will be available for
purchase. The amendment to the Purchase Plan was adopted by the Board of
Directors on April 23, 1996, subject to stockholder approval.
The Rational Board of Directors believes the amendment to the Purchase Plan
is an important addition to the Company's efforts to encourage employee equity
participation in order to increase worker retention and align employee interests
with those of the stockholders. The Board is pleased with the success of the
Purchase Plan in increasing the level of employee interest in the Company's
stock price, and has proposed this amendment to promote continued employee
participation in the Purchase Plan.
DESCRIPTION OF THE PLAN
The Company's Purchase Plan, which is intended to qualify under Section 423
of the Code, permits eligible employees to purchase Common Stock through payroll
deductions. The Purchase Plan is administered by the Board of Directors or a
committee appointed by the Board (the "Administrator"). Every finding,
9
<PAGE> 12
decision and determination by the Administrator shall, to the full extent
permitted by law, be final and binding upon all parties.
Employees are eligible to participate if they are employed by the Company
on an offering date; however, they must be regularly employed by the Company for
at least twenty hours per week and more than five months per calendar year.
Participation in the Purchase Plan ends automatically on termination of
employment with the Company. Eligible employees may become a participant by
completing a subscription agreement authorizing payroll deductions and filing it
with the Company's stock administration department prior to the applicable
enrollment date.
The Purchase Plan is implemented by consecutive and overlapping offering
periods of approximately 24 months, with a new offering period commencing on the
first trading day on or after November 1 and May 1 of each year, or on such
other date as the Board may determine. The purchase price per share of the
shares offered under the Purchase Plan in a given offering period is 85% of the
fair market value of the Common Stock on the enrollment date or 85% of the fair
market value of the Common Stock on the exercise date. The fair market value of
the Common Stock on a given date is the closing sale price of the Common Stock
for such date as reported by the NASDAQ National Market.
The purchase price for the shares is accumulated by payroll deductions
during the offering period. The deductions may not exceed 10% of a participant's
eligible compensation, which is defined in the plan to include base pay,
including commissions, but exclusive of payments for overtime, shift premium,
incentive compensation, incentive payments, bonuses, and other compensation for
a given offering period. A participant may discontinue his or her participation
in the Purchase Plan at any time during the offering period. Payroll deductions
shall commence on the first payday following the enrollment date, and shall end
on the exercise date of the offering period unless sooner terminated as provided
in the Purchase Plan.
The maximum number of shares placed under option to a participant in an
offering is that number determined by dividing the amount of the participant's
total payroll deductions to be accumulated prior to an exercise date by the
lower of 85% of the fair market value of the Common Stock at the beginning of
the offering period or on the exercise date. Unless a participant withdraws from
the Purchase Plan, such participant's option for the purchase of shares will be
exercised automatically on each exercise date for the maximum number of whole
shares at the applicable price.
Notwithstanding the foregoing, no employee will be permitted to subscribe
for shares under the Purchase Plan if, immediately after the grant of the
option, the employee would own 5% or more of the voting power or value of all
classes of stock of the Company or of any of its subsidiaries (including stock
which may be purchased under the Purchase Plan or pursuant to any other
options), nor shall any employee be granted an option which would permit the
employee to buy under all employee stock purchase plans of the Company more than
$25,000 worth of stock (determined at the fair market value of the shares at the
time the option is granted) in any calendar year.
Employees may end their participation in the offering at any time during
the offering period, and participation ends automatically on termination of
employment with the Company. A participant may withdraw all, but not less than
all, of the payroll deductions credited to such participant's account and not
yet used by giving written notice to the Company. No rights or accumulated
payroll deductions of a participant under the Purchase Plan may be assigned,
transferred, pledged or otherwise disposed of in any way (other than by will,
the laws of descent and distribution or pursuant to the Purchase Plan) and any
such attempt may be treated by the Company as an election to withdraw from the
Purchase Plan.
The shares reserved under the Purchase Plan as well as the price per share
of Common Stock covered by each option under the Purchase Plan which has not yet
been exercised, will be proportionately adjusted for any increase or decrease in
the number of issued shares of Common Stock resulting from a stock split,
reverse stock split, stock dividend, combination or reclassification of the
Common Stock, or any other increase or decrease in the number of shares of
Common Stock effected without receipt of consideration by the Company. In the
event of the proposed dissolution or liquidation of the Company, the offering
period will terminate immediately prior to the consummation of such proposed
action, unless otherwise provided by the Board. In
10
<PAGE> 13
the event of a proposed sale of all or substantially all of the assets of the
Company or a merger of the Company with or into another corporation, the
Purchase Plan provides that each option under the plan shall be assumed or an
equivalent option be substituted by the successor or purchaser corporation,
unless the Board determines to shorten the offering period.
The Board of Directors of the Company may at any time and for any reason
terminate or amend the Purchase Plan. Except as provided in the Purchase Plan,
no such termination can adversely affect options previously granted, provided
that an offering period may be terminated by the Board of Directors on any
exercise date if the Board determines that the termination of the Purchase Plan
is in the best interests of the Company and its stockholders. Unless terminated
sooner, the Purchase Plan will terminate 10 years from its effective date of May
20, 1994.
FEDERAL INCOME TAX CONSEQUENCES
The Purchase Plan, and the right of participants to make purchases
thereunder, is intended to qualify under the provisions of Sections 421 and 423
of the Code. Under these provisions, no income will be taxable to a participant
until the shares purchased under the Plan are sold or otherwise disposed of.
Upon sale or other disposition of the shares, the participant will generally be
subject to tax and the amount of tax will depend upon the holding period. If the
shares are sold or otherwise disposed of more than two years from the first day
of the offering period, or one year from the exercise date, the participant will
recognize ordinary income measured as the lesser of (a) the excess of the fair
market of the shares at the time of such sale or disposition over the purchase
price, or (b) an amount equal to 15% of the fair market value of the shares as
of the first day of the offering period. Any additional gain will be treated as
long-term capital gain. If the shares are sold or otherwise disposed of before
the expiration of these holding periods, the participant will recognize ordinary
income generally measured as the excess of the fair market value of the shares
on the date the shares are purchased over the purchase price. Any additional
gain or loss on such sale or disposition will be long-term or short-term capital
gain or loss, depending on the holding period. Rational is not entitled to a
deduction for amounts taxed as ordinary income or capital gain to a participant,
except to the extent of ordinary income recognized by participants upon a sale
or disposition of shares prior to the expiration of the holding period described
above.
The foregoing is only a summary of the effect of federal income taxation
upon the participant and Rational with respect to the shares purchased under the
Purchase Plan. Reference should be made to the applicable provisions of the
Code. In addition, the summary does not discuss the tax consequences of a
participant's death or the income tax laws of any state or foreign country in
which the participant may reside.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL 5. Directors who
are employees of the Company may benefit from adoption of this amendment, and to
that extent may have a conflict of interest in recommending the amendment.
Because the affirmative vote of the holders of a majority of the shares of
Common Stock present or represented at the Annual Meeting and entitled to vote
is required to approve the proposal, abstentions will have the same effect as a
vote against the proposal, and broker non-votes will have no effect on the
outcome of the proposal.
AMENDMENT TO THE DIRECTORS' STOCK OPTION PLAN
INCREASING THE SIZE OF THE ANNUAL OPTION GRANT AND
ACCELERATING THE DATE OF CERTAIN INITIAL OPTION GRANTS
(PROPOSAL 6)
PROPOSED AMENDMENT
The stockholders are being asked to approve an amendment to the Directors'
Stock Option Plan (the "Directors' Plan") that will increase the size of the
annual option grant awarded to each Eligible Director (as such term is defined
in the Description of the Directors' Plan below) and accelerate the date of
initial option grants to new Eligible Directors and Eligible Directors who cease
serving in a representative capacity and commence serving in an individual
capacity. Presently, the Directors' Plan provides for an annual grant of an
11
<PAGE> 14
option to purchase the greater of (i) 8,333 shares of the Company's Common Stock
or (ii) the number of shares of the Company's Common Stock representing the
difference between 33,333 and the number of option shares of the Company's
Common Stock already granted to the director by the Company. The proposed
amendment described below would increase the size of the annual option grant to
the greater of (i) 8,500 shares of the Company's Common Stock or (ii) the number
of shares of the Company's Common Stock representing the difference between
34,000 and the number of option shares of the Company's Common Stock already
granted to the director by the Company.
The amendment to the Directors' Plan will also accelerate the date of
certain initial options granted to Eligible Directors. First, the proposed
amendment described below would accelerate the date on which options are granted
to new Eligible Directors from the date of the Company's annual meeting to the
date on which the director becomes an Eligible Director. Second, the proposed
amendment described below would accelerate the date of option grants to Eligible
Directors who serve on the Board in a representative capacity (pursuant to which
they were prohibited from receiving options under the Directors' Plan by the
entity they were representing) and then begin serving in an individual capacity.
Presently, the Directors' Plan provides for such options to be granted on the
date of the Company's annual meeting. The proposed amendment would accelerate
the date such options are granted to the date on which the Eligible Director
commences serving in an individual capacity.
The option price for options granted pursuant to the Directors' Plan is set
at not less than 100% of the fair market value of such Common Stock on the date
the option is granted. In addition, options granted pursuant to the Directors'
Plan vest over a period of four years, at a rate of 25% per year, and terminate
ten years from the date of the grant.
The exercise price and the other material provisions of the Directors' Plan
will not be affected by the proposed amendment. The Board of Directors believes
that increasing the equity stake of Eligible Directors will aid in attracting
and retaining qualified individuals to serve on the Company's Board, and will
further align the interests of Eligible Directors with those of the
stockholders. The amendment to the Directors' Plan was adopted by the Board of
Directors on April 23, 1996, subject to stockholder approval. The amendment
effects the following changes:
1. Any new Eligible Director joining the Board of Directors will
receive an option grant, on the date such person first becomes an Eligible
Director, for that number of shares equal to the greater of (a) 8,500 or
(b) the difference between 34,000 and the number of option shares already
granted to such director by the Company at any time in the past, if any;
2. Any new Eligible Director joining the board who declines to accept
an option grant because such person is serving as a representative of
another party who prohibits its representatives from accepting options and
later ceases to serve in a representative capacity and begins to serve in
an individual capacity, will be granted an option, on the date that such
Eligible Director begins to serve in an individual capacity, for that
number of shares equal to the greater of (a) 8,500 or (b) the difference
between 34,000 and the number of options shares already granted to such
director by the Company at any time in the past, if any; and
3. In each year after 1995, each Eligible Director who does not
receive a grant during the year pursuant to items 1 and 2 above will be
granted an option on the date of the Annual Meeting for 8,500 shares;
provided that such director remains an Eligible Director on such date.
DESCRIPTION OF THE DIRECTORS' PLAN
The Directors' Plan was adopted by the Board of Directors on August 23,
1991, and approved by the Stockholders of the Company on July 29, 1992 and
amended on July 25, 1995. Options to purchase Rational Common Stock may be
granted under the Directors' Plan to individuals ("Eligible Directors") who
serve as members of the Board of Directors of Rational and who are not officers
or employees of Rational and who have not given Rational written notice that
they decline to receive a grant of options under the Directors' Plan. The number
of shares of Rational Common Stock that may be issued pursuant to options
granted under the
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<PAGE> 15
Director's Plan shall not exceed 283,332 shares. Option grants under the
Directors' Plan are not considered "incentive stock options" ("Incentive Stock
Options") within the meaning of Section 422 of the Internal Revenue Code (the
"Code"). The Directors' Plan has an effective date of August 23, 1991 and a
termination date of August 23, 2001.
The Directors' Plan is designed to be effective automatically without
requiring administration. However, to the extent administration is necessary, it
will be provided by the Board of Directors. The interpretation and construction
of any provision of the Directors' Plan by the Board of Directors shall be final
and conclusive. Members of the Board of Directors receive no additional
compensation for their services in connection with the administration of the
Directors' Plan.
The Directors' Plan currently provides that, as of the close of business on
the date of the Annual Meeting of Stockholders of Rational held each year, each
Eligible Director generally receives a grant of an option to purchase the
greater of either 8,333 shares of Common Stock or the difference between 33,333
and the number of option shares of Common Stock previously granted to the
Eligible Director. (If this amendment is approved each Eligible Director would
generally receive an option to purchase the greater of either 8,500 shares of
Common Stock or the difference between 34,000 and the number of option shares of
Common Stock previously granted to the Eligible Director.) Options granted by
the Company vest over a period of four years, at a rate of 25% per year. All
options granted pursuant to the Directors' Plan are evidenced by written
agreements. The option price may not be less than 100 percent of the fair market
value of such Common Stock on the date the option is granted. The exercise price
may be paid in cash or by tendering shares of Common Stock (valued at fair
market value) or by a combination of cash and shares. The terms of the options
under the Directors' Plan described above may not be amended more than once
every six months, except for amendments to comply with changes in applicable
law. Options granted under the Directors' Plan are nontransferable by the
optionee, other than by will or the laws of descent and distribution, and are
exercisable during the optionee's lifetime only by the optionee. Any option
granted under the Directors' Plan terminates upon the earlier of (i) ten years
after the date such option is granted or (ii) one year after the optionee's
termination of service as a director of Rational for any reason.
