<PAGE>
As filed with the Securities and Exchange Commission on August 4, 1998
Registration No. 333-_____
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
FORM S-8
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
RATIONAL SOFTWARE CORPORATION
(Exact name of issuer as specified in its charter)
Delaware 54-1217099
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
18880 Homestead Road
Cupertino, CA 95014
(Address of principal executive offices)
--------------
1997 Stock Option Plan
1998 Employee Stock Purchase Plan
Directors' Stock Option Plan
(Full title of the plans)
--------------
PAUL D. LEVY
CHIEF EXECUTIVE OFFICER
RATIONAL SOFTWARE CORPORATION
18880 HOMESTEAD ROAD
CUPERTINO, CA 95014
(408) 863-9900
(Name, address and telephone number of agent for service)
--------------
Copy to:
Gail Clayton Husick, Esq.
Martin Wellington, Esq.
Julia Schwartzman, Esq.
Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, California 94304
--------------
================================================================================
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=============================================================================================================
Title of Proposed Maximum Proposed Maximum
Securities to be Amount to be Offering Price Aggregate Amount of
Registered Registered Per Share(3) Offering Price Registration Fee(4)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997 Stock Option
Plan 4,000,000 $15.91(1) $63,640,000(1) $18,774
- -------------------------------------------------------------------------------------------------------------
1998 Employee
Stock Purchase 2,000,000 $13.52(2) $27,040,000(2) $ 7,977
Plan
- -------------------------------------------------------------------------------------------------------------
Directors' Stock
Option Plan 350,000 $15.91(1) $ 5,568,500(1) $ 1,643
- -------------------------------------------------------------------------------------------------------------
Total 6,350,000 $96,248,500 $28,394
=============================================================================================================
</TABLE>
(1) Estimated in accordance with Rule 457(h) solely for the purpose of
computing the amount of the registration fee based on the prices of the
Company's Common Stock as reported on the Nasdaq National Market on July
28, 1998.
(2) The Proposed Maximum Offering Price Per Share has been estimated in
accordance with Rule 457(c) and Rule 457(h) under the Securities Act solely
for the purpose of calculating the registration fee. The computation was
based upon 85% of the average best bid and ask prices of the Company's
common stock as reported on the Nasdaq National Market on July 28, 1998,
which average was $15.91.
(3) Rounded to the nearest cent.
(4) Rounded up to the nearest dollar.
<PAGE>
RATIONAL SOFTWARE CORPORATION
REGISTRATION STATEMENT ON FORM S-8
PART II
INFORMATION REQUIRED IN THE REGISTRATION STATEMENT
Item 3. Incorporation of Documents by Reference.
---------------------------------------
There are hereby incorporated by reference in this Registration Statement
the following documents and information heretofore filed with the Securities and
Exchange Commission (the "Commission"):
(a) The Registrant's Annual Report on Form 10-K for the year ended March
31, 1998 as filed with the Commission.
(b) The Registrant's Current Report on Form 8-K dated April 22, 1998 as
filed with the Commission.
(c) All other reports filed pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") since the end
of the fiscal year covered by the registrant document referred to in (a) above.
(d) The description of the Registrant's Common Stock contained in the
Registration Statement on Form S-4 (File No. 333-29799) filed by the Registrant
with the Commission on June 25, 1997 and any amendment or report filed hereafter
for the purpose of updating such description.
The Company hereby incorporates by reference in this Registration Statement
the contents of the Company's Registration Statements on Form S-8 (Registration
Nos. 33-97042, 333-25815, 333-22687 and 333-39569).
Item 1 of Registrant's Form 8-A dated May 25, 1984 as amended on Form 8-A/A
dated May 25, 1995, filed with the Commission.
All documents filed by the Registrant pursuant to Sections 13(a), 13(c), 14
and 15(d) of the Exchange Act subsequent to the filing of this Registration
Statement, and prior to the filing of a post-effective amendment which indicates
that all securities offered have been sold or which deregisters all securities
then remaining unsold, shall be deemed to be incorporated by reference in the
Registration Statement and to be part hereof from the date of filing of such
documents.
Item 4. Description of Securities.
-------------------------
Not applicable.
II-1
<PAGE>
Item 5. Interests of Named Experts and Counsel.
--------------------------------------
Not applicable.
Item 6. Indemnification of Directors and Officers.
-----------------------------------------
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's Board of Directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933, as amended. The Registrant's
Certificate of Incorporation, as amended, and Bylaws provide for indemnification
of its officers, directors, employees and other agents to the maximum extent
permitted by the Delaware Law. In addition, the Registrant has entered into
Indemnification Agreements with its officers and directors, the form of which is
attached hereto as Exhibit 10.1.
Item 7. Exemption from Registration Claims.
----------------------------------
Not applicable.
Item 8. Exhibits
--------
Exhibit
Number Description
- ------- -----------
4.1 The 1997 Stock Option Plan, as amended as of July 16, 1998 and
form of Agreement thereunder. The form of Agreement is
incorporated herein by reference to the Registrant's
Registration Statement on Form S-8, File No. 333-22687.
4.2 The 1998 Employee Stock Purchase Plan and form of Agreement
thereunder.
4.3 The Directors' Stock Option Plan is incorporated herein by
reference to the Registrant's Registration Statement on Form S-
8, File No. 33-97042.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, P.C. with respect
to the legality of the securities being registered.
10.1 Form of Indemnification Agreement is incorporated herein by
reference to Exhibit 10.01 filed with the Company's Registration
Statement on Form S-4 (Registration No. 333-19669), filed with
the Commission on January 13, 1997, as amended on January 17,
1997.
23.1 Consent of Ernst & Young LLP, Independent Auditors
II-2
<PAGE>
23.2 Consent of Counsel (contained in Exhibit 5.1)
24.1 Power of Attorney (see page II-5)
Item 9. Undertakings
------------
(a) Rule 415 Offering. The undersigned registrant hereby undertakes:
1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate, represent
a fundamental change in the information set forth in the registration statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if
-------- -------
the registration statement is on Form S-3 ((S)239.13 of this chapter) or Form S-
8 ((S)239.16(b) of this chapter), and the information required to be included in
a post-effective amendment by those paragraphs is contained in periodic reports
filed by the registrant pursuant to section 13 or section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the
registration statement.
2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(b) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to section 13(a) or section 15(d) of the
Exchange Act (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934)
that is incorporated by reference in the registration statement shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-3
<PAGE>
(c) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the Delaware General Corporations Law, the Certificate of
Incorporation of the Registrant, the Bylaws of the Registrant, Indemnification
Agreements entered into between the Registrant and its officers and directors,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-8 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Santa Clara, State of California, on July 31, 1998.
