<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 23, 1997
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
RATIONAL SOFTWARE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 7372 54-1217099
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NUMBER)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
2800 SAN TOMAS EXPRESSWAY, SANTA CLARA, CALIFORNIA 95051-0951
(408) 496-3600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
PAUL D. LEVY
CHIEF EXECUTIVE OFFICER
RATIONAL SOFTWARE CORPORATION
2800 SAN TOMAS EXPRESSWAY
SANTA CLARA, CALIFORNIA 95051-0951
(408) 496-3600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
COPIES TO:
FRANCIS S. CURRIE, ESQ. DENNIS R. DEBROECK, ESQ.
GAIL C. HUSICK, ESQ. DAVID W. HEALY, ESQ.
DANIEL P. DILLON, ESQ. JOHN W. KASTELIC, ESQ.
MARTIN A. WELLINGTON, ESQ. FENWICK & WEST, LLP
WILSON SONSINI GOODRICH & ROSATI TWO PALO ALTO SQUARE,
PROFESSIONAL CORPORATION PALO ALTO, CALIFORNIA 94306
650 PAGE MILL ROAD (415) 494-0600
PALO ALTO, CALIFORNIA 94304
(415) 493-9300
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: Upon
consummation of the Merger described herein.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
----------------
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE TO BE OFFERING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED(1) PER UNIT(2) PRICE(2) FEE(2)(3)
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, Par Value
$0.01 per............. 42,500,000 shares $14.87 $631,550,000 $192,000
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Represents the number of shares of the Common Stock of the Registrant
which may be issued to stockholders of Pure Atria Corporation ("Pure
Atria") pursuant to the Merger described herein.
(2) Each share of Pure Atria Common Stock will be converted into 0.9 shares of
Common Stock of the Registrant pursuant to the Merger described herein.
Pursuant to Rule 457(f) under the Securities Act of 1933, as amended, the
registration fee has been calculated as of June 19, 1997. The number shown
is rounded from $14.8611.
(3) The amount of the registration fee includes $105,000 previously paid
pursuant to Section 14(g) of the Securities Exchange Act of 1934, as
amended, in connection with the filing by the Registrant and Pure Atria of
a Preliminary Prospectus/Joint Proxy Statement related to the proposed
Merger.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
[LOGO OF RATIONAL SOFTWARE CORPORATION APPEARS HERE]
June 27, 1997
Dear Stockholder:
As most of you are aware, Rational Software Corporation ("Rational") has
entered into an agreement providing for the merger of Pure Atria Corporation
("Pure Atria") with Rational in a strategic business combination (the
"Merger"). At our Special Meeting of Stockholders (the "Special Meeting") on
July 30, 1997, you will be asked to consider and vote upon the reservation and
issuance of shares of the Common Stock, par value $0.01 per share, of Rational
(the "Rational Common Stock") to the stockholders of Pure Atria pursuant to an
Agreement and Plan of Reorganization, dated as of April 7, 1997 (the
"Agreement"), by and among Rational, Pure Atria and Wings Merger Corporation,
a wholly owned subsidiary of Rational ("Merger Sub"), and upon an amendment to
Rational's Certificate of Incorporation increasing the authorized number of
shares of Common Stock from 75,000,000 to 150,000,000, which, among other
things, will provide Rational with a sufficient number of authorized but
unissued shares of Common Stock to consummate the Merger.
In the Merger, Merger Sub will be merged with and into Pure Atria, which
will be the surviving corporation and will become a wholly owned subsidiary of
Rational. As used herein, the term "Combined Company" means Rational and Pure
Atria and their respective subsidiaries as a consolidated entity following the
Merger.
Pursuant to the Merger, each outstanding share of Common Stock, par value
$0.0001 per share, of Pure Atria (the "Pure Atria Common Stock") will be
converted into the right to receive 0.9 (the "Exchange Ratio") shares of
Rational Common Stock, and each outstanding option or right to purchase Pure
Atria Common Stock under the Pure Atria stock option plans or the Pure Atria
stock purchase plan will be assumed by Rational and will become an option or
right to purchase Rational Common Stock, with appropriate adjustments to be
made to the number of shares issuable thereunder and the exercise price
thereof based on the Exchange Ratio. The shares of Rational Common Stock held
by Rational stockholders immediately prior to the Merger will remain unchanged
by the Merger.
Based upon the capitalization of Pure Atria as of the close of business on
March 31, 1997, an aggregate of approximately 38,542,000 shares of Rational
Common Stock will be issued to Pure Atria stockholders in the Merger and
Rational will assume options and rights to purchase Pure Atria Common Stock
for up to approximately 6,951,000 additional shares of Rational Common Stock.
Based upon the capitalization of Rational and Pure Atria as of the close of
business on March 31, 1997, immediately following the Merger, the former
securityholders of Pure Atria will hold approximately 45% of the Combined
Company's outstanding voting power, and approximately 45% of the Combined
Company's capital stock calculated on a fully diluted basis. The foregoing
numbers of shares and percentages are subject to change in the event that the
capitalization of either Rational or Pure Atria changes subsequent to
March 31, 1997, and prior to the effective time of the Merger.
The proposals relating to the Merger are described more fully in the
accompanying Notice of Special Meeting of Stockholders and Prospectus/Joint
Proxy Statement.
After careful consideration, Rational's Board of Directors has determined
that the Merger is fair from a financial point of view to, and in the best
interests of Rational. Therefor, Rational's Board of Directors has approved
the Agreement and the transactions contemplated thereby by the unanimous vote
of all non-interested directors, and recommends that you vote FOR the
proposals relating to the Merger.
<PAGE>
In addition, Rational has retained the investment banking firm of Hambrecht
& Quist LLC ("Hambrecht & Quist") to advise it with respect to the
consideration to be paid by Rational in the Merger. Hambrecht & Quist has
advised the Board of Directors of Rational (the "Rational Board") that, in its
opinion, the consideration to be paid by Rational is fair from a financial
point of view to Rational. A copy of the Hambrecht & Quist opinion dated as of
April 6, 1997 is attached to the Prospectus/Joint Proxy Statement as Annex E.
The Rational Board believes the Merger offers Rational and its stockholders
a number of important benefits, including the strategic fit between the two
companies' product lines and their respective technologies, development,
managerial, sales and marketing resources, the potential ability of the
Combined Company to better serve customers with broader, more integrated
product offerings and the opportunity for enhanced stockholder value over the
long term.
All stockholders are invited to attend the Special Meeting in person. The
reservation and issuance of the shares of Rational Common Stock in connection
with the Merger requires the affirmative vote of the majority of the total
votes cast at the Special Meeting regarding such proposal. The amendment to
Rational's Certificate of Incorporation requires the affirmative vote of the
holders of a majority of the shares of Rational Common Stock outstanding as of
the record date. THE MERGER CANNOT BE CONSUMMATED UNLESS BOTH PROPOSALS ARE
APPROVED.
Stockholders are urged to review carefully the information contained in the
accompanying Prospectus/Joint Proxy Statement, including in particular the
information under the captions "Rational Special Meeting--Recommendation of
the Rational Board," "Proposal No. 1: The Merger--Risk Factors," "--Approval
of the Merger and Related Transactions--Joint Reasons for the Merger," and "--
Rational's Reasons for the Merger" prior to making any voting decision.
Whether or not you expect to attend the Special Meeting in person, please
complete, sign and promptly return the enclosed proxy card in the enclosed
postage-prepaid envelope to assure representation of your shares. You may
revoke your proxy at any time before it has been voted, and if you attend the
Special Meeting you may vote in person even if you have previously returned
your proxy card. Your prompt cooperation will be greatly appreciated.
Sincerely,
/s/ Paul D. Levy
Paul D. Levy
Chief Executive Officer
Santa Clara, California
YOUR PROXY IS IMPORTANT--PLEASE VOTE PROMPTLY
<PAGE>
RATIONAL SOFTWARE CORPORATION
2800 SAN TOMAS EXPRESSWAY
SANTA CLARA, CALIFORNIA 95051
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JULY 30, 1997
TO THE STOCKHOLDERS OF RATIONAL SOFTWARE CORPORATION:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the "Special
Meeting") of Rational Software Corporation, a Delaware corporation
("Rational"), will be held on July 30, 1997 at 11:30 a.m., local time, at 2800
San Tomas Expressway, Santa Clara, California.
At the Special Meeting you will be asked to consider and vote upon the
following matters:
(1) The reservation and issuance of shares of the Common Stock, par value
$0.01 per share, of Rational (the "Rational Common Stock") to the
stockholders of Pure Atria Corporation ("Pure Atria") pursuant to an
Agreement and Plan of Reorganization, dated as of April 7, 1997 (the
"Agreement"), by and among Rational, Pure Atria and Wings Merger
Corporation, a wholly owned subsidiary of Rational ("Merger Sub"),
providing, among other things, (i) for the merger of Merger Sub with and
into Pure Atria, resulting in Pure Atria becoming a wholly owned subsidiary
of Rational (the "Merger"), (ii) for the conversion of outstanding shares
of Common Stock, par value $.0001 per share, of Pure Atria ("Pure Atria
Common Stock") into the right to receive 0.9 (the "Exchange Ratio") shares
of Rational Common Stock, and (iii) for each outstanding option or right to
purchase Pure Atria Common Stock under the Pure Atria stock option plans
and the Pure Atria stock purchase plan to be assumed by Rational and to
become an option or right to purchase Rational Common Stock, with
appropriate adjustments to be made to the number of shares issuable
thereunder and the exercise price thereof based on the Exchange Ratio;
(2) To approve an amendment of Rational's Certificate of Incorporation to
increase the authorized number of shares of Common Stock from 75,000,000 to
150,000,000, which will, among other things, provide Rational with a
sufficient number of authorized but unissued shares of Common Stock to
consummate the Merger; and
(3) To transact such other business as may properly come before the
Special Meeting or any adjournment thereof.
