-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WSkJiiSFruo3v7beK3RYHHCZYqtbdxCXvqQQcsyy2zSIHV4XTvGZ2goaDbgwt5cU LzJcl8shQEpgCSN0RDx35w== 0001012870-98-001811.txt : 19980716 0001012870-98-001811.hdr.sgml : 19980716 ACCESSION NUMBER: 0001012870-98-001811 CONFORMED SUBMISSION TYPE: DEFS14A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980814 FILED AS OF DATE: 19980715 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MERCURY INTERACTIVE CORPORATION CENTRAL INDEX KEY: 0000867058 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 770224776 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: DEFS14A SEC ACT: SEC FILE NUMBER: 000-22350 FILM NUMBER: 98666199 BUSINESS ADDRESS: STREET 1: 470 POTRERO AVE CITY: SUNNYVALE STATE: CA ZIP: 94086 BUSINESS PHONE: 4085239900 MAIL ADDRESS: STREET 1: 470 POTRERO AVE CITY: SUNNYVALE STATE: CA ZIP: 94086 DEFS14A 1 DEFINITIVE SPECIAL NOTICE AND PROXY STATEMENT ================================================================================ SCHEDULE 14A INFORMATION PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934 (AMENDMENT NO. ) Filed by the Registrant [X] Filed by a Party other than the Registrant [_] Check the appropriate box: [_] Preliminary Proxy Statement [_] CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY (AS PERMITTED BY RULE 14a-6(e)(2)) [X] Definitive Proxy Statement [_] Definitive Additional Materials [_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12 Mercury Interactive Corporation - -------------------------------------------------------------------------------- (Name of Registrant as Specified In Its Charter) - -------------------------------------------------------------------------------- (Name of Person(s) Filing Proxy Statement, if other than the Registrant) Payment of Filing Fee (Check the appropriate box): [X] No fee required. [_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11. (1) Title of each class of securities to which transaction applies: ------------------------------------------------------------------------- (2) Aggregate number of securities to which transaction applies: ------------------------------------------------------------------------- (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is calculated and state how it was determined): ------------------------------------------------------------------------- (4) Proposed maximum aggregate value of transaction: ------------------------------------------------------------------------- (5) Total fee paid: ------------------------------------------------------------------------- [_] Fee paid previously with preliminary materials. [_] Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. (1) Amount Previously Paid: ------------------------------------------------------------------------- (2) Form, Schedule or Registration Statement No.: ------------------------------------------------------------------------- (3) Filing Party: ------------------------------------------------------------------------- (4) Date Filed: ------------------------------------------------------------------------- Notes: MERCURY INTERACTIVE CORPORATION ---------------- NOTICE OF SPECIAL MEETING OF STOCKHOLDERS TO BE HELD AUGUST 14, 1998 TO THE STOCKHOLDERS OF MERCURY INTERACTIVE CORPORATION: NOTICE IS HEREBY GIVEN that the Special Meeting of Stockholders of MERCURY INTERACTIVE CORPORATION (the "Company"), a Delaware corporation, will be held at 10:00 a.m., local time, on August 14, 1998, at the Company's corporate offices at 1325 Borregas Avenue, Sunnyvale, California 94089, for the following purposes: 1. To ratify and approve the adoption of the 1998 Employee Stock Purchase Plan to replace the 1993 Employee Stock Purchase Plan and the reservation of 325,000 shares for issuance thereunder. 2. To ratify and approve the reservation of an additional 300,000 shares of Common Stock for issuance under the Amended and Restated 1989 Stock Option Plan. 3. To ratify and approve the adoption of the 1999 Stock Option Plan to replace the Amended and Restated 1989 Stock Option Plan, effective upon the expiration of the term of such plan in August 1999, and the reservation of 225,000 shares for issuance thereunder. 4. To ratify and approve 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 Corporation, and to provide for a one time grant to the non-employee directors of the Corporation who are serving as directors of the Corporation as of the date of this Special Meeting of Stockholders. To transact such other business as may properly come before the meeting or any adjournment 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 July 15, 1998 are entitled to notice of and to vote at the Special Meeting. All stockholders are cordially invited to attend the Special 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 SPECIAL MEETING. ANY STOCKHOLDER ATTENDING THE SPECIAL 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 July 15, 1998 MERCURY INTERACTIVE CORPORATION PROXY STATEMENT FOR THE MERCURY INTERACTIVE CORPORATION 1998 SPECIAL 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 Special Meeting of Stockholders to be held on August 14, 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 Special Meeting of Stockholders. The Special 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 