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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 [_]CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(E)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S)240.14a-11(c) or (S)240.14a-12
RATIONAL SOFTWARE CORPORATION
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] 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 ActRule 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:
(5) Total fee paid:
[_] Fee paid previously with preliminary materials.
[_] 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:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
Notes:
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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD SEPTEMBER 25, 1997
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 18880
Homestead Road, Cupertino, CA 95014, on September 25, 1997 at 11:00 a.m. local
time, for the following purposes:
1. To elect three Class II members of the Board of Directors (Proposal 1);
2. To approve an amendment to the 1997 Stock Option Plan reserving an
additional 4,000,000 shares of the Company's Common Stock for issuance
thereunder (Proposal 2);
3. To approve an amendment to the 1994 Employee Stock Purchase Plan reserving
an additional 1,000,000 shares of the Company's Common Stock for
issuance thereunder (Proposal 3);
4. 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 1998 (Proposal 4); and
5. 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 August 12, 1997, 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
August 18, 1997
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>
RATIONAL SOFTWARE CORPORATION
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PROXY STATEMENT
----------------
FOR THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD SEPTEMBER 25, 1997
----------------
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 18880 Homestead Road, Cupertino, CA 95014, at 11:00
am. on Thursday, September 25, 1997, 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
three Class II members of the Board of Directors; (2) to approve an amendment
to the 1997 Stock Option Plan reserving an additional 4,000,000 shares of the
Company's Common Stock for issuance thereunder; (3) to approve an amendment to
the 1994 Employee Stock Purchase Plan reserving an additional 1,000,000 shares
of the Company's Common Stock for issuance thereunder; and (4) 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 1998; and (5)
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 August 12, 1997, 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
three 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 87,100,389 shares were outstanding at the
close of business on August 12, 1997. Stockholders of record at the close of
business on August 12, 1997, 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, Berlin v. Emerald Partners, the
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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, 1997, which includes Rational's 10-K for its 1997 fiscal year, accompanies
this Proxy Statement. The Company is required to file an annual report on Form
10-K for its 1997 fiscal year with the Securities and Exchange Commission
("SEC"). Stockholders may obtain, for the cost of copying, a copy of any
exhibits thereto by writing: Rational Software Corporation, 18880 Homestead
Road, Cupertino, CA 95014, Attention: Investor Relations.
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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 August 12, 1997,
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
BENEFICIALLY PERCENT
NAME OWNED OF CLASS
---- ------------ --------
<S> <C> <C>
Paul D. Levy(1)........................................ 215,627 *
Michael T. Devlin(2)................................... 215,627 *
Robert T. Bond(3)...................................... 187,823 *
John R. Lovitt(4)...................................... 152,784 *
David H. Bernstein(5).................................. 105,835 *
Leslie G. Denend(6).................................... 55,083 *
Daniel H. Case III(7).................................. 48,914 *
Allison R. Schleicher(8)............................... 46,583 *
James S. Campbell(9)................................... 34,083 *
John E. Montague (10).................................. 17,602 *
All current Directors and current Executive Officers
as a group (35 persons)(11)........................... 2,583,386 3.74%
</TABLE>
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*Less than one percent.
(1) Includes 175,625 shares purchasable by Mr. Levy within 60 days of August
12, 1997 pursuant to outstanding options.
(2) Includes 175,625 shares purchasable by Mr. Devlin within 60 days of
August 12, 1997 pursuant to outstanding options.
(3) Includes 162,831 shares purchasable by Mr. Bond within 60 days of August
12, 1997 pursuant to outstanding options.
(4) Includes 109,165 shares purchasable by Mr. Lovitt within 60 days of
August 12, 1997 pursuant to outstanding options.
(5) Includes 75,833 shares purchasable by Mr. Bernstein within 60 days of
August 12, 1997 pursuant to outstanding options.
(6) Includes 55,081 shares purchasable by Mr. Denend within 60 days of August
12, 1997 pursuant to outstanding options.
(7) Includes 12,583 shares purchasable by Mr. Case within 60 days of August
12, 1997 pursuant to outstanding options.
(8) Includes 41,581 shares purchasable by Mr. Schleicher within 60 days of
August 12, 1997 pursuant to outstanding options.
(9) Includes 22,999 shares purchasable by Mr. Campbell within 60 days of
August 12, 1997 pursuant to outstanding options.
(10) Includes 17,000 shares purchasable by Mr. Montague within 60 days of
August 12, 1997 pursuant to outstanding options.
(11) Includes an aggregate of 1,691,220 shares that may be acquired within 60
days of August 12, 1997 pursuant to outstanding options.
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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 1999, the term of Class II directors expires in 1997, and
the term Class III directors expires in 1998. The three Class II directors who
were serving as directors at the end of fiscal year 1997 are nominated for
reelection. Directors elected at the Annual Meeting will hold office for a
three-year term expiring in 2000 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 three 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 2000
DANIEL H. CASE III, age 40, has been a director of 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 41, co-founded Rational in 1981. He is currently Chairman
of the Board and Chief Executive Officer. Prior to September 1996, Mr. Levy
served as President and Chief Executive Officer of Rational. Mr. Levy is a
director of Peerless Systems Corporation and Genesys Telecommunications
Laboratories, Inc. Mr. Levy is the son-in-law of Mr. Campbell.