Each proposal is described more fully in the accompanying Prospectus/Joint
Proxy Statement.
Stockholders of record at the close of business on June 17, 1997 are
entitled to notice of, and to vote at, the Special Meeting and any
adjournments or postponements thereof. All stockholders are cordially invited
to attend the Special Meeting in person.
By Order of the Board of Directors
Paul D. Levy
Chief Executive Officer
Santa Clara, California
June 27, 1997
WHETHER OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE,
DATE AND SIGN THE ENCLOSED PROXY CARD AND MAIL IT PROMPTLY IN THE ENCLOSED
ENVELOPE IN ORDER TO ASSURE REPRESENTATION OF YOUR SHARES. NO POSTAGE NEED BE
AFFIXED IF THE PROXY CARD IS MAILED IN THE UNITED STATES.
<PAGE>
PURE ATRIA
(LOGO)
June 27, 1997
Dear Stockholder:
As most of you are aware, Pure Atria Corporation ("Pure Atria") has entered
into a definitive merger agreement to combine with Rational Software
Corporation ("Rational") in a strategic business combination (the "Merger").
At our Special Meeting of Stockholders (the "Special Meeting") on July 30,
1997, you will be asked to consider and vote upon the adoption and approval of
the Agreement and Plan of Reorganization, dated as of April 7, 1997 (the
"Agreement"), by and among Rational, its wholly owned subsidiary, Wings Merger
Corporation ("Merger Sub"), and Pure Atria and the transactions contemplated
thereby.
In the Merger, Merger Sub will be merged with and into Pure Atria, which
will be the surviving corporation and will become a wholly owned subsidiary of
Rational. As used herein, the term "Combined Company" means Rational and Pure
Atria and their respective subsidiaries as a consolidated entity following the
Merger.
Pursuant to the Merger, each outstanding share of Common Stock, par value
$0.0001 per share, of Pure Atria (the "Pure Atria Common Stock") will be
converted into the right to receive 0.9 (the "Exchange Ratio") shares of
Common Stock, par value $0.01 per share, of Rational (the "Rational Common
Stock") and each outstanding option or right to purchase Pure Atria Common
Stock under the Pure Atria stock option plans or the Pure Atria stock purchase
plan will be assumed by Rational and will become an option or right to
purchase Rational Common Stock, with appropriate adjustments to be made to the
number of shares issuable thereunder and the exercise price thereof based on
the Exchange Ratio. The shares of Rational Common Stock held by Rational
stockholders immediately prior to the Merger will remain unchanged by the
Merger.
Based upon the capitalization of Pure Atria as of the close of business on
March 31, 1997, an aggregate of approximately 38,542,000 shares of Rational
Common Stock will be issued to Pure Atria stockholders in the Merger and
Rational will assume options and rights to purchase Pure Atria Common Stock
for up to approximately 6,951,000 additional shares of Rational Common Stock.
Based upon the capitalization of Rational and Pure Atria as of the close of
business on March 31, 1997, immediately following the Merger, the former
securityholders of Pure Atria will hold approximately 45% of the Combined
Company's outstanding voting power, and approximately 45% of the Combined
Company's capital stock calculated on a fully diluted basis. The foregoing
numbers of shares and percentages are subject to change in the event that the
capitalization of either Rational or Pure Atria changes subsequent to March
31, 1997, and prior to the effective time of the Merger.
The accompanying Prospectus/Joint Proxy Statement describes more fully the
proposal relating to the Merger.
After careful consideration, the Pure Atria Board of Directors has
determined that the Merger is fair from a financial point of view to, and in
the best interests of, Pure Atria and its stockholders. Therefore, Pure
Atria's Board of Directors has adopted and approved the Agreement and the
transactions contemplated thereby by unanimous vote, and recommends that you
vote FOR the adoption and approval of the Agreement and the transactions
contemplated thereby.
In addition, Pure Atria has retained the investment banking firm of Deutsche
Morgan Grenfell Inc. ("DMG") as its financial advisor in connection with the
Merger. DMG has delivered to the Pure Atria Board of Directors its opinion,
dated as of April 6, 1997, that, as of such date, the Exchange Ratio pursuant
to the Merger is fair from a financial point of view to the holders of Pure
Atria Common Stock. A copy of the DMG opinion is attached to the
Prospectus/Joint Proxy Statement as Annex F.
<PAGE>
The Board of Directors of Pure Atria believes the Merger offers Pure Atria
and its stockholders a number of important benefits, including the strategic
fit between the two companies' product lines and their respective
technologies, development, managerial, sales and marketing resources, the
potential ability of the Combined Company to better serve customers with
broader, more integrated product offerings, and the opportunity for enhanced
stockholder value over the long term.
All stockholders are invited to attend the Special Meeting in person. The
affirmative vote of holders of a majority of the shares of Pure Atria Common
Stock outstanding as of the record date is necessary for adoption and approval
of the Agreement and the transactions contemplated thereby.
Stockholders are urged to review carefully the information contained in the
accompanying Prospectus/Joint Proxy Statement, including in particular the
information under the captions "Pure Atria Special Meeting--Recommendation of
the Pure Atria Board," "Proposal No. 1: The Merger--Risk Factors," "--Approval
of the Merger and Related Transactions--Joint Reasons for the Merger," and "--
Pure Atria's Reasons for the Merger" prior to making any voting decision in
connection with their Pure Atria Common Stock.
Whether or not you expect to attend the Special Meeting in person, please
complete, sign and promptly return the enclosed proxy card in the enclosed
postage-prepaid envelope to assure representation of your shares. You may
revoke your proxy at any time before it has been voted, and if you attend the
Special Meeting you may vote in person even if you have previously returned
your proxy card. Your prompt cooperation will be greatly appreciated.
Sincerely,
Reed Hastings
President and Chief Executive
Officer
Cupertino, California
YOUR PROXY IS IMPORTANT--PLEASE VOTE PROMPTLY
PURE ATRIA STOCKHOLDERS SHOULD NOT SURRENDER OR OTHERWISE ATTEMPT TO
EXCHANGE THEIR PURE ATRIA STOCK CERTIFICATES FOR RATIONAL STOCK CERTIFICATES
UNLESS AND UNTIL THEY HAVE RECEIVED APPROPRIATE NOTICE AND INSTRUCTIONS FOR
EXCHANGE.
<PAGE>
PURE ATRIA CORPORATION
18880 HOMESTEAD ROAD
CUPERTINO, CA 95014
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JULY 30, 1997
TO THE STOCKHOLDERS OF PURE ATRIA CORPORATION:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the "Special
Meeting") of Pure Atria Corporation, a Delaware corporation ("Pure Atria"),
will be held at the offices of Fenwick & West LLP, Two Palo Alto Square, Palo
Alto, California 94306 on July 30, 1997, at 9:00 a.m., local time.
At the Special Meeting you will be asked to consider and vote upon the
following matters:
1. Approval and adoption of the Agreement and Plan of Reorganization (the
"Agreement"), dated as of April 7, 1997, by and among Rational Software
Corporation, a Delaware corporation ("Rational"), Wings Merger Corporation,
a Delaware corporation and wholly owned subsidiary of Rational ("Merger
Sub"), and Pure Atria and the transactions contemplated thereby.
2. Such other matters as may properly come before the Special Meeting or
any postponements or adjournments thereof.
The Agreement contemplates that (i) Merger Sub will be merged with and into
Pure Atria, with Pure Atria becoming the surviving corporation, thereby
becoming a wholly owned subsidiary of Rational (the "Merger"), (ii) each share
of Common Stock, $0.0001 par value per share, of Pure Atria ("Pure Atria
Common Stock"), will be converted into the right to receive, and become
exchangeable for, 0.9 (the "Exchange Ratio") shares of Common Stock, $0.01 par
value per share, of Rational ("Rational Common Stock") and (iii) each
outstanding option or right to purchase Pure Atria Common Stock will be
assumed by Rational and will become an option or right to purchase Rational
Common Stock, with appropriate adjustments to be made to the number of shares
issuable thereunder and the exercise price thereof based on the Exchange
Ratio.
The proposal relating to the Merger is described more fully in the
accompanying Prospectus/Joint Proxy Statement.
Stockholders of record as of the close of business on June 17, 1997 will be
entitled to notice of, and to vote at, the Special Meeting and any
adjournments or postponements thereof.
All stockholders are cordially invited to attend the Special Meeting in
person.
For the Board of Directors
Reed Hastings
President and Chief Executive
Officer
Cupertino, California
June 27, 1997
WHETHER OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE,
DATE AND SIGN THE ENCLOSED PROXY CARD AND MAIL IT PROMPTLY IN THE ENCLOSED
ENVELOPE IN ORDER TO ASSURE REPRESENTATION OF YOUR SHARES. NO POSTAGE NEED BE
AFFIXED IF THE PROXY CARD IS MAILED IN THE UNITED STATES.
