<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of
1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to 240.14a-11(c) or 240.14a-12
MERCURY INTERACTIVE 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 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 Act Rule 0-11: ______________________________________
(See 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 _____________________________________________________________:
<PAGE>
MERCURY INTERACTIVE CORPORATION
----------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 20, 1998
TO THE STOCKHOLDERS OF MERCURY INTERACTIVE CORPORATION:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of MERCURY
INTERACTIVE CORPORATION (the "Company"), a Delaware corporation, will be held
at 10:00 a.m., local time, on May 20, 1998, at the Company's corporate offices
at 1325 Borregas Avenue, Sunnyvale, California 94089, for the following
purposes:
1. To elect five (5) directors to serve for the ensuing year and until
their successors are elected.
2. To approve an amendment to the Company's Restated Certificate of
Incorporation to increase the authorized number of shares of Common Stock
of the Company to 60,000,000.
3. To ratify and approve: (i) the adoption of the 1998 Stock Option Plan
and the 1998 Employee Stock Purchase Plan to replace the 1989 Stock Option
Plan and the 1993 Employee Stock Purchase Plan, respectively, (ii) the
amendment of the 1994 Directors' Stock Option Plan to increase the number
of shares granted as an initial grant to new non-employee directors and an
annual grant to continuing non-employee directors of the Company, and to
provide for a one time grant to the non-employee directors of the Company
who are elected to serve as directors at the 1998 Annual Meeting of
Stockholders; (iii) the reservation of an aggregate of 3,000,000 shares of
Common Stock for issuance under the 1998 Stock Option Plan, the 1998
Employee Stock Purchase Plan and the Amended 1994 Directors' Stock Option
Plan, and the allocation of such shares amongst such plans as determined by
the Board of Directors of the Company; and (iv) to automatically increase
each year the aggregate number of shares reserved for issuance under the
Company's 1998 Stock Option Plan, the 1998 Employee Stock Purchase Plan and
the Amended 1994 Directors' Stock Option Plan by 6% of the Common Stock and
equivalents outstanding as of January 1 of each year starting in 1999 and
ending in 2008 upon the termination of the option plans.
4. To ratify the appointment of Price Waterhouse LLP as independent
auditors of the Company for the year ending December 31, 1998.
5. To transact such other business as may properly come before the
meeting or any postponements or adjournments thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
Only stockholders of record at the close of business on March 31, 1998 are
entitled to notice of and to vote at the Annual Meeting.
All stockholders are cordially invited to attend the Annual Meeting in
person; however, to ensure your representation at the meeting you are urged to
mark, sign, date and return the enclosed proxy card as promptly as possible in
the postage prepaid envelope enclosed for that purpose. YOU MAY REVOKE YOUR
PROXY IN THE MANNER DESCRIBED IN THE ACCOMPANYING PROXY STATEMENT AT ANY TIME
BEFORE IT HAS BEEN VOTED AT THE ANNUAL MEETING. ANY STOCKHOLDER ATTENDING THE
ANNUAL MEETING MAY VOTE IN PERSON EVEN IF HE OR SHE HAS RETURNED A PROXY.
By Order of the Board of Directors,
Sharlene Abrams
Secretary
Sunnyvale, California
April 17, 1998
<PAGE>
MERCURY INTERACTIVE CORPORATION
PROXY STATEMENT FOR THE
MERCURY INTERACTIVE CORPORATION
1998 ANNUAL MEETING OF STOCKHOLDERS
----------------
INFORMATION CONCERNING SOLICITATION AND VOTING
GENERAL
The enclosed proxy is solicited on behalf of MERCURY INTERACTIVE CORPORATION
(the "Company") for use at the Annual Meeting of Stockholders to be held on
May 20, 1998 at 10:00 a.m. local time, or at any adjournment or postponement
thereof, for the purposes set forth herein and in the accompanying Notice of
Annual Meeting of Stockholders. The Annual Meeting will be held at the
Company's corporate offices at 1325 Borregas Avenue, Sunnyvale, California
94089. The telephone number at that location is (408) 822-5200. When proxies
are properly dated, executed and returned, the shares they represent will be
voted at the meeting in accordance with the instructions of the stockholder.
If no specific instructions are given, the shares will be voted for the
election of the nominees for directors set forth herein, for the ratification
of the appointment of Price Waterhouse LLP as independent auditors as set
forth herein, and at the discretion of the proxyholders, upon such other
business as may properly come before the meeting or any adjournment or
postponement thereof.
These proxy solicitation materials and the Annual Report to Stockholders for
the year ended December 31, 1997, including financial statements, were first
mailed on or about April 20, 1998, to all stockholders entitled to vote at the
meeting.
RECORD DATE AND VOTING SECURITIES
Stockholders of record at the close of business on March 31, 1998 are
entitled to notice of and to vote at the meeting. At the record date,
17,200,654 shares of the Company's Common Stock, $0.002 par value, were issued
and outstanding. No shares of the Company's Preferred Stock were outstanding.
REVOCABILITY OF PROXIES
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by (i) filing
with the Secretary of the Company at or before the taking of the vote at the
Annual Meeting a written notice of revocation bearing a later date than the
proxy, (ii) duly executing a later dated proxy relating to the same shares and
delivering it to the Secretary of the Company at or before the taking of the
vote at the Annual Meeting, or (iii) attending the Annual Meeting and voting
in person (although attendance at the Annual Meeting will not in and of itself
constitute a revocation of a proxy). Any written notice of revocation or
subsequent proxy should be delivered to MERCURY INTERACTIVE CORPORATION at
1325 Borregas Avenue, Sunnyvale, California 94089, Attention: Secretary, or
hand-delivered to the Secretary of the Company at or before the taking of the
vote at the Annual Meeting.
VOTING AND SOLICITATION
On all matters, each share has one vote.
The cost of soliciting proxies will be borne by the Company and is estimated
to be $3,500. The Company has retained Skinner & Company to assist in its
solicitation of proxies from brokers, nominees, institutions and individuals.
Arrangements will also be made with custodians, nominees and fiduciaries for
forwarding of proxy solicitation materials to beneficial owners of shares held
of record by such custodians, nominees and fiduciaries. The Company will
reimburse such custodians, nominees and fiduciaries for reasonable expenses
incurred in connection therewith. In addition, proxies may be solicited by
directors, officers and employees of the Company
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in person or by telephone, telegram or other means of communication. No
additional compensation will be paid for such services.
QUORUM; ABSTENTIONS; BROKER NON-VOTES
The required quorum for the transaction of business at the Annual Meeting is
a majority of the votes eligible to be cast by holders of shares of Common
Stock issued and outstanding on the Record Date. Shares that are voted "FOR,"
"AGAINST," or "WITHHELD FROM" on a matter are treated as being present at the
meeting for purposes of establishing a quorum and are also treated as shares
entitled to vote at the Annual Meeting (the "Votes Cast") with respect to such
matter.
While there is no definitive statutory or case law authority in Delaware as
to the proper treatment of abstentions, 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 Votes
Cast with respect to a proposal (other than the election of directors). In the
absence of controlling precedent to the contrary, the Company intends to treat
abstentions in this manner. Accordingly, abstentions will have the same effect
as a vote against the proposal.
In a 1988 Delaware case, Berlin v. Emerald Partners, the Delaware Supreme
Court held that, while broker non-votes should 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 Votes Cast with respect to the particular proposal on which the
broker has expressly not voted. Accordingly, the Company intends to treat
broker non-votes in this manner. Thus, a broker non-vote will not affect the
outcome of the voting on a proposal.
STOCKHOLDER PROPOSALS FOR NEXT ANNUAL MEETING
The Company currently intends to hold its 1998 Annual Meeting of
Stockholders in mid-May 1999 and to mail Proxy Statements relating to such
meeting in mid-April 1999 The date by which stockholder proposals must be
received by the Company for inclusion in the Proxy Statement and form of proxy
for its 1999 Annual Meeting of Stockholders, is November 26, 1998. Such
stockholder proposals should be submitted to MERCURY INTERACTIVE CORPORATION
at 1325 Borregas Avenue, Sunnyvale, California 94089, Attention: Secretary.
PROPOSAL NO. 1
ELECTION OF DIRECTORS
NOMINEES
The Company currently has five (5) directors. A board of five (5) directors
is to be elected at the Annual Meeting. Unless otherwise instructed, the
proxyholders will vote the proxies received by them for management's five (5)
nominees named below, all of whom are presently directors of the Company. In
the event that any management nominee is unable or declines to serve as a
director at the time of the Annual Meeting, the proxies will be voted for a
nominee who shall be designated by the present Board of Directors to fill the
vacancy. In the event that additional persons are nominated for election as
directors, the proxyholders intend to vote all proxies received by them in
such a manner as will assure the election of as many of the nominees listed
below as possible, and, in such event, the specific nominees to be voted for
will be determined by the proxyholders. The Company is not aware of any
nominee who will be unable or will decline to serve as a director. The term of
office for each person elected as a director will continue until the next
annual meeting of the stockholders or until such director's successor has been
duly elected and qualified.
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VOTE REQUIRED
The five nominees receiving the highest number of affirmative votes of the
shares entitled to be voted shall be elected to the Board of Directors. An
abstention will have the same effect as a vote withheld for the election of
directors, and pursuant to Delaware law, a broker non-vote will not be treated
as voting in person or by proxy on the proposal.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE NOMINEES
LISTED BELOW.