The Directors' Plan requires that options granted thereunder comply with
the applicable provisions of Rule 16b-3 promulgated under the Exchange Act, or
any successor thereto. Such options shall contain such additional conditions or
restrictions as may be required thereunder to qualify for the maximum exemption
from Section 16 of the Exchange Act with respect to the Directors' Plan
transactions.
The Board of Directors may, at any time and from time to time, amend,
suspend or terminate the Directors' Plan as to any shares of Common Stock as to
which options have not been granted; provided, however, that the Board may not,
without approval by the stockholders of Rational, (i) materially modify the
eligibility requirements of the Directors' Plan; (ii) materially increase the
maximum number of shares of Common Stock that may be sold pursuant to options
granted under the Directors' Plan; or (iii) materially increase the benefits
accruing to Eligible Directors under the Directors' Plan. The number of shares
for which options are outstanding pursuant to the Directors' Plan will be
adjusted proportionately for any increase or decrease in the outstanding shares
of Rational's Common Stock effected without receipt of consideration by
Rational, such as a stock split or a reverse stock split. In the event of the
proposed dissolution or liquidation of the Company, all outstanding options will
terminate immediately prior to the consummation of such proposed action. In the
event of a merger of the Company with or into another corporation or the sale of
all or substantially all of the assets of the Company, each outstanding option
shall become fully vested and exercisable.
FEDERAL INCOME TAX CONSEQUENCES
An optionee will not recognize income at the time an option is granted to
such optionee under the Directors' Plan. However, upon exercise of an option
granted under the Directors' Plan, the optionee will generally recognize
ordinary income in an amount equal to the difference between the option exercise
price and the fair market value of the stock on the date of exercise. Because
shares held by directors might be subject to restrictions on resale under
Section 16(b) of the Securities Exchange Act of 1934, as amended, the
13
<PAGE> 16
date of taxation may be deferred unless the optionee files an election with the
Internal Revenue Service pursuant to Section 83(b) of the Internal Revenue Code
within 30 days after the date of exercise.
Generally, the Company will be entitled to a deduction in the same amount
and at the same time as the optionee recognizes ordinary income. Upon a
subsequent sale or exchange of shares acquired pursuant to the exercise of an
option, the optionee will have either long-term or short-term capital gain or
loss (depending upon the holding period), measured by the difference between the
amount realized on the disposition and the tax basis of the shares (generally,
the amount paid for the shares plus the amount treated as ordinary income at the
time the option was exercised).
The foregoing is only a summary of the effect of federal income taxation
upon the optionee and the Company with respect to the grant and exercise of
options under the Directors' Plan. It does not purport to be complete, and it
does not discuss the tax consequences of the optionee's death or the income tax
laws of any municipality, state, or foreign country in which an optionee may
reside.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL 6. In considering
the recommendation of the Board of Directors that the proposed amendment be
adopted, it should be noted that the Eligible Directors have an inherent
conflict of interest in their recommendation because they personally benefit
from the adoption of the amendment at the potential expense of the stockholders.
Because the affirmative vote of the holders of a majority of the shares of
Common Stock present or represented at the Annual Meeting and entitled to vote
is required to approve the proposal, abstentions will have the same effect as a
vote against the proposal, and broker non-votes will have no effect on the
outcome of the proposal.
RATIFICATION OF INDEPENDENT AUDITORS
(PROPOSAL 7)
Action is to be taken at the Annual Meeting with respect to the
ratification of independent auditors, who were nominated by the Audit Committee,
to examine the financial statements of the Company for fiscal year 1997. Unless
otherwise directed therein, proxies received pursuant to this solicitation will
be voted for the ratification of Ernst & Young LLP, who served as the Company's
auditors for fiscal year 1996. Although the ratification of independent auditors
is not required to be submitted to a vote of the stockholders, the Board of
Directors believes that such ratification is a matter on which the stockholders
should express their opinion. If the stockholders do not ratify Ernst & Young
LLP, the selection of independent auditors will be reconsidered by the Audit
Committee of the Board of Directors. Ernst & Young LLP has advised the Company
that no member of its firm has any direct or indirect material financial
interest in the Company. Representatives of Ernst & Young LLP are expected to be
present at the Annual Meeting, will have the opportunity to make a statement if
they so desire, and will be available to respond to appropriate questions from
the stockholders.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL 7.
OTHER MATTERS
No business other than that set forth above is expected to come before the
Annual Meeting or any adjournment thereof. Should other business properly come
before the meeting or any adjournment thereof, the proxy holders will vote upon
the same according to their discretion and best judgment.
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<PAGE> 17
EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
NAME; AGE PRINCIPAL OCCUPATIONS AND EMPLOYMENT
POSITION(S) WITH THE COMPANY DURING THE PAST FIVE YEARS
- ------------------------------------------------ --------------------------------------------------
<S> <C>
Michael T. Devlin; 41 See "Election of Directors" above for further
Chairman of the Board information concerning Mr. Devlin.
Paul D. Levy; 40 See "Election of Directors" above for further
President and Chief Executive Officer information concerning Mr. Levy.
David H. Bernstein; 44 Vice President and General Manager, Object
Senior Vice President and General Manager, Technology, old Rational, 1994 and Rational from
Products 1994 to 1995. Vice President, Product Development
from 1982 to 1994.
Robert T. Bond; 53 Executive Vice President and General Manager of
Senior Vice President, Chief Operating Officer, International Field Operations, old Rational from
Chief Financial Officer and Secretary 1990 to 1994, and Rational from 1994 to 1995.
John R. Lovitt; 51 Vice President of North American Field Operations,
Senior Vice President, North American Field old Rational from 1990 to 1994, and Rational from
Operations 1994 to 1995.
Stephen F. Zeigler; 44 Vice President Ada Products, Rational from 1983 to
Senior Vice President and General Manager, 1995.
UNIX Application Construction Products
Timothy A. Brennan; 41 Corporate Controller, Rational from 1994 to 1995;
Vice President, Finance and Administration Division Controller, The Ask Group, Inc. from 1990
to 1994.
Kevin J. Haar; 39 Vice President of North American Major Accounts,
Vice President, Major Accounts, Rational, 1995. Account Representative, old
North American Field Operations Rational from 1986 to 1994, and Rational from 1994
to 1995.
Ivar Jacobson; 57 Vice President, Technology, Objectory AB from 1991
Vice President, Business Engineering to 1995; President, Objectory AB, 1990.
Joseph N. Marasco; 50 Vice President and General Manager, Programming
Vice President and General Manager, Tools, Rational, 1995. Product Manager, old
Windows Application Construction Products Rational from 1986 to 1994, and Rational from 1994
to 1995.
Gregory L. Meyers; 40 Chief Architect, Software Tools, Palladio Software
Vice President, Object Modeling Products Corp. from 1992 to 1995 (Palladio Software Corp.
was acquired by Rational on December 30, 1994).
Product Manager, Medical Equipment Manufacturer,
General Electric Medical Systems from 1990 to
1992.
Richard P. Reitman; 43 Chief Architect, old Rational 1993 to 1994, and
Vice President, Process and Project Management Rational from 1994 to 1996; Product Architect, old
Products Rational from 1991 to 1993.
Gerald J. Rudisin; 42 Director of Marketing, old Rational from 1991 to
Vice President, Corporate Marketing 1994, and Rational from 1994 to 1995. Vice
President of Product Marketing at Alsys, Inc. from
1986 to 1991.
</TABLE>
COMPLIANCE WITH SECTION 16 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors and executive officers and the holders of 10% or more of
the Company's Common Stock to file with the Securities and Exchange Commission
initial reports of ownership and reports of changes in ownership of equity
securities of the Company. Two Forms 4 as to two transactions were filed 19 days
late and 113 days late by Ivar Jacobson. In addition, one Form 4 was filed 176
days late by John Montague. Based upon a review of Forms 3, 4 and 5, and written
representations of the Company's directors, executive officers, and 10%
stockholders as to whether Forms 5 were required to be filed by them, the
Company believes that all other reports required pursuant to Section 16(a) with
respect to the 1995 fiscal year were timely filed.
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<PAGE> 18
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The Securities and Exchange Commission requires the following table setting
forth for the fiscal years ending March 31, 1996, 1995, and 1994, the cash
compensation paid by the Company to the Chief Executive Officer and each of the
four other most highly compensated executive officers during the last fiscal
year.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION ALL OTHER
NAME AND PRINCIPAL ---------------------------------- COMPENSATION
POSITION YEAR(1) SALARY($) BONUS($) ($)(1)
- ---------------------------------------- ------- --------- -------- ------------------
<S> <C> <C> <C> <C>
Michael T. Devlin....................... 1996 240,000 82,374 348(2)
Chairman of the Board 1995 220,000 0 348(2)
Paul D. Levy............................ 1996 240,000 82,374 348(2)
President and Chief Executive Officer 1995 220,000 0 348(2)
David H. Bernstein...................... 1996 220,000 80,000 348(2)
Vice President and General Manager, 1995 220,000 0 348(2)
Products
Robert T. Bond.......................... 1996 185,000 67,729 348(2)
Senior Vice President, Chief Operating 1995 185,000 0 3,652(2)(3)(4)
Officer, Chief Financial Officer and
Secretary
Kevin J. Haar........................... 1996 220,000 20,000 3,468(2)(5)
Vice President, Major Accounts, 1995 199,131 10,921 1,128(2)(5)
North American Field Operations
</TABLE>
- ---------------
(1) Messrs. Devlin, Levy, Bernstein, Bond, and Haar became employees of the
Company in connection with the March 31, 1994 merger of the Company with old
Rational. Therefore, this table only presents compensation for fiscal years
1995 and 1996 for these individuals.
(2) Includes $348 in premiums paid pursuant to a long-term disability plan
through which the Company provides long-term disability income insurance for
all its employees. In the event of an insured officer's disability, the
officer may be eligible after three consecutive months of disability for a
monthly benefit of 60% of his tax-free monthly earnings up to a $6,000 per
month maximum.
(3) Includes a $304 interest differential reimbursed to Mr. Bond pursuant to the
old Rational Stock Option Financial Assistance Plan that was adopted in
Sept. 29, 1983, to assist optionees in the financing of their purchase of
options granted under the old Rational 1983 Incentive Stock Option Plan. Mr.
Bond repaid the loan in fiscal year 1996.
(4) Includes $3,000 paid to Mr. Bond as an award for ten years of combined
service with the Company and old Rational.
(5) Includes $780 for fiscal year 1995 and $3,120 for fiscal year 1996 paid to
Mr. Haar for a car allowance pursuant to the Company's Field Employee Auto
Reimbursement Plan which provides for reimbursements of up to $260 per month
to certain of the Company's sales personnel.
16
<PAGE> 19
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information with respect to each of the
named executive officers of the Company concerning the grant of stock options
during the last fiscal year and the potential realizable value at certain
assumed annual rates of stock price appreciation.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
- ----------------------------------------------------------------------------------------- VALUE AT
PERCENT OF ASSUMED ANNUAL
NUMBER OF TOTAL RATES OF
SHARES OF OPTIONS STOCK PRICE
COMMON GRANTED TO APPRECIATION FOR
STOCK EMPLOYEES EXERCISE OPTION TERM(1)
UNDERLYING IN FISCAL PRICE ---------------------
NAME OPTIONS(#) YEAR ($/SH) EXPIRATION DATE 5%($) 10%($)
- ----------------------------- --------- ----------- -------- --------------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Michael T. Devlin............ 50,000 9.50 14.12 7/25/05 444,000 1,125,182
Paul D. Levy................. 50,000 9.50 14.12 7/25/05 444,000 1,125,182
David H. Bernstein........... 0 0 0 -- 0 0
Robert T. Bond............... 18,333 3.48 14.12 7/25/05 162,797 412,559
Kevin J. Haar................ 33,333 6.33 12.38 4/28/05 259,521 657,678
</TABLE>
- ---------------
(1) The Potential Realizable Value is calculated based on the fair market value
on the date of grant, which is equal to the exercise price of fiscal year
1996 granted options, assuming that the stock appreciates in value from the
date of grant until the end of the option term at the annual rate specified
(5% and 10%). Potential Realizable Value is net of the option exercise
price. The assumed rates of appreciation are specified in rules of the
Securities and Exchange Commission, and do not represent the Company's
estimate or projection of future stock price. Actual gains, if any,
resulting from stock option exercises and Common Stock holdings are
dependent on the future performance of the Common Stock and overall stock
market conditions, as well as the option holder's continued employment
through the exercise/vesting period. There can be no assurance that the
amounts reflected in this table will be achieved.
OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END VALUES
The following table sets forth information with respect to each of the
named executive officers of the Company concerning the exercise of stock options
during the last fiscal year and the fiscal year 1996 year-end value of all
unexercised options held by such individuals.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES DOLLAR VALUE OF UNEXERCISED,
UNDERLYING IN-THE-MONEY
NUMBER OF UNEXERCISED OPTIONS HELD AT OPTIONS HELD AT
SHARES MARCH 31, 1996 MARCH 31, 1996(1)
ACQUIRED ON DOLLAR VALUE ----------------------------- -----------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------- ----------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Michael T. Devlin.... 50,000 1,637,250 0 200,000 0 6,462,000
Paul D. Levy......... 50,000 1,323,500 0 200,000 0 6,462,000
David H. Bernstein... 26,666 741,065 0 40,000 0 1,377,200
Robert T. Bond....... 13,333 218,261 29,333 58,333 988,628 1,850,092
Kevin J. Haar........ 2,666 92,297 21,165 40,167 716,236 1,133,589
</TABLE>
- ---------------
(1) Value based on market value of the Company's Common Stock at date of
exercise, or at March 29, 1996 (the last business day of the fiscal year),
minus the exercise price. The market value at March 29, 1996 was $39.50 per
share.
17
<PAGE> 20
COMPENSATION COMMITTEE REPORT
Pursuant to rules adopted by the Securities and Exchange Commission
designed to enhance disclosure of public companies' policies toward executive
compensation, set forth below is a report submitted by the Company's
Compensation Committee (the "Committee") addressing the Company's compensation
policies with respect to executive officers.
The Committee reviews and recommends to the Board action with respect to
compensation of and benefits granted to officers and other key employees of the
Company and administers the Company's several stock option plans and stock
purchase plan. During fiscal year 1996, the Committee was comprised of two
non-employee directors.
The Company structures executive compensation in a manner designed to
provide competitive levels of compensation and to assist the Company in
attracting and retaining qualified executives. The compensation paid to the
Company's executive officers consists primarily of base salary, cash bonuses
under a management incentive bonus plan, and grants of stock pursuant to the
Company's stock option plans.
The Committee annually reviews base salaries of executive officers,
including the executive officers named in the Summary Compensation Table.
Industry compensation surveys are used to establish base salaries that are
within the range of those of persons holding comparably responsible positions at
other similar-sized companies, both regionally and nationally. While salary
surveys that directly correspond to the companies included in the "peer group"
used to construct the Performance Graph included in this Proxy Statement are not
available, there is substantial overlap between the companies included in the
salary surveys used by the Company and the companies included in such "peer
group," and the Committee believes that it is appropriate to consider such
surveys in establishing the range of competitive salaries for its executive
officers. In addition, other factors are considered in setting salaries, such as
cost-of-living increases, management performance reviews and recommendations, as
well as the individual's past performance and potential with the Company. The
consideration of additional factors and the weight given to any particular
factor are within the discretion of the Committee.
Mr. Levy's salary was set at $220,000 in fiscal year 1995. After
considering the factors described above in connection with salary adjustments,
and giving particular emphasis to competitive factors and individual
performance, the Committee recommended that Mr. Levy's base salary be increased
to $240,000 in fiscal year 1996.
The Company's management incentive bonus plan ties payment of benefits to
executive officers, including the executive officers named in the Summary
Compensation Table, to corporate profit and revenue goals established by the
Board of Directors and a minimum level of profitability must be achieved before
any amounts are paid pursuant to the plan. Payments under the plan are based
upon the following factors: (a) annual base salary; (b) an employee's targeted
percentage (a percentage of base salary that increases for higher positions
within the Company, which places a greater percentage of compensation at risk
for those with greater responsibility); and (c) a corporate performance factor
based on a comparison of corporate results to profitability and revenue
objectives established by the Board of Directors' operating budget plan each
year for the succeeding year.
The option incentive component of the total compensation package is
intended to retain and motivate executives to improve long-term stock market
performance and to increase value for all stockholders. The Committee generally
grants options under the Company's stockholder-approved plans with an exercise
price equal to the market price at the date of the grant and, as a result, the
options will have value only if the Company's stock price increases from the
time of the award. Grants are made to executive officers based on salary,
responsibility, and performance of the individual officer. Consistent with the
Committee's philosophy that the award of stock options should be used to
incentivize key executive officers and to further align their interests with
those of the stockholders, during fiscal year 1996 the Committee examined the
stock and option holdings of the Company's executive officers and determined
that the awards set forth in the Option Grants in Last Fiscal Year Table were
appropriate.
The Committee has considered the potential future effects of Section 162(m)
of the Code, as amended. Section 162(m) limits the deductibility by public
companies of certain executive compensation in excess of $1 million per
executive per year, but excludes from the calculation of such $1 million limit
certain elements
18
<PAGE> 21
of compensation, including performance-based compensation, provided that certain
requirements are met. None of the Company's executive officers approached the $1
million limit in fiscal year 1996, nor is any expected to approach such limit in
fiscal year 1997. However, the provisions of Section 162(m) merit current
consideration because, under certain circumstances, the difference between the
fair market value and the exercise price of options granted in the present time
period, measured at the time of exercise, could be included in the calculation
under Section 162(m) of the executive officers' compensation in the time period
in which the exercise occurs. This result can be avoided if the plans under
which such options are granted comply with certain requirements at the time of
grant, including administration by a committee consisting solely of two or more
outside directors and stockholder approval of the terms of the plan, including
approval of an annual limit stated in the plan on the number of shares with
respect to which options may be granted to any employee. The Company's 1994
Stock Option Plan has been designed and administered to meet such requirements.
The Company has not attempted to structure other elements of executive
compensation to qualify as performance-based compensation for purposes of
Section 162(m).
Leslie G. Denend
Allison R. Schleicher
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No interlocking relationship exists between the Company's Board of
Directors or Officers Compensation Committee and the board of directors or
compensation committee of any other company.
PERFORMANCE GRAPH
The following graph compares the five-year cumulative total returns for the
Company, the NASDAQ Market Index and an index constructed from a peer group
consisting of 491 companies that are classified in the same Standard Industrial
Classification (SIC) code as the Company.
<TABLE>
<CAPTION>
Measurement Period Company Peer Group NASDAQ Market
(Fiscal Year Covered) Common Stock Index Index
<S> <C> <C> <C>
1991 100.00 100.00 100.00
1992 228.57 135.56 105.40
1993 185.71 153.60 117.95
1994 178.57 163.31 136.32
1995 210.71 216.00 144.62
1996 752.38 314.16 194.52
</TABLE>
ASSUMES $100 INVESTED ON APRIL 1, 1991
ASSUMES DIVIDENDS REINVESTED
FISCAL YEAR ENDING MARCH 31, 1996
19
<PAGE> 22
CERTAIN TRANSACTIONS
Daniel H. Case III, a director and stockholder of the Company, is the
President and Chief Executive Officer and a shareholder of Hambrecht & Quist
LLC. Hambrecht & Quist LLC was a managing underwriter of the Company's public
offering which took place in June 1995, and received certain discounts and
commissions, and was indemnified by the Company, with respect thereto. Hambrecht
& Quist LLC may in the future provide investment banking services or other
financial advisory services to the Company as well as continue to provide
research coverage of the Company or make a market in its publicly traded
securities, although there is no agreement between the Company and Hambrecht &
Quist LLC relating to such activities.
The Company sells its products to Lockheed Martin Corporation ("Lockheed
Martin"), a former major stockholder of the Company. Sales of the Company's
products to Lockheed Martin accounted for approximately 1%, 2% and 4% of the
Company's revenue in fiscal years 1994, 1995 and 1996, respectively. Sales to
Lockheed Martin were made at market rates. The Company has entered into an
arrangement with Martin Marietta Advanced Concepts Center ("ACC"), an operating
element of Lockheed Martin, wherein the ACC has agreed to adopt the combined
Booch and OMT method being developed by the Company, when developed, for its
systems integration business and augment the Company's own training and
consulting capacity. To date, this agreement has not produced material revenues.
John E. Montague, Vice President, Financial Strategies, at Lockheed Martin,
serves on the Company's Board of Directors in his individual capacity and not as
a representative of Lockheed Martin.
Ivar Jacobson, who became an officer of the Company on October 24, 1995,
was the President of Objectory AB ("Objectory"), a privately held Swedish
corporation that the Company acquired from Objectory's two stockholders,
Telefonaktiebolaget LM Ericsson (publ.) ("Ericsson") and Usecase Engineering
S.A. ("Usecase") in two transactions that took place on October 6, 1995 and
January 23, 1996, respectively. In addition to being President of Objectory, Mr.
Jacobson was also the beneficial owner of Usecase, which held 46% of Objectory's
outstanding stock. In return for its shares of Objectory, Usecase received
476,272 shares of the Company's Common Stock. Mr. Jacobson's daughter, Agneta
Jacobson, also works for the Company's Swedish subsidiary as Director of Process
Development. Ms. Jacobson's annual salary is approximately $65,000.
EXPENSES OF SOLICITATION
The cost of solicitation of proxies for the Annual Meeting will be paid by
the Company. In addition to solicitation of proxies by mail, the officers,
directors, and regular employees of the Company may solicit proxies in person or
by telegraph or telephone. Brokerage houses, nominees, fiduciaries, and other
custodians will be requested by the Company to forward proxy soliciting material
to beneficial owners of shares held of record by them and the Company will
reimburse them for reasonable out-of-pocket expenses incurred in doing so. The
Company may also retain a professional solicitation firm to assist in the
solicitation of proxies at a cost not to exceed $10,000.
STOCKHOLDER PROPOSALS
Pursuant to Rule 14a-8 under the Exchange Act, stockholders may present
proper proposals for inclusion in the Company's proxy statement and for
consideration at the next Annual Meeting of stockholders by submitting their
proposals to the Company in a timely manner. In order to be considered for the
1997 Annual Meeting of stockholders, stockholder proposals must be received by
the Company no later than March 14, 1997 and have complied with the requirements
of Rule 14a-8 of the Securities Exchange Act of 1934, as amended.
By Order of the Board of Directors,
ROBERT T. BOND
Secretary
20
<PAGE> 23
EXHIBIT A
AMENDMENT TO CERTIFICATE OF INCORPORATION
OF
RATIONAL SOFTWARE CORPORATION
Rational Software Corporation, a corporation organized and existing under
the laws of the State of Delaware (the "Company"), hereby certifies as follows:
FIRST: The Board of Directors of the Company, at a meeting duly called and
held in accordance with the Bylaws of the Company and Section 141 of the
Delaware General Corporation Law, as amended, duly adopted resolutions proposing
and declaring advisable the amendment to the Certificate of Incorporation of the
Company as set forth below.
SECOND: Paragraph 4(a) of the Certificate of Incorporation, as amended to
date, hereby is amended to read as follows:
4. (a) The total number of shares of Common Stock which the
corporation shall have authority to issue shall be seventy-five million
(75,000,000) and each of such shares shall have a par value of one cent
($0.01).
THIRD. The undersigned, Paul D. Levy and Robert T. Bond, further verify
that:
A. This Amendment to Certificate of Incorporation has been duly
adopted in accordance with Section 242 of the Delaware General Corporation
Law, as amended.
B. Pursuant to a duly adopted resolution of the Board of Directors of
the Company, the annual meeting of the stockholders of the Company was duly
called and held, upon notice in accordance with Section 222 of the Delaware
General Corporation Law, as amended, at which meeting holders of at least a
majority of the outstanding shares of Common Stock of the Company,
constituting the only outstanding securities of the Company entitled to
vote in respect of the amendment to the Certificate of Incorporation of the
Company as set forth above, duly approved said amendment.
THE UNDERSIGNED, being the President and Secretary, respectively, of
Rational Software Corporation, do make this Amendment to Certificate of
Incorporation, hereby declaring and certifying that this is an act and deed of
the Company and that the facts herein stated are true, and accordingly have
hereunto set their hands this day of August, 1996.
--------------------------------------
Paul D. Levy, President
--------------------------------------
Robert T. Bond, Secretary
21
<PAGE> 24
RATIONAL SOFTWARE CORPORATION
ANNUAL MEETING OF STOCKHOLDERS
August 27, 1996
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned stockholder of Rational Software Corporation, a Delaware
corporation, hereby acknowledges receipt of the Notice of Annual Meeting of
Stockholders and Proxy Statement, each dated July 12, 1996, and hereby appoints
Paul D. Levy and Robert T. Bond, and each of them, with full power of
substitution, as Proxy or Proxies, to vote all shares of the Common Stock of the
undersigned at the Annual Meeting of Stockholders of Rational Software
Corporation to be held on August 27, 1996, and at any adjournments thereof, upon
the proposals set forth on this form of proxy and described in the Proxy
Statement, and in their discretion with respect to such other matters as may be
properly be brought before the meeting or any adjournments thereof.