proposals 1, 2, 3 and 4, 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 were first mailed on or about July 16, 1998, to all stockholders entitled to vote at the meeting. RECORD DATE AND VOTING SECURITIES Stockholders of record at the close of business on July 15, 1998 are entitled to notice of and to vote at the meeting. At the record date, 17,378,056 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 Special 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 Special Meeting, or (iii) attending the Special Meeting and voting in person (although attendance at the Special 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 Special 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 $14,800 plus expenses. The Company has retained Innisfree M&A, Incorporated 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 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 Special 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" 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 Special 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. PROPOSAL NO. 1 APPROVAL OF THE 1998 EMPLOYEE STOCK PURCHASE PLAN AND THE RESERVATION OF 325,000 SHARES OF COMMON STOCK FOR ISSUANCE THEREUNDER At the Special Meeting, 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 June 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 Company has reserved a total of 325,000 shares of Common Stock for issuance pursuant to the Purchase Plan. 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 Special 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 already granted, and such options shall remain in full force and effect. A summary of the Purchase Plan is located in Appendix A to this Proxy Statement. As of July 1, 1998, no shares of Common Stock had been issued under the Purchase Plan. See "Amended and New Plan Benefits" below for certain information with respect to participation in the Purchase Plan in 1997. Due to restrictions imposed by the Internal Revenue Code of 1986, as amended, the number of shares reserved and available for issuance pursuant to shares issued upon exercise of options under the Purchase Plan cannot, without further stockholder approval, exceed 325,000 shares of Common Stock if this Proposal No. 1 is approved by the stockholders at the Special Meeting or no shares of Common Stock if this Proposal No. 1 is not approved by the stockholders. The Board believes the adoption of the Purchase Plan and the reservation of 325,000 shares for issuance thereunder is in the best interests of the Company. The Board believes that it needs to have the Purchase Plan in place, and an adequate reserve of shares available for issuance thereunder, to enable the Company to compete successfully with other companies in attracting and retaining valuable employees. The competition for employees has increased significantly 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. 2 REQUIRED VOTE The affirmative vote of a majority of the Votes Cast is required for approval of the Purchase Plan and the reservation of the shares for issuance thereunder. THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" THE PURCHASE PLAN AND THE RESERVATION OF 325,000 SHARES OF COMMON STOCK FOR ISSUANCE THEREUNDER. PROPOSAL NO. 2 APPROVAL OF AN AGGREGATE 300,000 SHARE INCREASE IN SHARES ISSUABLE UNDER THE AMENDED AND RESTATED 1989 STOCK OPTION PLAN INCREASE OF 300,000 SHARES The Company's Amended and Restated 1989 Stock Option Plan, as amended (the "Amended and Restated 1989 Option Plan") was approved by the Board of Directors in August 1989 and by the stockholders in June 1990. A total of 5,808,669 shares of Common Stock have been reserved for issuance since the inception of the Amended and Restated 1989 Option Plan. In June 1998, the Board of Directors approved a further increase of 300,000 shares issuable under the Amended and Restated 1989 Option Plan, which, if approved, by the stockholders would increase the total shares reserved for issuance under the Amended and Restated 1989 Option Plan since its inception to 6,108,669 shares. The Amended and Restated 1989 Option Plan terminates in August 1999. A summary of the principal terms of the Amended and Restated 1989 Option Plan is located in Appendix B to this Proxy Statement. The Board believes the requested increase in the shares reserved for issuance under the Amended and Restated 1989 Option Plan is in the best interests of the Company. The Board believes that the increase will provide an adequate reserve of shares available for issuance under the Amended and Restated 1989 Option Plan, which is necessary to enable the Company to compete successfully with other companies in attracting and retaining valuable employees. The competition for employees has increased significantly and the Company needs the increase in share reserve to be able to provide options to its ever increasing number of employees in order to expand its operations. As of July 1, 1998, options to purchase 3,504,887 shares of Common Stock were unexercised and outstanding under the Amended and Restated 1989 Option Plan and 1996 Supplemental Stock Option Plan. As of July 1, 1998, no shares remained available for future option grants under the Amended and Restated 1989 Option Plan, and no shares remain available