The names of the nominees and certain information about them as of March 1,
1998 are set forth below:
<TABLE>
<CAPTION>
POSITION(S) WITH THE DIRECTOR
NAME OF NOMINEE AGE COMPANY SINCE
--------------- --- -------------------------- --------
<C> <C> <S> <C>
Aryeh Finegold................... 51 Chairman of the Board of 1989
Directors
Igal Kohavi(1)(2)................ 58 Director 1994
Amnon Landan..................... 39 President, Chief Executive 1996
Officer and Director
Yair Shamir(1)(2)................ 52 Director 1994
Giora Yaron(1)(2)................ 49 Director 1996
</TABLE>
- --------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Mr. Aryeh Finegold, a founder of the Company, has served as Chairman of the
Board of Directors since the Company's incorporation in July 1989, served as
Chief Executive Officer from July 1989 until January 1997 and served as
President from July 1989 until October 1995. Previously, Mr. Finegold was
President, Chief Executive Officer and Chairman of the Board of Directors of
Ready Systems, Inc. He also co-founded Daisy Systems, Inc., serving as its
President and Chief Executive Officer. Previously, Mr. Finegold was a product
line architect in the microprocessor division at Intel Corporation.
Dr. Igal Kohavi has been a director of the Company since January 1994. Dr.
Kohavi has served as the Chairman of the Board of Directors of DSP Group,
Inc., a developer of digital signal processing technology, since September
1995. Dr. Kohavi also serves as Chairman of Polaris, an Israeli-based venture
capital fund and has served in that capacity since 1996. From October 1994 to
March 1996, Dr. Kohavi served as the President and Chief Executive Officer of
Dovrat-Schrem & Co., Ltd., an Israeli investment bank. Prior to that, Dr.
Kohavi served as President of Clal Electronics Industries Ltd., from May 1993
until September 1994. From April 1986 to May 1993, Dr. Kohavi served as
President of Clal Computers and Technology Ltd., an electronics company and a
subsidiary of Clal.
Mr. Amnon Landan has been a director of the Company since February 1996. Mr.
Landan has served as President and Chief Executive Officer of the Company
since February 1997. From October 1995 to January 1997, he served as President
of the Company and from March 1995 to September 1995, he served as President
of North American Operations. He served as Chief Operating Officer from August
1993 until March 1995. From December 1992 to August 1993, he served as the
Company's Vice President of Operations and from June 1991 to December 1992, he
served as Vice President of Research and Development. From November 1989 to
June 1991, he served in several technical positions with the Company.
Mr. Yair Shamir has been a director of the Company since August 1994. Mr.
Shamir is currently the President of VCON Telecommunications, Ltd., a
developer of videoconferencing hardware and software, and has served in that
capacity since March 1997. Mr. Shamir served as Executive Vice President of
the venture capital firm The Challenge Fund--Etgar L.P. from July 1995 to
March 1997. From January 1994 until July 1995, he was Chief Executive Officer
of Elite Industries Ltd., a food products company. Prior to that, Mr. Shamir
was Executive Vice President and General Manager, Israel of Scitex
Corporation, an electronics company, from January 1988 through January 1994.
Mr. Shamir serves on the board of directors of DSP Group, Inc., Orckit
Communications Ltd. and Comfy Interactive Movies, Ltd.
3
<PAGE>
Dr. Giora Yaron has been a director of the Company since February 1996. Dr.
Yaron is currently Chairman and Chief Executive Officer of Itamar Medical (CM)
and has served in these capacities since January 1997. In addition, Dr. Yaron
is the Chairman of Comsys Communications and Signal Processing Ltd. and has
served in that capacity since January 1996. Prior to that, Dr. Yaron served as
the President of Indigo NV, a vendor of digital color press products, from
August 1992 to November 1995. From April 1979 to July 1992, Dr. Yaron was with
National Semiconductor Corporation where he served as General Manager of its
Israeli operations and Corporate Vice President of Office Products.
BOARD MEETINGS AND COMMITTEES
The Board of Directors of the Company held a total of four (4) meetings
during 1997. No directors attended fewer than 75% of the total number of
meetings of the Board of Directors or committees of the Board of Directors
held in 1997 during the period in which such directors were members of the
Board of Directors. The Board of Directors has an Audit Committee and a
Compensation Committee. The Board does not have a nominating committee or any
committee performing similar functions.
In 1997, the Audit Committee consisted of Messrs. Kohavi, Shamir and Yaron
and met four (4) times. This committee is primarily responsible for approving
the services performed by the Company's independent auditors and for reviewing
and evaluating the Company's accounting principles and its system of internal
accounting controls. Messrs. Kohavi, Shamir and Yaron will continue serving as
the Audit Committee for 1998.
In 1997, the Compensation Committee consisted of Messrs. Kohavi, Shamir and
Yaron and met one (1) time. This committee reviews and approves the Company's
executive compensation policy and plan. Messrs. Kohavi, Shamir and Yaron will
continue serving as the Compensation Committee for 1998.
BOARD COMPENSATION
Directors do not receive any cash compensation for their services as members
of the Board of Directors, although they are reimbursed for their expenses in
attending out-of-town meetings. Officers are appointed by and serve at the
discretion of the Board of Directors. There are no family relationships
between directors and executive officers of the Company. Currently,
nonemployee directors are automatically granted an initial option to purchase
25,000 shares of the Company's Common Stock and thereafter annual grants to
purchase 5,000 shares of the Company's Common Stock pursuant to the terms of
the Company's 1994 Directors' Stock Option Plan (the "Directors' Plan").
Pursuant to the Directors' Plan, Messrs. Kohavi, Shamir and Yaron were each
granted an option to purchase 5,000 shares on the date of the 1997 Annual
Meeting at an exercise price of $12.25 which vests in whole on the fifth
anniversary of the date of grant, provided that such director has continually
served as a director of the Company until the fifth anniversary of the date of
grant of such option.
PROPOSAL NO. 2
AMENDMENT OF RESTATED CERTIFICATE OF INCORPORATION
The Company's Restated Certificate of Incorporation (the "Certificate"), as
currently in effect, provides that the Company is authorized to issue
25,000,000 shares of Common Stock, par value $.002 per share, and 5,000,000
shares of Preferred Stock, with a par value of $.002 per share. In February
1998, the Board of Directors authorized an amendment to the Certificate to
increase the authorized number of shares of Common Stock to 60,000,000 shares.
Under the proposed amendment, the first paragraph of Article III of the
Certificate would be amended to read as follows:
This Corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The
total number of shares which the corporation is authorized to issue is
Sixty-five Million (65,000,000) shares. Sixty Million (60,000,000)
shares shall be Common Stock and Five Million (5,000,000) shares shall
be Preferred Stock, each with a par value of $.002.
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As of March 1, 1998, 17,149,887 shares of Common Stock were issued and
outstanding. In addition, as of March 1, 1998, 3,754,300 shares were reserved
for future grant or for future issuance upon exercise of outstanding options
under the Company's Amended and Restated 1989 Stock Option Plan and the 1996
Supplemental Stock Option Plan; 90,000 shares were reserved for future
issuance upon exercise of outstanding options; and, subject to stockholder
approval as more fully described below, an aggregate of 3,000,000 shares were
reserved for grant under the Company's 1998 Stock Option Plan, the 1998
Employee Stock Purchase Plan and the Amended 1994 Directors' Stock Option
Plan.
PURPOSE AND EFFECT OF AMENDMENT
The principal purpose of the proposed amendment to the Certificate is to
authorize additional shares of Common Stock which will be available for
issuance under the Company's stock option and purchase plans and in the event
that the Board of Directors determines that it is necessary or appropriate to
effect future stock dividends or stock splits, to raise additional capital
through the sale of securities, to acquire another company or its business or
assets through the issuance of securities, or to establish a strategic
relationship with a corporate partner through the exchange of securities. In
determining the appropriate level of authorized shares of Common Stock, the
Board of Directors considered, among other factors, (i) that as of March 1,
1998, assuming stockholder approval of Proposal No. 3, options to purchase
6,844,300 shares of Common Stock were outstanding or reserved for issuance
pursuant to the Company's stock option and purchase plans, (ii) that were the
Company to effect a two-for-one stock split in the future, a minimum of
47,988,374 authorized shares would be required, and (iii) that in the Board's
opinion, at least 10% to 15% of the Company's equity securities should be
available for any of the aforementioned potential strategic transactions. If
the proposed amendment is adopted, 35,000,000 additional shares of Common
Stock will be available for issuance by the Board of Directors without any
further stockholder approval, although certain issuances of shares may require
stockholder approval in accordance with the requirements of the Nasdaq
National Market or the Delaware General Corporations Law. The holders of
Common Stock have no preemptive rights to purchase any stock of the Company.
The additional shares might be issued at such times and under such
circumstances as to have a dilutive effect on earnings per share and on the
equity ownership of the present common stockholders.