RATIONAL SOFTWARE CORPORATION
By: /s/ Timothy A. Brennan
-------------------------------------
Timothy A. Brennan
Chief Financial Officer and Secretary
(Principal Financial and Accounting
Officer)
POWER OF ATTORNEY
KNOW ALL THESE PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Paul D. Levy and Timothy A. Brennan and
each of them, jointly and severally, his attorneys-in-fact, each with full power
of substitution, for him in any and all capacities, to sign any and all
amendments to this Registration Statement on Form S-8 and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and conforming all that
each said attorneys-in-fact or his substitute or substitutes, may do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
Date: July 31, 1998 /s/ Paul D. Levy
----------------------------------------------
Paul D. Levy, Chairman of the Board and
Chief Executive Officer
Date: July 31, 1998 /s/ Michael T. Devlin
----------------------------------------------
Michael T. Devlin, President and Director
Date: July 31, 1998 /s/ Timothy A. Brennan
----------------------------------------------
Timothy A. Brennan, Chief Financial Officer
and Secretary (Principal Financial and
Accounting Officer)
Date: July 31, 1998 /s/ James S. Campbell
----------------------------------------------
James S. Campbell, Director
Date: July 31, 1998 /s/ Daniel H. Case III
----------------------------------------------
Daniel H. Case III, Director
II-5
<PAGE>
Date: July 31, 1998 /s/ Leslie G. Denend
---------------------------------------------
Leslie G. Denend, Director
Date: July 31, 1998 /s/ John E. Montague
---------------------------------------------
John E. Montague, Director
Date: July 31, 1998 /s/ Allison R. Schleicher
---------------------------------------------
Allison R. Schleicher, Director
II-6
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
4.1 The 1997 Stock Option Plan, as amended as of July 16, 1998.
4.2 The 1998 Employee Stock Purchase Plan and form of Agreement
thereunder.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, P.C. with respect
to the legality of the securities being registered
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2 Consent of Counsel (contained in Exhibit 5.1)
24.1 Power of Attorney (see page II-5)
II-7
<PAGE>
Exhibit 4.1
RATIONAL SOFTWARE CORPORATION
1997 STOCK OPTION PLAN
<PAGE>
RATIONAL SOFTWARE CORPORATION
1997 STOCK PLAN
1. Purposes of the Plan. The purposes of this Stock Plan are:
--------------------
. to attract and retain the best available personnel for positions of
substantial responsibility,
. to provide additional incentive to Employees, Directors and
Consultants, and
. to promote the success of the Company's business.
Options granted under the Plan may be Incentive Stock Options or
Nonstatutory Stock Options, as determined by the Administrator at the time of
grant. Stock Purchase Rights may also be granted under the Plan.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Administrator" means the Board or any of its Committees as shall be
-------------
administering the Plan, in accordance with Section 4 of the Plan.
(b) "Applicable Laws" means the requirements relating to the
---------------
administration of stock option plans under U. S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or quotation
system on which the Common Stock is listed or quoted and the applicable laws of
any foreign country or jurisdiction where Options or Stock Purchase Rights are,
or will be, granted under the Plan.
(c) "Board" means the Board of Directors of the Company.
-----
(d) "Code" means the Internal Revenue Code of 1986, as amended.
----
(e) "Committee" means a committee of Directors appointed by the Board
---------
in accordance with Section 4 of the Plan.
(f) "Common Stock" means the common stock of the Company.
------------
(g) "Company" means Rational Software Corporation, a Delaware
-------
corporation.
(h) "Consultant" means any person, including an advisor, engaged by the
----------
Company or a Parent or Subsidiary to render services to such entity.
(i) "Director" means a member of the Board.
--------
<PAGE>
(j) "Disability" means total and permanent disability as defined in
----------
Section 22(e)(3) of the Code.
(k) "Employee" means any person, including Officers and Directors,
--------
employed by the Company or any Parent or Subsidiary of the Company. A Service
Provider shall not cease to be an Employee in the case of (i) any leave of
absence approved by the Company or (ii) transfers between locations of the
Company or between the Company, its Parent, any Subsidiary, or any successor.
For purposes of Incentive Stock Options, no such leave may exceed ninety days,
unless reemployment upon expiration of such leave is guaranteed by statute or
contract. If reemployment upon expiration of a leave of absence approved by the
Company is not so guaranteed, on the 181st day of such leave any Incentive Stock
Option held by the Optionee shall cease to be treated as an Incentive Stock
Option and shall be treated for tax purposes as a Nonstatutory Stock Option.
Neither service as a Director nor payment of a director's fee by the Company
shall be sufficient to constitute "employment" by the Company.
(l) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(m) "Fair Market Value" means, as of any date, the value of Common Stock
-----------------
determined as follows:
(i) If the Common Stock is listed on any established stock exchange
or a national market system, including without limitation the Nasdaq National
Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market
Value shall be the closing sales price for such stock (or the closing bid, if no
sales were reported) as quoted on such exchange or system for the last market
trading day prior to the time of determination, as reported in The Wall Street
Journal or such other source as the Administrator deems reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market Value of
a Share of Common Stock shall be the mean between the high bid and low asked
prices for the Common Stock on the last market trading day prior to the day of
determination, as reported in The Wall Street Journal or such other source as
the Administrator deems reliable; or
(iii) In the absence of an established market for the Common Stock,
the Fair Market Value shall be determined in good faith by the Administrator.
(n) "Incentive Stock Option" means an Option intended to qualify as an
----------------------
incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.
(o) "Nonstatutory Stock Option" means an Option not intended to qualify
-------------------------
as an Incentive Stock Option.
-2-
<PAGE>
(p) "Notice of Grant" means a written or electronic notice evidencing
---------------
certain terms and conditions of an individual Option or Stock Purchase Right
grant. The Notice of Grant is part of the Option Agreement.
(q) "Officer" means a person who is an officer of the Company within the
-------
meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(r) "Option" means a stock option granted pursuant to the Plan.
------
(s) "Option Agreement" means an agreement between the Company and an
----------------
Optionee evidencing the terms and conditions of an individual Option grant. The
Option Agreement is subject to the terms and conditions of the Plan.
(t) "Option Exchange Program" means a program whereby outstanding
-----------------------
Options are surrendered in exchange for Options with a lower exercise price.
(u) "Optioned Stock" means the Common Stock subject to an Option or
--------------
Stock Purchase Right.
(v) "Optionee" means the holder of an outstanding Option or Stock
--------
Purchase Right granted under the Plan.
(w) "Parent" means a "parent corporation," whether now or hereafter
------
existing, as defined in Section 424(e) of the Code.
(x) "Plan" means this 1997 Stock Option Plan.
----
(y) "Restricted Stock" means shares of Common Stock acquired pursuant to
----------------
a grant of Stock Purchase Rights under Section 11 of the Plan.
(z) "Restricted Stock Purchase Agreement" means a written agreement
-----------------------------------
between the Company and the Optionee evidencing the terms and restrictions
applying to stock purchased under a Stock Purchase Right. The Restricted Stock
Purchase Agreement is subject to the terms and conditions of the Plan and the
Notice of Grant.
(aa) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any successor
----------
to Rule 16b-3, as in effect when discretion is being exercised with respect to
the Plan.