<PAGE>
PROSPECTUS/JOINT PROXY STATEMENT
42,500,000 Shares
[LOGO OF RATIONAL SOFTWARE CORPORATION APPEARS HERE]
Common Stock
This Prospectus/Joint Proxy Statement constitutes the Prospectus of Rational
Software Corporation, a Delaware corporation ("Rational"), with respect to up
to 42,500,000 shares of its Common Stock, par value $0.01 per share ("Rational
Common Stock"), to be issued in connection with the proposed merger (the
"Merger") of Wings Merger Corporation, a Delaware corporation and a wholly
owned subsidiary of Rational ("Merger Sub"), with and into Pure Atria
Corporation, a Delaware corporation ("Pure Atria"), pursuant to the terms set
forth in the Agreement and Plan of Reorganization, dated as of April 7, 1997
(the "Agreement"), by and among Rational, Merger Sub and Pure Atria. Based
upon the capitalization of Rational and Pure Atria as of the close of business
on March 31, 1997, immediately following the Merger, the former
securityholders of Pure Atria will hold approximately 45% of the Combined
Company's outstanding voting power, and approximately 45% of the Combined
Company's capital stock calculated on a fully diluted basis. As used herein,
the term "Combined Company" means Rational and Pure Atria and their respective
subsidiaries as a consolidated entity following the Merger and references to
the products, business, results of operations or financial condition of the
Combined Company should be considered to refer to Rational and Pure Atria,
unless the context otherwise requires. The shares of Rational Common Stock
after the Merger are sometimes referred to herein as "Combined Company Common
Stock" and the Common Stock, par value $0.0001 per share, of Pure Atria is
referred to herein as "Pure Atria Common Stock." As a result of the Merger,
each outstanding share of Pure Atria Common Stock will be converted into the
right to receive 0.9 (the "Exchange Ratio") shares of Rational Common Stock,
and each outstanding option or right to purchase Pure Atria Common Stock under
the Pure Atria 1995 Stock Plan, the Pure Software, Inc. 1992 Stock
Option/Stock Issuance Plan, the Atria Software, Inc. 1994 Stock Plan, the
Atria Software, Inc. 1994 Non-Employee Director Stock Option Plan, the Atria
Software, Inc. 1990 Stock Option Plan, the Integrity QA Software, Inc. 1995
Stock Option Plan, the Performix, Inc. 1991 Stock Option Plan and the QualTrak
1994 Stock Option Plan (collectively, the "Pure Atria Stock Option Plans") or
the Pure Atria Employee Stock Purchase Plan (the "Pure Atria Stock Purchase
Plan") will be assumed by Rational and will become an option or right to
purchase Rational Common Stock, with appropriate adjustments to the number of
shares issuable thereunder and the exercise price thereof based on the
Exchange Ratio.
This Prospectus/Joint Proxy Statement also constitutes the Proxy Statements
of Rational and Pure Atria with respect to the Special Meeting of Stockholders
of Rational scheduled to be held on July 30, 1997 (the "Rational Special
Meeting"), and the Special Meeting of Stockholders of Pure Atria scheduled to
be held on July 30, 1997 (the "Pure Atria Special Meeting").
This Prospectus/Joint Proxy Statement and the accompanying form of proxy are
first being mailed to the stockholders of Rational and Pure Atria on or about
June 27, 1997.
See "RISK FACTORS" beginning at page 27 for a discussion of certain factors
that should be considered by the Rational stockholders in evaluating the
proposals related to the Merger to be voted on at the Rational Special Meeting
and by the Pure Atria stockholders in evaluating the proposal to be voted on
at the Pure Atria Special Meeting and the acquisition of the securities
offered hereby.
----------------
NEITHER THIS TRANSACTION NOR THE SECURITIES OF RATIONAL OFFERED HEREBY HAVE
BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS/JOINT PROXY STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
----------------
The date of this Prospectus/Joint Proxy Statement is June , 1997.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AVAILABLE INFORMATION..................................................... 1
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE........................... 1
TRADEMARKS................................................................ 2
FORWARD-LOOKING STATEMENTS................................................ 2
SUMMARY................................................................... 3
STOCKHOLDER MEETINGS..................................................... 3
Rational Special Meeting................................................ 3
Date, Time, Place and Purpose......................................... 3
Record Date and Vote Required......................................... 3
Recommendation of Rational Board of Directors......................... 4
Pure Atria Special Meeting.............................................. 4
Date, Time, Place and Purpose......................................... 4
Record Date and Vote Required......................................... 4
Recommendation of Pure Atria Board of Directors....................... 4
PROPOSAL NO. 1: THE MERGER............................................... 5
The Companies........................................................... 5
Risk Factors............................................................ 6
Reasons for the Merger.................................................. 7
Opinions of Financial Advisors.......................................... 8
Income Tax Treatment.................................................... 8
Regulatory Matters...................................................... 8
Accounting Treatment.................................................... 9
Terms of the Agreement.................................................. 9
Appraisal Rights........................................................ 13
MARKET PRICE DATA........................................................ 14
SELECTED HISTORICAL AND SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL
DATA................................................................... 16
RATIONAL SELECTED HISTORICAL FINANCIAL INFORMATION ................... 16
PURE ATRIA SELECTED HISTORICAL FINANCIAL INFORMATION.................. 17
RATIONAL AND PURE ATRIA SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL
DATA.................................................................... 18
COMPARATIVE PER SHARE DATA............................................... 19
PROPOSAL NO. 2 FOR RATIONAL STOCKHOLDERS: AMENDMENT OF RATIONAL'S
CERTIFICATE OF INCORPORATION............................................ 20
INTRODUCTION.............................................................. 21
RATIONAL SPECIAL MEETING.................................................. 21
Date, Time and Place of Rational Special Meeting...................... 21
Purpose............................................................... 21
Record Date and Outstanding Shares.................................... 21
Vote Required......................................................... 21
Proxies............................................................... 22
Solicitation of Proxies; Expenses..................................... 23
Recommendation of the Rational Board.................................. 23
PURE ATRIA SPECIAL MEETING................................................ 24
Date, Time and Place of Pure Atria Special Meeting.................... 24
Purpose............................................................... 24
Record Date and Outstanding Shares.................................... 24
Vote Required......................................................... 24
Proxies............................................................... 25
Solicitation of Proxies; Expenses..................................... 25
</TABLE>
i
<PAGE>
TABLE OF CONTENTS--(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Recommendation of the Pure Atria Board................................ 25
PROPOSAL NO. 1: THE MERGER................................................ 26
RISK FACTORS............................................................ 26
Risks Related to the Merger........................................... 26
Risks Related to Rational and Pure Atria.............................. 29
Risks Related to Rational............................................. 37
Risks Related to Pure Atria........................................... 39
APPROVAL OF THE MERGER AND RELATED TRANSACTIONS......................... 41
Joint Reasons for the Merger.......................................... 41
Rational's Reasons for the Merger..................................... 43
Pure Atria's Reasons for the Merger................................... 46
Disadvantages of the Merger........................................... 48
Material Contacts and Board Deliberations............................. 48
Opinion of Rational's Financial Advisor............................... 56
Opinion of Pure Atria's Financial Advisor............................. 59
Certain Federal Income Tax Considerations............................. 64
Governmental and Regulatory Approvals................................. 65
Accounting Treatment.................................................. 65
TERMS OF THE MERGER..................................................... 66
Effective Time........................................................ 66
Manner and Basis of Converting Shares................................. 66
Stock Ownership Following the Merger.................................. 67
Conduct of the Combined Company Following the Merger.................. 67
Conduct of Rational's and Pure Atria's Businesses Prior to the
Merger............................................................... 68
Non-Solicitation...................................................... 69
Conditions to the Merger.............................................. 70
Termination, Amendment and Waiver..................................... 71
Break Up Fees; Expenses............................................... 72
Stock Option Agreements............................................... 73
Voting Agreements..................................................... 73
Affiliate Agreements.................................................. 74
Interests of Certain Persons.......................................... 74
Appraisal Rights...................................................... 75
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION............ 76
Unaudited Pro Forma Condensed Combined Balance Sheet Reflecting
Rational Software Corporation After Giving Effect to the Merger...... 77
Unaudited Pro Forma Condensed Combined Statements of Operations for
the Year Ended March 31, 1997 Reflecting Rational Software
Corporation After Giving Effect to the Merger........................ 78
Unaudited Pro Forma Condensed Combined Statements of Operations for
the Years Ended March 31, 1995 and 1996 Reflecting Rational Software
Corporation After Giving Effect to the Merger........................ 79
Notes to Unaudited Pro Forma Condensed Combined Financial Statements.. 80
COMPARISON OF CAPITAL STOCK............................................. 82
Description of Rational Capital Stock................................. 82
Description of Pure Atria Capital Stock............................... 82
Comparison of Capital Stock........................................... 83
PROPOSAL NO. 2 FOR RATIONAL STOCKHOLDERS: AMENDMENT OF RATIONAL'S
CERTIFICATE OF INCORPORATION............................................. 85
Certain Anti-Takeover Effects......................................... 85
EXPERTS................................................................... 87
LEGAL MATTERS............................................................. 87
FUTURE STOCKHOLDER PROPOSALS.............................................. 87
ACCOUNTANTS' REPRESENTATIVES.............................................. 87
INDEX TO FINANCIAL STATEMENTS............................................. F-1
</TABLE>
ii
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TABLE OF CONTENTS--(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ANNEX A--Agreement and Plan of Reorganization, dated as of April 7, 1997,
by and among Rational Software Corporation, Wings Merger Corporation and
Pure Atria Corporation................................................... A-1
ANNEX B--Form of Certificate of Merger Merging Wings Merger Corporation
with and into Pure Atria Corporation..................................... B-1
ANNEX C--Stock Option Agreement dated April 7, 1997, by and between
Rational Software Corporation and Pure Atria Corporation (granting
Rational the option to purchase Pure Atria Common Stock)................. C-1
ANNEX D--Stock Option Agreement dated April 7, 1997, by and between
Rational Software Corporation and Pure Atria Corporation (granting Pure
Atria the option to purchase Rational Common Stock)...................... D-1
ANNEX E--Opinion of Hambrecht & Quist LLC................................. E-1
ANNEX F--Opinion of Deutsche Morgan Grenfell Inc. ........................ F-1
ANNEX G--Form of Amendment to Certificate of Incorporation of Rational
Software Corporation..................................................... G-1
</TABLE>
iii
<PAGE>
AVAILABLE INFORMATION
Rational and Pure Atria are subject to the information reporting
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith file reports, proxy statements and other
information with the Securities and Exchange Commission (the "SEC"). Such
reports, proxy statements and other information may be inspected and copied at
the public reference facilities maintained by the SEC at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's
regional offices located at Seven World Trade Center, Suite 1300, New York,
New York 10048, and at Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60601-2511. Copies of such material may be obtained by mail
from the Public Reference Section of the SEC at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. The SEC also
maintains a Web site that contains reports, proxy and information statements
and other information regarding registrants that file electronically with the
SEC at the address "http://www.sec.gov." Rational Common Stock and Pure Atria
Common Stock are quoted on the Nasdaq National Market, and such reports, proxy
statements and other information can also be inspected at the offices of
Nasdaq Operations, 1735 K Street, N.W., Washington, D.C. 20006.