The flexibility of the Board of Directors to issue additional shares of
stock could enhance the Board's ability to negotiate on behalf of the
stockholders in a takeover situation. Although it is not the purpose of the
proposed amendment, the authorized but unissued shares of Common Stock (as
well as the authorized but unissued shares of Preferred Stock) also could be
used by the Board of Directors to discourage, delay or make more difficult a
change in the control of the Company. For example, such shares could be
privately placed with purchasers who might align themselves with the board in
opposing a hostile takeover bid. The issuance of additional shares might serve
to dilute the stock ownership of persons seeking to obtain control and thereby
increase the cost of acquiring a given percentage of the outstanding stock.
The Company has previously adopted certain measures that may have the effect
of helping to resist an unsolicited takeover attempt, including a dividend
distributed to the holders of the Company's Common Stock consisting of rights
to purchase the Company's Series A Participating Preferred Stock upon the
terms and conditions set forth in the Rights Agreement approved by the Board
of Directors, and provisions of the Certificate authorizing the Board of
Directors to issue up to 5,000,000 shares of Preferred Stock with terms,
provisions and rights fixed by the Board, and provisions in the Certificate
providing for the Board of Directors. The Board of Directors is not aware of
any pending or proposed effort to acquire control of the Company.
VOTE REQUIRED
The approval of the amendment to the Certificate requires the affirmative
vote of a majority of the outstanding shares of Common Stock of the Company.
An abstention or nonvote is not an affirmative vote and, therefore, will have
the same effect as a vote against the proposal.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE AMENDMENT TO THE COMPANY'S
RESTATED CERTIFICATE OF INCORPORATION TO AUTHORIZE AN ADDITIONAL 35,000,000
SHARES OF COMMON STOCK, FOR AN AGGREGATE OF 60,000,000 SHARES OF COMMON STOCK.
5
<PAGE>
PROPOSAL NO. 3
APPROVAL OF THE 1998 STOCK OPTION PLAN, APPROVAL OF THE 1998 EMPLOYEE STOCK
PURCHASE PLAN, APPROVAL OF AN INCREASE IN THE AUTOMATIC GRANTS UNDER THE 1994
DIRECTORS' STOCK OPTION PLAN AND THE GRANT OF AN ONE-TIME ADDITIONAL OPTION TO
EXISTING NON-EMPLOYEE DIRECTORS, APPROVAL OF THE RESERVATION OF AN AGGREGATE
OF 3,000,000 SHARES FOR ISSUANCE UNDER SUCH PLANS AND AN AUTOMATIC 6% YEARLY
INCREASE IN ISSUABLE SHARES UNDER SUCH PLANS
At the Annual Meeting, the stockholders are being asked to approve the 1998
Stock Option Plan (the "Option Plan") which was adopted by the Board of
Directors in February 1998. The Option Plan will be administered by the Board
of Directors, except with respect to grants to executive officers which are
administered by the Compensation Committee. The Option Plan terminates in May
2008. The Board of Directors has implemented the Option Plan to replace the
Amended and Restated 1989 Stock Option Plan, which pursuant to its terms would
expire in August 1999. The Company does not plan to issue any further options
under the Amended and Restated 1989 Stock Option Plan. A summary of the
principal terms of the Option Plan is located in Appendix A to this Proxy
Statement.
In addition, the stockholders are being asked to approve the 1998 Employee
Stock Purchase Plan (the "Purchase Plan") which was adopted by the Board of
Directors in February 1998 to replace the 1993 Employee Stock Purchase Plan
which was terminated on February 15, 1998 after issuance of all of the shares
reserved thereunder. The Purchase Plan is currently administered by the Board
of Directors. The Purchase Plan will not become effective until receipt of
stockholder approval at the Annual Meeting. Unless terminated sooner, the
Purchase Plan will terminate in 2008. The Board has authority to amend or
terminate the Purchase Plan, provided no such action may affect options or
restricted stock already granted and such options and restricted stock shall
remain in full force and effect. A summary of the Purchase Plan is located in
Appendix B to this Proxy Statement.
At the Annual Meeting, the stockholders are also being asked to approve
amendments to the 1994 Directors' Stock Option Plan (the "Directors' Plan"),
which was adopted by the Board of Directors in August 1994 and by the
stockholders in April 1995. The amendments thereto were adopted by the Board
of Directors in February 1998. The Directors' Plan is currently administered
by the Board of Directors. At present under the Directors' Plan, each new
nonemployee director automatically receives a nonstatutory stock option to
purchase 25,000 shares of the Company's Common Stock upon becoming a
nonemployee director (an "Initial Option"). Each nonemployee director is also
automatically granted a nonstatutory option to purchase 5,000 shares of Common
Stock upon reelection annually to the Board of Directors (an "Annual Option").
The Board of Directors has approved amendments to the automatic grants to
provide for the automatic grant on of an Initial Option of 50,000 shares and
an Annual Option of 10,000 shares. In addition, the Board of Directors has
approved a one-time additional option grant of 25,000 shares each to Messrs.
Kohavi, Shamir and Yaron, each of the current non-employee directors, upon
reelection to the Board of Directors at the 1998 Annual Meeting of
Stockholders (the "Additional Options"). A summary of the Directors' Plan is
located in Appendix C to this Proxy Statement.
Options granted under the Directors' Plan have a term of ten years unless
terminated sooner upon termination of the optionee's status as a director or
otherwise pursuant to the Directors' Plan. Except as otherwise designated by
the Board, such options are not transferable by the optionee other than by
will or the laws of descent or distribution, and each option is exercisable
during the lifetime of the director only by such director. The exercise price
of each option granted under the Directors' Plan is equal to the fair market
value of the Common Stock on the date of grant. Subject to stockholder
approval of the amendments to the Directors' Plan, Initial Options granted
under the Directors' Plan vest as to 10,000 shares on the date of each Annual
Meeting of Stockholders of the Company after the date of grant of such option.
Annual Options granted under the Director's Plan vest as to 10,000 shares on
the date of the fifth Annual Meeting of Stockholders to occur after the date
of grant of such option. Additional Options granted under the Directors' Plan
vest as to 5,000 shares as of the date of the 1998 Annual Meeting of
Stockholders and 5,000 shares on each of the dates of the next Annual Meeting
of Stockholders to occur after the 1998 Annual Meeting of Stockholders each
until such option is fully vested.
6
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In the event of a merger of the Company with or into another corporation or a
consolidation, acquisition of assets or like transaction involving the
Company, each option shall be assumed, or an equivalent option substituted, by
the successor corporation. If the successor corporation refuses to assume the
options or substitute equivalent options, each option shall become fully
vested and exercisable. Unless terminated sooner, the Directors' Plan will
terminate in 2008. The Board has authority to amend or terminate the
Directors' Plan, provided no such action may affect options or restricted
stock already granted and such options and restricted stock shall remain in
full force and effect.
As of March 1, 1998, no shares of Common Stock had been issued under the
Option Plan or the Purchase Plan. As of March 1, 1998, under the Directors'
Plan, options to purchase 90,000 shares of Common Stock were outstanding and
options to purchase 45,000 shares had been exercised. The aggregate market
value of the unexercised and outstanding options to purchase 45,000 shares of
Common Stock under the Directors' Plan was $1,698,750 based on a closing price
of $37.75 on the Nasdaq National Market on March 1, 1998. See "Amended and New
Plan Benefits" below for certain information with respect to options granted
under the Directors' Plan in 1998.
The Company's is also requesting approval by the stockholders at this Annual
Meeting of a pool of an aggregate of 3,000,0000 shares to be reserved for
issuance under the Option Plan, the Purchase Plan and the Directors' Plan with
such shares to be allocated among such plans as determined by the Board of
Directors annually (the "Reserved Pool of Shares"). The Reserved Pool of
Shares was approved by the Board of Directors in February 1998. The Company
originally reserved a total of 500,000 shares of Common Stock for issuance
pursuant to the Directors' Plan and as of March 1, 1998, 365,000 shares were
available for grant there under. The remaining 365,000 shares available for
grant under the Directors' Plan are included in the 3,000,000 Reserved Pool of
Shares for which the Company is requesting approval. As of March 1, 1998 there
were 131,519 shares available for the grant of new options under the Amended
and Restated 1989 Stock Option Plan or the 1996 Supplemental Stock Option
Plan.
In February 1998, the Board of Directors also approved an automatic annual
increase in the number of shares in the Reserved Pool of Shares for issuance
under the Option Plan, the Purchase Plan and the Directors' Plan beginning in
1999 and continuing until the plans all terminate in 2008. The shares would be
allocated among the plans as determined by the Board of Directors annually.
This automatic increase provides that on January 1 of each year beginning in
1999 and ending in 2008 when the Plans will terminate, the number of shares
reserved and available for grant as part of the Reserved Pool of Shares for
the Option Plan, the Purchase Plan and the Directors' Plan will be increased
by a number of shares equal to 6% of the Base Shares (as defined below)
calculated as of the last day of the preceding fiscal year. The "Base Shares"
to which the 6% factor is applied will equal the sum of (i) the number of
shares of the Company's Common Stock outstanding on the last day of the
preceding fiscal year and (ii) the number of shares of Common Stock reserved
for issuance upon the exercise of options outstanding under all of the
Company's option plans as of the last day of the preceding fiscal year. In
addition, the number of shares available for grant would also be increased
automatically by the amount of any outstanding shares or shares subject to
issuance under options that have been forfeited back to the Company under the
terms of a grant under the terms of the Plans("Forfeited Shares").