1. ELECTION OF CLASS I MEMBERS (WITH TERMS EXPIRING IN 1999) OF THE BOARD
OF DIRECTORS:
[ ] FOR all nominees listed below [ ] WITHHOLD authority to vote for all
(except as indicated) nominees listed below
If you wish to withhold authority to vote for any individual nominee, strike
a line through that nominee's name in the list below:
Michael T. Devlin, Leslie G. Denend
2. PROPOSAL TO APPROVE AN AMENDMENT TO THE COMPANY'S CERTIFICATE OF
INCORPORATION INCREASING THE NUMBER OF AUTHORIZED COMMON STOCK FROM
25,000,000 TO 75,000,000 SHARES:
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. PROPOSAL TO APPROVE AN AMENDMENT TO THE 1994 STOCK OPTION PLAN RESERVING
AN ADDITIONAL 1,000,000 SHARES OF THE COMPANY'S COMMON STOCK FOR
ISSUANCE THEREUNDER:
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. PROPOSAL TO APPROVE AN AMENDMENT TO THE 1994 STOCK OPTION PLAN
INCREASING THE SIZE OF THE OPTIONS THAT MAY BE GRANTED IN ANY CALENDAR
YEAR:
[ ] FOR [ ] AGAINST [ ] ABSTAIN
<PAGE> 25
5. PROPOSAL TO APPROVE AN AMENDMENT TO THE 1994 EMPLOYEE STOCK PURCHASE
PLAN RESERVING AN ADDITIONAL 200,000 SHARES OF THE COMPANY'S COMMON
STOCK FOR ISSUANCE THEREUNDER:
[ ] FOR [ ] AGAINST [ ] ABSTAIN
6. PROPOSAL TO APPROVE AN AMENDMENT TO THE DIRECTORS' STOCK OPTION PLAN
INCREASING THE SIZE OF THE ANNUAL OPTION GRANT AND ACCELERATING THE DATE
OF CERTAIN INITIAL OPTION GRANTS:
[ ] FOR [ ] AGAINST [ ] ABSTAIN
7. PROPOSAL TO RATIFY THE APPOINTMENT OF ERNST & YOUNG LLP AS THE COMPANY'S
INDEPENDENT AUDITORS TO EXAMINE THE FINANCIAL STATEMENTS OF THE COMPANY
FOR FISCAL YEAR 1997:
[ ] FOR [ ] AGAINST [ ] ABSTAIN
THIS PROXY WILL BE VOTED AS DIRECTED OR, IF NO DIRECTION IS INDICATED,
WILL BE VOTED FOR EACH OF THE PROPOSALS LISTED ABOVE, AND AS SAID PROXIES DEEM
ADVISABLE ON SUCH OTHER MATTERS AS MAY COME BEFORE THE MEETING.
Either of such Proxies or substitutes shall have and may exercise all
of the powers of said Proxies hereunder.
Dated:
-----------------------------
-----------------------------------
(Signature)
----------------------------------
(Signature)
(This proxy should be marked, dated, signed by the stockholder or stockholders
exactly as the stockholder's or stockholders' names appear hereon, and returned
promptly in the enclosed envelope. Persons signing in a fiduciary or
representative capacity should so indicate. If shares are held by joint
tenants, as community property or otherwise by more than one person, all should
sign.)
<PAGE> 26
APPENDIX
--------
RATIONAL SOFTWARE CORPORATION
1994 STOCK OPTION PLAN
Rational Software Corporation (the "Corporation") sets forth herein the
terms of this 1994 Stock Option Plan (the "Plan") as follows:
1. PURPOSE
The Plan is intended to advance the interests of the
Corporation by providing eligible individuals (as designated pursuant to Section
4 below) with an opportunity to acquire or increase a proprietary interest in
the Corporation, which thereby will create a stronger incentive to expend
maximum effort for the growth and success of the Corporation and its
subsidiaries, and will encourage such eligible individuals to remain in the
employ or service of the Corporation or that of one or more of its subsidiaries.
Each stock option granted under the Plan (an "Option") is intended to be an
"incentive stock option" within the meaning of Section 422 of the Internal
Revenue Code of 1986, or the corresponding provision of any subsequently-enacted
tax statute, as amended from time to time (the "Code") ("Incentive Stock
Option"), except (i) to the extent that any such Option would exceed the
limitations set forth in Section 7 below and (ii) for Options specifically
designated at the time of grant as not being "incentive stock options."
2. ADMINISTRATION
(a) Board. The Plan shall be administered by the Board of
Directors of the Corporation (the "Board"), which shall have the full power and
authority to take all actions, and to make all determinations required or
provided for under the Plan or any Option granted or Option Agreement (as
defined in Section 8 below) entered into hereunder and all such other actions
and determinations not inconsistent with the specific terms and provisions of
the Plan deemed by the Board to be necessary or appropriate to the
administration of the Plan or any Option granted or Option Agreement entered
into hereunder. All such actions and determinations shall be by the affirmative
vote of a majority of the members of the Board present at a meeting at which any
issue relating to the Plan is properly raised for consideration or without a
meeting by written consent of the Board executed in accordance with the
Corporation's Certificate of Incorporation and By-Laws, and with applicable law.
The interpretation and construction by the Board of any provision of the Plan or
of any Option granted or Option Agreement entered into hereunder shall be final
and conclusive.
(b) Committee. The Board may from time to time appoint a
Committee (the "Committee") consisting of not less than two members of the
Board, none of whom shall be an officer or other salaried employee of the
Corporation or any of its subsidiaries, and each of whom shall qualify in all
respects as a "disinterested person" as defined in Rule 16b-3 of the Securities
and Exchange Commission under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). The Board may designate the Compensation Committee of the
Board to serve as the Committee hereunder. The Board, in its sole discretion,
may provide that the role of the Committee shall be limited to making
recommendations to the Board concerning any
<PAGE> 27
determinations to be made and actions to be taken by the Board pursuant to or
with respect to the Plan, or the Board may delegate to the Committee such powers
and authorities related to the administration of the Plan, as set forth in
Section 2(a) above, as the Board shall determine, consistent with the
Certificate of Incorporation and By-Laws of the Corporation and applicable law.
The Board may remove members, add members, and fill vacancies on the Committee
from time to time, all in accordance with the Corporation's Certificate of
Incorporation and By-Laws, and with applicable law. The majority vote of the
Committee, or acts reduced to or approved in writing by a majority of the
members of the Committee, shall be the valid acts of the Committee.
(c) No Liability. No member of the Board or of the Committee
shall be liable for any action or determination made in good faith with respect
to the Plan or any Option granted or Option Agreement entered into hereunder.
(d) Delegation to the Committee. In the event that the Plan or
any Option granted or Option Agreement entered into hereunder provides for any
action to be taken by or determination to be made by the Board, such action may
be taken by or such determination may be made by the Committee if the power and
authority to do so has been delegated to the Committee by the Board as provided
for in Section 2(b) above. Unless otherwise expressly determined by the Board,
any such action or determination by the Committee shall be final and conclusive.
(e) Action by the Board. The Board may act under the Plan with
respect to any Option granted to or Option Agreement entered into with an
officer, director or shareholder of the Corporation who is subject to Section 16
of the Exchange Act other than by, or in accordance with the recommendations of,
the Committee, constituted as set forth in Section 2(b) above, only if all of
the members of the Board are "disinterested persons" as defined in Rule 16b-3 of
the Securities and Exchange Commission under the Exchange Act.
3. STOCK
The stock that may be issued pursuant to Options granted under
the Plan shall be shares of Common Stock, par value $.01 per share, of the
Corporation (the "Stock"), which shares may be treasury shares or authorized but
unissued shares. The number of shares of Stock that may be issued pursuant to
Options granted under the Plan shall not exceed in the aggregate 1,500,000
shares. The numbers of shares specified in this Section and elsewhere in the
Plan are subject to adjustment as provided in Section 17 below. If any Option
expires, terminates, or is terminated or canceled for any reason prior to
exercise in full, the shares of Stock that were subject to the unexercised
portion of such Option shall be available for future Options granted under the
Plan.
-2-
<PAGE> 28
4. ELIGIBILITY
Options may be granted under the Plan to any employee
of the Corporation or any "subsidiary corporation" of the Corporation (a
"Subsidiary") thereof within the meaning of Section 424(f) of the Code
(including any such employee who is an officer or director of the Corporation or
any Subsidiary) as the Board shall determine and designate from time to time
prior to expiration or termination of the Plan. The maximum number of shares of
Stock subject to Options that may be granted under the Plan to any executive
officer or other employee of the Corporation or any Subsidiary is 83,333 shares
in any calendar year (subject to adjustment as provided in Section 17 hereof).
An individual may hold more than one Option, subject
to such restrictions as are provided herein.
5. EFFECTIVE DATE AND TERM OF THE PLAN
(a) Effective Date. The Plan shall be effective as of
the date of adoption by the Board, which date is set forth below (the "Effective
Date"), subject to approval of the Plan within one year of the Effective Date by
a majority of the outstanding shares of the Corporation's voting stock;
provided, however, that upon approval of the Plan by the shareholders of the
Corporation as set forth above, all Options granted under the Plan on or after
the Effective Date shall be fully effective as if the shareholders of the
Corporation had approved the Plan on the effective date. If the shareholders
fail to approve the Plan within one year of the Effective Date, any options and
granted hereunder shall be null and void and of no effect.
(b) Term. The Plan shall terminate on the date ten
years from the Effective Date.
6. GRANT OF OPTIONS
Subject to the terms and conditions of the Plan, the Board
may, at any time and from time to time, prior to the date of termination of the
Plan, grant to such eligible individuals as the Board may determine
("Optionees"), Options to purchase such number of shares of the Stock on such
terms and conditions as the Board may determine, including any terms or
conditions that may be necessary to qualify such Options as Incentive Stock
Options. The date on which the Board approves the grant of an Option (or such
later date as is specified by the Board) shall be considered the date on which
such Option is granted.
7. LIMITATION ON INCENTIVE STOCK OPTIONS
An Option (other than an Option described in exception (ii) of
Section 1) shall constitute an Incentive Stock Option to the extent that the
aggregate fair market value
-3-
<PAGE> 29
(determined at the time the option is granted) of the Stock with respect to
which Incentive Stock Options are exercisable for the first time by any Optionee
during any calendar year (under the Plan and all other plans of the Optionee's
employer corporation and its parent and subsidiary corporations within the
meaning of Section 422(d) of the Code) does not exceed $100,000. This limitation
shall be applied by taking Options into account in the order in which they were
granted.
8. OPTION AGREEMENTS
All Options granted pursuant to the Plan shall be evidenced by
written agreements ("Option Agreements"), to be executed by the Corporation and
by the Optionee, in such form or forms as the Board shall from time to time
determine. Option Agreements covering Options granted from time to time or at
the same time need not contain similar provisions; provided, however, that all
such Option Agreements shall comply with all terms of the Plan.
9. OPTION PRICE
The purchase price of each share of the Stock subject to an
Option (the "Option Price") shall be fixed by the Board and stated in each
Option Agreement, and shall be not less than the greater of par value or 100
percent of the fair market value of a share of the Stock on the date the Option
is granted (as determined in good faith by the Board); provided, however, that
in the event the Optionee would otherwise be ineligible to receive an Incentive
Stock Option by reason of the provisions of Sections 422(b)(6) and 424(d) of the
Code (relating to stock ownership of more than ten percent), the Option Price of
an Option that is intended to be an Incentive Stock Option shall be not less
than the greater of par value or 110 percent of the fair market value of a share
of Stock at the time such Option is granted. In the event that the Stock is
listed on an established national or regional stock exchange, is admitted to
quotation on the National Association of Securities Dealers Automated Quotation
System, or is publicly traded on an established securities market, in
determining the fair market value of the Stock, the Board shall use the closing
price of the Stock on such exchange or System or in such market (the highest
such closing price if there is more that one such exchange or market) on the
trading date immediately before the Option is granted (or, if there is no such
closing price, then the Board shall use the mean between the high and low prices
on such date), or, if no sale of the Stock had been made on such day, on the
next preceding day on which any such sale shall have been made.
10. TERM AND EXERCISE OF OPTIONS
(a) Term. Each Option granted under the Plan shall terminate
and all rights to purchase shares thereunder shall cease upon the expiration of
ten years from the date such Option is granted or on such date prior thereto as
may be fixed by the Board and stated in the Option Agreement relating to such
Option; provided, however, that in the event the Optionee
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would otherwise be ineligible to receive an Incentive Stock Option by reason of
the provisions of Sections 422(b)(6) and 424(d) of the Code (relating to stock
ownership of more than ten percent), an Option granted to such Optionee that is
intended to be an Incentive Stock Option shall in no event be exercisable after
the expiration of five years from the date it is granted.
(b) Option Period and Limitations on Exercise. Each Option
shall be exercisable, in whole or in part, at any time and from time to time,
over a period commencing on or after the date of grant and ending upon the
expiration or termination of the Option, as the Board shall determine and set
forth in the Option Agreement relating to such Option. Without limiting the
foregoing, the Board, subject to the terms and conditions of the Plan, may in
its sole discretion provide that an Option may not be exercised in whole or in
part for any period or periods of time during which such Option is outstanding;
provided, however, that any such limitation on the exercise of an Option
contained in any Option Agreement may be rescinded, modified or waived by the
Board, in its sole discretion, at any time and from time to time after the date
of grant of such Option, so as to accelerate the time at which the Option may be
exercised. Notwithstanding any other provision of the Plan, no Option granted to
an Optionee under the 'Plan shall be exercisable in whole or in part prior to
the date the Plan is approved by the shareholders of the Corporation as provided
in Section 5 above.