for future grant under the 1996 Supplemental Stock Option Plan. The aggregate market value of the unexercised and outstanding options to purchase 3,504,887 shares of Common Stock under the Amended and Restated 1989 Option Plan at July 1, 1998 was $155,967,471.50 based on a closing price of $44.50 on the Nasdaq National Market on that date. See "Amended and New Plan Benefits" below for certain information with respect to options granted under the Amended and Restated 1989 Option Plan in 1997. VOTE REQUIRED The affirmative vote of a majority of the Votes Cast will be required to approve the amendment to increase by 300,000 the shares issuable under the Amended and Restated 1989 Stock Option Plan. THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" THE INCREASE IN THE SHARES ISSUABLE UNDER THE AMENDED AND RESTATED 1989 STOCK OPTION PLAN. 3 PROPOSAL NO. 3 APPROVAL OF THE 1999 STOCK OPTION PLAN AND THE RESERVATION OF 225,000 SHARES FOR ISSUANCE THEREUNDER At the Special Meeting, the stockholders are being asked to approve the 1999 Stock Option Plan (the "1999 Option Plan") which was adopted by the Board of Directors in June 1998 and the reservation of 225,000 shares for issuance thereunder. The 1999 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 Board of Directors has implemented the 1999 Option Plan to replace the Amended and Restated 1989 Stock Option Plan, which pursuant to its terms expires in August 1999. The 1999 Option Plan will become effective in August 1999 upon expiration of the Amended and Restated 1989 Stock Option Plan and terminates in August 2009. A summary of the principal terms of the 1999 Option Plan is located in Appendix C to this Proxy Statement. Options granted under the 1999 Option Plan have a term of ten years unless terminated sooner upon termination of the optionee's status as an employee or consultant of the Company or otherwise pursuant to the 1999 Option 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 optionee only by such optionee. The exercise price of each option granted under the 1999 Option Plan is equal to the fair market value of the Common Stock on the date of grant. Options granted under the 1999 Option Plan typically vest at the rate of one- quarter of the shares on the first anniversary date of the date of grant of such option and 1/48th of the shares subject to the option at the end of each month thereafter until such option is fully vested. The Board and the Compensation Committee have the authority to grant options with different vesting schedules. 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 1999 Option Plan will terminate in 2009. The Board has authority to amend or terminate the 1999 Option 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 July 1, 1998, no shares of Common Stock had been issued under the 1999 Option Plan. Due to restrictions imposed by the Internal Revenue Code of 1986, as amended, the number of shares reserved and available for issuance pursuant to incentive stock options under the 1999 Option Plan cannot, without further stockholder approval, exceed 225,000 shares of Common Stock if this Proposal No. 3 is approved by the stockholders at the Special Meeting or no shares of Common Stock if this Proposal No. 3 is not approved by the stockholders. The Board believes the adoption of the 1999 Option Plan and the reservation of 225,000 shares for issuance thereunder are in the best interests of the Company. As the Amended and Restated 1989 Stock Option Plan expires in August 1999, the Board believes that it needs to have the 1999 Option Plan in place and an adequate reserve of shares for issuance thereunder, to enable the Company to compete successfully with other companies in attracting and retaining valuable employees. The competition for employees has increased significantly and the Company needs the new option plan to be able to provide options to its ever increasing number of employees in order to continue to expand its operations. VOTE REQUIRED The affirmative vote of a majority of the Votes Cast will be required to approve the adoption of the 1999 Option Plan and the reservation of 225,000 shares for issuance thereunder. THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" THE ADOPTION OF THE 1999 STOCK OPTION PLAN AND THE RESERVATION OF 225,000 SHARES OF COMMON STOCK FOR ISSUANCE THEREUNDER. 4 PROPOSAL NO. 4 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 At the Special 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 June 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 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, provided that such non-employee directors are directors as of the date of the 1998 Special Meeting of Stockholders (the "Additional Options"). A summary of the Directors' Plan is located in Appendix D 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 Directors' 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 this 1998 Special Meeting of Stockholders and 5,000 shares on each of the dates of the next Annual Meeting of Stockholders to occur after the 1998 Special Meeting of Stockholders, each until such option is fully vested. 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 2004. 