JOHN E. MONTAGUE, age 43, 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.
DIRECTORS CONTINUING IN OFFICE IN THE CLASS OF 1999
MICHAEL T. DEVLIN, age 42, co-founded Rational in 1981 and is currently
President and a Director. Prior to September 1996, Mr. Devlin served as
Chairman of the Board of the Company.
LESLIE G. DENEND, age 56, has been a director of 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
Corporation and Proxim, Inc.
DIRECTORS CONTINUING IN OFFICE IN THE CLASS OF 1998
JAMES S. CAMPBELL, age 70, has been a director of the Company since 1990.
Mr. Campbell is a retired Corporate Vice President of Xerox. Since 1987, he
has been the Managing Director of Management Partners International
Corporation, a management and consulting firm specializing in technology
companies. He serves on the national board of directors of United We Stand
America, Inc. and is a Director of Applied Voice Technology, Inc. Mr. Campbell
is the father-in-law of Mr. Levy.
ALLISON R. SCHLEICHER, age 53, has been a director of Rational since 1990.
Since 1967, he has been with IBM Corporation in various executive and
management positions. Most recently, he was appointed Vice President, Finance
& Planning, Personal Systems Technology Group, IBM Corporation. In 1994, he
was
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appointed Vice President, Finance of IBM Credit Corporation. Mr. Schleicher is
a director of IBM Credit Corporation.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE NOMINATED DIRECTORS.
Because the three nominees who receive the greatest number of votes will be
elected to serve as Class II 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 eleven
actions by unanimous written consent) and seven special meetings during fiscal
year 1997. Each incumbent director attended at least 75 percent of the
meetings held during the part of fiscal year 1997 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, 1994 Stock Option Plan,
1994 Employee Stock Purchase Plan, 1997 Stock Option Plan and the 1997
Supplemental Stock Option Plan. The Compensation Committee held five meetings
during fiscal year 1997. 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 1997.
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 $1,250.00 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.
AMENDMENT TO THE 1997 STOCK OPTION PLAN RESERVING AN ADDITIONAL
4,000,000 SHARES OF THE COMPANY'S COMMON STOCK
(PROPOSAL 2)
PROPOSED AMENDMENT
The stockholders are being asked to approve an amendment to the 1997 Stock
Option Plan reserving an additional 4,000,000 shares of the Company's Common
Stock, which if approved would result in a total of 5,650,000 shares being
issuable under the 1997 Stock Option Plan. Currently there are 1,650,000
shares reserved under the 1997 Stock Option Plan, of which there are 1,624,190
subject to outstanding options and 25,810 available for grant. In addition,
there are outstanding and unexercised options under the 1994 Stock Option Plan
for the purchase of approximately 3,600,000 shares of Common Stock. Shares
subject to any such options which expire, terminate unexercised, or are
otherwise returned to the Company, upon forfeiture thereof will be added to
the available pool under the 1997 Stock Option Plan. If this amendment is
approved, there will be a total of 5,650,000 reserved under the 1997 Stock
Option Plan, of which 1,624,190 will be subject to outstanding options and
4,025,810 will be available for grant. The amendment to the 1997 Stock Option
Plan was adopted by the Board of Directors on July 15, 1997, subject to
stockholder approval. There are approximately 1,600 employees of Rational and
its subsidiaries who are eligible to participate in the 1997 Stock Option
Plan.
The Rational Board of Directors believes that the amendment to the 1997
Stock Option Plan is important to the continued functioning of the 1997 Stock
Option Plan, which has proved an effective means of motivating
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and encouraging the continued employment of the employees of Rational and its
subsidiaries including those recently absorbed in the Pure Atria merger.
In an act which emphasizes the need for this current amendment, on July 15,
1997, the Board of Directors approved by unanimous written consent a 1997
Supplemental Stock Option Plan. This nonstatutory stock option plan was
adopted to accommodate a significant increase in new employees resulting from
the mergers and acquisitions during the first and second quarters of fiscal
year 1997, prior to the Pure Atria merger as well as to award existing
employees. The Board approved the reservation of 350,000 shares of the
Company's Common Stock for issuance under the 1997 Supplemental Stock Option
Plan.
DESCRIPTION OF THE 1997 STOCK OPTION PLAN
General. The purpose of the Plan is to attract and retain the best available
personnel for positions of substantial responsibility with Rational, to
provide additional incentive to the employees and consultants of Rational and
to promote the success of Rational's business. Options and stock purchase
rights may be granted under the Plan. Options granted under the Plan may be
either "incentive stock options," as defined in Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), or nonstatutory stock options.