(c) Method of Exercise. An Option that is exercisable
hereunder may be exercised by delivery to the Corporation on any business day,
at its principal office, addressed to the attention of the Corporate Secretary,
of written notice of exercise, which notice shall specify the number of shares
with respect to which the Option is being exercised. The minimum number of
shares of Stock with respect to which an Option may be exercised, in whole or in
part, at any time shall be the lesser of 33 shares or the maximum number of
shares available for purchase under the Option at the time of exercise. Except
as provided in the next sentence, payment in full of the Option Price of the
shares for which the Option is being exercised shall accompany the written
notice of exercise of the Option and shall be made either (i) in cash or in cash
equivalents; (ii) through the tender to the Corporation of shares of Stock,
which shares shall be valued, for purposes of determining the extent to which
the Option Price has been paid thereby, at their fair market value (determined
in the manner described in Section 9 above) on the date of exercise; or (iii) by
a combination of the methods described in (i) and (ii); provided, however, that
the Board may in its discretion impose and set forth in the Option Agreement
such limitations or prohibitions on the use of shares of Stock to exercise
Options as it deems appropriate. Unless the Board shall provide otherwise in an
Option Agreement, payment in full of the Option Price need not accompany the
written notice of exercise provided such notice of exercise directs that the
Stock certificate or certificates for the shares for which the Option is
exercised be delivered to a licensed broker acceptable to the Corporation as the
agent for the individual exercising the Option and, at the time such Stock
certificate or certificates are delivered, the broker tenders to the Corporation
cash (or cash equivalents acceptable to the Corporation) equal to the Option
Price for the shares of Stock purchased pursuant to the exercise of the option
plus the amount (if any) of federal and other taxes which the Corporation may,
in its judgment, be required to withhold
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with respect to the exercise of the Option. An attempt to exercise any Option
granted hereunder other than as set forth above shall be invalid and of no force
and effect. Promptly after the exercise of an Option and the payment in full of
the Option Price of the shares of Stock covered thereby, the individual
exercising the Option shall be entitled to the issuance of a Stock certificate
or certificates evidencing his ownership of such shares. A separate Stock
certificate or certificates shall be issued for any shares purchased pursuant to
the exercise of an Option that is an Incentive Stock Option, which certificate
or certificates shall not include any shares which were purchased pursuant to
the exercise of an Option which is not an Incentive Stock Option. An individual
holding or exercising an Option shall have none of the rights of a shareholder
until the shares of Stock covered thereby are fully paid and issued to him and,
except as provided in Section 17 below, no adjustment shall be made for
dividends or other rights for which the record date is prior to the date of such
issuance.
(d) Restrictions on Transfer of Stock. If an Option is
exercised prior to the date that is six months from the later of (i) the date of
grant of the Option or (ii) the date of shareholder approval of the Plan and the
individual exercising the Option is a reporting person under Section 16(a) of
the Exchange Act, then such certificate or certificates shall bear a legend
restricting the transfer of the Stock covered thereby until the expiration of
six months from the later of the dates specified in clauses (i) and (ii) above.
11. TRANSFERABILITY OF OPTIONS
During the lifetime of an Optionee to whom an Option is
granted, only such Optionee (or, in the event of legal incapacity or
incompetency, the Optionee's guardian or legal representative) may exercise the
Option. No Option shall be assignable or transferable by the Optionee to whom it
is granted, other than by will or the laws of descent and distribution.
12. TERMINATION OF SERVICE OR EMPLOYMENT
Upon the termination of the employment or service of an
Optionee with the Corporation or a Subsidiary, other than by reason of the
death, "permanent and total disability" (within the meaning of Section 22(e)(3)
of the Code), or "Retirement" (as defined in Section 13(B) below) of such
Optionee, any Option granted to an Optionee pursuant to the Plan shall
terminate, and such Optionee shall have no further right to purchase shares of
Stock pursuant to such Option; provided, however, that the Board may provide, by
inclusion of appropriate language in any Option Agreement, that the Optionee may
(subject to the general limitations on exercise set forth in Section 10(b)
above), in the event of termination of service or employment of the Optionee
with the Corporation or a Subsidiary, exercise an Option, in whole or in part,
at any time subsequent to such termination of service or employment and prior to
termination of the Option pursuant to Section 10(a) above, either subject to or
without regard to any installment limitation on exercise imposed pursuant to
Section 10(b) above. Whether a leave of absence or leave on military or
government service shall constitute a
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termination of service or employment for purposes of the Plan shall be
determined by the Board, which determination shall be final and conclusive. For
purposes of the Plan, a termination of employment with the Corporation or a
Subsidiary shall not be deemed to occur if the Optionee is immediately
thereafter employed with or in the service of the Corporation or any Subsidiary.
13. RIGHTS IN THE EVENT OF DEATH, DISABILITY OR RETIREMENT
(a) Death. If an Optionee dies while in the employ or service
of the Corporation or a Subsidiary or within the period following the
termination of employment or service during which the Option is exercisable
under Section 12 above or Section 13(b) below, the executors or administrators
or legatees or distributees of such Optionee's estate shall have the right
(subject to the general limitations on exercise set forth in Section 10(b)
above), at any time within one year after the date of such Optionee's death and
prior to termination of the Option pursuant to Section 10(a) above, to exercise
any Option held by such Optionee at the date of such Optionee's death, whether
or not such Option was exercisable immediately prior to such Optionee's death;
provided, however, that the Board may provide by inclusion of appropriate
language in any Option Agreement that, in the event of the death of the
Optionee, the executors or administrators or legatees or distributees of such
Optionee's estate may exercise an Option (subject to the general limitations on
exercise set forth in Section 10(b) above), in whole or in part, at any time
subsequent to such Optionee's death and prior to termination of the Option
pursuant to Section 10(a) above, either subject to or without regard to any
installment limitation on exercise imposed pursuant to Section 10(b) above.
(b) Disability or Retirement. If an Optionee terminates
employment or service with the Corporation or a Subsidiary by reason of (i) the
"permanent and total disability" within the meaning of Section 22(e)(3) of the
Code ("Disability") of such Optionee or (ii) retirement of the Optionee under an
approved plan of retirement of the Corporation or a Subsidiary, entitling such
Optionee to receive payment of retirement benefits thereunder immediately
("Retirement"), then such Optionee shall have the right (subject to the general
limitations on exercise set forth in Section 10(b) above), at any time within
three months after such termination of service or employment and prior to
termination of the Option pursuant to Section 10(a) above, to exercise, in whole
or in part, any Option held by such Optionee at the date of such termination of
service or employment, whether or not such Option was exercisable immediately
prior to such termination of service or employment; provided, however, that the
Board may provide, by inclusion of appropriate language in any Option Agreement,
that the Optionee may (subject to the general limitations on exercise set forth
in Section 10(b) above), in the event of the termination of service or
employment of the Optionee with the Corporation or a Subsidiary by reason of the
Disability or Retirement of such Optionee, exercise an Option in whole or in
part, at any time subsequent to such termination of service or employment and
prior to termination of the Option pursuant to Section 10(a) above, either
subject to or without regard to any installment limitation on exercise imposed
pursuant to Section 10(b) above. Whether a termination of service or employment
is to be
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<PAGE> 33
considered by reason of Disability or Retirement for purposes of this Plan shall
be determined by the Board, which determination shall be final and conclusive.
14. USE OF PROCEEDS
The proceeds received by the Corporation from the sale of
Stock pursuant to Options granted under the Plan shall constitute general funds
of the Corporation.
15. REQUIREMENTS OF LAW
(a) Violations of Law. The Corporation shall not be required
to sell or issue any shares of Stock under any Option if the sale or issuance of
such shares would constitute a violation by the individual exercising the Option
or the Corporation of any provisions of any law or regulation of any
governmental authority, including without limitation any federal or state
securities laws or regulations. Specifically in connection with the Securities
Act of 1933 (as now in effect or as hereafter amended, the "Act"), upon exercise
of any Option, unless a registration statement under the Act is in effect with
respect to the shares of Stock covered by such Option, the Corporation shall not
be required to sell or issue such shares unless the Board has received evidence
satisfactory to it that the holder of such Option may acquire such shares
pursuant to an exemption from registration under the Act. Any determination in
this connection by the Board shall be final, binding, and conclusive. The
Corporation may, but shall in no event be obligated to, register any securities
covered hereby pursuant to the Act. The Corporation shall not be obligated to
take any affirmative action in order to cause the exercise of an Option or the
issuance of shares of stock pursuant thereto to comply with any law or
regulation of any governmental authority. As to any jurisdiction that expressly
imposes the requirement that an Option shall not be exercisable unless and until
the shares of Stock covered by such Option are registered or are subject to an
available exemption from registration, the exercise of such Option (under
circumstances in which the laws of such jurisdiction apply) shall be deemed
conditioned upon the effectiveness of such registration or the availability of
such an exemption.
(b) Compliance with Rule 16b-3. The intent of this Plan is to
qualify for the exemption provided by Rule 16b-3 under the Exchange Act. To the
extent any provision of the Plan does not comply with the requirements of Rule
16b-3, it shall be deemed inoperative to the extent permitted by law and deemed
advisable by the Board and shall not affect the validity of the Plan. In the
event Rule 16b-3 is revised or replaced, the Board, or the Committee acting on
behalf of the Board, may exercise discretion to modify this Plan in any respect
necessary to satisfy the requirements of the revised exemption or its
replacement.
16. AMENDMENT AND TERMINATION OF THE PLAN
The Board may, at any time and from time to time, amend,
suspend or terminate the Plan as to any shares of Stock as to which Options have
not been granted;
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provided, however, that no amendment by the Board shall, without approval by a
majority of the votes present and entitled to vote at a duly held meeting of the
shareholders of the Corporation at which a quorum representing a majority of all
outstanding voting stock is, either in person or by proxy, present and voting on
the amendment, or by written consent in accordance with applicable state law and
the Certificate of Incorporation and By-Laws of the Corporation, materially
increase the benefits accruing to participants under the Plan, change the
requirements as to eligibility to receive Options or increase the maximum number
of shares of Stock in the aggregate that may be sold pursuant to Options granted
under the Plan (except as permitted under Section 17 hereof. Except as permitted
under Section 17 hereof, no amendment, suspension or termination of the Plan
shall, without the consent of the holder of the Option, alter or impair rights
or obligations under any Option theretofore granted under the Plan.
17. EFFECT OF CHANGES IN CAPITALIZATION
(a) Changes in Stock. If the outstanding shares of Stock are
increased or decreased or changed into or exchanged for a different number or
kind of shares or other securities of the Corporation by reason of any
recapitalization, reclassification, stock split, reverse split, combination of
shares, exchange of shares, stock dividend or other distribution payable in
capital stock, or other increase or decrease in such shares effected without
receipt of consideration by the Corporation, occurring after the Effective Date,
the number and kinds of shares for the purchase of which Options may be granted
under the Plan shall be adjusted proportionately and accordingly by the
Corporation. In addition, the number and kind of shares for which Options are
outstanding shall be adjusted proportionately and accordingly so that the
proportionate interest of the holder of the Option immediately following such
event shall, to the extent practicable, be the same as immediately prior to such
event. Any such adjustment in outstanding Options shall not change the aggregate
Option Price payable with respect to shares subject to the unexercised portion
of the Option outstanding but shall include a corresponding proportionate
adjustment in the Option Price per share.
(b) Reorganization in Which the Corporation Is the Surviving
Corporation. Subject to Subsection (c) hereof, if the Corporation shall be the
surviving corporation in any reorganization, merger, or consolidation of the
Corporation with one or more other corporations, any Option theretofore granted
pursuant to the Plan shall pertain to and apply to the securities to which a
holder of the number of shares of Stock subject to such Option would have been
entitled immediately following such reorganization, merger, or consolidation,
with a corresponding proportionate adjustment of the Option Price per share so
that the aggregate Option Price thereafter shall be the same as the aggregate
Option Price of the shares remaining subject to the Option immediately prior to
such reorganization, merger, or consolidation.
(c) Reorganization in Which the Corporation Is Not the
Surviving Corporation or Sale of Assets or Stock. Upon the dissolution or
liquidation of the Corporation, or upon a merger, consolidation, reorganization
or other business combination of
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the Corporation with one or more other entities in which the Corporation is not
the surviving entity, or upon a sale of all or substantially all of the assets
of the Corporation to another entity, or upon any transaction (including,
without limitation, a merger or reorganization in which the Corporation is the
surviving corporation) approved by the Board which results in any person or
entity (or persons or entities acting as a group or otherwise in concert) owning
50 percent or more of the combined voting power of all classes of stock of the
Corporation, the Plan and all Options outstanding hereunder shall terminate,
except to the extent provision is made in writing in connection with such
transaction for the continuation of the Plan and/or the assumption of the
Options theretofore granted, or for the substitution for such Options of new
options covering the stock of a successor entity, or a parent or subsidiary
thereof, with appropriate adjustments as to the number and kinds of shares and
exercise prices, in which event the Plan and Options theretofore granted shall
continue in the manner and under the terms so provided. In the event of any such
termination of the Plan, each individual holding an Option shall have the right
(subject to the general limitations on exercise set forth in Section 10(b) above
and except as otherwise specifically provided in the Option Agreement relating
to such Option), immediately prior to the occurrence of such termination and
during such period occurring prior to such termination as the Board in its sole
discretion shall determine and designate, to exercise such Option in whole or in
part, whether or not such Option was otherwise exercisable at the time such
termination occurs and without regard to any installment limitation on exercise
imposed pursuant to Section 10(b) above. The Board shall send written notice of
an event that will result in such a termination to all individuals who hold
Options not later than the time at which the Corporation gives notice thereof to
its shareholders.