(bb) "Section 16(b)" means Section 16(b) of the Exchange Act.
-------------
(cc) "Service Provider" means an Employee, Director or Consultant.
----------------
-3-
<PAGE>
(dd) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 13 of the Plan.
(ee) "Stock Purchase Right" means the right to purchase Common Stock
--------------------
pursuant to Section 11 of the Plan, as evidenced by a Notice of Grant.
(ff) "Subsidiary" means a "subsidiary corporation", whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 13 of
-------------------------
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is 10,200,000 Shares,plus any unused Shares and any forfeited
Shares. For purposes of this Section 3, (i) "unused Shares" means Shares
reserved for issuance but not covered by grants under the1994 Stock Option Plan
(the "1994 Plan") (which 1994 Plan shall be terminated as of the effective date
of the Plan), and (ii) "forfeited Shares" means any Shares covered by grants
under the 1994 Plan that are not issued to participants or that are returned to
the Company upon forfeiture of such Shares.
If an Option or Stock Purchase Right expires or becomes unexercisable
without having been exercised in full, or is surrendered pursuant to an Option
Exchange Program, the unpurchased Shares which were subject thereto shall become
available for future grant or sale under the Plan (unless the Plan has
terminated); provided, however, that Shares that have actually been issued under
--------
the Plan, whether upon exercise of an Option or Right, shall not be returned to
the Plan and shall not become available for future distribution under the Plan,
except that if Shares of Restricted Stock are repurchased by the Company at
their original purchase price, such Shares shall become available for future
grant under the Plan.
4. Administration of the Plan.
--------------------------
(a) Procedure.
---------
(i) Multiple Administrative Bodies. The Plan may be administered by
------------------------------
different Committees with respect to different groups of Service Providers.
(ii) Section 162(m). To the extent that the Administrator determines
--------------
it to be desirable to qualify Options granted hereunder as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the Plan shall
be administered by a Committee of two or more "outside directors" within the
meaning of Section 162(m) of the Code.
(iii) Rule 16b-3. To the extent desirable to qualify transactions
----------
hereunder as exempt under Rule 16b-3, the transactions contemplated hereunder
shall be structured to satisfy the requirements for exemption under Rule 16b-3.
-4-
<PAGE>
(iv) Other Administration. Other than as provided above, the Plan
--------------------
shall be administered by (A) the Board or (B) a Committee, which committee shall
be constituted to satisfy Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions of the Plan,
---------------------------
and in the case of a Committee, subject to the specific duties delegated by the
Board to such Committee, the Administrator shall have the authority, in its
discretion:
(i) to determine the Fair Market Value;
(ii) to select the Service Providers to whom Options and Stock
Purchase Rights may be granted hereunder;
(iii) to determine the number of shares of Common Stock to be
covered by each Option and Stock Purchase Right granted hereunder;
(iv) to approve forms of agreement for use under the Plan;
(v) to determine the terms and conditions, not inconsistent with the
terms of the Plan, of any Option or Stock Purchase Right granted hereunder.
Such terms and conditions include, but are not limited to, the exercise price,
the time or times when Options or Stock Purchase Rights may be exercised (which
may be based on performance criteria), any vesting acceleration or waiver of
forfeiture restrictions, and any restriction or limitation regarding any Option
or Stock Purchase Right of the shares of Common Stock relating thereto, based in
each case on such factors as the Administrator, in its sole discretion, shall
determine;
(vi) to reduce the exercise price of any Option or Stock Purchase
Right to the then current Fair Market Value if the Fair Market Value of the
Common Stock covered by such Option or Stock Purchase Right shall have declined
since the date the Option or Stock Purchase Right was granted;
(vii) to institute an Option Exchange Program;
(viii) to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan;
(ix) to prescribe, amend and rescind rules and regulations relating
to the Plan, including rules and regulations relating to sub-plans established
for the purpose of qualifying for preferred tax treatment under foreign tax
laws;
(x) to modify or amend each Option or Stock Purchase Right (subject
to Section 15(c) of the Plan), including the discretionary authority to extend
the post-termination exercisability period of Options longer than is otherwise
provided for in the Plan;
-5-
<PAGE>
(xi) to allow Optionees to satisfy withholding tax obligations by
electing to have the Company withhold from the Shares to be issued upon exercise
of an Option or Stock Purchase Right that number of Shares having a Fair Market
Value equal to the amount required to be withheld. The Fair Market Value of the
Shares to be withheld shall be determined on the date that the amount of tax to
be withheld is to be determined. All elections by an Optionee to have Shares
withheld for this purpose shall be made in such form and under such conditions
as the Administrator may deem necessary or advisable;
(xii) to authorize any person to execute on behalf of the Company
any instrument required to effect the grant of an Option or Stock Purchase Right
previously granted by the Administrator;
(xiii) to make all other determinations deemed necessary or
advisable for administering the Plan.
(c) Effect of Administrator's Decision. The Administrator's decisions,
----------------------------------
determinations and interpretations shall be final and binding on all Optionees
and any other holders of Options or Stock Purchase Rights.
5. Eligibility. Nonstatutory Stock Options and Stock Purchase Rights may
-----------
be granted to Service Providers. Incentive Stock Options may be granted only to
Employees.
6. Limitations.
-----------
(a) Each Option shall be designated in the Option Agreement as either an
Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding
such designation, to the extent that the aggregate Fair Market Value of the
Shares with respect to which Incentive Stock Options are exercisable for the
first time by the Optionee during any calendar year (under all plans of the
Company and any Parent or Subsidiary) exceeds $100,000, such Options shall be
treated as Nonstatutory Stock Options. For purposes of this Section 6(a),
Incentive Stock Options shall be taken into account in the order in which they
were granted. The Fair Market Value of the Shares shall be determined as of the
time the Option with respect to such Shares is granted.
(b) Neither the Plan nor any Option or Stock Purchase Right shall confer
upon an Optionee any right with respect to continuing the Optionee's
relationship as a Service Provider with the Company, nor shall they interfere in
any way with the Optionee's right or the Company's right to terminate such
relationship at any time, with or without cause.
(c) The following limitations shall apply to grants of Options:
(i) No Service Provider shall be granted, in any fiscal year of the
Company, Options to purchase more than 1,000,000 Shares (as appropriately
adjusted pursuant to Section 13(a) ("Changes in Capitalization") hereof.
-6-
<PAGE>
(ii) The foregoing limitations shall be adjusted proportionately in
connection with any change in the Company's capitalization as described in
Section 13.
(iii) If an Option is cancelled in the same fiscal year of the
Company in which it was granted (other than in connection with a transaction
described in Section 13), the cancelled Option will be counted against the
limits set forth in subsection (i) above. For this purpose, if the exercise
price of an Option is reduced, the transaction will be treated as a cancellation
of the Option and the grant of a new Option.
7. Term of Plan. Subject to Section 19 of the Plan, the Plan shall become
------------
effective upon its adoption by the Board. It shall continue in effect for a
term of ten (10) years unless terminated earlier under Section 15 of the Plan.