Administration. The Plan may be administered by the Rational Board of
Directors or a committee of the Rational Board (the "Administrator"), which
Administrator shall, in the case of options intended to qualify as
"performance-based compensation" within the meaning of Section 162(m) of the
Code, consist of two or more "outside directors" within the meaning of Section
162(m) of the Code. The Administrator has the power to determine the terms of
the options or stock purchase rights granted, including the exercise price,
the number of shares subject to each option or stock purchase right, the
exercisability thereof, and the form of consideration payable upon such
exercise. In addition, the Administrator has the authority to amend, suspend
or terminate the Plan, provided that no such action may affect any share of
Rational Common Stock previously issued and sold or any option previously
granted under the Plan.
Eligibility; Limitations. Nonstatutory stock options and stock purchase
rights may be granted under the Plan to employees and consultants of Rational
and any parent or subsidiary of Rational. Incentive stock options may be
granted only to employees. The Administrator, in its discretion, selects the
employees and consultants to whom options and stock purchase rights may be
granted, the time or times at which such options and stock purchase rights
shall be granted, and the number of shares subject to each such grant.
Section 162(m) of the Code places limits on the deductibility for federal
income tax purposes of compensation paid to certain executive officers of
Rational. In order to preserve Rational's ability to deduct the compensation
income associated with options and stock purchase rights granted to such
persons, the Plan provides that no employee may be granted, in any fiscal year
of Rational, options and stock purchase rights to purchase more than 500,000
shares of Common Stock (as appropriately adjusted for changes in the
capitalization of Rational). Notwithstanding this limit, however, in
connection with an employee's initial employment, he or she may be granted
options or stock purchase rights to purchase up to an additional 500,000
shares of Common Stock (as appropriately adjusted for changes in the
capitalization of Rational).
Terms and Conditions of Options. Each option is evidenced by a stock option
agreement between Rational and the optionee, and is subject to the following
additional terms and conditions:
(a) Exercise Price. The Administrator determines the exercise price of
options at the time the options are granted. The exercise price of an
incentive stock option may not be less than 100% of the fair market value
of the Common Stock on the date such option is granted; provided, however,
the exercise price of an incentive stock option granted to a 10%
stockholder may not be less than 110% of the fair market value of the
Common Stock on the date such option is granted. The fair market value of
the Common Stock is generally determined with reference to the closing sale
price for the Common Stock (or the closing bid if no sales were reported)
on the last market trading day prior to the date the option is granted.
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(b) Exercise of Option; Form of Consideration. The Administrator
determines when options become exercisable, and may in its discretion,
accelerate the vesting of any outstanding option. Stock options granted
under the Plan generally vest and become exercisable over four (4) years.
The means of payment for shares issued upon exercise of an option is
specified in each option agreement. The Plan permits payment to be made by
cash, check, promissory note, other shares of Common Stock of Rational
(with some restrictions), cashless exercises, a reduction in the amount of
any Company liability to the optionee, any other form of consideration
permitted by applicable law, or any combination thereof.
(c) Term of Option. The term of an incentive stock option may be no more
than ten (10) years from the date of grant; provided that in the case of an
incentive stock option granted to a 10% stockholder, the term of the option
may be no more than five (5) years from the date of grant. No option may be
exercised after the expiration of its term.
(d) Termination of Employment. If an optionee's employment or consulting
relationship terminates for any reason (other than death or disability),
then all options held by the optionee under the Plan expire on the earlier
of (i) the date set forth in his or her notice of grant or, in the absence
thereof, three (3) months after the date of termination or (ii) the
expiration date of such option. To the extent the option is exercisable at
the time of such termination, the optionee may exercise all or part of his
or her option at any time before termination.
(e) Death or Disability. If an optionee's employment or consulting
relationship terminates as a result of death or disability, then all
options held by such optionee under the Plan expire on the earlier of (i)
the date set forth in his or her notice of grant or, in the absence
thereof, twelve (12) months from the date of such termination or (ii) the
expiration date of such option. The optionee (or the optionee's estate or
the person who acquires the right to exercise the option by bequest or
inheritance), may exercise all or part of the option at any time before
such expiration to the extent that the option was exercisable at the time
of such termination.
(f) Nontransferability of Options. Options granted under the Plan are not
transferable other than by will or the laws of descent and distribution,
and may be exercised during the optionee's lifetime only by the optionee.
(g) Other Provisions. The stock option agreement may contain other terms,
provisions and conditions not inconsistent with the Plan as may be
determined by the Administrator.
Stock Purchase Rights. A stock purchase right gives the purchaser a period
as determined by the Administrator from the date of grant to purchase Common
Stock. A stock purchase right is accepted by the execution of a restricted
stock purchase agreement between Rational and the purchaser, accompanied by
the payment of the purchase price for the shares. Unless the Administrator
determines otherwise, the restricted stock purchase agreement shall give
Rational a repurchase option exercisable upon the voluntary or involuntary
termination of the purchaser's employment or consulting relationship with
Rational for any reason (including death and disability). The purchase price
for any shares repurchased by Rational shall be the original price paid by the
purchaser. The repurchase option lapses at a rate determined by the
Administrator. A stock purchase right is nontransferable other than by will or
the laws of descent and distribution, and may be exercised during the
optionee's lifetime only by the optionee.