Rational has filed with the SEC a registration statement on Form S-4
(herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"). This Prospectus/Joint Proxy Statement does not contain all
of the information set forth in the Registration Statement, certain parts of
which are omitted in accordance with the rules and regulations of the SEC. For
further information, reference is hereby made to the Registration Statement.
Copies of the Registration Statement and the exhibits and schedules thereto
may be inspected, without charge, at the offices of the SEC, or obtained at
prescribed rates from the Public Reference Section of the SEC at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN AS CONTAINED HEREIN IN CONNECTION WITH THESE
MATTERS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY RATIONAL OR PURE ATRIA. NEITHER THE
DELIVERY HEREOF NOR ANY DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
FACTS HEREIN SET FORTH SINCE THE DATE HEREOF. THIS PROSPECTUS/JOINT PROXY
STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER
TO BUY THE SECURITIES OFFERED BY THIS PROSPECTUS/JOINT PROXY STATEMENT WHERE,
OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR
SOLICITATION.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
Rational's Annual Report on Form 10-K for the fiscal year ended March 31,
1997, Rational's Form 8-A dated May 25, 1984, and amended on Form 8-A/A dated
May 25, 1995, Rational's Current Report on Form 8-K dated February 26, 1997,
as amended on Form 8-K/A filed May 12, 1997, Rational's Current Report on
Form 8-K dated March 31, 1997, as amended on Form 8-K/A filed June 16, 1997,
Rational's Current Report on Form 8-K, dated April 7, 1997, previously filed
by Rational with the SEC, are hereby incorporated by reference in this
Prospectus/Joint Proxy Statement except as superseded or modified herein. Pure
Atria's Annual Report on Form 10-K for the fiscal year ended December 31,
1996, as amended by Form 10-K/A, dated April 25, 1997, Pure Atria's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1997, Pure Atria's Form 8-
A, dated June 7, 1995, Pure Atria's Current Report on Form 8-K dated January
31, 1997, as amended on Form 8-K/A filed May 14, 1997, Pure Atria's Form 8-K,
dated April 16, 1997, previously filed by Pure Atria with the SEC, are hereby
incorporated by reference in this Prospectus/Joint Proxy Statement except as
superseded or modified herein. All documents filed by Rational and Pure Atria
with the SEC pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act
after the date of this Prospectus/Joint Proxy Statement and prior to the
termination of the offering of the shares offered hereby shall be deemed to be
incorporated by reference into this Prospectus/Joint Proxy Statement and to be a
part hereof from the date of filing of such documents. Any statement contained
in any document incorporated or deemed to be incorporated by reference herein
shall be
<PAGE>
deemed to be modified or superseded for purposes of this Prospectus/Joint
Proxy Statement to the extent that a statement contained herein or in any
other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as
modified or superseded, to constitute a part of this Prospectus/Joint Proxy
Statement.
THIS PROSPECTUS/JOINT PROXY STATEMENT INCORPORATES DOCUMENTS BY REFERENCE
WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. RATIONAL AND PURE ATRIA
WILL PROVIDE WITHOUT CHARGE TO EACH PERSON, INCLUDING ANY BENEFICIAL OWNER, TO
WHOM THIS PROSPECTUS IS DELIVERED, UPON WRITTEN OR ORAL REQUEST OF SUCH
PERSON, A COPY OF ANY AND ALL OF THE DOCUMENTS THAT HAVE BEEN OR MAY BE
INCORPORATED BY REFERENCE HEREIN (OTHER THAN EXHIBITS TO SUCH DOCUMENTS WHICH
ARE NOT SPECIFICALLY INCORPORATED BY REFERENCE INTO SUCH DOCUMENTS). IN THE
CASE OF DOCUMENTS RELATED TO RATIONAL, SUCH REQUESTS SHOULD BE DIRECTED TO THE
SECRETARY AT RATIONAL'S PRINCIPAL EXECUTIVE OFFICES AT 2800 SAN TOMAS
EXPRESSWAY, SANTA CLARA, CALIFORNIA 95051- 0951 (TELEPHONE (408) 496-3600). IN
THE CASE OF DOCUMENTS RELATED TO PURE ATRIA, SUCH REQUESTS SHOULD BE DIRECTED
TO CHRISTINA QUAKENBUSH AT PURE ATRIA'S PRINCIPAL EXECUTIVE OFFICES AT 18880
HOMESTEAD ROAD, CUPERTINO, CA 95014 (TELEPHONE (408) 863-9900). IN ORDER TO
ENSURE TIMELY DELIVERY OF THE DOCUMENTS, REQUESTS SHOULD BE MADE BY JULY 23,
1997.
TRADEMARKS
This Prospectus/Joint Proxy Statement contains trademarks of Rational and
Pure Atria, and may contain trademarks of others, in the U.S. and other
countries. Rational(R), Rational Rose(R), SoDA(R), Verdix(R), Rational Summit,
Rational Apex, VADScross, Rational Approach, Rational Visual Test, SQA(R), SQA
Suite(R), SQA Process(R), SQA Manager(R), SQA Robot(R), SQA Load Test(R),
Object Testing(R), Object-Oriented Recording(R), RequisitePro(R), and preVue-
C/S, preVue-Web, preVue-X, WinVue and preVue-ASCII are trademarks of Rational.
ClearCase(R), ClearCase MultiSite(R), Performix(R), Pure Coverage(R), Pure
Link(R), Purify(R), Quantify(R), Pure Atria, the Pure Atria logo, ClearCase
Attache, ClearDDTS, and Clear Guide are trademarks of Pure Atria. Microsoft,
Windows(R)95, Windows(R) NT, Visual Basic(R), Visual C++, Visual J++, ActiveX,
BackOffice and Developer Studio are trademarks of Microsoft Corporation
("Microsoft"). Java and all Java-based trademarks are trademarks or registered
trademarks of Sun Microsystems, Inc. ("Sun Microsystems") in the U.S. and
other countries.
FORWARD-LOOKING STATEMENTS
This Prospectus/Joint Proxy Statement contains forward-looking statements
within the meaning of Section 27A of the Securities Act and Section 21E of the
Exchange Act. Words such as "expects," "anticipates," "intends," "plans,"
"believes," "seeks," "estimates," variations of such words and similar
expressions are intended to identify these forward looking statements. Actual
results could differ materially from those projected in the forward-looking
statements as a result of certain factors, including those described in the
risk factors set forth under "Proposal No. 1: The Merger--Risk Factors," and
reference is made to the particular discussions set forth under "--Approval of
the Merger and Related Transactions--Joint Reasons for the Merger," "--
Rational's Reasons for the Merger," and "--Pure Atria's Reasons for the
Merger."
Readers are cautioned not to place undue reliance on forward-looking
statements contained herein, which reflect the analysis of the management of
Rational and Pure Atria, as appropriate, only as of the date hereof. Neither
Rational nor Pure Atria undertakes any obligation to release publicly the
results of any revision to these forward-looking statements which may be made
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
2
<PAGE>
SUMMARY
The following contains a summary of certain information contained elsewhere
in this Prospectus/Joint Proxy Statement. This summary does not contain a
complete statement of all material elements of the proposals to be voted on and
is qualified in its entirety by the more detailed information appearing
elsewhere in this Prospectus/Joint Proxy Statement and in the documents annexed
hereto. Except as otherwise noted, all figures presented in this
Prospectus/Joint Proxy Statement have been adjusted to reflect stock splits by
Rational through March 31, 1997.
STOCKHOLDER MEETINGS
RATIONAL SPECIAL MEETING
Date, Time, Place and Purpose
The Rational Special Meeting will be held at 2800 San Tomas Expressway, Santa
Clara, CA 95051, on July 30, 1997 at 11:30 a.m. local time. The purpose of the
Rational Special Meeting is (i) to approve the reservation and issuance of
shares of Rational Common Stock to the securityholders of Pure Atria pursuant
to the Agreement and (ii) to amend Rational's Certificate of Incorporation to
increase the authorized number of shares of Rational Common Stock from
75,000,000 to 150,000,000. See "Rational Special Meeting--Date, Time and Place
of Rational Special Meeting," and "--Purpose."