8. Term of Option. The term of each Option shall be stated in the Option
--------------
Agreement. In the case of an Incentive Stock Option, the term shall be ten (10)
years from the date of grant or such shorter term as may be provided in the
Option Agreement. Moreover, in the case of an Incentive Stock Option granted to
an Optionee who, at the time the Incentive Stock Option is granted, owns stock
representing more than ten percent (10%) of the total combined voting power of
all classes of stock of the Company or any Parent or Subsidiary, the term of the
Incentive Stock Option shall be five (5) years from the date of grant or such
shorter term as may be provided in the Option Agreement.
9. Option Exercise Price and Consideration.
---------------------------------------
(a) Exercise Price. The per share exercise price for the Shares to be
--------------
issued pursuant to exercise of an Option shall be determined by the
Administrator, subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time the Incentive Stock
Option is granted, owns stock representing more than ten percent (10%) of the
voting power of all classes of stock of the Company or any Parent or Subsidiary,
the per Share exercise price shall be no less than 110% of the Fair Market Value
per Share on the date of grant.
(B) granted to any Employee other than an Employee described in
paragraph (A) immediately above, the per Share exercise price shall be no less
than 100% of the Fair Market Value per Share on the date of grant.
-7-
<PAGE>
(ii) In the case of a Nonstatutory Stock Option, the per Share
exercise price shall be determined by the Administrator. In the case of a
Nonstatutory Stock Option intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the per Share
exercise price shall be no less than 100% of the Fair Market Value per Share on
the date of grant.
(iii) Notwithstanding the foregoing, Options may be granted with a
per Share exercise price of less than 100% of the Fair Market Value per Share on
the date of grant pursuant to a merger or other corporate transaction.
(b) Waiting Period and Exercise Dates. At the time an Option is
---------------------------------
granted, the Administrator shall fix the period within which the Option may be
exercised and shall determine any conditions which must be satisfied before the
Option may be exercised.
(c) Form of Consideration. The Administrator shall determine the
---------------------
acceptable form of consideration for exercising an Option, including the method
of payment. In the case of an Incentive Stock Option, the Administrator shall
determine the acceptable form of consideration at the time of grant. Such
consideration may consist entirely of:
(i) cash;
(ii) check;
(iii) promissory note;
(iv) other Shares which (A) in the case of Shares acquired upon
exercise of an option, have been owned by the Optionee for more than six months
on the date of surrender, and (B) have a Fair Market Value on the date of
surrender equal to the aggregate exercise price of the Shares as to which said
Option shall be exercised;
(v) consideration received by the Company under a cashless exercise
program implemented by the Company in connection with the Plan;
(vi) a reduction in the amount of any Company liability to the
Optionee, including any liability attributable to the Optionee's participation
in any Company-sponsored deferred compensation program or arrangement;
(vii) any combination of the foregoing methods of payment; or
(viii) such other consideration and method of payment for the
issuance of Shares to the extent permitted by Applicable Laws.
10. Exercise of Option.
------------------
-8-
<PAGE>
(a) Procedure for Exercise; Rights as a Shareholder. Any Option granted
-----------------------------------------------
hereunder shall be exercisable according to the terms of the Plan and at such
times and under such conditions as determined by the Administrator and set forth
in the Option Agreement. Unless the Administrator provides otherwise, vesting
of Options granted hereunder shall be tolled during any unpaid leave of absence.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed exercised when the Company receives: (i)
written or electronic notice of exercise (in accordance with the Option
Agreement) from the person entitled to exercise the Option, and (ii) full
payment for the Shares with respect to which the Option is exercised. Full
payment may consist of any consideration and method of payment authorized by the
Administrator and permitted by the Option Agreement and the Plan. Shares issued
upon exercise of an Option shall be issued in the name of the Optionee or, if
requested by the Optionee, in the name of the Optionee and his or her spouse.
Until the Shares are issued (as evidenced by the appropriate entry on the books
of the Company or of a duly authorized transfer agent of the Company), no right
to vote or receive dividends or any other rights as a shareholder shall exist
with respect to the Optioned Stock, notwithstanding the exercise of the Option.
The Company shall issue (or cause to be issued) such Shares promptly after the
Option is exercised. No adjustment will be made for a dividend or other right
for which the record date is prior to the date the Shares are issued, except as
provided in Section 13 of the Plan.
Exercising an Option in any manner shall decrease the number of
Shares thereafter available, both for purposes of the Plan and for sale under
the Option, by the number of Shares as to which the Option is exercised.
(b) Termination of Relationship as a Service Provider. If an Optionee
-------------------------------------------------
ceases to be a Service Provider, other than upon the Optionee's death or
Disability, the Optionee may exercise his or her Option within such period of
time as is specified in the Option Agreement to the extent that the Option is
vested on the date of termination (but in no event later than the expiration of
the term of such Option as set forth in the Option Agreement). In the absence
of a specified time in the Option Agreement, the Option shall remain exercisable
for three (3) months following the Optionee's termination. If, on the date of
termination, the Optionee is not vested as to his or her entire Option, the
Shares covered by the unvested portion of the Option shall revert to the Plan.
If, after termination, the Optionee does not exercise his or her Option within
the time specified by the Administrator, the Option shall terminate, and the
Shares covered by such Option shall revert to the Plan.
(c) Disability of Optionee. If an Optionee ceases to be a Service
----------------------
Provider as a result of the Optionee's Disability, the Optionee may exercise his
or her Option within such period of time as is specified in the Option Agreement
to the extent the Option is vested on the date of termination (but in no event
later than the expiration of the term of such Option as set forth in the Option
Agreement). In the absence of a specified time in the Option Agreement, the
Option shall remain exercisable for twelve (12) months following the Optionee's
termination. If, on the date of termination, the Optionee is not vested as to
his or her entire Option, the Shares covered by the
-9-
<PAGE>
unvested portion of the Option shall revert to the Plan. If, after termination,
the Optionee does not exercise his or her Option within the time specified
herein, the Option shall terminate, and the Shares covered by such Option shall
revert to the Plan.
(d) Death of Optionee. If an Optionee dies while a Service Provider,
-----------------
the Option may be exercised within such period of time as is specified in the
Option Agreement (but in no event later than the expiration of the term of such
Option as set forth in the Notice of Grant), by the Optionee's estate or by a
person who acquires the right to exercise the Option by bequest or inheritance,
but only to the extent that the Option is vested on the date of death. In the
absence of a specified time in the Option Agreement, the Option shall remain
exercisable for twelve (12) months following the Optionee's termination. If, at
the time of death, the Optionee is not vested as to his or her entire Option,
the Shares covered by the unvested portion of the Option shall immediately
revert to the Plan. The Option may be exercised by the executor or
administrator of the Optionee's estate or, if none, by the person(s) entitled to
exercise the Option under the Optionee's will or the laws of descent or
distribution. If the Option is not so exercised within the time specified
herein, the Option shall terminate, and the Shares covered by such Option shall
revert to the Plan.