Adjustments Upon Changes in Capitalization. In the event that the stock of
Rational changes by reason of any stock split, reverse stock split, stock
dividend, combination, reclassification or other similar change in the capital
structure of Rational effected without the receipt of consideration,
appropriate adjustments shall be made in the number and class of shares of
stock subject to the Plan, the number and class of shares of stock subject to
any option or stock purchase right outstanding under the Plan, and the
exercise price of any such outstanding option or stock purchase right.
In the event of a liquidation or dissolution, any unexercised options or
stock purchase rights will terminate. The Administrator may, in its discretion
provide that each optionee shall have the right to exercise all of the
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optionee's options and stock purchase rights, including those not otherwise
exercisable, until the date ten (10) days prior to the consummation of the
liquidation or dissolution, or that any rights of repurchase in Rational with
respect to stock purchase rights shall lapse provided the proposed dissolution
or liquidation takes place at the time and in the manner anticipated.
In connection with any merger, consolidation, acquisition of assets or like
occurrence involving Rational, each outstanding option or stock purchase right
shall be assumed or an equivalent option or right substituted by the successor
corporation. If the successor corporation refuses to assume the options and
stock purchase rights or to substitute substantially equivalent options and
stock purchase rights, the optionee shall have the vested right to exercise
the option or stock purchase right as to all the optioned stock, including
shares not otherwise vested or exercisable. In such event, the Administrator
shall notify the optionee that the option or stock purchase right is fully
exercisable for fifteen (15) days from the date of such notice and that the
option or stock purchase right terminates upon expiration of such period.
Amendment and Termination of the Plan. The Board may amend, alter, suspend
or terminate the Plan, or any part thereof, at any time and for any reason.
However, Rational shall obtain stockholder approval for any amendment to the
Plan to the extent necessary to comply with Rule 16b-3, Section 162(m) and
Section 422 of the Code, or any similar rule or statute. No such action by the
Board or stockholders may alter or impair any option or stock purchase right
previously granted under the Plan without the written consent of the optionee.
Unless terminated earlier, the Plan shall terminate ten years from the date of
its approval by the stockholders or the Board of Rational, whichever is
earlier.
FEDERAL INCOME TAX CONSEQUENCES
Incentive Stock Options. An optionee who is granted an incentive stock
option does not recognize taxable income at the time the incentive stock
option is granted or upon its exercise, although the exercise may subject the
optionee to the alternative minimum tax. Upon a disposition of the shares more
than two years after grant of the incentive stock option and one year after
exercise of the incentive stock option, any gain or loss is treated as long-
term capital gain or loss. If these holding periods are not satisfied, the
optionee recognizes ordinary income at the time of disposition equal to the
difference between the exercise price and the lower of (i) the fair market
value of the shares at the date of the option exercise or (ii) the sale price
of the shares. Any gain or loss recognized on such a premature disposition of
the shares in excess of the amount treated as ordinary income is treated as
long-term or short-term capital gain or loss, depending on the holding period.
A different rule for measuring ordinary income upon such a premature
disposition may apply if the optionee is also an officer, director, or 10%
stockholder of Rational. Rational is entitled to a deduction in the same
amount as the ordinary income recognized by the optionee.
Nonstatutory Stock Options. An optionee does not recognize any taxable
income at the time he or she is granted a nonstatutory stock option. Upon
exercise, the optionee recognizes taxable income generally measured by the
excess of the then fair market value of the shares over the exercise price.
Any taxable income recognized in connection with an option exercise by an
employee or former employee of Rational is subject to tax withholding by
Rational. Rational is entitled to a deduction in the same amount as the
ordinary income recognized by the optionee. Upon a disposition of such shares
by the optionee, any difference between the sale price and the optionee's
exercise price, to the extent not recognized as taxable income as provided
above, is treated as long-term or short-term capital gain or loss, depending
on the holding period.
Stock Purchase Rights. Stock purchase rights will generally be taxed in the
same manner as nonstatutory stock options. However, restricted stock is
generally purchased upon the exercise of a stock purchase right. At the time
of purchase, restricted stock is subject to a "substantial risk of forfeiture"
within the meaning of Section 83 of the Code. As a result, the purchaser will
not recognize ordinary income at the time of purchase. Instead, the purchaser
will recognize ordinary income on the dates when the stock ceases to be
subject to a substantial risk of forfeiture. The stock will generally cease to
be subject to a substantial risk of forfeiture when it is no longer subject to
Rational's right to repurchase the stock upon the purchaser's termination of
employment
8
<PAGE>
with Rational. At such times, the purchaser will recognize ordinary income
measured as the difference between the purchase price and the fair market
value of the stock on the date the stock is no longer subject to a substantial
risk of forfeiture.
The purchaser may accelerate his or her recognition of ordinary income, if
any, to the date of purchase and begin the capital gain holding period by
timely filing an election pursuant to Section 83(b) of the Code. In such
event, the ordinary income recognized, if any, is measured as the difference
between the purchase price and the fair market value of the stock on the date
of purchase, and the capital gain holding period commences on such date. The
ordinary income recognized by a purchaser who is an employee or former
employee will be subject to tax withholding by Rational. Different rules may
apply if the purchaser is also an officer, director, or 10% stockholder of
Rational.