(d) Adjustments. Adjustments under this Section 17 related to
stock or securities of the Corporation shall be made by the Board, whose
determination in that respect shall be final, binding, and conclusive. No
fractional shares of Stock or units of other securities shall be issued pursuant
to any such adjustment, and any fractions resulting from any such adjustment
shall be eliminated in each case by rounding downward to the nearest whole share
or unit.
(e) No Limitations on Corporation. The grant of an Option
pursuant to the Plan shall not affect or limit in any way the right or power of
the Corporation to make adjustments, reclassifications, reorganizations or
changes of its capital or business structure or to merge, consolidate, dissolve
or liquidate, or to sell or transfer all or any part of its business or assets.
18. DISCLAIMER OF RIGHTS
No provision in the Plan or in any Option granted or Option
Agreement entered into pursuant to the Plan shall be construed to confer upon
any individual the right to remain in the employ or service of the Corporation
or any Subsidiary, or to interfere in any way with the right and authority of
the Corporation or any Subsidiary either to increase or decrease the
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<PAGE> 36
compensation of any individual at any time, or to terminate any employment or
other relationship between any individual and the Corporation or any Subsidiary.
19. NONEXCLUSIVITY OF THE PLAN
Neither the adoption of the Plan nor the submission of the
Plan to the shareholders of the Corporation for approval shall be construed as
creating any limitations upon the right and authority of the Board to adopt such
other incentive compensation arrangements (which arrangements may be applicable
either generally to a class or classes of individuals or specifically to a
particular individual or individuals) as the Board in its discretion determines
desirable, including, without limitation, the granting of stock options or stock
appreciation rights otherwise than under the Plan.
* * *
This Plan was duly adopted and approved by the Board of
Directors of the Corporation by resolution at a meeting held on the 16th day of
February, 1994.
__________________________________
Secretary of the Corporation
This Plan as amended was duly approved by the shareholders of
the Corporation at a meeting of the shareholders held on the 25th day of July,
1995.
__________________________________
Secretary of the Corporation
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<PAGE> 37
RATIONAL SOFTWARE CORPORATION
STOCK OPTION PLAN FOR DIRECTORS
Rational Software Corporation (the "Company") sets forth herein the
terms of this Stock Option Plan for Directors (the "Plan") as follows:
1. PURPOSE
The Plan is intended to advance the interests of the Company and its
subsidiaries by providing eligible individuals (as designated pursuant to
Section 3 below) with an opportunity to acquire or increase a proprietary
interest in the Company, which thereby will create a stronger incentive to
increase their efforts for the growth and success of the Company and its
subsidiaries, will encourage such eligible individuals to remain in the service
of the Company and will reward them for their efforts on the Company's behalf.
Each stock option granted under the Plan (an "Option") is not intended to be an
"incentive stock option" within the meaning of Section 422 of the Internal
Revenue Code of 1986, or the corresponding provision of any subsequently-enacted
tax statute, as amended from time to time (the "Code").
2. STOCK
The stock that may be issued pursuant to Options granted under the Plan
shall be shares of Common Stock, par value $.01 per share, of the Company (the
"Stock"), which shares may be treasury shares or authorized but unissued shares.
The number of shares of Stock that may be issued pursuant to Options granted
under the Plan shall not exceed in the aggregate 283,332 shares, which number of
shares is subject to adjustment as provided in Section 14 below. If any Option
is cancelled by mutual consent or expires or terminates for any reason before
having been exercised in full, the unpurchased
<PAGE> 38
shares that were subject to the Option shall, unless the Plan has then
terminated, be available for other Options under the Plan.
3. ELIGIBILITY
Options shall be granted under the Plan to those individuals ("Eligible
Directors") who from time to time are serving as members of the board of
directors of the Company and who are not officers or employees of the Company or
one or more of its subsidiaries and who have not given the Company written
notice that they decline to receive a grant of Options hereunder. No person
shall have any discretion to select which Eligible Directors shall be granted
options or to determine the number of shares covered by options granted to
Eligible Directors.
An individual may hold more than one Option, subject to such
restrictions as are provided herein.
4. EFFECTIVE DATE AND TERM OF THE PLAN
(a) Effective Date. The Plan shall be effective as of August 23, 1991
subject to approval of the Plan on or before December 31, 1992 by an affirmative
majority vote of the votes cast at a duly held meeting of the shareholders of
the Company at which a quorum representing a majority of all outstanding voting
stock is, either in person or by proxy, present and voting on the amendment;
provided, however, that upon approval of the Plan by the shareholders of the
Company as set forth above, all Options granted under the Plan on or after the
effective date shall be fully effective as if the shareholders of the Company
had approved the Plan on the effective date. If the shareholders fail to approve
the Plan on or before December 31, 1992, any Options granted hereunder shall be
null and void and of no effect.
(b) Term. The Plan shall terminate on August 23, 2001.
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5. OPTION GRANTS
All grants of options to Eligible Directors under the Plan shall be
automatic and non-discretionary and shall be made strictly in accordance with
the provisions of this Section 5 and Sections 3, 7 and 8:
(a) Any Eligible Director serving on the Company's Board of Directors
on July 25, 1995 will, on such date, have his 1994 option grant rescinded, and
receive a replacement option grant with the same exercise price for that number
of shares equal to the greater of (a) 8,333 or (b) the difference between 33,333
and the number of option shares already granted to the director by the Company
at any time in the past (exclusive of options being rescinded);
(b) Any new Eligible Director joining the Board of Directors will
receive an option grant, on the date such person first becomes an Eligible
Director, for that number of shares equal to the greater of (a) 8,333 or (b) the
difference between 33,333 and the number of option shares already granted to
such director by the Company at any time in the past, if any;
(c) Any new Eligible Director joining the board who declines to accept
the option grant provided for by Section 5(b) because such person is serving as
a representative of another party who prohibits its representatives from
accepting options and later ceases to serve in a representative capacity and
begins to serve in an individual capacity, will be granted an option on the date
that such person begins to serve in an individual capacity for that number of
shares equal to the greater of (a) 8,333 or (b) the difference between 33,333
and the number of option shares already granted to such director by the Company
at any time in the past, if any; and
(d) In each year after 1994, each Eligible Director shall be granted an
option on the date of the Annual Meeting for 8,333 shares; provided that such
director remains an Eligible Director on such
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<PAGE> 40
date and, as of such date, he or she shall not have received an option pursuant
to Sections 5(b) or (c) within the preceding six (6) months.
6. OPTION AGREEMENTS
All Options granted pursuant to the Plan shall be evidenced by written
agreements ("Option Agreements"), to be executed by the Company and by the
Optionee, in such form or forms as the Board of Directors of the Company (the
"Board") shall from time to time determine. All such Option Agreements shall
comply with all terms of the Plan.
7. OPTION PRICE
The purchase price of each share of the Stock subject to an Option (the
"Option Price") shall be the greater of par value or 100% of the fair market
value of a share of the Stock on the date the Option is granted, determined with
reference to the closing sales price (or the closing bid, if no sales were
reported) on any exchange or system on which the Company's common stock is
traded for the day of determination.
8. TERM AND EXERCISE OF OPTIONS
(a) Term. Each Option granted under the Plan shall terminate and all
rights to purchase shares thereunder shall cease upon the expiration of ten
years form the date such Option is granted.
(b) Option Period. Each Option granted under the Plan shall be
exercisable in installments cumulatively as to one fourth of the shares of Stock
subject to such Option on each anniversary of its date of grant, provided the
Optionee is a Director on each such anniversary. Notwithstanding any other
provision of the Plan, no Option granted to an Optionee under the Plan shall be
exercisable in whole or in part prior to the date the Plan is approved by the
shareholders of the Company as provided in Section 4 above.
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<PAGE> 41
(c) Method of Exercise. An Option that is exercisable hereunder may be
exercised by delivery to the Company on any business day, at its principal
office, of written notice of exercise, which notice shall specify the number of
shares with respect to which the Option is being exercised, and shall be
accompanied by payment in full of the Option Price of the shares for which the
Option is being exercised. The minimum number of shares of Stock with respect to
which an Option may be exercised, in whole or in part, at any time shall be the
lesser of 33 shares or the maximum number of shares available for purchase under
the Option at the time of exercise. Payment of the Option Price for the shares
of Stock purchased pursuant to the exercise of an Option shall be made either
(i) in cash or in cash equivalents; (ii) through the tender to the Company of
shares of Stock, which shares shall be valued, for purposes of determining the
extent to which the Option Price has been paid thereby, at their fair market
value on the date of exercise; or (iii) by a combination of the methods
described in (i) and (ii). An attempt to exercise any Option granted hereunder
other than as set forth above shall be invalid and of no force and effect.
Promptly after the exercise of an Option and the payment in full of the Option
Price of the shares of Stock covered thereby, the individual exercising the
Option shall be entitled to the issuance of a Stock certificate or certificates
evidencing his ownership of such shares. An individual holding or exercising an
Option shall have none of the rights of a shareholder until the shares of Stock
covered thereby are fully paid and issued to him or her and, except as provided
in Section 14 below, no adjustment shall be made for dividends or other rights
for which the record date is prior to the date of such issuance.
9. TRANSFERABILITY OF OPTIONS
During the lifetime of an Optionee to whom an Option is granted, only
such Optionee (or, in the event of legal incapacity or incompetency, the
Optionee's guardian or legal representative) may exercise
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<PAGE> 42
the Option. No Option shall be assignable or transferable by the Optionee to
whom it is granted, other than by will or the laws of descent and distribution.
10. TERMINATION OF SERVICE, DEATH OR DISABILITY
Any Option granted under the Plan shall terminate upon the earlier of
(i) the expiration of the Option under Section 8(a) above or (ii) one year after
the Optionee's termination of service as a director for any reason.
11. USE OF PROCEEDS
The proceeds received by the Company from the sale of Stock pursuant to
Options granted under the Plan shall constitute general funds of the Company.
12. REQUIREMENTS OF LAW
The Company shall not be required to sell or issue any shares of Stock
under any Option if the sale or issuance of such shares would constitute a
violation by the individual exercising the Option or the Company of any
provisions of any law or regulation of any governmental authority, including
without limitation any federal or state securities laws or regulations.
Specifically in connect with the Securities Act of 1933 (as now in effect or as
hereafter amended), upon exercise of any Option, unless a registration statement
under such Act is in effect with respect to the shares of Stock covered by such
Option, the Company shall not be required to sell or issue such shares unless
the Board has received evidence satisfactory to it that the holder of such
Option may acquire such shares pursuant to an exemption from registration under
such Act. Any determination in this connection by the Board shall be final,
binding, and conclusive. The Company may, but shall in no event be obligated to,
register any securities covered hereby pursuant to the Securities Act of 1933
(as now in effect or as hereafter amended). The Company shall not be obligated
to take any affirmative action in order to cause the exercise of an Option or
the
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<PAGE> 43
issuance of shares pursuant thereto to comply with any law or regulation of any
governmental authority. As to any jurisdiction that expressly imposes the
requirement that an Option shall not be exercisable unless and until the shares
of Stock covered by such Option are registered or are subject to an available
exemption from registration, the exercise of such Option (under circumstances in
which the laws of such jurisdiction apply) shall be deemed conditioned upon the
effectiveness of such registration or the availability of such an exemption.
13. AMENDMENT AND TERMINATION OF THE PLAN
The Board may, at any time and from time to time, amend, suspend or
terminate the Plan as to any shares of Stock as to which Options have not been
granted; provided, however, that no amendment by the Board shall, without
approval by a majority of the votes cast at a duly held meeting of the
shareholders of the Company at which a quorum representing a majority of all
outstanding voting stock is, either in person or by proxy, present and voting on
the amendment, (a) materially modify the requirements as to eligibility to
receive Options; (b) materially increase the maximum number of shares of Stock
in the aggregate that may be sold pursuant to Options granted under the Plan
(except as permitted under Section 14 hereof); or (c) materially increase the
benefits accruing to eligible individuals under the Plan. Except as permitted
under Section 14 hereof, no amendment, suspension or termination of the Plan
shall, without the consent of the holder of the Option, alter or impair rights
or obligations under any Option theretofore granted under the Plan. The
provisions set forth in Sections 3, 5, 7 and 8 shall not be amended more than
once every six (6) months, other than to comport with changes in the Internal
Revenue Code of 1986, as amended, the Employee Retirement Income Security Act of
1974, as amended, or the rules thereunder.