Record Date and Vote Required
Only Rational stockholders of record at the close of business on June 17,
1997 (the "Rational Record Date"), are entitled to notice of and to vote at the
Rational Special Meeting. Because the number of shares of Rational Common Stock
to be issued or reserved for issuance in connection with the Merger will exceed
20% of the number of shares of Rational Common Stock outstanding prior to the
Merger, approval by holders of Rational Common Stock of the reservation and
issuance of Rational Common Stock pursuant to the Agreement is required under
the Nasdaq National Market rules. Under the Nasdaq National Market rules, the
proposal to reserve and issue Rational Common Stock pursuant to the Agreement
must be approved by a majority of the votes cast at the Rational Special
Meeting. In addition, because Rational does not currently have a sufficient
number of authorized but unissued shares of Rational Common Stock to consummate
the Merger, Rational stockholders are being asked to approve an amendment to
Rational's Certificate of Incorporation to increase the number of authorized
shares of Rational Common Stock. The proposal to amend Rational's Certificate
of Incorporation must be approved by a majority of the shares of Rational
Common Stock outstanding as of the Rational Record Date. IF HOLDERS OF RATIONAL
COMMON STOCK DO NOT VOTE TO APPROVE BOTH SUCH RESERVATION AND ISSUANCE AND SUCH
AMENDMENT, THE MERGER WILL NOT BE CONSUMMATED. Rational is not a constituent
corporation to the Merger and, therefore, specific approval of the Agreement by
Rational's stockholders is not required under the Delaware General Corporation
Law (the "DGCL") or Rational's Certificate of Incorporation or Bylaws. See
"Rational Special Meeting--Vote Required."
As a group, all executive officers and directors of Rational and their
affiliates owned 762,805 shares, or approximately 2%, of Rational Common Stock
outstanding as of the Rational Record Date. No executive officer or director of
Pure Atria or any affiliate of any such executive officer or director
beneficially owned any shares of Rational Common Stock as of such date.
Rational's directors have entered into Voting Agreements, as defined below in
"Proposal No.1: The Merger--Terms of the Merger--Voting Agreements," with Pure
Atria pursuant to which each of the Rational directors has agreed to vote, and
to grant Pure Atria an irrevocable proxy to vote, the shares of Rational Common
Stock owned by such directors in favor of the proposals related to the
reservation and issuance of Rational Common Stock pursuant to the Agreement and
the amendment of Rational's Certificate of Incorporation.
As of the Rational Record Date, there were 47,685,503 shares of Rational
Common Stock outstanding and 998 stockholders of record of Rational Common
Stock, each of which will be entitled to cast one vote per share on the matters
to be acted on at the Rational Special Meeting. See "Rational Special Meeting--
Record Date and Outstanding Shares."
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<PAGE>
Recommendation of Rational Board of Directors
Rational's Board of Directors (the "Rational Board") has adopted and approved
the Agreement and the transactions contemplated thereby and approved the Merger
by the unanimous vote of all non-interested directors, and has determined that
the Merger, and the reservation and issuance of shares of Rational Common Stock
in connection with the Merger, is fair from a financial point of view to, and
in the best interests of Rational. Daniel H. Case III, a member of the Rational
Board and the President and Chief Executive Officer of Hambrecht & Quist, which
is serving as Rational's financial advisor in connection with the Merger,
abstained from voting on the Agreement and the transactions contemplated
thereby. After careful consideration, the Rational Board recommends a vote FOR
the reservation and issuance of shares of Rational Common Stock pursuant to the
Agreement and a vote FOR the amendment of Rational's Certificate of
Incorporation. See "Rational Special Meeting--Recommendation of the Rational
Board," "Proposal No. 1: The Merger," "--Approval of the Merger and Related
Transactions--Joint Reasons for the Merger," "--Rational's Reasons for the
Merger," "--Material Contacts and Board Deliberations" and "Proposal No. 2 for
Rational Stockholders: Amendment of Rational's Certificate of Incorporation."
PURE ATRIA SPECIAL MEETING
Date, Time, Place and Purpose
The Pure Atria Special Meeting will be held at the offices of Fenwick & West
LLP, Two Palo Alto Square, Palo Alto, California 94306 on July 30, 1997 at 9:00
a.m., local time. The purpose of the Pure Atria Special Meeting is to adopt and
approve the Agreement and the transactions contemplated thereby. See "Pure
Atria Special Meeting--Date, Time and Place of Pure Atria Special Meeting" and
"--Purpose."
Record Date and Vote Required
Only stockholders of record of Pure Atria Common Stock at the close of
business on June 17, 1997 (the "Pure Atria Record Date"), are entitled to
notice of, and to vote at, the Pure Atria Special Meeting. Pursuant to the DGCL
and the Pure Atria Restated Certificate of Incorporation, as amended, the
affirmative vote of a majority of the outstanding shares of Pure Atria Common
Stock entitled to vote at the Pure Atria Special Meeting is required to adopt
and approve the Agreement and the transactions contemplated thereby. See "Pure
Atria Special Meeting--Vote Required."
As a group, all executive officers and directors of Pure Atria and their
affiliates owned 4,780,126 shares, or approximately 11% of Pure Atria Common
Stock outstanding as of the Pure Atria Record Date. No executive officer or
director of Rational or any affiliate of any such executive officer or director
beneficially owned any shares of Pure Atria Common Stock as of such date. Pure
Atria's directors have entered into Voting Agreements with Rational, pursuant
to which, each of the Pure Atria directors has agreed to vote, and to grant
Rational an irrevocable proxy to vote, the shares of Pure Atria Common Stock
held by such director in favor of approval of the Agreement and the Merger.
As of the Pure Atria Record Date, there were 43,316,558 shares of Pure Atria
Common Stock outstanding and 531 stockholders of record of Pure Atria Common
Stock, each of which will be entitled to cast one vote per share on the matters
to be acted on at the Pure Atria Special Meeting. See "Pure Atria Special
Meeting--Record Date and Outstanding Shares," "Proposal No. 1: The Merger--
Terms of the Merger--Voting Agreements" and "--Interests of Certain Persons."
Recommendation of Pure Atria Board of Directors
The Board of Directors of Pure Atria (the "Pure Atria Board"), by unanimous
vote, has adopted and approved the Agreement and the transactions contemplated
thereby and has determined that the Merger is fair from a financial point of
view to, and in the best interests of, Pure Atria and its stockholders. After
careful
4
<PAGE>
consideration, the Pure Atria Board unanimously recommends a vote FOR adoption
and approval of the Agreement and the transactions contemplated thereby. See
"Pure Atria Special Meeting-- Recommendation of the Pure Atria Board,"
"Proposal No. 1: The Merger--Approval of the Merger and Related Transactions--
Joint Reasons for the Merger," "--Pure Atria's Reasons for the Merger," and "--
Material Contacts and Board Deliberations."
PROPOSAL NO. 1: THE MERGER
THE COMPANIES
Rational Software Corporation
Rational develops, markets and supports a comprehensive solution for
automating the component-based development of software systems. Rational's
objective is to ensure the success of customers in developing and managing
software systems that are strategically important to their businesses. Rational
provides an integrated family of tools that spans the critical phases of the
software development process from initial analysis and design through testing,
delivery and maintenance. In addition, Rational provides technical consulting,
training and support services. By supporting controlled iterative development,
visual modeling and an architecture-driven process, Rational's products support
individual designers, developers and testers, development teams and project
managers, and enable customers to reduce the risk of project failure, improve
the quality of the software systems they develop, increase developer
productivity, reduce time-to-market and increase software reusability.
Rational employs a direct selling approach through its major-account sales
and technical consulting organization in the United States, Canada, Europe and
in the Asia/Pacific/Latin America region, as well as telesales and additional
distribution channels such as original equipment manufacturers, value added
resellers and independent software vendors.
Rational was incorporated in Delaware in 1982. Rational's executive offices
are located at 2800 San Tomas Expressway, Santa Clara, California 95051-0951,
and its telephone number is (408) 496-3600.
Merger Sub
Merger Sub is a corporation recently organized by Rational solely for the
purpose of effecting the Merger. It has no material assets and has not engaged
in any activities except in connection with the proposed Merger. Merger Sub's
executive offices are located at 2800 San Tomas Expressway, Santa Clara,
California, 95051, and its telephone number is (408) 496-3600.
Pure Atria Corporation
Pure Atria develops, markets and supports a comprehensive, integrated suite
of software products that are designed to improve the software development
process and enable the production of reliable, high-quality software. Pure
Atria offers a family of products for use from initial software development
through quality assurance and deployment. These products are designed to
control the software development process, improve software reliability, reduce
development and testing cost, shorten time-to-market and increase the
predictability of software development cycles. In addition, Pure Atria provides
technical consulting, training and support services.
Pure Atria's products are sold directly by telephone and field sales
personnel in North America, Europe and Japan and through distributors in these
regions and a variety of other countries. Pure Atria's products are used by
information systems departments that develop software to support internal
operations, engineering departments that develop software as a component of a
manufactured product and independent software vendors that develop software for
resale.
5
<PAGE>
In August 1996, Pure Software Inc. ("Pure") and Atria Software, Inc.
("Atria") effected a strategic combination of the two companies through the
merger of a wholly-owned subsidiary of Pure with and into Atria. In connection
with such combination, Pure changed its name to Pure Atria Corporation. Pure
Atria was initially incorporated in California in 1991 and was reincorporated
in Delaware in July 1995. Pure Atria maintains executive offices at 18880
Homestead Road, Cupertino, California 95014 and its telephone number is
(408) 863-9900.
RISK FACTORS
Rational and Pure Atria stockholders should carefully consider a variety of
risks in evaluating the matters to be voted on at the Rational Special Meeting
and the Pure Atria Special Meeting and the acquisition of the securities
offered hereby, including risks related to the Merger, risks related to both
Rational and Pure Atria, risks related specifically to Rational, and risks
related specifically to Pure Atria. See "Proposal No. 1: The Merger--Risk
Factors."