THE FOREGOING IS ONLY A SUMMARY OF THE EFFECT OF FEDERAL INCOME TAXATION
UPON OPTIONEES, HOLDERS OF STOCK PURCHASE RIGHTS, AND RATIONAL WITH RESPECT TO
THE GRANT AND EXERCISE OF OPTIONS AND STOCK PURCHASE RIGHTS UNDER THE PLAN. IT
DOES NOT PURPORT TO BE COMPLETE, AND DOES NOT DISCUSS THE TAX CONSEQUENCES OF
THE OPTIONEE'S DEATH OR THE PROVISIONS OF THE INCOME TAX LAWS OF ANY
MUNICIPALITY, STATE OR FOREIGN COUNTRY IN WHICH THE OPTIONEE MAY RESIDE.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL 2. 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 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
Employee Stock Purchase Plan (the "Purchase Plan") reserving an additional
1,000,000 shares of the Company's Common Stock for issuance thereunder.
Currently there are 1,200,000 shares reserved under the Purchase Plan, of
which 1,109,044 have been purchased and 90,956 are still available for
purchase. If this amendment is approved there will be a total of 2,200,000
shares reserved under the Purchase Plan, of which 1,109,044 have been
purchased and 1,090,956 shares will be available for purchase. The amendment
to the Purchase Plan was adopted by the Board of Directors on July 15, 1997,
subject to stockholder approval.
The Rational Board of Directors believes that 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.
At its regular meeting on July 15, 1997, the Board of Directors of the
Company determined that it was in the best interests of the Company and its
stockholders to provide the former employees of Pure Atria Corporation the
opportunity to participate in the Purchase Plan prior to the commencement of
the offering period scheduled to begin on the first trading day on or after
November 1, 1997. Pursuant to Section 4 of the Purchase Plan, the Board
approved the establishment of a special offering period for all employees
under the Purchase Plan commencing with the first trading day following the
effective closing date of the merger of Pure Atria Corporation with the
Company. The enrollment date for this special offering period was July 31,
1997, and the enrollment period will terminate on the last trading day on or
before April 30, 1999. All other offering period scheduled to begin under the
Purchase Plan on or after November 1, 1997 are unaffected.
9
<PAGE>
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, 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 on or before 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 the
lower of 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.
10
<PAGE>
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 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 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.
11
<PAGE>
RATIFICATION OF INDEPENDENT AUDITORS
(PROPOSAL 4)
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 1998. 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 1997. 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 4.
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.
EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
NAME; AGE PRINCIPAL OCCUPATIONS AND EMPLOYMENT
POSITION(S) WITH THE COMPANY DURING THE PAST FIVE YEARS
---------------------------- ------------------------------------
<C> <S>
Paul D. Levy; 41 See "Election of Directors" above for
Chief Executive Officer further information concerning Mr. Levy.
Michael T. Devlin; 42 See "Election of Directors" above for
President further information concerning Mr. Devlin.
Robert T. Bond; 54 Executive Vice President and General
Senior Vice President, Manager of International Field Operations,
Chief Operating Officer, old Rational from 1990 to 1994, and
Chief Financial Officer and Rational from 1994 to 1995.
Secretary
David H. Bernstein; 45 Vice President and General Manager, Object
Senior Vice President and Technology, old Rational, 1994 and Rational
General Manager, Products from 1994 to 1995. Vice President, Product
Development from 1982 to 1994.
Robert H. Dickerson; 40 Vice President, Developer and Performix
Senior Vice President and Products Groups, Pure Atria Corporation,
General Manager, Products 1994 to 1997 (Rational acquired Pure Atria
on 7/30/97). Senior Vice President, Client
Server Division, Director of Marketing,
Borland International, 1987 to 1994.
John R. Lovitt; 52 Vice President of North American Field
Senior Vice President, Operations, old Rational from 1990 to 1994,
Worldwide Field Operations and Rational from 1994 to 1995.
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
NAME; AGE PRINCIPAL OCCUPATIONS AND EMPLOYMENT
POSITION(S) WITH THE COMPANY DURING THE PAST FIVE YEARS
---------------------------- ------------------------------------
<C> <S>
Thomas F. Bogan; 45 Senior Vice President, Finance &
Vice President and General Administration, Chief Financial Officer,
Manager, SQA Business Unit Treasurer and Assistant Secretary of SQA,
Inc., 1996 to 1997 (Rational acquired SQA,
Inc. on 2/26/97). President and Chief
Executive Officer of Pacific Data Products,
Inc., 1993 to 1996. President and Chief
Executive Officer of Avatar Corporation,
1987 to 1993.
Timothy A. Brennan; 41 Corporate Controller, Rational from 1994 to
Vice President, Finance and 1995; Division Controller, The Ask Group,
Administration Inc. from 1990 to 1994.
Frederick J. Ciaramaglia; 49 Vice President, Research and Development of
Vice President, Research and SQA, Inc. 1994 to 1997 (Rational acquired
Development SQA, Inc. on 2/26/97). Senior Vice
President, Development, Clinical
Information Advantages, Inc., 1992 to 1994.