Due to restrictions imposed by the Internal Revenue Code of 1986, as
amended, the number of shares reserved and available for issuance pursuant to
(i) incentive stock options under the Option Plan cannot, without further
stockholder approval, exceed 3,000,000 shares of Common Stock plus up to a
maximum of 1,500,000 shares of Common Stock annually as a result of the 6%
increase (however, such number shall not exceed the actual number of shares by
which the pool is increased as a result of the 6% increase) described above if
this Proposal No. 3 is approved by the stockholders at the Annual Meeting or
no shares of Common Stock if this Proposal No. 3 is not approved by the
stockholders and (ii) shares issued upon exercise of options under the
Purchase Plan cannot, without further stockholder approval, exceed 3,000,000
shares of Common Stock plus up to a maximum of 500,000 shares of Common Stock
annually as a result of the 6% increase described above if this Proposal No. 3
is approved by the stockholders at the Annual Meeting or no shares of Common
Stock if this Proposal No. 3 is not approved by the stockholders.
7
<PAGE>
The following example is intended to illustrate the operation of this
automatic increase provision. Had the automatic increase been in effect at the
beginning of 1998, the amount of shares that would have been added to the
Reserved Pool of Shares on January 1, 1998 would have been approximately
1,210,845 shares, calculated as set forth below and assuming for purposes of
the calculation that this Proposal No. 3 were in effect prior to 1998. At the
end of 1997, there would have been approximately 20,180,752 Base Shares,
consisting of approximately (i) 16,737,665 shares of Common Stock issued and
outstanding on December 31, 1997 and (ii) 3,443,087 shares of Common Stock
reserved for issuance upon the exercise of options outstanding under all of
the Company's option plans as of December 31, 1997. Accordingly, the total
number of shares available for issuance under the Option Plan, the Purchase
Plan and the Directors' Plan, 3,000,000, would have been increased to
4,210,845 shares of Common Stock, all of which would have been available for
the grant of incentive stock options under the Option Plan and options under
the Purchase Plan.
The Board believes the adoption of the Option Plan, the Purchase Plan and
the amendments to the Directors' Plan (collectively the "Stock Plans") and the
approval of the Reserved Pool of Shares and the 6% automatic annual increase
thereof are in the best interests of the Company. First, the Board believes
that it needs to have the Option Plan and the Purchase Plan in place and an
adequate reserve of shares for issuance thereunder, in order to enable the
Company to compete successfully with other companies to attract and retain
valuable employees, while maintaining the greatest amount of flexibility for
the Company in being able to allocate those shares amongst the plans to
maximize the number of shares available for issuance to employees. The
competition for employees has increased greatly and the Company needs the
flexibility to be able to respond to its ever increasing number of employees
in order to continue to expand its operations. Second, the Board believes that
the amendments to the Directors' Plan are necessary and desirable in order for
the Company to attract experienced persons to serve as non-employee Board
members as the Company does not otherwise pay its non-employee directors for
their service on the Board. Further, by including the Directors' Plan in the
pool of reserved shares the Board will have the flexibility to allocate shares
amongst the plans as needed. Third, the Board believes that it is appropriate
to have a substantial pool of options available for grant in connection with
acquisitions that the Company may decide to make from time-to-time. The
ability to make such grants enhances the Company's ability to structure
attractive offers to potential acquisition targets. The Board further believes
that the automatic annual increase mechanism is in the best interests of the
Company, as it enables the Company to provide an adequate reserve of shares in
amounts determined annually for issuance under the Option Plan, the Purchase
Plan and the Directors' Plan without the need to seek stockholder approval for
such increase at each annual meeting.
VOTE REQUIRED
The affirmative vote of a majority of the Votes Cast will be required to
approve (i) the adoption of the Option Plan, (ii) the Purchase Plan, (iii) the
amendments to the Directors' Plan, (iv) the reservation of a pool of 3,000,000
shares for issuance under the Option Plan, the Purchase Plan and the
Directors' Plan and (v) the automatic increase in the number of shares
reserved in the pool of shares reserved for issuance under the Option Plan,
the Purchase Plan and the Directors' Plan by 6% of the shares of Common Stock
and equivalents outstanding as of January 1 of each year starting in 1999 and
ending in May 2008 upon the termination of all of the plans.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" THE
ADOPTION OF THE 1998 STOCK OPTION PLAN, THE 1998 EMPLOYEE PURCHASE PLAN, THE
AMENDMENTS TO THE 1994 DIRECTORS' PLAN TO PROVIDE FOR INCREASES IN THE NUMBER
OF SHARES ISSUED UNDER THE INITIAL OPTIONS AND THE ANNUAL OPTIONS AND THE
ADDITIONAL OPTIONS, AND THE POOL OF AN AGGREGATE OF 3,000,000 SHARES OF COMMON
STOCK FOR ISSUANCE UNDER THE 1998 STOCK OPTION PLAN, THE 1998 EMPLOYEE
PURCHASE PLAN AND THE AMENDED 1994 DIRECTORS' PLAN, AND THE AUTOMATIC 6%
INCREASE IN THE AGGREGATE NUMBER OF SHARES TO BE RESERVED IN THE POOL OF
SHARES ISSUABLE EACH YEAR UNDER THE 1998 STOCK OPTION PLAN, THE 1998 EMPLOYEE
STOCK PURCHASE PLAN AND THE AMENDED 1994 DIRECTORS' OPTION PLAN, AND THE
ALLOCATION OF THE SHARES AMONG THE PLANS AS DETERMINED BY THE BOARD OF
DIRECTORS.
8
<PAGE>
AMENDED AND NEW PLAN BENEFITS
The following table sets forth, as to the executive officers named under
"Executive CompensationSummary Compensation Table" below all current executive
officers as a group, all current directors who are not executive officers as a
group and all other employees as a group the following information regarding
benefits received or allocated to the persons and groups set forth below for
the last completed fiscal year as if such plans had been in place for such
fiscal year: (a) with respect to the Option Plan: (i) the market value of the
shares of Common Stock underlying such options as of March 1, 1998 based on a
closing price of $37.75 on the Nasdaq National Market on that date, minus the
exercise price of such shares; and (ii) the number of shares of the Company's
Common Stock subject to options granted during the fiscal year ended December
31 1997 under the Option Plan; (b) with respect to the Purchase Plan: (i) the
market value of the shares of Common Stock issued based on a closing price of
$37.75 on the Nasdaq National Market on that date, minus the purchase price of
such shares; and (ii) the number of shares of the Company's Common Stock
issued under the Purchase Plan during the fiscal year ended December 31, 1997;
and (c) with respect to the Directors' Plan: (i) the market value of the
shares of Common Stock underlying such options as of March 1, 1998 based on a
closing price of $37.75 on the Nasdaq National Market on that date, minus the
exercise price of such shares; and (ii) the number of shares of the Company's
Common Stock subject to options granted under the Directors' Plan during
fiscal year ended December 31, 1997.
<TABLE>
<CAPTION>
1998 STOCK 1998 EMPLOYEE 1994 DIRECTORS'
OPTION PLAN(1) STOCK PURCHASE PLAN(1) STOCK OPTION PLAN
------------------------- -------------------------- ------------------------
NUMBER OF NUMBER OF
NAME OF INDIVIDUAL SHARES SUBJECT SHARES SUBJECT
OR IDENTITY OF DOLLAR TO OPTIONS DOLLAR NUMBER OF DOLLAR TO OPTIONS
GROUP OR POSITION VALUE($) GRANTED (#)(2VALUES($))SHARES ISSUED(#) VALUES($) GRANTED(#)
------------------ ---------- -------------- --------- ---------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Amnon Landan............ $4,480,000 160,000 $ 43,806 1,674 -- --
Chief Executive Officer
and President
Sharlene Abrams......... 700,000 25,000 60,424 2,309 -- --
Vice President of Fi-
nance and Administra-
tion, Chief Financial
Officer and Secretary
Moshe Egert............. -- -- 25,485 978 -- --
Vice President of Euro-
pean Operations
Aryeh Finegold.......... 2,800,000 100,000 -- -- -- --
Chairman of the Board
Kenneth Klein........... 840,000 30,000 48,020 1,835 -- --
Vice President of North
American Sales
Igal Kohavi............. -- -- -- -- $127,500 5,000
Director
Yair Shamir............. -- -- -- -- 127,500 5,000
Director
Giora Yaron............. -- -- -- -- 127,500 5,000
Director
All current executive
officers as a group 8,820,000 315,000 177,735 6,796 -- --
All current directors
who are not executive
officers as a group.... -- -- -- -- 382,500 15,000
All other employees as a
group.................. 18,763,750 752,250 3,490,400 133,858 -- --
</TABLE>
- --------
(1) The dollar value and number of units set forth for the 1998 Stock Option
Plan and the 1998 Employee Stock Purchase Plan are based upon each
participant's participation in the Amended and Restated 1989 Stock Option
Plan and the 1993 Employee Stock Purchase Plan, respectively. The 1993
Employee Stock Purchase Plan was terminated in February 1998.
9
<PAGE>
PROPOSAL NO. 4
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors has selected Price Waterhouse LLP, independent
auditors, to audit the consolidated financial statements of the Company for
the fiscal year ending December 31, 1998, and recommends that stockholders
vote for ratification of such appointment. In the event of a negative vote on
such ratification, the Board of Directors will reconsider its selection.