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 July 1, 1998, under the Directors' Plan, options to purchase 100,000 shares of Common Stock were outstanding and options to purchase 50,000 shares had been exercised. The aggregate market value of the unexercised and outstanding options to purchase 100,000 shares of Common Stock under the Directors' Plan was $4,450,000 based on a closing price of $44.50 on the Nasdaq National Market on July 1, 1998. See "Amended and New Plan Benefits" below for certain information with respect to options granted under the Directors' Plan in 1997. The Board believes the amendments to the Directors' Plan are in the best interests of the Company. 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. 5 VOTE REQUIRED The affirmative vote of a majority of the Votes Cast will be required to approve the amendments to the Directors' Plan. THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" THE AMENDMENTS TO THE 1994 DIRECTORS' PLAN. AMENDED AND NEW PLAN BENEFITS The following table sets forth, as to the executive officers named under "Executive Compensation Summary 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 Amended and Restated 1989 Option Plan: (i) the market value of the shares of Common Stock underlying such options as of July 1, 1998 based on a closing price of $44.50 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 Amended and Restated 1989 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 $44.50 on the Nasdaq National Market on July 1, 1998, minus the purchase price of such shares; and (ii) the number of shares of the Company's Common Stock issued under the previous 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 July 1, 1998 based on a closing price of $44.50 on the Nasdaq National Market on that date, minus the exercise price of such shares; and (ii) the number of shares of the Company's Common Stock subject to options granted under the Directors' Plan during fiscal year ended December 31, 1997.
AMENDED AND RESTATED 1998 EMPLOYEE 1994 DIRECTORS' 1989 STOCK OPTION PLAN(1) STOCK PURCHASE PLAN(1) STOCK OPTION PLAN ------------------------- -------------------------- ------------------------ NUMBER OF NUMBER OF NAME OF INDIVIDUAL SHARES SUBJECT SHARES SUBJECT OR IDENTITY OF DOLLAR TO OPTIONS DOLLAR NUMBER OF DOLLAR TO OPTIONS GROUP OR POSITION VALUE($) GRANTED(#)(2) VALUES($) SHARES ISSUED(#) VALUES($) GRANTED(#) - ------------------------ ---------- -------------- --------- ---------------- --------- -------------- Amnon Landan............ $7,120,000 160,000 $ 74,493 1,674 -- -- Chief Executive Officer and President Sharlene Abrams......... 1,112,500 25,000 102,751 2,309 -- -- Vice President of Finance and Administration, Chief Financial Officer and Secretary Moshe Egert............. -- -- 43,521 978 -- -- Vice President of European Operations Aryeh Finegold.......... 4,450,000 100,000 -- -- -- -- Chairman of the Board Kenneth Klein........... 1,335,000 30,000 81,658 1,835 -- -- Vice President of North American Sales Igal Kohavi............. -- -- -- -- $225,500 5,000 Director Yair Shamir............. -- -- -- -- 225,500 5,000 Director Giora Yaron............. -- -- -- -- 225,500 5,000 Director All current executive officers as a group............. 14,017,500 315,000 302,422 6,796 -- -- All current directors who are not executive officers as a group.... -- -- -- -- 667,500 15,000 All other employees as a group.................. 33,475,125 752,250 5,956,681 133,858 -- --
6 - -------- (1) The dollar value and number of units set forth for the 1998 Employee Stock Purchase Plan are based upon each participant's participation in the 1993 Employee Stock Purchase Plan. The 1993 Employee Stock Purchase Plan was terminated in February 1998. Information regarding grants under the 1999 Stock Option Plan is not set forth in the table above as such plan will not become effective until the Amended and Restated 1989 Stock Option Plan terminates in August 1999 and as the 1999 Option Plan replaces the Amended and Restated 1989 Stock Option Plan, the information would be the same as set forth under the Amended and Restated 1989 Stock Option Plan column above. 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 automatically receive 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 1998 Annual Meeting at an exercise price of $34.625 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. 7 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 four most highly compensated executive officers of the Company (the "Named Executive Officers"), who are the only executive officers who earned greater than $100,000 in salary and bonus during the year ended December 31, 1997:
LONG-TERM ANNUAL COMPENSATION COMPENSATION ------------------------------------------ ------------ OTHER ANNUAL SECURITIES NAME AND PRINCIPAL COMPEN- UNDERLYING ALL OTHER POSITION YEAR SALARY($) BONUS($) SATION($) OPTIONS(#) COMPENSATION ----------------------- ---- --------- -------- --------- ------------ ------------ Amnon Landan............ 1997 $215,000 $130,000 $40,800(1) 160,000 -- President and Chief 1996 185,000 -- 45,200(1) 195,000(3) -- Executive 1995 155,000 110,000(2) -- 15,000 -- Officer Sharlene Abrams......... 1997 138,750 40,000 -- 25,000 -- Vice President of 1996 115,000 -- -- 35,000(3) -- Finance and 1995 96,250 62,500(4) -- -- -- Administration, Chief Financial Officer and Secretary Moshe Egert............. 1997 117,121 -- 84,701(5) -- -- Vice President of 1996 91,235 -- 42,000(5) 72,000 -- European 1995 50,358 19,000 -- 9,000 -- Operations 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(8) -- 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 --