Founder of Softbridge Microsystems, Inc.,
and Senior Vice President, Technology, 1983
to 1992.
James P. Cluchey; 49 Vice President, Managing Director of
Vice President, European European Operations of SQA, Inc., 1995 to
Operations 1997 (Rational acquired SQA, Inc. on
2/26/97). Vice President Europe of ST
Europe PLC, 1993 to 1995. Vice President
Europe of Datalogix Europe, 1991 to 1993.
William T. Dedrick; 41 Vice President, U.S. Sales of SQA, Inc.,
Vice President, Channel and 1993 to 1997 (Rational acquired SQA, Inc.
Telesales Operations on 2/26/97). Vice President, North American
Sales of Easel Corporation, 1992 to 1993.
Elizabeth H. Friday; 36 Vice President, Worldwide Customer Support,
Vice President, Customer Support Pure Atria Corporation, 1994 to 1997
(Rational acquired Pure Atria on 7/30/97).
Kevin J. Haar; 40 Vice President of North American Major
Vice President, Major Accounts, Accounts, Rational, 1995. Account
North American Field Operations Representative, old Rational from 1986 to
1994, and Rational from 1994 to 1995.
Roger A. Hodskins; 41 Vice President, Strategic Alliances of SQA,
Vice President, Business Inc., 1996 to 1997 (Rational acquired SQA,
Development Inc. on 2/26/97). Vice President,
Enterprise Partners, SQA, Inc., 1995 to
1992; Director of Alternate Channels, SQA,
Inc., 1992 to 1995. Manager, Geographic
Information Systems and Senior
International Marketing Manager, Wang
Laboratories, Inc., 1988 to 1992.
J. Burr Gibbons; 50 Director, Human Resources, Rational, from
Vice President, Human Resources 1990 to 1997.
Ivar Jacobson; 58 Vice President, Technology, Objectory AB
Vice President, Business from 1991 to 1995; President, Objectory AB,
Engineering 1990.
Richard H. Lanchantin; 41 Pure Atria Corporation, 1997 (Rational
Vice President, Field Operations acquired Pure Atria on 7/30/97).
Denis P. LeBlanc; 45 Vice President, Atria Product Group, Pure
Vice President and General Atria Corporation, 1996 to 1997 (Rational
Manager, Configuration and acquired Pure Atria on 7/30/97). Director
Change Management Business Unit of Marketing, Atria Product Group, Pure
Atria, 1996; Regional Sales Manager, Atria
Software, 1992 to 1996; and District Sales
Manager, MIPS Computer Systems, 1991 to
1992.
Dean Leffingwell; 47 Co-founder and Chief Executive Officer of
Vice President and General Requisite, Inc., 1994 to 1997 (Rational
Manager, Rational University acquired Requisite, Inc. in 2/4/97).
Chairman of Colorado MEDtech, Inc., prior
to 1994.
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
NAME; AGE PRINCIPAL OCCUPATIONS AND EMPLOYMENT
POSITION(S) WITH THE COMPANY DURING THE PAST FIVE YEARS
---------------------------- ------------------------------------
<C> <S>
Joseph N. Marasco; 51 Vice President and General Manager,
Vice President and General Programming Tools, Rational, 1995. Product
Manager, Programming Manager, old Rational from 1986 to 1994,
Environments and Rational from 1994 to 1995.
Gregory L. Meyers; 40 Chief Architect, Software Tools, Palladio
Vice President and General Software Corp. from 1992 to 1995 (Palladio
Manager, Rose Business Software Corp. was acquired by Rational on
December 30, 1994). Product Manager,
Medical Equipment Manufacturer, General
Electric Medical Systems from 1990 to 1992.
Reinhard Nielsen; 45 Vice President and Managing Director,
Vice President, Field Operations European Sales, Pure Atria Corporation,
1994 to 1997 (Rational acquired Pure Atria
on 7/30/97).
Roger W. Oberg; 37 Vice President, Sales and Marketing,
Vice President and General Requisite, Inc. 1996 to 1997. (Rational
Manager, Requirements Management acquired Requisite, Inc. on 2/4/97).
Business Unit Executive Director, Advanced Intelligent
Network, US West Communications, 1996; Vice
President of Engineering, XVT Software,
1995; and Vice President of Marketing XVT
Software, 1992 to 1994.
Richard P. Reitman; 44 Chief Architect, old Rational 1993 to 1994,
Vice President, Process and and Rational from 1994 to 1996; Product
Project Management Products Architect, old Rational from 1991 to 1993.
Pamela S. Roussos; 37 Director, Product Marketing, Pure Atria
Vice President, Developer Corporation 1996 to 1997 (Rational acquired
Products Business Unit Pure Atria on 7/30/97). Product Manager,
Pure Software Corporation, 1994 to 1996;
Consultant Systems Engineer and various
managerial positions, Amdahl, 1982 to 1994.
Gerald J. Rudisin; 43 Director of Marketing, old Rational from
Vice President, Corporate 1991 to 1994, and Rational from 1994 to
Marketing and Technical 1995. Vice President of Product Marketing
Marketing at Alsys, Inc. from 1986 to 1991.