Price Waterhouse LLP has audited the Company's financial statements since
inception of the Company. Its representatives are expected to be present at
the Annual Meeting with the opportunity to make a statement if they desire to
do so and are expected to be available to respond to appropriate questions.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR RATIFICATION OF
THE APPOINTMENT OF PRICE WATERHOUSE LLP AS THE COMPANY'S INDEPENDENT AUDITORS.
10
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation earned in each of the three
years in the period ended December 31, 1997 by the Chief Executive Officer and
each of the other three most highly compensated executive officers of the
Company (the "Named Executive Officers"), who are the only executive officers
who earned greater than $100,000 in salary and bonus during the year ended
December 31, 1997:
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------------------------- ------------
OTHER ANNUAL SECURITIES
COMPEN- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) SATION($) OPTIONS(#) COMPENSATION
- --------------------------- ---- --------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Amnon Landan............ 1997 $215,000 $130,000 $40,800(1) 160,000 --
President and Chief Ex- 1996 185,000 -- 45,200(1) 195,000(3) --
ecutive Officer 1995 155,000 110,000(2) -- 15,000 --
Sharlene Abrams......... 1997 138,750 40,000 -- 25,000 --
Vice President of Fi- 1996 115,000 -- -- 35,000(3) --
nance and Administration, 1995 96,250 62,500(4) -- -- --
Chief Financial
Officer and Secretary
Moshe Egert............. 1997 117,121 -- 84,701(5) -- --
Vice President of Euro- 1996 91,235 -- 42,000(5) 72,000 --
pean Operations 1995 50,358 19,000 -- 9,000 --
Aryeh Finegold.......... 1997 237,500(6) 130,000 -- 100,000 --
Chairman of the Board 1996 200,000(6) 120,000 -- 30,000 --
1995 180,000(6)(7) 120,000(3) -- 50,000 --
Kenneth Klein........... 1997 127,500 -- 155,956(5) 30,000 --
Vice President of North 1996 112,300 -- 208,923(5) 124,166(3) --
American Sales 1995 80,000 -- 179,084(5) 23,334 --
</TABLE>
- --------
(1) Includes $36,000 and $33,000 in housing costs for 1997 and 1996,
respectively, as well as a school and car allowance.
(2) Includes a bonus of $60,000 awarded to Mr. Landan which had been accrued,
but not yet paid to Mr. Landan as of the end of 1995.
(3) Includes replacement options granted in connection with an option
repricing in May 1996 of 20,000 shares for Ms. Abrams, 29,166 shares for
Mr. Klein and 25,000 for Mr. Landan. Options to purchase the same number
of shares originally granted in March 1995 were cancelled.
(4) Includes a bonus of $18,000 awarded to Ms. Abrams which had been accrued,
but not yet paid to Ms. Abrams as of the end of 1995.
(5) Reflects the amounts paid as sales commission and/or a car allowance.
(6) Includes $100,000 in compensation paid to Mr. Finegold by the Company's
wholly-owned subsidiary in Israel.
(7) Includes $80,000 in salary which had been accrued, but not yet paid to Mr.
Finegold as of the end of 1995.
(8) Includes a bonus of $60,000 awarded to Mr. Finegold which had been
accrued, but not yet paid to Mr. Finegold as of the end of 1995.
11
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth each grant of stock options made during the
year ended December 31, 1997 to each of the Named Executive Officers:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------
POTENTIAL REALIZABLE VALUE
NUMBER OF PERCENT OF EXERCISE AT ASSUMED ANNUAL RATES OF
SECURITIES TOTAL OPTIONS OR BASE STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO PRICE FOR OPTION TERM (4)
OPTIONS EMPLOYEES IN ($/SH) EXPIRATION ---------------------------
NAME GRANTED(#)(1) FISCAL YEAR (2) (3) DATE 5% ($) 10% ($)
---- ------------- --------------- -------- ---------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Amnon Landan(5)......... 160,000 14.99% $9.75 3/31/07 $ 981,076 $ 4,046,238
Sharlene Abrams(5)...... 25,000 2.34 9.75 3/31/07 153,293 632,225
Moshe Egert(5).......... -- -- -- -- -- --
Aryeh Finegold(5)....... 100,000 9.37 9.75 3/31/07 613,560 2,528,899
Kenneth Klein(5)........ 30,000 2.81 9.75 3/31/07 183,952 758,670
</TABLE>
- --------
(1) Under the terms of the Company's 1989 Amended and Restated Stock Option
Plan, the Compensation Committee of the Board of Directors retains
discretion, subject to plan limits, to modify the terms of outstanding
options and to reprice the options.
(2) An aggregate of 1,067,250 options to purchase shares of Common Stock of
the Company were granted to employees during 1997.
(3) The exercise price and tax withholding obligations related to exercise may
be paid by delivery of shares that are already owned or by offset of the
underlying shares, subject to certain conditions.
(4) This column shows the hypothetical gains or "option spreads" of the
options granted based on assumed annual compound stock appreciation rates
of 5% and 10% over the full ten year term of the option. The 5% and 10%
assumed rates of appreciation are mandated by the rules of the Commission
and do not represent the Company's estimate or projection of future Common
Stock prices.
(5) Messrs. Finegold, Klein and Landan and Ms. Abrams were granted options on
March 31, 1997. Each option vests at the rate of 1/4th of the shares
subject to the option at the end of twelve months and 1/36th of the
remaining shares subject to the option at the end of each monthly period
thereafter as long as such optionee's employment with the Company has not
terminated. Under the Company's Amended and Restated 1989 Stock Option
Plan, all options are immediately exercisable whether or not vested.
Shares purchased upon exercise of unvested options are subject to
repurchase by the Company, at its option, upon the optionee's termination
of employment.
12
<PAGE>
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES.
The following table provides certain information concerning the exercises of
options by each of the Named Executive Officers during the year ended December
31, 1997, including the aggregate value of gains on the date of exercise:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
NO. OF UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT FY-END(#)(2): OPTIONS AT FY-END($)(1):
ACQUIRED ON VALUE ------------------------- -------------------------
NAME EXERCISE(#) REALIZED($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Amnon Landan............ -- -- 430,000 -- $7,994,375 --
Sharlene Abrams......... -- -- 95,000 -- 1,531,875 --
Moshe Egert............. -- -- 83,500 -- 1,336,500 --
Aryeh Finegold.......... -- -- 240,000 -- 3,915,750 --
Kenneth Klein........... 12,418 $159,186 187,104 -- 2,704,422 --
</TABLE>
- --------
(1) Calculated by determining the difference between the closing price of the
Company's Common Stock on the Nasdaq National Market on the date of
exercise, or year-end ($26.75), as the case may be, and the exercise price
of the in-the-money options. Such numbers do not reflect amounts actually
realized upon sale of the shares by such officers.
(2) Under the Company's 1989 Stock Option Plan, all options are immediately
exercisable whether or not vested. Shares purchased upon exercise of
unvested options are subject to repurchase by the Company, at its option,
upon the optionee's termination of employment.
13
<PAGE>
REPORT OF THE COMPENSATION COMMITTEE
The following is the Report of the Compensation Committee of the Company,
describing the compensation policies and rationale applicable to the Company's
executive officers with respect to the compensation paid to such executive
officers for the year ended December 31, 1997. The information contained in
the report shall not be deemed to be "soliciting material" or to be "filed"
with the Securities and Exchange Commission nor shall such information be
incorporated by reference into any future filing under the Securities Act of
1933, as amended (the "Securities Act") or the Securities Exchange Act of
1934, as amended (the "Exchange Act"), except to the extent that the Company
specifically incorporates it by reference into such filing.
TO: Board of Directors
The Compensation Committee of the Board of Directors of Mercury
Interactive Corporation is charged with the responsibility of administering
all aspects of the Company's executive compensation programs. The members
of the Committee for the year ended December 31, 1997 were Messrs. Kohavi,
Shamir and Yaron, who were all nonemployee Directors of the Company.
COMPENSATION OBJECTIVES
The objectives of the compensation program are: (1) to provide a means
for the Company to attract and retain high-quality executives; (2) to tie
executive compensation directly to the Company's business and performance
objectives; and (3) to reward outstanding individual performance that
contributes to the long-term success of the Company.
COMPENSATION VEHICLES
The Company uses a simple total compensation program that consists of
cash and equity compensation. Having a compensation program that allows the
Company to successfully attract and retain key employees permits it to
provide useful products and services to customers, enhance stockholder
value, stimulate technological innovation, foster Company values and
adequately reward employees. The vehicles are:
CASH COMPENSATION
Salary
The Committee considers specifically the following factors in determining
base compensation: (1) a comparison of the Company's growth and financial
performance relative to the performance of competitors; (2) salary levels
for comparable positions in companies in the software industry; and (3)
each executive's responsibility level and financial and strategic
objectives for the subsequent year.
Bonus
Annual and other bonuses for officers other than Mr. Landan are based on
the Company's financial performance, as well as individual executive
officer performance compared to goals. Other qualitative factors are also
included in determining the bonuses, including achievements within the
organization for which an executive is responsible and bonuses given by
other similarly situated companies.