Risks related to the Merger include the following: (i) that the expected
long-term strategic benefits of the Merger are dependent upon the successful
integration of operations, and there can be no assurance that this will be
achieved, (ii) that disruption of Rational's sales and marketing activities
resulting from the Merger may not be smoothly or effectively corrected, and
that this failure could materially and adversely affect Rational's financial
results, (iii) that the integration of Rational's and Pure Atria's products,
technologies and engineering teams after the Merger might not be timely
accomplished or technically feasible, which could in turn reduce the expected
technological benefits of the Merger or adversely impact the Combined Company's
product development, (iv) that the Combined Company's stock price will be
significantly and adversely affected if, contrary to the expectations of
financial analysts, the Combined Company fails to achieve business synergies
after the Merger or if the Merger has a dilutive effect, (v) that Rational may
fail to integrate successfully the geographically dispersed operations of the
two companies after the Merger, (vi) that the inherent risks of the Merger may
be compounded by ongoing efforts associated with the integration of recent
acquisitions by both Rational and Pure Atria, (vii) that negative reaction to
the Merger on the part of Rational's and/or Pure Atria's resellers and
customers could result in reduced revenues and earnings, which could in turn
have a negative impact on the price of Rational Common Stock or, prior to the
Merger, Pure Atria Common Stock, (viii) that the price of Rational Common Stock
declined following the announcement of the Agreement, thereby decreasing the
anticipated value to be received by the Pure Atria Stockholders, and that as a
result of the fixed Exchange Ratio, if the price of Rational Common Stock were
to decline further the value received by Pure Atria stockholders would further
decrease, (ix) that the Merger is expected to result in substantial direct
transaction costs and operating charges relating to the integration of Pure
Atria's operations into Rational's operations, and that the integration of the
two companies may involve substantial additional unexpected costs, (x) that
there are certain risks associated with potential conflicts of interest
relating to a director and officer of Pure Atria and a director of Rational,
(xi) that the Merger will dilute Rational and Pure Atria stockholders'
ownership interests, compared to their ownership interests in their respective
companies prior to the Merger, (xii) that future sales of Rational Common Stock
after the Merger could adversely affect or cause substantial variations in the
price of such stock, and (xiii) that if certain restrictions on transfer of
shares of Rational Common Stock and, prior to the Merger, Pure Atria Common
Stock, are not observed by each company's respective affiliates, the Merger may
fail to qualify as a pooling of interests for financial reporting purposes. See
"Proposal No. 1: The Merger--Risk Factors--Risks Related to the Merger."
Risks related to both Rational and Pure Atria include the following: (i) that
a number of factors may result in fluctuations in the operating results of both
companies, and that such fluctuations may in turn affect the prices of Rational
Common Stock and, prior to the Merger, Pure Atria Common Stock, (ii) that the
prices of Rational Common Stock and Pure Atria Common Stock have historically
been volatile, (iii) the inherent risks associated with recent acquisitions
that both companies have completed and the fact that both companies' ability to
consider or pursue future acquisitions is restricted during the pendancy of the
Merger, (iv) that the industry for tools for automating software application
development and management is extremely competitive and rapidly changing,
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<PAGE>
and that the success of the Combined Company will depend in part upon its
ability to successfully compete with numerous competitors at each point within
the Combined Company's product line, (v) that both companies are dependent upon
their respective sales forces, which require costly support services, and there
can be no assurance that less costly alternative channels of distribution will
be developed, (vi) that the Combined Company's success will depend in part upon
the adoption of component-based development and testing tools, the growth of
emerging industries, the expansion of product lines and the introduction of new
products or product enhancements in a field characterized by rapid
technological change, (vii) that both companies depend upon the hiring and
retention of qualified personnel, and there can be no assurance that the
Combined Company will be successful in attracting and retaining the necessary
personnel, (viii) the inherent risks in managing rapid growth, (ix) the risks
that defects in the software products of both companies and the Combined
Company may materially and adversely affect such companies' business, results
of operations or financial condition, (x) the inherent risks in the Combined
Company's significant international operations, (xi) the dependence of both
companies upon proprietary technology, which they may not be able to protect
fully or which may be subject to litigation and (xii) the risk that the
Combined Company's competitors may use litigation as a means of competition.
See "Proposal No. 1: The Merger-- Risk Factors--Risks Related to Rational and
Pure Atria."
Risks related specifically to Rational include the following: (i) that
Rational is dependent in part on the success of certain strategic
relationships, (ii) the risks associated with Rational's relationship with
Microsoft and its acquisition of the Visual Test product from Microsoft, (iii)
that the success of Rational's products depends in part upon the success of the
major operating systems upon which such products run, (iv) the potential
adverse impact on Rational's revenues from the distribution of promotional
versions of Rational's products, (v) the potential that Rational's Unified
Modeling Language may not emerge as an industry standard, and (vi) the risks
associated with certain deferred tax assets. See "Proposal No.1: The Merger--
Risk Factors--Risks Related to Rational."
Risks related specifically to Pure Atria include the following: (i) that Pure
Atria may be unsuccessful in introducing and adapting products for the Windows,
Windows NT or other new operating systems and (ii) that the success of Pure
Atria's products has historically depended upon the success of the UNIX
operating system, upon which its products principally run and there can be no
assurance that Pure Atria will effectively develop or adapt products for use on
platforms other than UNIX. See "Proposal No. 1: The Merger--Risk Factors--Risks
Related to Pure Atria."
REASONS FOR THE MERGER
The Rational Board and the Pure Atria Board have authorized the execution and
delivery of the Agreement with the expectation that the proposed Merger will
contribute to the success of the Combined Company by: (i) creating a
comprehensive suite of integrated products that support component-based
software development, (ii) accelerating tighter integration of product lines by
leveraging combined software development teams and technologies, (iii)
accelerating sales force development by adding the Pure Atria sales force
capacity to, and increasing the number of products that flow through,
Rational's worldwide sales organization, (iv) enhancing the business model by
combining increased product offerings and a larger customer base to improve
consistency of financial results, and (v) sharing administrative and
operational expenses.
In addition, the Rational Board approved the proposed Merger because it
believes the Merger will: (i) help Rational maintain technology leadership,
(ii) allow Rational to accelerate its software configuration management
business, (iii) enable the extension of Rational's automated software quality
product suite, (iv) help Rational expand sales by gaining access to the Pure
Atria customer base, (v) strengthen Rational's UNIX-based product suite, and
(vi) provide Rational's existing management with the level of control necessary
to achieve a successful integration of Rational's and Pure Atria's products and
sales forces.
The Pure Atria Board approved the proposed Merger because it believes that:
(i) the Merger will provide to Pure Atria stockholders a premium to the trading
price of Pure Atria, (ii) Rational's experienced management
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team will be well suited to take advantage of the increased business
opportunities expected to result from the Merger, (iii) Rational's experienced
sales force will be well positioned to leverage the Combined Company's
products, (iv) the complementary nature of Rational's and Pure Atria's product
lines will allow the Combined Company to achieve greater scale and presence in
the markets for automated software development products, (v) combining with
Rational will provide an opportunity for expanded distribution of Pure Atria's
products to current Rational customers, and (vi) the Merger will allow Pure
Atria stockholders to participate in the potential for growth of the Combined
Company after the Merger. See "Proposal No. 1: The Merger--Approval of the
Merger and Related Transactions--Joint Reasons for the Merger," "--Rational's
Reasons for the Merger," and "--Pure Atria's Reasons for the Merger."
OPINIONS OF FINANCIAL ADVISORS
Opinion of Rational's Financial Advisor. Hambrecht & Quist LLC ("Hambrecht &
Quist") has delivered to the Rational Board its written opinion, dated April 6,
1997, to the effect that as of such date, the consideration to be paid by
Rational in the Merger was fair from a financial point of view to Rational. The
full text of the opinion of Hambrecht & Quist which sets forth, among other
things, assumptions made and matters considered, is attached as Annex E to this
Prospectus/Joint Proxy Statement and is incorporated herein by reference.
HOLDERS OF RATIONAL COMMON STOCK ARE URGED TO, AND SHOULD, READ SUCH OPINION IN
ITS ENTIRETY. See "Proposal No. 1: The Merger--Approval of the Merger and
Related Transactions--Opinion of Rational's Financial Advisor" and Annex E
hereto.
Opinion of Pure Atria's Financial Advisor. Deutsche Morgan Grenfell Inc.
("DMG") delivered its opinion to the Pure Atria Board on April 6, 1997, that,
as of the date of such opinion, the Exchange Ratio pursuant to the Merger was
fair from a financial point of view to the holders of Pure Atria Common Stock.
The full text of the written opinion of DMG, dated as of April 6, 1997, which
sets forth, among other things, assumptions made, procedures followed, matters
considered and limitations on the scope of the review undertaken in connection
with the opinion, is attached hereto as Annex F and is incorporated herein by
reference. HOLDERS OF PURE ATRIA COMMON STOCK ARE URGED TO, AND SHOULD, READ
SUCH OPINION IN ITS ENTIRETY. See "Proposal No. 1: The Merger--Approval of the
Merger and Related Transactions--Opinion of Pure Atria's Financial Advisor" and
Annex F hereto.