Lawrence W. Schork; 46 Director, Information Technologies,
Vice President, Information Rational, from 1996 to 1997. Senior
Technologies and Chief Applications Development Manager, Sunsoft,
Information Officer 1994 to 1996; Senior Project Manager, Apple
Computer, 1987 to 1994.
Eric L. Schurr; 39 Vice President, Product Management and
Vice President, Product Marketing, SQA, Inc., 1994 to 1997
Marketing Commercial IS Products (Rational acquired SQA, Inc. on 2/26/97).
Director of Marketing, SQA, Inc., 1992 to
1994. Director, Marketing Support and
various field, technical and marketing
positions, Cognos, 1983 to 1992.
Kirk G. Fuller; 39 Central District Manager, Rational, from
Regional Vice President, Central 1994 to 1997. Sales Manager, Verdix
Region Corporation, 1990 to 1994 (Rational
acquired Verdix Corporation on 3/30/94).
Burton M. Goldfield; 41 Western Regional Manager, Rational, 1996 to
Regional Vice President, Western 1997; and District Manager for Northeast
Region and Canada Region, Rational, from 1991 to 1996.
</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. The Company believes that all reports
required pursuant to Section 16(a) with respect to the 1997 fiscal year were
timely filed.
14
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The Securities and Exchange Commission requires the following table setting
forth for the fiscal years ending March 31, 1997, 1996, and 1995, 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 SALARY($) BONUS($) ($)
------------------ ---- --------- -------- ------------
<S> <C> <C> <C> <C>
Paul D. Levy.............. 1997 325,000 180,000 348(1)
Chief Executive Officer 1996 240,000 82,374 348(1)
1995 220,000 0 348(1)
Michael T. Devlin......... 1997 325,000 180,000 348(1)
President 1996 240,000 82,374 348(1)
1995 220,000 0 348(1)
Robert T. Bond............ 1997 250,000 139,000 348(1)
Senior Vice President, 1996 185,000 67,729 348(1)
Chief Operating Officer, 1995 185,000 0 3,652(1)(2)(3)
Chief Financial Officer
and Secretary
David H. Bernstein........ 1997 275,000 78,000 348(1)
Senior Vice President and 1996 220,000 80,000 348(1)
General Manager, Products 1995 220,000 0 348(1)
John R. Lovitt ........... 1997 195,000 135,000 3,348(1)(3)
Senior Vice President, 1996 180,000 62,238 348(1)
Worldwide Field
Operations 1995 170,000 0 348(1)
</TABLE>
- --------
(1) 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.
(2) 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.
(3) Includes $3,000 earned by each Mr. Bond and Mr. Lovitt as an award for ten
years of service with the Company.
15
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information with respect to each of the named
executive officers of the Company concerning the grant of stock options during
the last fiscal year and the potential realizable value at certain assumed
annual rates of stock price appreciation.
The total number of shares of Common Stock subject to options granted in
fiscal year 1997 were 4,344,561 (includes options granted under SQA, Inc.
option plans as well as Rational option plans).
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
-------------------------- ANNUAL RATES OF
NUMBER OF PERCENT OF STOCK PRICE
SHARES OF TOTAL OPTIONS APPRECIATION FOR
COMMON STOCK GRANTED TO OPTION TERM(1)
UNDERLYING EMPLOYEES IN EXERCISE PRICE --------------------
NAME OPTIONS (#) FISCAL YEAR ($/SHARE) EXPIRATION DATE 5% ($) 10% ($)
- ---- ------------ ------------- -------------- --------------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Paul D. Levy ........... 200,000 4.60% 28.19 8/26/06 3,545,708 8,985,520
200,000 4.60% 39.56 1/2/07 4,975,814 12,609,690
325,000 7.48% 18.25 3/18/07 3,730,131 9,452,885
Michael T. Devlin....... 200,000 4.60% 28.19 8/26/06 3,545,708 8,985,520
200,000 4.60% 39.56 1/2/07 4,975,814 12,609,690
325,000 7.48% 18.25 3/18/07 3,730,131 9,452,885
Robert T. Bond.......... 130,000 2.99% 28.19 8/27/06 2,304,710 5,840,588
David H. Bernstein...... 90,000 2.07% 28.19 8/27/06 1,595,569 4,043,484
John R. Lovitt.......... 90,000 2.07% 28.19 8/27/06 1,595,569 4,043,484
</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 1997 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.
16
<PAGE>
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 1997 year-end value of all
unexercised options held by such individuals.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES DOLLAR VALUE OF
UNDERLYING UNEXERCISED,
NUMBER OF UNEXERCISED OPTIONS HELD IN-THE-MONEY OPTIONS HELD
SHARES DOLLAR AT MARCH 31, 1997 AT MARCH 31, 1997(1)
ACQUIRED ON VALUE ------------------------- -------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Paul D. Levy............ 125,000 $2,476,910 0 600,000 $ 0 $5,426,250
Michael T. Devlin....... 125,000 $2,690,250 0 600,000 $ 0 $5,426,250
Robert T. Bond.......... 0 $ 0 94,498 80,834 $1,649,219 $1,342,916
David H. Bernstein...... 0 $ 0 26,666 53,334 $ 482,255 $ 964,545
John R. Lovitt.......... 105,330 $2,501,022 51,109 75,557 $ 894,398 $1,280,759
</TABLE>
- --------
(1) Value based on market value of the Company's Common Stock at date of
exercise, or at March 31, 1997 (the last business day of the fiscal year),
minus the exercise price. The market value at March 31, 1997 was $20.625
per share.