(e) Buyout Provisions. The Administrator may at any time offer to buy
-----------------
out for a payment in cash or Shares an Option previously granted based on such
terms and conditions as the Administrator shall establish and communicate to the
Optionee at the time that such offer is made.
11. Stock Purchase Rights.
---------------------
(a) Rights to Purchase. Stock Purchase Rights may be issued either
------------------
alone, in addition to, or in tandem with other awards granted under the Plan
and/or cash awards made outside of the Plan. After the Administrator determines
that it will offer Stock Purchase Rights under the Plan, it shall advise the
offeree in writing or electronically, by means of a Notice of Grant, of the
terms, conditions and restrictions related to the offer, including the number of
Shares that the offeree shall be entitled to purchase, the price to be paid, and
the time within which the offeree must accept such offer. The offer shall be
accepted by execution of a Restricted Stock Purchase Agreement in the form
determined by the Administrator.
(b) Repurchase Option. Unless the Administrator determines otherwise,
-----------------
the Restricted Stock Purchase Agreement shall grant the Company a repurchase
option exercisable upon the voluntary or involuntary termination of the
purchaser's service with the Company for any reason (including death or
Disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock Purchase Agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option shall lapse at a rate determined by the
Administrator.
(c) Other Provisions. The Restricted Stock Purchase Agreement shall
----------------
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the Administrator in its sole discretion.
-10-
<PAGE>
(d) Rights as a Shareholder. Once the Stock Purchase Right is
-----------------------
exercised, the purchaser shall have the rights equivalent to those of a
shareholder, and shall be a shareholder when his or her purchase is entered upon
the records of the duly authorized transfer agent of the Company. No adjustment
will be made for a dividend or other right for which the record date is prior to
the date the Stock Purchase Right is exercised, except as provided in Section 13
of the Plan.
12. Non-Transferability of Options and Stock Purchase Rights. Unless
--------------------------------------------------------
determined otherwise by the Administrator, an Option or Stock Purchase Right may
not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any
manner other than by will or by the laws of descent or distribution and may be
exercised, during the lifetime of the Optionee, only by the Optionee. If the
Administrator makes an Option or Stock Purchase Right transferable, such Option
or Stock Purchase Right shall contain such additional terms and conditions as
the Administrator deems appropriate.
13. Adjustments Upon Changes in Capitalization, Dissolution, Merger or Asset
------------------------------------------------------------------------
Sale.
----
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option and Stock Purchase Right, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or which have
been returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, as well as the price per share of Common Stock covered by each
such outstanding Option or Stock Purchase Right and the limitations on issuance
as set forth in Sections 6(c)(i) and 6(c)(ii) hereof, 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 issued 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 or Stock
Purchase Right.
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Administrator shall notify each
Optionee as soon as practicable prior to the effective date of such proposed
transaction. The Administrator in its discretion may provide for an Optionee to
have the right to exercise his or her Option until ten (10) days prior to such
transaction as to all of the Optioned Stock covered thereby, including Shares as
to which the Option would not otherwise be exercisable. In addition, the
Administrator may provide that any Company repurchase option applicable to any
Shares purchased upon exercise of an Option or Stock Purchase Right shall
-11-
<PAGE>
lapse as to all such Shares, provided the proposed dissolution or liquidation
takes place at the time and in the manner contemplated. To the extent it has not
been previously exercised, an Option or Stock Purchase Right will terminate
immediately prior to the consummation of such proposed action.
(c) Merger or Asset Sale. In the event of a merger of the Company with
--------------------
or into another corporation, or the sale of substantially all of the assets of
the Company, each outstanding Option and Stock Purchase Right shall be assumed
or an equivalent option or right substituted by the successor corporation or a
Parent or Subsidiary of the successor corporation. In the event that the
successor corporation refuses to assume or substitute for the Option or Stock
Purchase Right, the Optionee shall fully vest in and have the right to exercise
the Option or Stock Purchase Right as to all of the Optioned Stock, including
Shares as to which it would not otherwise be vested or exercisable. If an
Option or Stock Purchase Right becomes fully vested and exercisable in lieu of
assumption or substitution in the event of a merger or sale of assets, the
Administrator shall notify the Optionee in writing or electronically that the
Option or Stock Purchase Right shall be fully vested and exercisable for a
period of fifteen (15) days from the date of such notice, and the Option or
Stock Purchase Right shall terminate upon the expiration of such period. For
the purposes of this paragraph, the Option or Stock Purchase Right shall be
considered assumed if, following the merger or sale of assets, the option or
right confers the right to purchase or receive, for each Share of Optioned Stock
subject to the Option or Stock Purchase Right immediately prior to the merger or
sale of assets, the consideration (whether stock, cash, or other securities or
property) received in the merger or sale of assets by holders of Common Stock
for each Share held on the effective date of the transaction (and if holders
were offered a choice of consideration, the type of consideration chosen by the
holders of a majority of the outstanding Shares); provided, however, that if
such consideration received in the merger or sale of assets is not solely common
stock of the successor corporation or its Parent, the Administrator may, with
the consent of the successor corporation, provide for the consideration to be
received upon the exercise of the Option or Stock Purchase Right, for each Share
of Optioned Stock subject to the Option or Stock Purchase Right, 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 in the
merger or sale of assets.
14. Date of Grant. The date of grant of an Option or Stock Purchase Right
-------------
shall be, for all purposes, the date on which the Administrator makes the
determination granting such Option or Stock Purchase Right, or such other later
date as is determined by the Administrator. Notice of the determination shall
be provided to each Optionee within a reasonable time after the date of such
grant.
15. Amendment and Termination of the Plan.
-------------------------------------
(a) Amendment and Termination. The Board may at any time amend, alter,
-------------------------
suspend or terminate the Plan.
-12-
<PAGE>
(b) Shareholder Approval. The Company shall obtain shareholder approval
--------------------
of any Plan amendment to the extent necessary and desirable to comply with
Applicable Laws.
(c) Effect of Amendment or Termination. No amendment, alteration,
----------------------------------
suspension or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.
Termination of the Plan shall not affect the Administrator's ability to exercise
the powers granted to it hereunder with respect to Options granted under the
Plan prior to the date of such termination.
16. Conditions Upon Issuance of Shares.
----------------------------------
(a) Legal Compliance. Shares shall not be issued pursuant to the
----------------
exercise of an Option or Stock Purchase Right unless the exercise of such Option
or Stock Purchase Right and the issuance and delivery of such Shares shall
comply with Applicable Laws and shall be further subject to the approval of
counsel for the Company with respect to such compliance.
(b) Investment Representations. As a condition to the exercise of an
--------------------------
Option or Stock Purchase Right, the Company may require the person exercising
such Option or Stock Purchase Right 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.
17. Inability to Obtain Authority. The inability of the Company to obtain
-----------------------------
authority from any regulatory body having jurisdiction, which authority is
deemed by the Company's counsel to be necessary to the lawful issuance and sale
of any Shares hereunder, shall relieve the Company of any liability in respect
of the failure to issue or sell such Shares as to which such requisite authority
shall not have been obtained.