EQUITY PARTICIPATION
The Company has adopted a stock option plan to provide employees with
additional incentives to work to maximize stockholder value. The stock
option plan utilizes vesting periods to encourage key employees to continue
in the employ of the Company. Stock options have been awarded to the
majority of the Company's employees. The Company believes that options
align the interests of executive officers closely with the interests of
other stockholders because of the direct benefits executive officers
receive through improved stock performance.
14
<PAGE>
CHIEF EXECUTIVE OFFICER'S COMPENSATION
Compensation for the Chief Executive Officer is determined by a process
similar to that discussed above for executive officers. Mr. Landan's base
compensation for April 1997 to March 1998 was established by the
Compensation Committee in April 1997.
The Committee also established Mr. Landan's individual bonus plan for the
above period according to the bonus structure described above and based on
1997 Company performance objectives for Mr. Landan established in April
1997.
Mr. Landan received a bonus of $130,000 in 1997. In addition, Mr. Landan
may be eligible for a 1997 performance bonus, but the amount of such bonus
has not been determined.
The foregoing report has been furnished by the Compensation Committee of the
Board of Directors of Mercury Interactive Corporation.
Compensation Committee
Igal Kohavi
Yair Shamir
Giora Yaron
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Please see "Certain Transactions With Management" below for information
regarding reportable transactions between the Company and members of the
Compensation Committee.
15
<PAGE>
COMPANY PERFORMANCE
The following line graph compares the cumulative total return to
stockholders on the Company's Common Stock since October 29, 1993 (the date
the Company first became subject to the reporting requirements of the Exchange
Act). The graph compares stockholder return on the Company's Common Stock with
the same cumulative total return on the Hambrecht & Quist Growth Index. The
information contained in the Performance Graph shall not be deemed to be
"soliciting material" or to be "filed" with the Securities and Exchange
Commission, nor shall such information be incorporated by reference into any
future filing under the Securities Act or the Exchange Act, except to the
extent that the Company specifically incorporates it by reference into such
filing.
The graph assumes that $100 was invested on October 29, 1993 in the
Company's Common Stock at the initial public offering price of $13.00 per
share and in the index, and that all dividends were reinvested. No dividends
have been declared or paid on the Company's Common Stock. Stockholder returns
over the period indicated should not be considered indicative of future
stockholder returns.
MERCURY INTERACTIVE
H&Q GROWTH INDEX
NASDAQ STOCK MARKET--U.S. INDEX
PERFORMANCE GRAPH APPEARS HERE
<TABLE>
<CAPTION>
Measurement Period MERCURY NASDAQ STOCK
(Fiscal Quarter Covered) INTERACTIVE MARKET -U.S H & Q GROWTH
- ----------------------- ----------- ------------ ------------
<S> <C> <C> <C>
Measurement Pt- 10/29/93 $100 $100 $100
FQE 12/93 $132.69 $99.72 $99.52
FQE 3/94 $132.69 $95.53 $93.25
FQE 6/94 $78.85 $91.07 $79.91
FQE 9/94 $76.44 $98.61 $96.79
FQE 12/94 $101.92 $97.48 $102.79
FQE 3/95 $129.81 $106.27 $114.66
FQE 6/95 $154.81 $121.56 $129.68
FQE 9/95 $213.46 $136.20 $161.76
FQE 12/95 $140.38 $137.86 $171.55
FQE 3/96 $123.08 $144.29 $176.99
FQE 6/96 $105.77 $156.07 $193.81
FQE 9/96 $106.73 $161.62 $193.71
FQE 12/96 $100.00 $169.56 $179.56
FQE 3/97 $75.00 $160.37 $144.89
FQE 6/97 $114.42 $189.77 $169.22
FQE 9/97 $147.12 $221.87 $203.97
FQE 12/97 $205.77 $208.08 $184.42
</TABLE>
16
<PAGE>
CERTAIN TRANSACTIONS WITH MANAGEMENT
The Company entered into letter agreements dated February 26, 1998 with
Messrs. Finegold and Landan and Ms. Abrams which provide that in the event
that such employee's employment is terminated for any reason other than cause
within eighteen months of a change of control of the Company, each shall be
entitled to severance benefits of one year' base salary and all of such
employee's stock options shall immediately vest in full upon such termination.
The Company has entered into indemnification agreements with each of its
directors and executive officers. Such agreements require the Company to
indemnify such individuals to the fullest extent permitted by Delaware law.
17
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of March 1, 1998 (except as noted in the
footnotes) certain information with respect to the beneficial ownership of the
Company's Common Stock by (i) each director of the Company, (ii) each of the
Named Executive Officers and (iii) all directors and executive officers as a
group. There are no persons known by the Company to own beneficially more than
5% of the outstanding shares of Common Stock. Except as indicated in the
footnotes to this table, the persons and entities named in the table have sole
voting and investment power with respect to all shares of Common Stock shown
as beneficially owned by them, subject to community property laws where
applicable.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
BENEFICIALLY OWNED(1)
---------------------------
PERCENTAGE
NAME OF BENEFICIAL OWNER(2) NUMBER OWNERSHIP
--------------------------- ------------- -------------
<S> <C> <C>
Aryeh Finegold(3)(4)................................. 512,979 2.94%
Amnon Landan(4)(5)................................... 500,670 2.85%
Kenneth Klein(4)(6).................................. 220,881 1.27%
Igal Kohavi.......................................... -- *
Yair Shamir(7)....................................... 20,000 *
Giora Yaron(8)....................................... 10,000 *
Sharlene Abrams(4)(9)................................ 115,805 *
Moshe Egert(4)(10)................................... 103,966 *
All directors and officers as a group
(8 persons)(3)(4)(5)(6)(7)(8)(9)(10)................ 1,484,301 8.08%
</TABLE>
- --------
* Less than 1%.
(1) Percentage ownership is based on 17,149,887 shares of Common Stock
outstanding as of March 1, 1998.
(2) Except as otherwise indicated in the footnotes to this table and pursuant
to applicable community property laws, the persons named in the table
have sole voting and investment power with respect to all shares of
Common Stock.
(3) Includes 34,484 shares held in trust for the Finegold family; 39,623
shares held in trust for Gad Finegold, 39,624 shares held in trust for
Michal Finegold, 39,624 shares held in trust for Tamar Finegold and
39,624 shares held in trust for Yonatan Finegold; Mr. Finegold is a co-
trustee of the above trusts. Also includes 320,000 shares subject to
stock options held by Mr. Finegold that are exercisable within 60 days of
March 1, 1998.
(4) Includes shares subject to outstanding options that are currently
exercisable or exercisable within 60 days of March 1, 1998. Because all
options granted by the Company pursuant to the Amended and Restated 1989
Stock Option Plan (the "Option Plan") are immediately exercisable whether
or not vested, all options granted pursuant to the Option Plan, held by
parties named in the table have been treated as currently exercisable.
However, the Company has a right to repurchase, upon the optionee's
termination of employment, any shares acquired by the optionee through
the exercise of any unvested options. This repurchase right lapses over
time.
(5) Includes 435,000 shares subject to stock options held by Mr. Landan that
are exercisable within 60 days of March 1, 1998.
(6) Includes 220,104 shares subject to stock options held by Mr. Klein that
are exercisable within 60 days of March 1, 1998.
(7) Includes options held by Mr. Shamir exercisable within 60 days of March
1, 1998 for 5,000 shares of Common Stock pursuant to the Company's 1994
Directors' Stock Option Plan. Includes 15,000 shares registered in the
name of Goldfarb & Levy and held on behalf of Mr. Shamir.
(8) Includes options held by Mr. Yaron exercisable within 60 days of March 1,
1998 for 10,000 shares of Common Stock pursuant to the Company's 1994
Directors' Stock Option gPlan.
(9) Includes 115,000 shares subject to stock options held by Ms. Abrams that
are exercisable within 60 days of March 1, 1998.
(10) Includes 103,996 shares subject to stock options held by Mr. Egert that
are exercisable within 60 days of March 1, 1998.
18
<PAGE>
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act and regulations of the Securities and
Exchange Commission (the "SEC") thereunder require the Company's executive
officers and directors, and persons who own more than 10% of a registered
class of the Company's equity securities, to file reports of initial ownership
and changes in ownership with the SEC. Based solely on its review of copies of
such forms received by the Company, or on written representations from certain
reporting persons that no other reports were required for such persons, the
Company believes that, during or with respect to the period from January 1,
1997 to December 31, 1997, all of the Section 16(a) filing requirements
applicable to its executive officers, directors and 10% stockholders were
complied with.
OTHER MATTERS
The Company knows of no other matters to be brought before the meeting. If
any other matters properly come before the meeting, it is the intention of the
persons named in the accompanying proxy to vote the shares represented as the
Board of Directors may recommend.
THE BOARD OF DIRECTORS
Sharlene Abrams
Secretary
Dated: April 17, 1998
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APPENDIX A
DESCRIPTION OF THE 1998 STOCK OPTION PLAN
GENERALLY: On February 26, 1998 the Board of Directors of the Company
adopted the 1998 Stock Option Plan (the "Option Plan"). The Company has
created a Share Pool for the use with all stock plans of the Company. The
Share Pool contains 3,000,000 Shares as of May 20, 1998 and will be increased
on the first day of each new fiscal year of the Company beginning on January
1, 1999 by a number of shares equal to 6% of the sum of the number of Shares
outstanding as of the last business day preceding each such first day of each
new fiscal year plus the number of shares subject to outstanding and
unexercised options. The Board of Directors may allocate up to the maximum
number of Shares in the Share Pool to the Option Plan.