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 1997, 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.
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 in fiscal year 1997.
17
<PAGE>
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 1997 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 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 nor is any expected to
approach such limit in fiscal year 1998. 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 1997 Stock Option Plan has been
designed and administered to meet such requirements, and the 1997 Supplemental
Stock Option Plan does not have to meet such requirements because the
executive officers and directors are excluded from participating in such Plan.
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.
18
<PAGE>
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 563 companies that are classified in the same Standard
Industrial Classification (SIC) code as the Company.
COMPARE 5-YEAR CUMULATIVE TOTAL RETURN
AMONG RATIONAL SOFTWARE CORPORATION,
NASDAQ MARKET INDEX AND SIC CODE INDEX
[PERFORMANCE GRAPH GRAPHIC APPEARS HERE]
ASSUMES $100 INVESTED ON APRIL 1, 1992
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING MARCH 31, 1997
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 1997
---- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Rational Software....................... 100 81.25 78.13 92.19 329.17 343.75
Industry Index.......................... 100 113.31 120.47 159.34 231.75 258.41
Broad Market............................ 100 111.91 129.33 137.21 184.56 206.47
</TABLE>
19
<PAGE>
CERTAIN TRANSACTIONS
Daniel H. Case III, a director and stockholder of the Company, is the
President and Chief Executive Officer of Hambrecht & Quist Group ("H&Q"). H&Q
was a managing underwriter of the Company's public offerings which took place
in June 1995 and October 1996, respectively, and received certain discounts
and commissions, and was indemnified by the Company, with respect thereto. H&Q
also provided financial advisory services to Rational in connection with the
merger of SQA, Inc. in February 1997. H&Q received an initial payment of
$250,000 upon delivery of its fairness opinion in connection with the SQA
Merger, and was paid an additional $750,000 upon consummation of the SQA
Merger as well as reimbursement for reasonable out-of-pocket expenses incurred
in connection with its services. H&Q also provided financial advisory services
to Rational in connection with the Pure Atria Merger. H&Q was paid in an
initial payment of $2.0 million upon delivery of its fairness opinion in
connection with the Pure Atria Merger. H&Q was also paid an additional $3.3
million upon consummation of the Pure Atria Merger. H&Q was also to be
reimbursed for reasonable out-of-pocket expenses incurred in connection with
its services in connection with the Pure Atria Merger. H&Q may in the future
provide other investment banking services or 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 H&Q relating to such activities.
In connection with the Company's October 1996 public offering, Ivar
Jacobson, Vice President, Business Engineering, sold 412,544 shares of
Rational Common Stock. Pursuant to a contractual obligation undertaken in
connection with its acquisition of Objectory, the Company reimbursed Mr.
Jacobson for the underwriting discount applicable to such shares. The amount
so reimbursed was $701,324.80.
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 has retained Georgeson & Company, 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
1998 Annual Meeting of stockholders, stockholder proposals must be received by
the Company no later than April 21, 1998, 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>
RATIONAL SOFTWARE CORPORATION
ANNUAL MEETING OF STOCKHOLDERS
September 25, 1997
THE 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 August 18, 1997, 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 September 25, 1997, 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 brought before the meeting or any adjournments thereof.
(CONTINUED AND TO BE MARKED, DATED AND SIGNED, ON THE OTHER SIDE)
- -------------------------------------------------------------------------------
FOLD AND DETACH HERE
<PAGE>
<TABLE>
<CAPTION>
Please mark [X]
your votes as
indicated in
this example
<S> <C>
WITHHELD
FOR FOR ALL FOR AGAINST ABSTAIN
1. ELECTION OF CLASS II [_] [_] 2. AMENDMENT TO THE 1997 [_] [_] [_]
MEMBERS (FOR TERMS STOCK OPTION PLAN
EXPIRING IN 2000) OF THE RESERVING AN ADDITIONAL
BOARD OF DIRECTORS: 4,000,000 SHARES OF THE
COMPANY'S COMMON STOCK.
Nominees: Daniel H. Case III, FOR AGAINST ABSTAIN
Paul D. Levy, 3. AMENDMENT TO THE 1994 [_] [_] [_]
John E. Montague EMPLOYEE STOCK PURCHASE
PLAN RESERVING AN
IF you wish to withhold authority to ADDITIONAL 1,000,000
vote for any individual nominee, strike SHARES OF THE COMPANY'S
a line through that nominees name in the COMMON STOCK.
list above. FOR AGAINST ABSTAIN
4. 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 1998:
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.)
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* FOLD AND DETACH HERE *
</TABLE>