- -------- (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 $60,000 awarded to Mr. Finegold which had been accrued, but not yet paid to Mr. Finegold as of the end of 1995. 8 OPTION GRANTS IN LAST FISCAL YEAR The following table sets forth each grant of stock options made during the year ended December 31, 1997 to each of the Named Executive Officers:
INDIVIDUAL GRANTS -------------------------------------- POTENTIAL REALIZABLE VALUE NUMBER OF PERCENT OF EXERCISE AT ASSUMED ANNUAL RATES SECURITIES TOTAL OPTIONS OR BASE OF STOCK PRICE APPRECIATION UNDERLYING GRANTED TO PRICE FOR OPTION TERM (4) OPTIONS EMPLOYEES IN ($/SH) EXPIRATION --------------------------- NAME GRANTED(#)(1) FISCAL YEAR (2) (3) DATE 5% ($) 10% ($) ---- ------------- --------------- -------- ---------- --------------------------- 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
- -------- (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. 9 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:
NUMBER OF SECURITIES VALUE OF UNEXERCISED NO. OF UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT SHARES OPTIONS AT FY-END(#)(2): FY-END($)(1): ACQUIRED ON VALUE ------------------------- ------------------------- NAME EXERCISE(#) REALIZED($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- -------------- ----------- ------------- ----------- ------------- 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 --
- -------- (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. 10 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. 11 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. 12 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 Measurement Period MERCURY NASDAQ STOCK (Fiscal Quarter Covered) INTERACTIVE MARKET - U.S. H & Q GROWTH - ------------------------ ----------- ------------- ------------ 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 13 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's 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. 14 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth as of July 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.
SHARES OF COMMON STOCK BENEFICIALLY OWNED(1) -------------------- PERCENTAGE NAME OF BENEFICIAL OWNER(2) NUMBER OWNERSHIP --------------------------- --------- ---------- Aryeh Finegold(3)(4)....................................... 453,061 2.57% Amnon Landan(4)(5)......................................... 500,670 2.82 Kenneth Klein(4)(6)........................................ 220,881 1.26 Igal Kohavi(7)............................................. 5,000 * Yair Shamir(8)............................................. 30,000 * Giora Yaron(9)............................................. 20,000 * Sharlene Abrams(4)(10)..................................... 115,805 * Moshe Egert(4)(11)......................................... 99,966 * All directors and officers as a group (8 persons)(3)(4)(5)(6)(7)(8)(9)(10)(11).................. 1,455,383 7.80%
- -------- * Less than 1%. (1) Percentage ownership is based on 17,346,026 shares of Common Stock outstanding as of July 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 14,484 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 280,082 shares subject to stock options held by Mr. Finegold that are exercisable within 60 days of July 1, 1998. (4) Includes shares subject to outstanding options that are currently exercisable or exercisable within 60 days of July 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 July 1, 1998. (6) Includes 220,104 shares subject to stock options held by Mr. Klein that are exercisable within 60 days of July 1, 1998. (7) Includes options held by Mr. Kohavi exercisable within 60 days of July 1, 1998 for 5,000 shares of Common Stock pursuant to the Company's 1994 Directors' Stock Option Plan. (8) Includes options held by Mr. Shamir exercisable within 60 days of July 1, 1998 for 15,000 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. (9) Includes options held by Mr. Yaron exercisable within 60 days of July 1, 1998 for 20,000 shares of Common Stock pursuant to the Company's 1994 Directors' Stock Option Plan. (10) Includes 115,000 shares subject to stock options held by Ms. Abrams that are exercisable within 60 days of July 1, 1998. (11) Includes 99,966 shares subject to stock options held by Mr. Egert that are exercisable within 60 days of July 1, 1998. 15 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: July 15, 1998 16 APPENDIX A DESCRIPTION OF THE 1998 EMPLOYEE STOCK PURCHASE PLAN GENERALLY: On June 19, 1998 the Board of Directors of the Company adopted, and the stockholders are being requested to approve, the 1998 Employee Stock Purchase Plan (the "Purchase Plan"). The Board has allocated a total of 325,000 Shares 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 a 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 February 15 and August 15 of each year. The Board has the power to change the duration of Offering Periods with respect to future offerings without shareholder 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: Subject to certain amendments in response to accounting changes as described below, 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. 