Options granted under the Plan may be either "incentive stock options"
(ISOs), as defined in Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code") or nonstatutory options (NSOs). The Board may allocate a
maximum of 3,000,000 Shares plus up to 1,500,000 Shares per fiscal year to the
Option Plan for ISO grants.
The Plan is not qualified under Section 401(a) of the Code and is not
subject to the Employee Retirement Income Security Act of 1974 ("ERISA").
PURPOSE OF THE PLAN: The purposes of the Plan are to attract and retain the
best available personnel for positions of substantial responsibility, to
provide additional incentive to employees and consultants of the Company and
its worldwide affiliates and to promote the success of the Company's business.
ADMINISTRATION OF THE PLAN: The Plan may be administered by the Board of
Directors of the Company or by one or more Committees appointed by the Board
(the "Administrator"). The Administrator has full power to select the
individuals to whom Options will be granted from among the officers,
directors, consultants or other employees eligible for grants, to make any
combination of grants to any participant and to determine the specific terms
of each grant, subject to the provisions of the Plan. The interpretation of
any provision of the Plan by the Administrator shall be final and conclusive.
Members of the Board or its Committee receive no compensation for their
services as Administrator of the Plan.
ELIGIBILITY: The Plan provides that Options may be granted to employees and
consultants (including employees, consultants and directors of the Company and
its majority-owned subsidiaries). Outside directors are excluded from
participation in the Plan.
STOCK OPTIONS: The Plan permits the granting of stock options that are
intended to qualify as either ISOs or NSOs. In the case of ISOs, the option
exercise price for each share shall not be less than 100% of fair market value
of a share of common stock on the date of grant of such option. In the case of
NSOs, the option exercise price for each share covered shall be determined by
the Administrator. The fair market value of the Common Stock shall be the
closing price as of such date as reported by the NASDAQ National Market System
or other stock exchange. The term of each option will be fixed by the
Administrator but may not exceed ten years from the date of grant for ISOs.
The Administrator will determine the time or times that each option may be
exercised. No Employee may be granted an Option for more than 200,000 Shares
in any fiscal year. Under the Plan, all options are immediately exercisable
whether or not vested. Shares purchased upon exercise of unvested options are
subject to repurchase by the Company, at its option, upon the optionee's
termination of employment.
The exercise price of Options granted under the Plan must be paid in full on
the date of exercise. The Administrator has broad discretion to authorize
payment by a variety of methods, as well as to authorize tax withholding with
stock. For any ISO, the form of payment permitted will be stated on the notice
of grant of the Option.
In the event of termination of employment or of an Optionee's consultancy
for any reason, including retirement, an Option may thereafter be exercised
(to the extent it was exercisable), for a period of thirty days, subject to
the stated term of the Option. If an Optionee's employment or consultancy is
terminated by reason of
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the Optionee's death or disability, the Option will in general be exercisable
for six months following death, subject to the stated term of the Option.
To qualify as ISOs, Options must meet additional federal income tax
requirements. Under current law these requirements include limits on the value
of ISOs that may become first exercisable annually with respect to any
Optionee, and a shorter exercise period and a higher minimum exercise price in
the case of certain large stockholders.
ADJUSTMENTS FOR STOCK DIVIDENDS, MERGERS ETC.: The Administrator is
authorized to make appropriate adjustments in connection with outstanding
Options to reflect stock dividends, stock splits and similar events. In the
event of a merger, liquidation or similar event, the Administrator in its
discretion may provide for substitution or adjustments in, or may accelerate
the vesting of, such Options.
AMENDMENT AND TERMINATION: The Board may amend, alter, suspend or
discontinue the Plan at any time, but such amendment, alteration, suspension
or discontinuation shall not impair any Options then outstanding under the
Plan without the participant's consent.
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APPENDIX B
DESCRIPTION OF THE 1998 EMPLOYEE STOCK PURCHASE PLAN
GENERALLY: On February 26, 1998 the Board of Directors of the Company
adopted, and the stockholders subsequently approved, the 1998 Employee Stock
Purchase Plan (the "Purchase Plan"). The Company has created a Share Pool for
the use with all stock plans of the Company. The Share Pool contains 3,000,000
Shares as of May 20, 1998 and will be increased on the first day of each new
fiscal year of the Company beginning on January 1, 1999 by a number of shares
equal to 6% of the sum of the number of Shares outstanding as of the last
business day preceding each such first day of each new fiscal year plus the
number of shares subject to outstanding and unexercised options. The Board of
Directors may allocate up to a maximum of 3,000,000 Shares plus up to 500,000
Shares per fiscal year to the Purchase Plan.
The Purchase Plan is intended to qualify under Sections 421 and 423 of the
Internal Revenue Code of 1986, as amended (the "Code"). The Purchase Plan is
not qualified under Section 401(a) of the Code and is not subject to the
Employee Retirement Income Security Act of 1974 ("ERISA").
PURPOSE: The purpose of the Purchase Plan is to provide employees of the
Company's majority-owned subsidiaries with an opportunity to purchase Common
Stock of the Company through payroll deductions. At this time, all of the
Company's subsidiaries are Designated Subsidiaries for purposes of
participation in the Purchase Plan.
ADMINISTRATION: The Purchase Plan is administered by the Board or a
committee of the Board. The interpretation of any provision of the Purchase
Plan by the Administrator shall be final and conclusive. Members of the Board
or its Committee receive no compensation for their services in administering
the Stock Purchase Plan.
ELIGIBILITY: Employees who are employed by the Company or its Designated
Subsidiary for at least 20 hours per week and five months per calendar year
are eligible to participant in the Purchase Plan, provided that such employees
are employed by the Company on the date that their participation in the
Purchase Plan is effective. Eligibility is subject to certain limitations
imposed by Section 423(b) of the Code and limitations on stock ownership as
defined in the Purchase Plan.
OFFERING DATES: The Purchase Plan generally will be implemented by
consecutive six month Offering Periods that begin every six months on May 20
and November 20 of each year. The Board has the power to change the duration
of Offering Periods with respect to future offerings without stockholder
approval if such change is announced at least fifteen days prior to the
scheduled beginning of the first Offering Period to be affected.
PARTICIPATION IN THE PLAN: Eligible employees become participants in the
Purchase Plan by filing with the employer's payroll office a subscription
agreement authorizing payroll deductions. An eligible employee who wishes to
become a participant in an offering must file a subscription agreement with
the payroll office prior to the commencement of such offering period, unless a
later time for filing the subscription agreement has been set by the Board for
all eligible employees with respect to a given offering. An employee who
becomes eligible to participate in the Purchase Plan after the commencement of
an offering may participate in the first Offering Period that starts after the
filing by such employee of a subscription agreement.
PURCHASE PRICE: The purchase price per share at which shares are sold to
participating employees under the Purchase Plan is the lower of (i) 85% of the
fair market value per share of the Common Stock on the first day of the
Offering Period (the "Offering Date") or (ii) 85% of the fair market value per
share of the Common Stock on the last day of an Exercise Period (the "Exercise
Date"). The fair market value of the Common Stock shall be the closing price
as of such date as reported by the NASDAQ National Market System or other
stock exchange.
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PAYMENT OF PURCHASE PRICE; PAYROLL DEDUCTIONS: The purchase price of the
shares to be acquired under the Purchase Plan is accumulated by payroll
deductions over each six-month Offering Period. The deductions may not exceed
15% of a participant's compensation. A participant may discontinue or decrease
his participation in the Purchase Plan, but may not increase the rate of
payroll deductions at any time during the Offering Period. Payroll deductions
for a participant shall commence on the first pay day following the Offering
Date and shall continue at the same rate until the end of the Offering Period
unless sooner terminated as provided in the Purchase Plan.
All payroll deductions made for a participant are credited to his account
under the Purchase Plan and are deposited with the general funds of the
Company. All payroll deductions received or held by the Company under the
Purchase Plan may be used by the Company for any corporate purpose, and the
Company shall not be obligated to segregate such payroll deductions. No
charges for administrative or other costs may be made by the Company against
the payroll deductions of a participant in the Purchase Plan.
PURCHASE OF STOCK; EXERCISE OF OPTION: By executing a subscription agreement
to participate in the Purchase Plan, the employee is entitled to have shares
placed under option to him. The maximum number of shares placed under option
to a participant in an Offering Period is the number determined by dividing
the total amount of his compensation which is to be withheld for the Offering
Period by 85% of the fair market value of the Common Stock on the Offering
Date. Unless the employee's participation is discontinued, his option for the
purchase of shares will be exercised automatically on the Exercise Date at the
applicable price.
Notwithstanding the preceding paragraph, no employee shall 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 stock or value
of all classes of stock of the Company or its majority-owned subsidiaries, nor
shall any employee be granted an option which would permit him to purchase
more than $25,000 worth of stock (determined at the time the option is
granted) under all employee stock purchase plans of the Company in any
calendar year.