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14. EFFECT OF CHANGES IN CAPITALIZATION
(a) Changes in Stock. If the outstanding shares of Stock are increased
or decreased or changed into or exchanged for a different number or kind of
shares or other securities of the Company by reason of any recapitalization,
reclassification, stock split-up, combination of shares, exchange of shares,
stock dividend or other distribution payable in capital stock, or other increase
or decrease in such shares effected without receipt of consideration by the
Company, occurring after the effective date of the Plan, the number and kinds of
shares for the purchase of which Options may be granted under the Plan shall be
adjusted proportionately and accordingly by the Company. In addition, the number
and kind of shares for which Options are outstanding shall be adjusted
proportionately and accordingly so that the proportionate interest of the holder
of the Option immediately prior to such event. Any such adjustment in
outstanding Options shall not change the aggregate Option Price payable with
respect to shares subject to the unexercised portion of the Option outstanding
but shall include a corresponding proportionate adjustment in the Option Price
per share.
(b) Reorganization in Which the Company Is the Surviving Corporation.
Subject to Subsection (c) hereof, if the Company shall be the surviving
corporation in any reorganization, merger, or consolidation of the Company with
one or more other corporations, any Option therefore granted pursuant to the
Plan shall pertain to and apply to the securities to which a holder of the
number of shares of Stock subject to such Option would have been entitled
immediately following such reorganization, merger, or consolidation, with a
corresponding proportionate adjustment of the Option Price per share so that the
aggregate Option Price thereafter shall be the same as the aggregate Option
Price of the shares remaining subject to the Option immediately prior to such
reorganization, merger, or consolidation.
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(c) Reorganization in Which the Company Is Not the Surviving
Corporation or Sale of Assets or Stock. Upon the dissolution or liquidation of
the Company, or upon a merger, consolidation, or reorganization of the Company
with one or more other corporations in which the Company is not the surviving
corporation, or upon a sale of substantially all of the assets of the Company to
another corporation, or upon a sale of substantially all of the assets of the
Company to another corporation, or upon any transaction (including, without
limitation, a merger or reorganization in which the Company is the surviving
corporation) approved by the Board which results in any person or entity owning
80 percent or more of the combined voting power of all classes of stock of the
Company, the Plan and all Options outstanding hereunder shall terminate, except
to the extent provision is made in writing in connection with such transaction
for the continuation of the Plan and/or the assumption of the Options
theretofore granted, or for the substitution for such Options of new options
covering the stock of a successor corporation, or a parent or subsidiary
thereof, with appropriate adjustments as to the number and kinds of shares and
exercise prices, in which event the Plan and Options theretofore granted shall
continue in the manner and under the terms so provided. The Board shall send
written notice of an event that will result in such a termination to all
individuals who hold Options not later than the time at which the Company gives
notice thereof to its shareholders.
(d) Adjustments. Adjustments under this Section 14 relate to stock or
securities of the Company shall be made by the Board, whose determination in
that respect shall be final, binding, and conclusive. No fractional shares or
Stock or units of other securities shall be issued pursuant to any such
adjustment, and any fractions resulting from any such adjustment shall be
eliminated in each case by rounding downward to the nearest whole share or unit.
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(e) No Limitations on Company. The grant of an Option pursuant to the
Plan shall not affect or limit in any way the right or power of the Company to
make adjustments, reclassifications, reorganizations or changes of its capital
or business structure or to merge, consolidate, dissolve or liquidate, or to
sell or transfer all or any part of its business or assets.
15. DISCLAIMER OF RIGHTS
No provision in the Plan or in any Option granted or Option Agreement
entered into pursuant to the Plan shall be construed to confer upon any
individual the right to continue to serve on the Board, or to interfere in any
way with the right and authority of the Company or any subsidiary either to
increase or decrease the compensation of any individual at any time, or to
terminate any employment or other relationship between any individual and the
Company or any subsidiary.
16. NONEXCLUSIVITY OF THE PLAN
The adoption of the Plan shall not be construed as creating any
limitations upon the right and authority of the Board to adopt such other
incentive compensation arrangements (which arrangements may be applicable either
generally to a class or classes of individuals or specifically to a particular
individual or individuals) as the Board in its discretion determines desirable,
including, without limitation, the granting of stock options or stock
appreciation rights otherwise than under the Plan.
This Plan was duly adopted and approved by the Board of Directors of
the Company on August 23, 1991.
------------------------
Secretary of the Company
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<PAGE> 47
This Plan as amended was duly approved by the shareholders of the
Company at a meeting of the shareholders held on the 25th day of July, 1995.
------------------------
Secretary of the Company
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<PAGE> 48
RATIONAL SOFTWARE CORPORATION
1994 EMPLOYEE STOCK PURCHASE PLAN
The following constitute the provisions of the 1994 Employee Stock
Purchase Plan of Rational Software Corporation.
1. Purpose. The purpose of the Plan is to provide employees of the
Company and its Designated Subsidiaries with an opportunity to purchase Common
Stock of the Company through accumulated payroll deductions. It is the intention
of the Company to have the Plan qualify as an "Employee Stock Purchase Plan"
under Section 423 of the Internal Revenue Code of 1986, as amended. The
provisions of the Plan, accordingly, shall be construed so as to extend and
limit participation in a manner consistent with the requirements of that section
of the Code.
2. Definitions.
(a) "Board" shall mean the Board of Directors of the Company.
(b) "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(c) "Common Stock" shall mean the Common Stock of the Company.
(d) "Company" shall mean Rational Software Corporation and any
Designated Subsidiary of the Company.
(e) "Compensation" shall mean all base straight time gross
earnings, including commissions, but exclusive of payments for overtime, shift
premium, incentive compensation, incentive payments, bonuses, and other
compensation.
(f) "Designated Subsidiaries" shall mean the Subsidiaries
which have been designated by the Board from time to time in its sole discretion
as eligible to participate in the Plan.
(g) "Employee" shall mean any individual who is an Employee of
the Company for tax purposes whose customary employment with the Company is at
least twenty (20) hours per week and more than five (5) months in any calendar
year. For purposes of the Plan, the employment relationship shall be treated as
continuing intact while the individual is on sick leave or other leave of
absence approved by the Company. Where the period of leave exceeds 90 days and
the individual's right to reemployment is not guaranteed either by statute or by
contract, the employment relationship will be deemed to have terminated on the
91st day of such leave.
(h) "Enrollment Date" shall mean the first day of each
Offering Period.
(i) "Exercise Date" shall mean the last day of each Purchase
Period.
(j) "Fair Market Value" shall mean, as of any date, the value
of Common Stock determined as follows:
(1) If the Common Stock is listed on any established
stock exchange or a national market system, including without limitation the
National Market System of the National
<PAGE> 49
Association of Securities Dealers, Inc. Automated Quotation ("NASDAQ") System,
its Fair Market Value shall be the closing sale price for the Common Stock (or
the mean of the closing bid and asked prices, if no sales were reported), as
quoted on such exchange (or the exchange with the greatest volume of trading in
Common Stock) or system on the date of such determination, as reported in The
Wall Street Journal or such other source as the Board deems reliable, or;
(2) If the Common Stock is quoted on the NASDAQ system
(but not on the National Market System thereof) or is regularly quoted by a
recognized securities dealer but selling prices are not reported, its Fair
Market Value shall be the mean of the closing bid and asked prices for the
Common Stock on the date of such determination, as reported in The Wall Street
Journal or such other source as the Board deems reliable, or;
(3) In the absence of an established market for the
Common Stock, the Fair Market Value thereof shall be determined in good faith by
the Board.
(k) "Offering Period" shall mean the period of approximately
twenty-four (24) months during which an option granted pursuant to the Plan may
be exercised, commencing on the first Trading Day on or after November 1 and May
1 of each year and terminating on the last Trading Day in the periods ending
twenty-four months later. The duration and timing of Offering Periods may be
changed pursuant to Section 4 of this Plan.
(l) "Plan" shall mean this Employee Stock Purchase Plan.
(m) "Purchase Price" shall mean an amount equal to 85% of the
Fair Market Value of a share of Common Stock on the Enrollment Date or on the
Exercise Date, whichever is lower.
(n) "Purchase Period" shall mean the approximately six-month
period commencing after one Exercise Date and ending with the next Exercise
Date, except that the first Purchase Period of any Offering Period shall
commence on the Enrollment Date and end with the next Exercise Date.
(o) "Reserves" shall mean the number of shares of Common Stock
covered by each option under the Plan which have not yet been exercised and the
number of shares of Common Stock which have been authorized for issuance under
the Plan but not yet placed under option.
(p) "Subsidiary" shall mean a corporation, domestic or
foreign, of which not less than 50% of the voting shares are held by the Company
or a Subsidiary, whether or not such corporation now exists or is hereafter
organized or acquired by the Company or a Subsidiary.
(q) "Trading Day" shall mean a day on which national stock
exchanges and the National Association of Securities Dealers Automated Quotation
(NASDAQ) System are open for trading.
3. Eligibility.
(a) Any Employee (as defined in Section 2(g)), who shall be
employed by the Company on a given Enrollment Date shall be eligible to
participate in the Plan.
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(b) Any provisions of the Plan to the contrary
notwithstanding, no Employee shall be granted an option under the Plan (i) if,
immediately after the grant, such Employee (or any other person whose stock
would be attributed to such Employee pursuant to Section 424(d) of the Code)
would own capital stock of the Company and/or hold outstanding options to
purchase such stock possessing five percent (5%) or more of the total combined
voting power or value of all classes of the capital stock of the Company or of
any Subsidiary, or (ii) which permits his or her rights to purchase stock under
all employee stock purchase plans of the Company and its subsidiaries to accrue
at a rate which exceeds twenty-five thousand dollars ($25,000) worth of stock
(determined at the fair market value of the shares at the time such option is
granted) for each calendar year in which such option is outstanding at any time.
4. Offering Periods. The Plan shall be implemented by consecutive,
overlapping Offering Periods with a new Offering Period commencing on the first
Trading Day on or after November 1 and May 1 each year, or on such other date as
the Board shall determine, and continuing thereafter until terminated in
accordance with Section 19 hereof. The Board shall have the power to change the
duration of Offering Periods (including the commencement dates thereof) with
respect to future offerings without shareholder approval if such change is
announced at least five (5) days prior to the scheduled beginning of the first
Offering Period to be affected thereafter.
5. Participation.
(a) An eligible Employee may become a participant in the Plan
by completing a subscription agreement authorizing payroll deductions in the
form of Exhibit A to this Plan and filing it with the Company's stock plan
administrator prior to the applicable Enrollment Date.
(b) Payroll deductions for a participant shall commence on the
first payroll following the Enrollment Date and shall end on the last payroll in
the Offering Period to which such authorization is applicable, unless sooner
terminated by the participant as provided in Section 10 hereof.
6. Payroll Deductions.
(a) At the time a participant files his or her subscription
agreement, he or she shall elect to have payroll deductions made on each pay day
during the Offering Period in an amount not exceeding ten percent (10%) of the
Compensation which he or she receives on each pay day during the Offering
Period, and the aggregate of such payroll deductions during the Offering Period
shall not exceed ten percent (10%) of the participant's Compensation during said
Offering Period.
(b) All payroll deductions made for a participant shall be
credited to his or her account under the Plan and will be withheld in whole
percentages only. A participant may not make any additional payments into such
account.
(c) A participant may discontinue his or her participation in
the Plan as provided in Section 10 hereof, or may increase or decrease the rate
of his or her payroll deductions during the Offering Period by completing or
filing with the Company a new subscription agreement authorizing a change in
payroll deduction rate. The Board may, in its discretion, limit the number of
participation rate changes during any Offering Period. The change in rate shall
be effective with the first full payroll period following five (5) business days
after the Company's receipt of the new subscription agreement unless the Company
elects to process a given change in participation more quickly. A participant's
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subscription agreement shall remain in effect for successive Offering Periods
unless terminated as provided in Section 10 hereof.
(d) Notwithstanding the foregoing, to the extent necessary to
comply with Section 423(b)(8) of the Code and Section 3(b) hereof, a
participant's payroll deductions may be decreased to 0% at such time during any
Purchase Period which is scheduled to end during the current calendar year (the
"Current Purchase Period") that the aggregate of all payroll deductions which
were previously used to purchase stock under the Plan in a prior Purchase Period
which ended during that calendar year plus all payroll deductions accumulated
with respect to the Current Purchase Period equal $21,250. Payroll deductions
shall recommence at the rate provided in such participant's subscription
agreement at the beginning of the first Purchase Period which is scheduled to
end in the following calendar year, unless terminated by the participant as
provided in Section 10 hereof.
(e) At the time the option is exercised, in whole or in part,
or at the time some or all of the Company's Common Stock issued under the Plan
is disposed of, the participant must make adequate provision for the Company's
federal, state, or other tax withholding obligations, if any, which arise upon
the exercise of the option or the disposition of the Common Stock. At any time,
the Company may, but will not be obligated to, withhold from the participant's
compensation the amount necessary for the Company to meet applicable withholding
obligations, including any withholding required to make available to the Company
any tax deductions or benefits attributable to sale or early disposition of
Common Stock by the Employee.