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. A-1 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 (subject to special amendments in response to accounting changes) such termination cannot adversely affect the rights of any participant. SPECIAL AMENDMENTS IN RESPONSE TO ACCOUNTING CHANGES: In the event that during any Offering Period the accounting rules relating to noncompensatory treatment of employee stock purchase plans under section 423 of the Code change so as to require, in the written opinion of the Company's independent public accountants, that the Company recognize a compensatory charge to earnings with respect to options granted during such Offering Period, the Board may, in its discretion, take any steps necessary to reduce or eliminate such charge to earnings. Such steps may include (without limitation) (i) amending the Plan to provide that the Exercise Price for any Offering Period (including the current Offering Period) shall be equal to 85% of the fair market value of a share of the Common Stock of the Company on the Exercise Date only or (ii) immediately terminating the Offering Period and returning all payroll deductions withheld to participants prior to the Exercise Period. A-2 APPENDIX B DESCRIPTION OF THE AMENDED AND RESTATED 1989 STOCK OPTION PLAN GENERALLY: The Company's Amended and Restated 1989 Stock Option Plan, as amended (the "Amended and Restated 1989 Option Plan") was approved by the Board of Directors in August 1989 and by the stockholders in June 1990. The total number of shares currently reserved for issuance under the Plan is 5,808,669 shares (such number includes the 4% increases in 1996, 1997 and 1998 as described below). The number of shares reserved under the Amended and Restated 1989 Option Plan is automatically increased on the first day of each new fiscal year of the Company from and including the 1996 fiscal year through the 1998 fiscal year by a number of shares equal to 4% 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. In June 1998, the Board of Directors approved a further increase of 300,000 shares issuable under the Amended and Restated 1989 Option Plan, which, if approved, by the stockholders would increase the total shares reserved for issuance under the Amended and Restated 1989 Option Plan since its inception to 6,108,669 shares. The Amended and Restated 1989 Option Plan terminates in August 1999. Options granted under the Amended and Restated 1989 Option 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 Amended and Restated 1989 Option 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 AMENDED AND RESTATED 1989 OPTION PLAN: The purposes of the Amended and Restated 1989 Option 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 AMENDED AND RESTATED 1989 OPTION PLAN: The Amended and Restated 1989 Option 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 Amended and Restated 1989 Option Plan. The interpretation of any provision of the Amended and Restated 1989 Option 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 Amended and Restated 1989 Option Plan. ELIGIBILITY: The Amended and Restated 1989 Option 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 Amended and Restated 1989 Option Plan. STOCK OPTIONS: The Amended and Restated 1989 Option 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. B-1 The exercise price of Options granted under the Amended and Restated 1989 Option Plan must be paid in full by cash, check, Shares of the Company (which, in the case of Shares acquired upon exercise of an Option either have been owned by the Optionee for more than six months on the date of surrender or were not acquired, directly or indirectly, from the Company and which have a fair market value on the exercise date equal to the aggregate exercise price of the Shares as to which said Option shall be exercised) or promissory note. The Administrator may authorize as payment the retention of Shares having a fair market value on the date of exercise equal to the exercise price for the total number of Shares as to which the Option is exercised or it may authorize delivery of a properly executed exercise notice together with irrevocable instructions to a broker to promptly deliver to the Company the amount of sale or loan proceeds required to pay the exercise price. The Administrator may also authorize payment by any combination of the foregoing methods, as well as 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 ninety days, subject to the stated term of the Option. If an Optionee's employment or consultancy is terminated by reason of 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 or adjust such Options. AMENDMENT AND TERMINATION: The Board may amend, alter, suspend or discontinue the Amended and Restated 1989 Option Plan at any time, but such amendment, alteration, suspension or discontinuation shall not impair any Options then outstanding under the Amended and Restated 1989 Option Plan without the participant's consent. B-2 APPENDIX C DESCRIPTION OF THE 1999 STOCK OPTION PLAN GENERALLY: On June 19, 1998 the Board of Directors of the Company adopted, and the stockholders are being requested to approve, the 1999 Stock Option Plan (the "Option Plan"). A total of 225,000 Shares have been reserved for issuance under the Option Plan. The Option Plan will become effective on August 31, 1999 upon expiration of the Amended and Restated 1989 Stock 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 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 all Options, 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. 