18. Reservation of Shares. The Company, during the term of this Plan, will
---------------------
at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
19. Shareholder Approval. The Plan shall be subject to approval by the
--------------------
shareholders of the Company within twelve (12) months after the date the Plan is
adopted. Such shareholder approval shall be obtained in the manner and to the
degree required under Applicable Laws.
-13-
<PAGE>
Exhibit 4.2
RATIONAL SOFTWARE CORPORATION
1998 EMPLOYEE STOCK PURCHASE PLAN
The following constitute the provisions of the 1998 Employee Stock Purchase
Plan (herein called the "Plan") of Rational Software Corporation (herein called
the "Company").
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. The provisions of
the Plan shall, accordingly, 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, a Delaware
-------
corporation and any Designated Subsidiary of the Company.
(e) "Compensation," unless otherwise determined by the Board, shall
------------
mean all regular straight time earnings, including commissions, but exclusive of
payments for overtime, shift premium, incentive compensation, incentive
payments, bonuses, or other compensation.
(f) "Continuous Status as an Employee" shall mean the absence of any
--------------------------------
interruption or termination of service as an Employee. Continuous Status as an
Employee shall not be considered interrupted in the case of a leave of absence
agreed to in writing by the Company, provided that such leave is for a period of
not more than 90 days or reemployment upon the expiration of such leave is
guaranteed by contract or statute.
(g) "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.
<PAGE>
(h) "Employee" shall mean any person, including an officer, who is
--------
customarily employed for at least twenty (20) hours per week and more than five
(5) months in a calendar year by the Company or one of its Designated
Subsidiaries.
(i) "Exercise Date," unless otherwise determined by the Board, shall
-------------
mean the last Trading Day of each Exercise Period.
(j) "Exercise Period," unless otherwise determined by the Board, shall
---------------
mean a period commencing on an Offering Date or on the day after an Exercise
Date and terminating on the last Trading Day before the commencement of the next
Offering Period under the Plan.
(k) "Offering Period," unless otherwise set forth herein or determined
---------------
by the Board, shall mean a period of twenty-four (24) months consisting of four
(4) six-month Exercise Periods during which options granted pursuant to the Plan
may be exercised.
(l) "Offering Date," unless otherwise determined by the Board, shall
-------------
mean the first day of each Offering Period of the Plan.
(m) "Plan" shall mean this 1998 Employee Stock Purchase Plan.
----
(n) "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.
(o) "Trading Day" shall mean a day on which the principal stock
-----------
exchange or quotation system on which the Company's stock is traded is open for
trading.
3. Eligibility.
-----------
(a) Any Employee as defined in paragraph 2 who shall be employed by
the Company on the Offering Date shall be eligible to participate in the Plan,
subject to limitations imposed by Section 423(b) of the Code.
(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 stock and/or
hold outstanding options to purchase stock possessing five percent (5%) or more
of the total combined voting power or value of all classes of stock of the
Company or of any subsidiary of the Company, or (ii) which permits such
Employee's 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) of fair market value of such stock (determined at the
time such option is granted) for each calendar year in which such option is
outstanding at any time.
4. Offering Periods. Unless otherwise determined by the Board, the Plan
----------------
shall be implemented by consecutive, overlapping twenty-four (24) month Offering
Periods beginning every six
<PAGE>
(6) months on the first Trading Day on or after May 1 and November 1 of each
year, until terminated in accordance with Section 20 hereof; provided that, the
first Offering Period (the "First Offering Period") shall begin on the first
Trading Day after the Company's Annual Meeting on July 16, 1998 and shall end on
the last Trading Day before November 1, 1999. The Board of Directors of the
Company shall have the power to change the commencement date, termination date
and duration of offering periods with respect to future offerings without
stockholder approval at any time.
5. Participation.
-------------
(a) An eligible Employee may become a participant in the Plan by
completing a subscription agreement authorizing payroll deductions on the form
provided by the Company and filing it with the Company's payroll office at least
one week prior to the applicable Offering Date, unless a later time for filing
the subscription agreement is set by the Board for all eligible Employees with
respect to a given offering.
(b) Payroll deductions for a participant shall continue at the rate
specified in the subscription agreement throughout an Offering Period with
automatic re-enrollment for the Offering Period which commences the day after
the last Exercise Date of any Offering Period at the same rate specified in the
original subscription agreement, subject to any change in subscription rate made
pursuant to Section 6(c) or (d), unless sooner terminated by the participant as
provided in Section 11.
6. Payroll Deductions.
------------------
(a) At the time a participant files his or her subscription agreement,
such participant shall elect to have payroll deductions made on each payday
during the Offering Period in an amount not exceeding ten percent (10%) of his
or her Compensation on each payroll date. The aggregate of such payroll
deductions during any Offering Period shall not exceed ten percent (10%) of his
or her aggregate Compensation during said Offering Period. Any Employee
electing to participate in the First Offering Period who is simultaneously
participating in the Company's 1994 Employee Stock Purchase Plan (the "1994
Plan") may elect to have such Employee's contributions under this Plan for such
period include the amount, if any, contributed under the 1994 Plan that would
otherwise be returned to such Employee in the event of a pro rata distribution
pursuant to Section 12(a) of the 1994 Plan on October 30, 1998, provided,
--------
however, that the total amount contributed under the Plan and the 1994 Plan may
- -------
not exceed 10% of such Employee's Compensation.
(b) All payroll deductions made by 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 11, 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 form provided by the Company notifying the payroll office of such
withdrawal or reduction of withholding rate. The change in rate shall be
effective as of
<PAGE>
the next pay date following five (5) business days after the Company's receipt
of the form or at such other time as the Company and the participant may agree.
(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 Exercise
Period which is scheduled to end during the current calendar year. Payroll
deductions shall recommence at the rate provided in such participant's
subscription agreement at the beginning of the first Exercise Period which is
scheduled to end in the following calendar year, unless terminated by the
participant as provided in Section 11 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 shall 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.
---------------
(a) Unless otherwise determined by the Board, on the Offering Date of
each Offering Period, each eligible Employee participating in the Plan shall be
granted an option to purchase on each Exercise Date during such Offering Period
(at the per share option price) up to a number of shares of the Company's Common
Stock determined by dividing such Employee's payroll deductions to be
accumulated prior to such Exercise Date by the lower of (i) eighty-five percent
(85%) of the fair market value of a share of the Company's Common Stock on the
Offering Date or (ii) eighty-five percent (85%) of the fair market value of a
share of the Company's Common Stock on the Exercise Date; provided that in no
event shall an Employee be permitted to purchase during an Exercise Period a
number of shares in excess of a number determined by dividing $12,500 by the
fair market value of a share of the Company's Common Stock on the Offering Date,
and provided further that such purchase shall be subject to the limitations set
forth in Sections 3(b) and 13 hereof. The Board may, for future Offering
Periods, increase or decrease, in its absolute discretion, the maximum number of
shares of the Company's Common Stock an Employee may purchase during each
Exercise Period of such Offering Period. Exercise of the option shall occur as
provided in Section 8 hereof, unless the participant has withdrawn pursuant to
Section 11 hereof. The option shall expire on the last day of the Offering
Period. Fair market value of a share of the Company's Common Stock shall be
determined as provided in Section 7(b) herein.