7. Grant of Option. On the Enrollment Date of each Offering Period,
each eligible Employee participating in such Offering Period shall be granted an
option to purchase on each Exercise Date during such Offering Period (at the
applicable Purchase Price) up to a number of shares of the Company's Common
Stock determined by dividing such Employee's payroll deductions accumulated
prior to such Exercise Date and retained in the Participant's account as of the
Exercise Date by the applicable Purchase Price; provided that in no event shall
an Employee be permitted to purchase during each Purchase Period more than a
number of Shares determined by dividing $12,500 by the Fair Market Value of a
share of the Company's Common Stock on the Enrollment Date, and provided further
that such purchase shall be subject to the limitations set forth in Sections
3(b) and 12 hereof. Exercise of the option shall occur as provided in Section 8
hereof, unless the participant has withdrawn pursuant to Section 10 hereof, and
shall expire on the last day of the Offering Period.
8. Exercise of Option. Unless a participant withdraws from the Plan as
provided in Section 10 hereof, his or her option for the purchase of shares will
be exercised automatically on the Exercise Date, and the maximum number of full
shares subject to option shall be purchased for such participant at the
applicable Purchase Price with the accumulated payroll deductions in his or her
account. No fractional shares will be purchased; any payroll deductions
accumulated in a participant's account which are not sufficient to purchase a
full share shall be retained in the participant's account for the subsequent
Purchase Period or Offering Period, subject to earlier withdrawal by the
participant as provided in Section 10 hereof. Any other monies left over in a
participant's account after the Exercise Date shall be returned to the
participant. During a participant's lifetime, a participant's option to purchase
shares hereunder is exercisable only by him or her.
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<PAGE> 52
9. Delivery. As promptly as practicable after each Exercise Date on
which a purchase of shares occurs, the Company shall arrange the delivery to
each participant, as appropriate, of a certificate representing the shares
purchased upon exercise of his or her option.
10. Withdrawal; Termination of Employment.
(a) A participant may withdraw all but not less than all the
payroll deductions credited to his or her account and not yet used to exercise
his or her option under the Plan at any time by giving written notice to the
Company in the form of Exhibit B to this Plan. All of the participant's payroll
deductions credited to his or her account will be paid to such participant
promptly after receipt of notice of withdrawal and such participant's option for
the Offering Period will be automatically terminated, and no further payroll
deductions for the purchase of shares will be made for such Offering Period. If
a participant withdraws from an Offering Period, payroll deductions will not
resume at the beginning of the succeeding Offering Period unless the participant
delivers to the Company a new subscription agreement.
(b) Upon a participant's ceasing to be an Employee (as defined
in Section 2(g) hereof), for any reason, he or she will be deemed to have
elected to withdraw from the Plan and the payroll deductions credited to such
participant's account during the Offering Period but not yet used to exercise
the option will be returned to such participant or, in the case of his or her
death, to the person or persons entitled thereto under Section 14 hereof, and
such participant's option will be automatically terminated. The preceding
sentence notwithstanding, a participant who receives payment in lieu of notice
of termination of employment shall be treated as continuing to be an Employee
for the participant's customary number of hours per week of employment during
the period in which the participant is subject to such payment in lieu of
notice.
11. Interest. No interest shall accrue on the payroll deductions of a
participant in the Plan.
12. Stock.
(a) The minimum number of shares of the Company's Common Stock
which shall be made available for sale under the Plan shall be four hundred
thousand (400,000) shares, subject to adjustment upon changes in capitalization
of the Company as provided in Section 18 hereof. If, on a given Exercise Date,
the number of shares with respect to which options are to be exercised exceeds
the number of shares then available under the Plan, the Company shall make a pro
rata allocation of the shares remaining available for purchase in as uniform a
manner as shall be practicable and as it shall determine to be equitable.
(b) The participant will have no interest or voting right in
shares covered by his option until such option has been exercised.
(c) Shares to be delivered to a participant under the Plan
will be registered in the name of the participant or in the name of the
participant and his or her spouse.
13. Administration.
(a) Administrative Body. The Plan shall be administered by the
Board or a committee of members of the Board appointed by the Board. The Board
or its committee shall have full
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<PAGE> 53
and exclusive discretionary authority to construe, interpret and apply the terms
of the Plan, to determine eligibility and to adjudicate all disputed claims
filed under the Plan. Every finding, decision and determination made by the
Board or its committee shall, to the full extent permitted by law, be final and
binding upon all parties.
(b) Rule 16b-3 Limitations. Notwithstanding the provisions of
Subsection (a) of this Section 13, in the event that Rule 16b-3 promulgated
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or
any successor provision ("Rule 16b-3") provides specific requirements for the
administrators of plans of this type, the Plan shall be only administered by
such a body and in such a manner as shall comply with the applicable
requirements of Rule 16b-3. Unless permitted by Rule 16b-3, no discretion
concerning decisions regarding the Plan shall be afforded to any committee or
person that is not "disinterested" as that term is used in Rule 16b-3.
14. Designation of Beneficiary.
(a) A participant may file a written designation of a
beneficiary who is to receive any shares and cash, if any, from the
participant's account under the Plan in the event of such participant's death
subsequent to an Exercise Date on which the option is exercised but prior to
delivery to such participant of such shares and cash. In addition, a participant
may file a written designation of a beneficiary who is to receive any cash from
the participant's under the Plan in the event of such participant's death prior
to exercise of the option. If a participant is married and the designated
beneficiary is not the spouse, spousal consent shall be required for such
designation to be effective.
(b) Such designation of beneficiary may be changed by the
participant at any time by written notice. In the event of the death of a
participant and in the absence of a beneficiary validly designated under the
Plan who is living at the time of such participant's death, the Company shall
deliver such shares and/or cash to the executor or administrator of the estate
of the participant, or if no such executor or administrator has been appointed
(to the knowledge of the Company), the Company, in its discretion, may deliver
such shares and/or cash to the spouse or to any one or more dependents or
relatives of the participant, or if no spouse dependent or relative is known to
the Company, then to such other person as the Company may designate.
15. Transferability. Neither payroll deductions credited to a
participant's account nor any rights with regard to the exercise of an option or
to receive shares under the Plan may be assigned transferred, pledged or
otherwise disposed of in any way (other than by will, the laws of descent and
distribution or as provided in Section 14 hereof) by the participant. Any such
attempt at assignment, transfer, pledge or other disposition shall be without
effect, except that the Company may treat such act as an election to withdraw
funds from an Offering Period in accordance with Section 10 hereof.
16. Use of Funds. All payroll deductions received or held by the
Company under the Plan may be used by the Company for any corporate purpose, and
the Company shall not be obligated to segregate such payroll deductions.
17. Reports. Individual accounts will be maintained for each
participant in the Plan. Statements of account will be given to participating
Employees at least annually, which statements will set forth the amounts of
payroll deductions, the Purchase Price, the number of shares purchased and the
remaining cash balance, if any.
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<PAGE> 54
18. Adjustments Upon Changes in Capitalization, Dissolution,
Liquidation, Merger or Asset Sale.
(a) Changes in Capitalization. Subject to any required action
by the shareholders of the Company, the Reserves as well as the price per share
of Common Stock covered by each option under the Plan which has not yet been
exercised shall be proportionately adjusted for any increase or decrease in the
number of issued shares of Common Stock resulting from a stock split, reverse
stock split, stock dividend, combination or reclassification of the Common
Stock, or any other increase or decrease in the number of shares of Common Stock
effected without receipt of consideration by the Company; provided, however,
that conversion of any convertible securities of the Company shall not be deemed
to have been "effected without receipt of consideration". Such adjustment shall
be made by the Board, whose determination in that respect shall be final,
binding and conclusive. Except as expressly provided herein, no issuance by the
Company of shares of stock of any class, or securities convertible into shares
of stock of any class, shall affect, and no adjustment by reason thereof shall
be made with respect to, the number or price of shares of Common Stock subject
to an option.
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, the Offering Periods will terminate
immediately prior to the consummation of such proposed action, unless otherwise
provided by the Board.
(c) Merger or Asset Sale. In the event of a proposed sale of
all or substantially all of the assets of the Company, or the merger of the
Company with or into another corporation, each option under the Plan shall be
assumed or an equivalent option shall be substituted by such successor
corporation or a parent or subsidiary of such successor corporation, unless the
Board determines, in the exercise of its sole discretion and in lieu of such
assumption or substitution, to shorten the Offering Periods then in progress by
setting a new Exercise Date (the "New Exercise Date"). If the Board shortens the
Offering Periods then in progress in lieu of assumption or substitution in the
event of a merger or sale of assets, the Board shall notify each participant in
writing, at least ten (10) business days prior to the New Exercise Date, the
Exercise Date for his option has been changed to the New Exercise Date and that
his option will be exercised automatically on the New Exercise Date, unless
prior to such date he has withdrawn from the Offering Period as provided in
Section 10 hereof. For purposes of this paragraph, an option granted under the
Plan shall be deemed to be assumed if, following the sale of assets or merger,
the option confers the right to purchase, for each share of option stock subject
to the option immediately prior to the sale of assets or merger, the
consideration (whether stock, cash or other securities or property) received in
the sale of assets or merger by holders of Common Stock for each share of Common
Stock held on the effective date of the transaction (and if such holders were
offered a choice or consideration, the type of consideration chosen by the
holders of a majority of the outstanding shares of Common Stock); provided,
however, that if such consideration received in the sale of assets or merger was
not solely common stock of the successor corporation or its parent (as defined
in Section 424(e) of the Code), the Board may, with the consent of the successor
corporation, provide for the consideration to be received upon exercise of the
option to be solely common stock of the successor corporation or its parent
equal in fair market value to the per share consideration received by holders of
Common Stock and the sale of assets or merger.
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<PAGE> 55
19. Amendment or Termination.
(a) The Board of Directors of the Company may at any time and
for any reason terminate or amend the Plan. Except as provided in Section 18
hereof, no such termination can affect options previously granted, provided that
an Offering Period may be terminated by the Board of Directors on any Exercise
Date if the Board determines that the termination of the Plan is in the best
interests of the Company and its shareholders. Except as provided in Section 18
hereof, no amendment may make any change in any option theretofore granted which
adversely affects the rights of any participant. To the extent necessary to
comply with Rule 16b-3 or under Section 423 of the Code (or any successor rule
or provision or any other applicable law or regulation), the Company shall
obtain shareholder approval in such a manner and to such a degree as required.
(b) Without shareholder consent and without regard to whether
any participant rights may be considered to have been "adversely affected," the
Board (or its committee) shall be entitled to change the Offering Periods, limit
the frequency and/or number of changes in the amount withheld during an Offering
Period, establish the exchange ratio applicable to amounts withheld in a
currency other than U.S. dollars, permit payroll withholding in excess of the
amount designated by a participant in order to adjust for delays or mistakes in
the Company's processing of properly completed withholding elections, establish
reasonable waiting and adjustment periods and/or accounting and crediting
procedures to ensure that amounts applied toward the purchase of Common Stock
for each participant properly correspond with amounts withheld from the
participant's Compensation, and establish such other limitations or procedures
as the Board (or its committee) determines in its sole discretion advisable
which are consistent with the Plan.
20. Notices. All notices or other communications by a participant to
the Company under or in connection with the Plan shall be deemed to have been
duly given when received in the form specified by the Company at the location,
or by the person, designated by the Company for the receipt thereof.
21. Conditions Upon Issuance of Shares. Shares shall not be issued with
respect to an option unless the exercise of such option and the issuance and
delivery of such shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as
amended, the rules and regulations promulgated thereunder, and the requirements
of any stock exchange upon which the shares may then be listed, and shall be
further subject to the approval of counsel for the Company with respect to such
compliance.
As a condition to the exercise of an option, the Company may
require the person exercising such option to represent and warrant at the time
of any such exercise that the shares are being purchased only for investment and
without any present intention to sell or distribute such shares if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned applicable provisions of law.
22. Term of Plan. The Plan shall become effective upon the earlier to
occur of its adoption by the Board of Directors or its approval by the
shareholders of the Company. It shall continue in effect for a term of ten (10)
years unless sooner terminated under Section 19 hereof.
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23. Automatic Transfer to Low Price Offering Period. To the extent
permitted by Rule 16b-3 of the Exchange Act, if the Fair Market Value of the
Common Stock on any Exercise Date in an Offering Period is lower than the Fair
Market Value of the Common Stock on the Enrollment Date of such Offering Period,
then all participants in such Offering Period shall be automatically withdrawn
from such Offering Period immediately after the exercise of their option on such
Exercise Date and automatically re-enrolled in the immediately following
Offering Period as of the first day thereof.
This Plan was duly adopted and approved by the Board of Directors of
the Company on the 20th day of May, 1994.
----------------------------------------
Secretary of the Company
This Plan as amended was duly approved by the shareholders of the
Company at a meeting of the shareholders held on the 25th day of July, 1995.
----------------------------------------
Secretary of the Company
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