INCOME TAX TREATMENT
The Merger is intended to qualify as a "reorganization" under Section 368(a)
of the Internal Revenue Code of 1986, as amended (the "Code"), in which case no
gain or loss should generally be recognized by the holders of shares of Pure
Atria Common Stock on the exchange of their shares of Pure Atria Common Stock
solely for the shares of Rational Common Stock (other than cash received for
fractional shares). Rational and Pure Atria have each received an opinion from
their respective tax counsel that, based upon certain assumptions and
qualifications, the Merger will constitute a reorganization under Section
368(a) of the Code. However, all Pure Atria stockholders are urged to consult
their own tax advisors. See "Proposal No. 1: The Merger--Approval of the Merger
and Related Transactions--Certain Federal Income Tax Considerations."
REGULATORY MATTERS
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended
(the "HSR Act"), the Merger may not be consummated until such time as certain
information has been furnished to the Department of Justice and the Federal
Trade Commission (the "FTC") and the specified waiting period requirements of
the HSR Act have been satisfied. Rational and Pure Atria are aware of no other
material governmental or regulatory approvals required for consummation of the
Merger, other than compliance with the federal securities law and applicable
securities and "blue sky" laws of the various states. See "Proposal No. 1: The
Merger--Approval of the Merger and Related Transactions--Governmental and
Regulatory Approvals."
8
<PAGE>
ACCOUNTING TREATMENT
The Merger is intended to qualify as a pooling of interests for financial
reporting purposes in accordance with generally accepted accounting principles.
Consummation of the Merger is conditioned upon (i) receipt by Pure Atria of a
letter from its independent auditors to the effect that Pure Atria qualifies as
an entity that may be a party to a business combination for which the pooling-
of-interests method of accounting would be available and (ii) receipt by
Rational of a letter from its independent auditors regarding concurrence with
Rational management's conclusion as to the appropriateness of pooling-of-
interests accounting treatment for the Merger under APB Opinion No. 16, if
consummated in accordance with the Agreement.
TERMS OF THE AGREEMENT
The Merger and Conversion of Pure Atria Common Stock
At the Effective Time (as defined below) of the Merger, Merger Sub will merge
with and into Pure Atria and Rational will own all of the capital stock of Pure
Atria. As a result of the Merger, each outstanding share of Pure Atria Common
Stock, except for shares of Common Stock held in the treasury of Pure Atria or
owned by Merger Sub, Rational or any wholly owned subsidiary of Rational or
Pure Atria, will be converted into the right to receive 0.9 shares of Rational
Common Stock, and each outstanding option or right to purchase Pure Atria
Common Stock under the Pure Atria Stock Option Plans or Pure Atria Stock
Purchase Plan will be assumed by the Combined Company and will become an option
or right to purchase Rational Common Stock, with appropriate adjustments to be
made to the number of shares issuable thereunder and the exercise price thereof
based on the Exchange Ratio.
No fractional shares will be issued by virtue of the Merger, but in lieu
thereof each holder of shares of Pure Atria Common Stock who would otherwise be
entitled to a fraction of a share (after aggregating all fractional shares to
be received by such holder) will receive from the Combined Company an amount of
cash (rounded to the nearest whole cent) equal to the product of (i) such
fraction, multiplied by (ii) the average closing price of a share of Rational
Common Stock for the ten most recent days that Rational Common Stock has traded
ending on the trading day immediately prior to the Effective Time, as reported
on the Nasdaq National Market. See "Proposal No. 1: The Merger--Terms of the
Merger--Manner and Basis of Converting Shares."
Effective Time of the Merger
The Merger will become effective upon the filing of the Certificate of Merger
in the form attached hereto as Annex B (the "Certificate of Merger") with the
Secretary of State of the State of Delaware or at such later time as may be
agreed in writing by Rational, Pure Atria and Merger Sub and specified in the
Certificate of Merger (the "Effective Time"). Assuming all conditions to the
Merger are met or waived prior thereto, it is anticipated that the closing date
of the Merger (the "Closing Date") and Effective Time will be on or about July
30, 1997. See "Proposal No. 1: The Merger--Terms of the Merger--Effective
Time."
Exchange of Pure Atria Stock Certificates
Promptly after the Effective Time, the Combined Company, acting through
ChaseMellon Shareholder Services as its exchange agent (the "Exchange Agent"),
will deliver to each Pure Atria stockholder of record a letter of transmittal
with instructions to be used by such stockholder in surrendering certificates
which, prior to the Merger, represented shares of Pure Atria Common Stock.
CERTIFICATES SHOULD NOT BE SURRENDERED BY THE HOLDERS OF PURE ATRIA COMMON
STOCK UNTIL SUCH HOLDERS RECEIVE THE LETTER OF TRANSMITTAL FROM THE EXCHANGE
AGENT. OPTION AGREEMENTS NEED NOT BE SURRENDERED. See "Proposal No. 1: The
Merger--Terms of the Merger--Manner and Basis of Converting Shares."
Assumption of Options under the Pure Atria Stock Option Plans and Rights
under the Pure Atria Stock Purchase Plan. At the Effective Time, each
outstanding option to purchase shares of Pure Atria Common Stock under the Pure
Atria Stock Option Plans, whether or not exercisable, will be assumed by
Rational in connection
9
<PAGE>
with the Merger. Each option so assumed by Rational under the Agreement will
continue to have, and be subject to, the same terms and conditions set forth in
the applicable Pure Atria Stock Option Plan immediately prior to the Effective
Time (including, without limitation, any repurchase rights), except that (i)
each such option will be exercisable (or will become exercisable in accordance
with its terms) for that number of whole shares of Rational Common Stock equal
to the product of the number of shares of Pure Atria Common Stock that were
issuable upon exercise of such option immediately prior to the Effective Time
multiplied by the Exchange Ratio, rounded down to the nearest whole number of
shares of Rational Common Stock and (ii) the per share exercise price for the
shares of Rational Common Stock issuable upon exercise of such option will be
equal to the quotient determined by dividing the exercise price per share of
Pure Atria Common Stock at which such Pure Atria Option was exercisable
immediately prior to the Effective Time by the Exchange Ratio, rounded up to
the nearest whole cent. It is the intention of Rational and Pure Atria that the
options so assumed by Rational qualify following the Effective Time as
incentive stock options under the Code, to the extent that the Pure Atria
Options qualified as incentive stock options immediately prior to the Effective
Time. After the Effective Time, Rational will issue to each holder of an
outstanding option to purchase shares of Pure Atria Common Stock a notice
describing the foregoing assumption of such option by Rational. OUTSTANDING
AGREEMENTS FOR THE PURCHASE OF SHARES OF PURE ATRIA COMMON STOCK NEED NOT BE
SURRENDERED. Rights to purchase Pure Atria Common Stock under the Pure Atria
Stock Purchase Plan will be assumed by Rational and will become a right to
purchase Rational Common Stock, with appropriate adjustments to the number of
shares issuable thereunder and the exercise price thereof based on the Exchange
Ratio.
Form S-8 Registration Statement
No later than five business days after the Closing Date, the Combined Company
will file a registration statement on Form S-8 under the Securities Act
covering the shares of Rational Common Stock issuable upon exercise of options
and rights to purchase Pure Atria Common Stock granted under the Pure Atria
Stock Option Plans and the Pure Atria Stock Purchase Plan to be assumed by
Rational at the Effective Time. See "Proposal No. 1: The Merger--Terms of the
Merger--Manner and Basis of Converting Shares."
Stock Ownership Following the Merger
Based upon the capitalization of Pure Atria as of the close of business on
March 31, 1997 (including the number of shares of Pure Atria Common Stock
outstanding, the number of shares issuable upon exercise of outstanding options
to purchase Pure Atria Common Stock and the level of participation in the Pure
Atria Stock Purchase Plan), an aggregate of approximately 38,542,000 shares of
Rational Common Stock will be issued to Pure Atria stockholders in the Merger
and Rational will assume options and rights to purchase Pure Atria Common Stock
for up to approximately 6,951,000 additional shares of Rational Common Stock.
Based upon the capitalization of Rational and Pure Atria as of the close of
business on March 31, 1997 (including the number of shares issuable upon
exercise of outstanding options for the purchase of the Common Stock of Pure
Atria or the Common Stock of Rational, and the level of participation in
Rational's and Pure Atria's respective stock purchase plans), immediately
following the Merger, the former securityholders of Pure Atria will hold
approximately 45% of the Combined Company's outstanding voting power, and
approximately 45% of the Combined Company's capital stock calculated on a fully
diluted basis. The foregoing numbers of shares and percentages are subject to
change in the event that the capitalization of either Rational or Pure Atria
changes subsequent to March 31, 1997, and prior to the effective time of the
Merger.
Officers and Directors of Combined Company Following the Merger
Immediately after the Effective Time, the Combined Company's Board of
Directors will consist of the Rational Board immediately prior to the Effective
Time. The present directors of Rational are Paul D. Levy, Michael T. Devlin,
James S. Campbell, Daniel H. Case III, Leslie G. Denend, John E. Montague and
Allison R. Schleicher. Immediately after the Effective Time the Audit and
Compensation Committees of the Combined Company shall be the Audit and
Compensation Committees of Rational immediately prior to the Effective Time.
10
<PAGE>
Immediately after the Effective Time, the executive officers of the Combined
Company will be the Executive Officers of Rational immediately prior to the
Effective Time. See "Proposal No. 1: The Merger--Terms of the Merger--Conduct
of the Combined Company Following the Merger."