(b) Unless otherwise determined by the Board, the option price per
share of the shares offered in a given Exercise Period shall be the lower of:
(i) 85% of the fair market value of a share of the Common Stock of the Company
on the Offering Date; or (ii) 85% of the fair market value of a share of the
Common Stock of the Company on the Exercise Date. The fair market value of the
<PAGE>
Company's Common Stock on a given date shall be the closing price as quoted on
the Nasdaq Stock Market, Inc.'s National Market or, if traded on a securities
exchange, the closing price on such exchange.
8. Exercise of Option. Unless a participant withdraws from the Plan as
------------------
provided in Section 11, his or her option for the purchase of shares will be
exercised automatically on each Exercise Date of the Offering Period, and the
maximum number of full shares subject to option will be purchased for him or her
at the applicable option price with the accumulated payroll deductions in his or
her account. During his or her lifetime, a participant's option to purchase
shares hereunder is exercisable only by him or her.
9. Delivery. As promptly as practicable after the Exercise Date of each
--------
offering, 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. Any cash remaining which is insufficient to purchase a full
share of Common Stock at the termination of each Exercise Period shall be
applied to such participant's account in the subsequent Exercise Period unless
the participant requests withdrawal of such cash.
10. Automatic Transfer to Low Price Offering Period. Unless otherwise
-----------------------------------------------
determined by the Board, in the event that the fair market value of the
Company's Common Stock is lower on an Exercise Date than it was on the first
Offering Date for that Offering Period, all Employees participating in the Plan
on the Exercise Date shall be deemed to have withdrawn from the Offering Period
immediately after the exercise of their option on such Exercise Date and to have
enrolled as participants in a new Offering Period which begins on or about the
day following such Exercise Date. A participant may elect to remain in the
previous Offering Period by filing a written statement declaring such election
with the Company prior to the time of the automatic change to the new Offering
Period.
11. 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 such
participant's option under the Plan at any time prior to the Exercise Date of
the Offering Period by giving written notice to the Company. All of the
participant's payroll deductions credited to his or her account will be paid to
him or her at the next pay date after receipt of his or her notice of withdrawal
and his or her option for the current period will be automatically terminated,
and no further payroll deductions for the purchase of shares will be made during
the Offering Period. If a participant withdraws from an Offering Period,
payroll deductions shall not resume at the beginning of the succeeding Offering
Period unless the participant delivers to the Company a new subscription
agreement.
(b) Upon termination of the participant's Continuous Status as an
Employee prior to the Exercise Date for any reason, including retirement or
death, the payroll deductions credited to his or her account will be returned to
the participant's or, in the case the of participant's death, to the person or
persons entitled thereto under Section 15, and his or her 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
<PAGE>
of hours per week of employment during the period in which the participant is
subject to such payment in lieu of notice.
(c) A participant's withdrawal from an offering will not have any
effect upon his or her eligibility to participate in a succeeding offering or in
any similar plan which may hereafter be adopted by the Company.
12. Interest. No interest shall accrue on the payroll deductions of a
--------
participant in the Plan.
13. Stock.
-----
(a) The maximum number of shares of the Company's Common Stock which
shall be made available for sale under the Plan shall be 2,000,000 shares, plus
a semi-annual increase to be made on the first Trading Day on or after May 1 and
November 1 of each year (the "Refreshment Date") equal to the lesser of (i) such
number of shares as is required to cause the number of shares reserved hereunder
to equal 2,000,000 as of the Refreshment Date after having given effect to all
option exercises on the immediately preceding Exercise Date or (ii) a lesser
amount determined by the Board, subject to adjustment upon changes in
capitalization of the Company as provided in Section 19 hereof. Unless
otherwise determined by the Board, if the total number of shares which would
otherwise be subject to options granted pursuant to Section 7(a) hereof on the
Exercise Date of an Offering Period exceeds the number of shares then available
under the Plan, the Company shall make a pro rata allocation of the shares
remaining available for option grant in as uniform a manner as shall be
practicable and as it shall determine to be equitable. In such event, the
Company shall give written notice of such reduction of the number of shares
subject to the option to each Employee affected thereby and shall similarly
reduce the rate of payroll deductions, if necessary.
(b) The participant will have no interest or voting right in shares
covered by his or her 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.
14. Administration. The Plan shall be administered by the Board of
--------------
Directors of the Company or a committee appointed by the Board. The
administration, interpretation or application of the Plan by the Board or its
committee shall be final, conclusive and binding upon all participants.
15. 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 the end of the
offering period 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 account under the
Plan in the event of such participant's death prior to the Exercise Date of the
offering period. If a participant is married and the designated beneficiary is
not the spouse, spousal consent shall be required for such designation to be
effective.
<PAGE>
(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.
16. 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 15 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 in accordance with Section 11.
17. 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.
18. Reports. Individual accounts will be maintained for each participant
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in the Plan. Statements of account will be given to participating Employees
annually promptly following the Exercise Date, which statements will set forth
the amounts of payroll deductions, the per share purchase price, the number of
shares purchased and the remaining cash balance, if any.
19. Adjustments Upon Changes in Capitalization. Subject to any required
------------------------------------------
action by the stockholders of the Company, the number of shares of Common Stock
covered by each option under the Plan which has not yet been exercised and the
number of shares of Common Stock which have been authorized for issuance under
the Plan but have not yet been placed under option (collectively, 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 or the payment of a stock dividend (but only
on 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
issue 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.
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
<PAGE>
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
(collectively, a "Successor"); provided, that if the Successor fails to assume
or substitute for each option, then the Exercise Date for all Offering Periods
then in effect shall be the date one day prior to the closing of such asset sale
or merger and the Plan shall terminate immediately thereafter. If the Exercise
Date for options is accelerated pursuant to the foregoing sentence, the Board
shall notify each participant of such acceleration at least ten (10) days prior
to the new Exercise Date.
The Board may, if it so determines in the exercise of its sole discretion,
also make provision for adjusting the Reserves, as well as the price per share
of Common Stock covered by each outstanding option, in the event that the
Company effects one or more reorganizations, recapitalizations, rights offerings
or other increases or reductions of shares of its outstanding Common Stock.
20. Amendment or Termination. The Board of Directors of the Company may
------------------------
at any time amend in any manner or terminate the Plan and may terminate any
Exercise Period or Offering Period by accelerating the date that such Exercise
Period or Offering Period shall end. In addition, to the extent necessary to
comply with Section 423 of the Code (or any successor rule or provision or any
other applicable law or regulation), the Company shall obtain stockholder
approval in such a manner and to such a degree as so required.