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. 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. The exercise price of Options granted under the Plan must be paid in full by cash, check, Shares of the Company (which, in the case of Shares acquired upon exercise of an Option either have been owned by the Optionee for more than six months on the date of surrender or were not acquired, directly or indirectly, from the Company and which have a fair market value on the exercise date equal to the aggregate exercise price of the Shares as to which said Option shall be exercised) or promissory note. The Administrator may authorize as payment the retention of Shares having a fair market value on the date of exercise equal to the exercise price for the total number of Shares as to which the Option is exercised or it may authorize delivery of a properly executed exercise notice together with irrevocable instructions to a broker to promptly deliver to the Company the amount of sale or loan proceeds required to pay the exercise price. The Administrator may also authorize payment by any combination of the foregoing methods, as well as 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 ninety days, subject to the stated term of the Option. If an Optionee's employment or consultancy is terminated by reason of 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. C-1 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 or adjust 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. C-2 APPENDIX D DESCRIPTION OF THE 1994 DIRECTORS' STOCK OPTION PLAN GENERALLY: On June 19, 1998 the Board of Directors of the Company amended the 1994 Directors' Stock Option Plan (the "Directors' Plan"). The total number of shares currently reserved for issuance under the Directors' Plan is 500,000 shares. 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 to 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 Directors' Plan must be paid in full by cash, check, Shares of the Company (which, in the case of Shares acquired upon exercise of an Option either have been owned by the Optionee for more than six months on the date of surrender or were not acquired, directly or indirectly, from the Company and which have a fair market value on the exercise date equal to the aggregate exercise price of the Shares as to which said Option shall be exercised) or promissory note. The Administrator may authorize as payment the retention of Shares having a fair market value on the date of exercise equal to the exercise price for the total number of Shares as to which the Option is exercised or it may authorize delivery of a properly executed exercise notice together with irrevocable instructions to a broker to promptly deliver to the Company the amount of sale or loan proceeds required to pay the exercise price. The Administrator may also authorize payment by any combination of the foregoing 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 the event of a merger, liquidation or other reorganization transaction, the Board shall provide for substitution or D-1 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. D-2 MERCURY INTERACTIVE CORPORATION 1998 SPECIAL MEETING OF STOCKHOLDERS The undersigned stockholder of Mercury Interactive Corporation, a Delaware corporation (the "Company"), hereby acknowledges receipt of the Notice of Special Meeting of Stockholders and Proxy Statement, each dated July 15, 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 Special Meeting of Stockholders of Mercury Interactive Corporation to be held on August 14, 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 PROPOSALS 1, 2, 3 AND 4, 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 1. To ratify and approve the adoption of the 1998 Employee Stock Purchase Plan to replace the 1993 Employee Stock Purchase Plan, and the reservation of 325,000 shares for issuance thereunder. FOR AGAINST ABSTAIN [_] [_] [_] 2. To ratify and approve the reservation of an additional 300,000 shares of Common Stock for issuance under the Amended and Restated 1989 Stock Option Plan. FOR AGAINST ABSTAIN [_] [_] [_] 3. To ratify and approve the adoption of the 1999 Stock Option Plan to replace the Amended and Restated 1989 Stock Option Plan, effective upon the expiration of the term of such plan in August 1999, and the reservation of 225,000 shares for issuance thereunder. FOR AGAINST ABSTAIN [_] [_] [_] 4. To ratify and approve 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 Corporation, and to provide for a one time grant to the non-employee directors of the Corporation who are serving as directors of the Corporation as of the date of this Special Meeting of Stockholders. FOR AGAINST 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 -----END PRIVACY-ENHANCED MESSAGE-----