WITHDRAWAL FROM THE PURCHASE PLAN: A participant's interest in a given
Offering Period may be terminated in whole, but not in part, by signing and
delivering to the Company a notice of withdrawal from the Purchase Plan. Such
withdrawal may be elected by a participant at any time prior to an Exercise
Date. A participant's withdrawal from an Offering Period does not have any
effect upon his eligibility to participate in subsequent Offering Periods
under the Purchase Plan.
TERMINATION OF EMPLOYMENT: Termination of a participant's employment for any
reason, including retirement or death, or the failure of the participant to
satisfy the requirements for eligibility, cancels his participation in the
Purchase Plan immediately. In such event, payroll deductions credited to the
participant's account will be returned to him, or in the case of death, to the
person or person entitled thereto as provided in the Purchase Plan.
ADJUSTMENTS FOR STOCK DIVIDENDS, MERGERS ETC.: The Board is authorized to
make appropriate adjustments in connection with outstanding options to reflect
stock dividends, stock splits and similar events. In the event of a merger,
liquidation or similar event, the Board in its discretion may provide for
substitution or adjustments of the options, or may shorten the current
Offering Period(s) to provide for an earlier Exercise Date.
AMENDMENT AND TERMINATION OF THE PLAN: The Board may at any time amend or
terminate the Purchase Plan, except that such termination cannot adversely
affect the rights of any participant.
B-2
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APPENDIX C
DESCRIPTION OF THE AMENDED 1994 DIRECTORS' STOCK OPTION PLAN
GENERAL: On February 26, 1998 the Board of Directors of the Company amended
the 1994 Directors' Stock Option Plan (the "Directors' Plan"). The Company has
created a Share Pool for the use with all stock plans of the Company. The
Share Pool contains 3,000,000 Shares as of May 20, 1998 and will be increased
on the first day of each new fiscal year of the Company beginning on January
1, 1999 by a number of shares equal to 6% of the sum of the number of Shares
outstanding as of the last business day preceding each such first day of each
new fiscal year plus the number of shares subject to outstanding and
unexercised options. The Board of Directors may allocate shares from the Share
Pool for use in the Directors' Plan.
The Directors' Plan is not qualified under Section 401(a) of the Code and is
not subject to the Employee Retirement Income Security Act of 1974 ("ERISA").
PURPOSE: The purposes of the Directors' Plan are to attract and retain the
best available individuals to serve as Directors of the Company and to
encourage their continued service on the Board.
ADMINISTRATION: Generally, the Directors' Plan will be administered by the
Board. With respect to Automatic Option grants and Annual Option grants, the
Board has no discretion to determine which Directors will be granted Options,
to determine the number of shares subject to Options, to determine the
exercise price of the Options or to determine any terms of such Options. The
Board may award additional grants to Directors, subject to compliance with
Section 16(b) of the Securities Exchange Act of 1934.
The interpretation of any provision of the Directors' Plan by the
Administrator shall be final and binding. Members of the Board receive no
compensation for their services in administering the Directors' Plan.
ELIGIBILITY: Options may be granted only Directors who are not employees of
the Company.
DIRECTORS' OPTIONS: The Directors' Plan provides for Initial Option grants
of 50,000 shares to each Director upon his election to the Board of Directors
and Annual Option grants of 10,000 shares upon his re-election each year. The
option term shall be ten years, and shall be exercisable while such person
remains a Director. The exercise price shall be 100% of fair market value on
the date of grant and shall be immediately exercisable in full as of the date
of grant. The fair market value of the Common Stock shall be the closing price
as of such date as reported by the NASDAQ National Market System or other
stock exchange. Stock subject to an Initial Option shall vest as to 10,000
Shares on the date of each Annual Meeting of Stockholders of the Company after
the date of grant of such Option. Stock subject to an Annual Option shall vest
as to 10,000 Shares on the date of the fifth Annual Meeting of Stockholders to
occur after the date of grant of such Option. If the Optionee ceases to serve
as a Director for any reason, vesting shall cease as of the date of such
termination.
PURCHASE PRICE; PAYMENT: The exercise price of Options granted under the
Plan must be paid in full on the date of exercise. The Administrator has broad
discretion to authorize payment by a variety of methods.
TERMINATION: In the event of termination of status as a Director, the Option
may thereafter be exercised (to the extent it was exercisable), for a period
of thirty days, subject to the stated term of the Option. If an Optionee's
status as a Director is terminated by reason of the death or disability, the
Option will in general be exercisable for six months following death, subject
to the stated term of the Option. Except as otherwise designated by the Board,
Options are not transferable by the Optionee other than by will or the laws of
descent or distribution, and each option is exercisable during the lifetime of
the Director only by such Director.
ADJUSTMENTS FOR STOCK DIVIDENDS, MERGERS ETC.: The Board is authorized to
make appropriate adjustments in connection with outstanding Options to reflect
stock dividends, stock splits and similar events. In
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the event of a merger, liquidation or other reorganization transaction, the
Board shall provide for substitution or assumption of the Options. If
substitution or assumption is not possible, the Board shall provide that there
will be no vesting restrictions on Optioned Stock, including Shares as to
which the vesting restrictions would not otherwise lapse.
AMENDMENT AND TERMINATION: The Board may amend, alter, suspend or
discontinue the Directors' Plan at any time, but such amendment, alteration,
suspension or discontinuation shall not impair any rights then outstanding
under the Directors' Plan without the participant's consent.
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MERCURY INTERACTIVE CORPORATION
1998 ANNUAL MEETING OF STOCKHOLDERS
The undersigned stockholder of Mercury Interactive Corporation, a Delaware
corporation (the "Company"), hereby acknowledges receipt of the Notice of
Annual Meeting of Stockholders and Proxy Statement, each dated April 17, 1998,
and hereby appoints Amnon Landan and Sharlene Abrams, or either of them,
proxies and attorneys-in-fact, with full power to each of substitution, on
behalf and in the name of the undersigned, to represent the undersigned at the
1998 Annual Meeting of Stockholders of Mercury Interactive Corporation to be
held on May 20, 1998, at 10:00 a.m. local time, at the Company's corporate
offices at 1325 Borregas Avenue, Sunnyvale, California, and at any
adjournment(s) thereof, and to vote all shares of Common Stock which the
undersigned would be entitled to vote if then and there personally present, on
the matters set forth below.
THIS PROXY WILL BE VOTED AS DIRECTED, OR, IF NO CONTRARY DIRECTION IS
INDICATED, WILL BE VOTED FOR THE ELECTION OF DIRECTORS, FOR PROPOSALS 2 AND 3,
--- ---
FOR THE RATIFICATION OF THE APPOINTMENT OF PRICE WATERHOUSE LLP AS INDEPENDENT
AUDITORS, AND AS SAID PROXIES DEEM ADVISABLE ON SUCH OTHER MATTERS AS MAY
PROPERLY COME BEFORE THE MEETING.
(Continued and to be signed on reverse side)
FOLD AND DETACH HERE
<PAGE>
1. To elect five (5) directors of the Company for the ensuing year and until
their successors are elected:
NOMINEES:
FOR WITHHELD
Aryeh Finegold [_] [_]
Amnon Landan
Igal Kohavi
Yair Shamir and Giora Yaron.
2. To approve an amendment to the Company's Restated Certificate of
Incorporation to increase the authorized number of shares of Common Stock
of the Company to 60,000,000.
FOR AGAINST ABSTAIN
[_] [_] [_]
3. To ratify and approve: (i) the adoption of the 1998 Stock Option Plan and the
1998 Employee Stock Purchase Plan to replace the 1989 Stock Option Plan and the
1993 Employee Stock Purchase Plan, respectively, (ii) the amendment of the 1994
Directors' Stock Option Plan to increase the number of shares granted as an
initial grant to new non-employee directors and an annual grant to continuing
non-employee directors of the Company, and to provide for a one time grant to
the non-employee directors of the Company who are elected to serve as directors
at the 1998 Annual Meeting of Stockholders; (iii) the reservation of an
aggregate of 3,000,000 shares of Common Stock for issuance under the 1998 Stock
Option Plan, the 1998 Employee Stock Purchase Plan and the Amended 1994
Directors' Stock Option Plan, and the allocation of such shares amongst such
plans as determined by the Board of Directors of the Company; and (iv) to
automatically increase each year the aggregate number of shares reserved for
issuance under the Company's 1998 Stock Option Plan, the 1998 Employee Stock
Purchase Plan and the Amended 1994 Directors' Stock Option Plan by 6% of the
Common Stock and equivalents outstanding as of January 1 of each year starting
in 1999 and ending in 2008 upon the termination of the option plans.
FOR AGAINST ABSTAIN
[_] [_] [_]
4. To ratify the appointment of Price Waterhouse LLP as independent auditors of
the Company for the year ending December 31, 1998.
FOR WITHHELD ABSTAIN
[_] [_] [_]
To transact such other business as may properly come before the meeting or
any postponements or adjournments thereof.
Signature(s): Date:
---------------------------------- -------------------------
Note: (This proxy should be marked, dated, signed by the stockholder(s) exactly
as his or her name appears hereon, and returned promptly in the enclosed
envelope. Persons in a fiduciary capacity should so indicate if shares are held
by joint tenants or as community property, both should sign)
FOLD AND DETACH HERE