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 and/or
Exercise 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.
21. 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.
22. 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.
<PAGE>
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.
23. 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
stockholders of the Company. It shall continue in effect for a term of ten (10)
years unless sooner terminated under paragraph 20.
RATIONAL SOFTWARE CORPORATION
-----------------------------
1998 EMPLOYEE STOCK PURCHASE PLAN
---------------------------------
SUBSCRIPTION AGREEMENT
----------------------
_____ Original Application Date:___________________________
_____ Change in Payroll Deduction Rate
_____ Change of Beneficiary(ies)
1. __________________________________ hereby elects to participate in the
Rational Software Corporation Employee Stock Purchase Plan (the "Stock
Purchase Plan") and subscribes to purchase shares of the Company's Common
Stock, without par value, in accordance with this Subscription Agreement
and the Stock Purchase Plan.
2. I hereby authorize payroll deductions from each paycheck in the amount of
_____% (maximum 10%) of my Compensation on each payday during the Offering
Period in accordance with the Stock Purchase Plan, provided, however, that
--------
if I am currently participating in the Company's 1994 Employee Stock
Purchase Plan (the "1994 Plan"), then during the First Offering Period (as
defined in the Stock Purchase Plan) I hereby elect to contribute to the
Stock Purchase Plan such amount as would otherwise be returned to me in the
event of a pro rata distribution pursuant to Section 12(a) of the 1994 Plan
on October 30, 1998 in lieu of the foregoing contribution in the First
Offering Period only. Such deductions are to continue for succeeding
Offering Periods until I give written instructions for a change in or
termination of such deductions.
3. I understand that said payroll deductions shall be accumulated for the
purchase of shares of Common Stock, without par value, at the applicable
purchase price determined in accordance with the Stock Purchase Plan. I
further understand that, except as otherwise set forth in the Stock
Purchase Plan, shares will be purchased for me automatically on each
Exercise Date of the offering period unless I otherwise withdraw from the
Stock Purchase Plan by giving written notice to the Company for such
purpose.
<PAGE>
4. I have received a copy of the complete "Rational Software Corporation
Employee Stock Purchase Plan." I understand that my participation in the
Stock Purchase Plan is in all respects subject to the terms of the Plan. I
have been provided with a prospectus describing the Stock Purchase Plan. I
understand that I may withdraw from the Stock Purchase Plan and have
payroll deductions refunded (without interest) on the next payroll date
following notice of withdrawal at any time during the Offering Period.
5. Shares purchased for me under the Stock Purchase Plan should be issued in
the name(s) of:
____________________________________________________________________.
6. I understand that if I dispose of any shares received by me pursuant to the
Stock Purchase Plan within 2 years after the Offering Date (the first day
of the offering period during which I purchased such shares) or within one
year after the date on which such shares were transferred to me, I will be
treated for federal income tax purposes as having received ordinary income
at the time of such disposition in an amount equal to the excess of the
fair market value of the shares at the time such shares were transferred to
me over the price which I paid for the shares, and that I may be required
to provide income tax withholding on that amount. I hereby agree to notify
------------------------
the Company in writing within 30 days after the date of any such
----------------------------------------------------------------
disposition. However, if I dispose of such shares at any time after the
-----------
expiration of the two-year and one-year holding periods, I understand that
I will be treated for federal income tax purposes as having received income
only at the time of such disposition, and that such income will be treated
as ordinary income only to the extent of an amount equal to the lesser of
(1) the excess of the fair market value of the shares at the time of such
disposition over the purchase price which I paid for the shares under the
option, or (2) the excess of the fair market value of the shares over the
option price, measured as if the option had been exercised on the Offering
Date. The remainder of the gain or loss, if any, recognized on such
disposition will be treated as capital gain or loss. The federal income
tax treatment of ordinary income and capital gain and loss is described in
the Company's prospectus relating to the Stock Purchase Plan.
7. I hereby agree to be bound by the terms of the Stock Purchase Plan. The
effectiveness of this Subscription Agreement is dependent upon my
eligibility to participate in the Stock Purchase Plan.
8. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due me under the Stock
Purchase Plan:
NAME: (Please print)_________________________________________________________
(First) (Middle) (Last)
Relationship
(Address)
<PAGE>
NAME: (Please print)_________________________________________________________
(First) (Middle) (Last)
Relationship
(Address)
Employee's Social
Security Number: ________________________
Employee's Address:*______________________________________________
I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT
SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME.
Dated:______________ ____________________________________________
Signature of Employee
_______
* It is the participant's responsibility to notify the Company's stock
administrator in the event of a change of address.
<PAGE>
Exhibit 5.1
July 31, 1998
Rational Software Corporation
18880 Homestead Road
Cupertino, CA 95014
Re: REGISTRATION STATEMENT ON FORM S-8
----------------------------------
Gentlemen:
We have examined the Registration Statement on Form S-8 to be filed by you
with the Securities and Exchange Commission on or about the date hereof (the
"Registration Statement") in connection with the registration under the
Securities Act of 1933, as amended, of 6,350,000 shares of your Common Stock
(the "Option Shares") reserved for issuance under the 1997 Stock Option Plan,
the 1998 Employee Stock Purchase Plan and the Directors' Stock Option Plan (the
"Plans"). As your legal counsel, we have examined the proceedings taken and are
familiar with the proceedings proposed to be taken by you in connection with the
sale and issuance of the Option Shares under the Plans. In addition, for
purposes of this opinion we have assumed that the consideration received by the
Company in connection with each issuance of the Option Shares will include an
amount in the form of cash, services rendered or property that exceeds the
greater of (i) the aggregate par value of such Option Shares or (ii) the portion
of such consideration determined by the Company's Board of Directors to be
"capital" for purposes of the Delaware General Corporation Law.
Based upon the foregoing, it is our opinion that, when issued and sold in
the manner referred to in the Plans and pursuant to the agreements which
accompany the Plans, the Option Shares issued and sold thereby will be legally
and validly issued, fully paid and non-assessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to the use of our name wherever appearing in the
Registration Statement, including any Prospectus constituting a part thereof,
and any amendments thereto. This opinion may be incorporated by reference in
any abbreviated registration statement filed pursuant to General Instruction E
of Form S-8 under the Securities Act with respect to the Registration Statement.
Very truly yours,
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
/s/ Wilson Sonsini Goodrich & Rosati
<PAGE>
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statement (Form S-8) pertaining to the Rational Software Corporation 1997
Stock Option Plan, 1998 Employee Stock Purchase Plan and Directors' Stock
Option Plan of Rational Software Corporation of our reports dated April 21,
1998, except for Note Fifteen, as to which the date is April 23, 1998, with
respect to the consolidated financial statements of Rational Software
Corporation included in its Annual Report (Form 10-K) for the year ended March
31, 1998 and the related financial statement schedule included therein, filed
with the Securities and Exchange Commission.
/s/ Ernst & Young LLP
Palo Alto, California
July 30, 1998