Non-Solicitation
Each party has agreed not to, directly or indirectly, solicit, initiate
discussions, encourage or engage in negotiations with, or disclose any
nonpublic information relating to such party or any of its subsidiaries to, or
otherwise assist, any person relating to a possible acquisition of such party,
except that, if the Board of Directors of either party receives an unsolicited
proposal, or written expression of interest that such party expects to lead to
a proposal that the Board of Directors of such party believes would, if
consummated, result in a transaction more favorable to its stockholders from a
financial point of view than the Merger, and the Board of Directors of such
party determines in good faith, after consultation with outside legal counsel,
that such actions are necessary for the Board of Directors of such party to
comply with its fiduciary duties under applicable law, then the Board of
Directors of such party will not be prevented from taking such other actions as
are consistent with the fiduciary obligations of the Board of Directors of such
party. See "Proposal No. 1: The Merger--Terms of the Merger--Non-Solicitation."
Termination
The Agreement may be terminated under certain circumstances, including,
without limitation, by mutual written consent of Rational and Pure Atria
authorized by their respective Boards of Directors or by either party
unilaterally if: (i) the Merger is not consummated on or before September 30,
1997 (except that the Agreement cannot be terminated pursuant to this provision
by a party whose action or failure to act has been a principal cause of the
failure of the Merger to occur on or before such date where such action or
failure to act constitutes a breach of the Agreement); (ii) if consummation of
the Merger is permanently enjoined or prevented by order of a court or other
competent authority which shall have become final and nonappealable; (iii)
either party's stockholders fail to approve the Merger-related proposals
described herein, provided that neither party may so terminate the Agreement if
such party's action or failure to act in breach of the Agreement is the cause
of such failure to obtain stockholder approval; (iv) the other party's Board of
Directors recommends a proposal that the Board of Directors of such party
believes would, if consummated, result in a transaction more favorable to its
stockholders from a financial point of view than the Merger or withholds,
withdraws or modifies in a manner adverse to the other party its recommendation
in favor of the Agreement and the Merger; (v) the other party commits certain
breaches of any representation, warranty or covenant contained in the Agreement
and such breach remains uncured; or (vi) a material adverse effect with respect
to the other party has occurred since the date of the Agreement. See "Proposal
No. 1: The Merger--Terms of the Merger--Termination, Amendment and Waiver."
Fees and Expenses
General. Whether or not the Merger is consummated, all fees and expenses
incurred in connection with the Agreement and the transactions contemplated
thereby shall be paid by the party incurring such expenses except expenses
(other than attorneys' and accountants' fees and expenses) incurred in
connection with the proxy materials and the registration statement in
connection with the Merger shall be shared equally by Pure Atria and Rational.
Break-Up Fees. Under certain circumstances, if the Agreement is terminated
without consummation of the Merger, then either Pure Atria or Rational may be
required to pay certain break-up fees to the other party. Specifically, if, in
the absence of a material adverse effect on Rational, the Agreement is
terminated and the Pure
11
<PAGE>
Atria Board has either (i) withheld, withdrawn or modified in a manner adverse
to Rational its recommendation that the Pure Atria stockholders adopt and
approve the Agreement and adopt and approve the Merger, (ii) recommended that
its stockholders approve a Superior Proposal with respect to Pure Atria, or
(iii) failed to hold a stockholder meeting by September 30, 1997, then Pure
Atria must pay Rational $18,000,000 within one business day of the earlier to
occur of a termination of the Agreement or a negative vote by the stockholders
of Pure Atria. Further, if, other than in a case described by the immediately
preceding sentence, (i) there is a competing acquisition bid with respect to
Pure Atria that is publicly disclosed and not withdrawn, (ii) the stockholders
of Pure Atria vote down the Merger (a "Pure Atria Negative Vote"), and (iii)
within 12 months of such Pure Atria Negative Vote, Pure Atria consummates or
agrees to an acquisition with the party that made such competing acquisition
bid, or within six months of such Pure Atria Negative Vote, Pure Atria
consummates, or agrees to an acquisition with any other party, and there has
been no material adverse effect on Rational prior to such Pure Atria Negative
Vote, then Pure Atria must pay to Rational $18,000,000 within one business day.
Finally, Pure Atria must pay Rational $3,000,000 (in addition to any other
break-up fee required) if the Agreement is terminated and either (i) Pure Atria
is required to pay Rational the $18,000,000 fee in any case described above,
(ii) there is a Pure Atria Negative Vote but no requirement to pay the
$18,000,000 fee arises, or (iii) Pure Atria has breached a representation,
warranty or covenant in the Merger Agreement or experiences a material adverse
effect such that Rational terminates the Merger Agreement. See "Proposal No.1:
The Merger--Terms of the Merger--Termination, Amendment and Waiver."
Similarly, if, in the absence of a material adverse effect on Pure Atria, the
Agreement is terminated and the Rational Board has either (i) withheld,
withdrawn or modified in a manner adverse to Pure Atria its recommendation that
the Rational stockholders approve the issuance of Rational Common Stock in
connection with the Merger, (ii) recommended that its stockholders approve a
Superior Proposal with respect to Rational, or (iii) failed to hold a
stockholder meeting by September 30, 1997, then Rational must pay Pure Atria
$18,000,000 within one business day of the earlier to occur of a termination of
the Agreement or a negative vote by the stockholders of Rational. Further, if,
other than in a case described by the immediately preceding sentence, (i) there
is a competing acquisition bid with respect to Rational that is publicly
disclosed and not withdrawn, (ii) the stockholders of Rational vote down the
Merger (a "Rational Negative Vote"), and (iii) within 12 months of such
Rational Negative Vote, Rational consummates or agrees to an acquisition with
the party that made such competing acquisition bid, or within six months of
such Rational Negative Vote, Rational consummates or agrees to an acquisition
with any other party, and there has been no material adverse affect on Pure
Atria prior to the Rational Negative Vote, then Rational must pay to Pure Atria
$18,000,000 within one business day. Finally, Rational must pay Pure Atria
$3,000,000 (in addition to any other break-up fee required) if the Agreement is
terminated and either (i) Rational is required to pay Pure Atria the
$18,000,000 fee in any case described above, (ii) there is a Rational Negative
Vote but no requirement to pay the $18,000,000 fee arises, or (iii) Rational
has breached a representation, warranty or covenant in the Merger Agreement or
experiences a material adverse effect such that Pure Atria terminates the
Merger Agreement. See "Proposal No.1: The Merger--Terms of the Merger--
Termination, Amendment and Waiver."
As an inducement to Rational to enter into the Agreement, Rational and Pure
Atria entered into a Stock Option Agreement dated as of April 7, 1997 (the
"Pure Atria Stock Option Agreement"), pursuant to which Pure Atria granted
Rational the option, under certain conditions, to purchase up to that number of
shares of Pure Atria Common Stock equal to 19.9% of the Pure Atria Common Stock
outstanding on the date the option first becomes exercisable for $21.038 per
share. Also as an inducement to Pure Atria to enter into the Agreement,
Rational and Pure Atria entered into a Stock Option Agreement dated as of April
7, 1997 (the "Rational Stock Option Agreement"), pursuant to which Rational
granted Pure Atria the option, under certain conditions, to purchase up to that
number of shares of Rational Common Stock equal to 19.9% of the Rational Common
Stock outstanding on the date the option first becomes exercisable for $23.375
per share. See "Proposal No.1: The Merger--Terms of the Merger--Stock Option
Agreements."
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<PAGE>
Conditions to the Merger
In addition to the requirements that the requisite approvals of stockholders
of Rational and Pure Atria be received and that all HSR requirements be
satisfied, consummation of the Merger is subject to a number of other
conditions that, if not satisfied or waived, may cause the Merger not to be
consummated and the Agreement to be terminated. Each party's obligation to
consummate the Merger is conditioned on, among other things, the accuracy of
the other party's representations, the other party's performance of its
covenants and the absence of legal action preventing consummation of the
Merger. Either party may waive compliance with any of the agreements or
satisfaction of any of the conditions in the Agreement. See "Proposal No.1: The
Merger--Terms of the Merger--Conditions to the Merger."
Voting Agreements
As an inducement to Rational to enter into the Agreement, each of the members
of Pure Atria Board (namely Reed Hastings, Paul H. Levine, Louis J. Volpe,
David A. Litwack, Thomas A. Jermoluk and Aki Fujimura) and each of certain of
Pure Atria's non-director officers (namely Chuck Bay, W. Geoffrey Stein and
David Barrett), in his respective capacity as a stockholder of Pure Atria, has
entered into a Voting Agreement with Rational. Together, as of the Pure Atria
Record Date the members of the Pure Atria Board and the aforementioned non-
director officers own an aggregate of 4,780,126 shares of Pure Atria Common
Stock representing approximately 11% of the votes entitled to be cast by
holders of shares of Pure Atria Common Stock issued and outstanding as of the
Pure Atria Record Date. Similarly, as an inducement to Pure Atria to enter into
the Agreement, each of the members of the Rational Board (namely Paul D. Levy,
Michael T. Devlin, James S. Campbell, Daniel H. Case III, Leslie G. Denend,
John H. Montague and Allison R. Schleicher) has entered into a Voting Agreement
with Pure Atria. Together, as of the Rational Record Date the members of the
Rational Board own an aggregate of 53,025 shares of Rational Common Stock
representing less than 1% of the votes entitled to be cast by holders of shares
of Rational Common Stock issued and outstanding as of the Rational Record Date.
See "Proposal No.1: The Merger--Terms of the Merger--Voting Agreements."
Affiliate Agreements
Each of the members of the Board of Directors of Pure Atria has, and certain
non-director officers of Pure Atria have, entered into agreements restricting
sales, dispositions or other transactions reducing their risk of investment in
respect of the shares of Pure Atria Common Stock held by them prior to the
Merger and the shares of Rational Common Stock to be received by them in the
Merger so as to comply with the requirements of applicable federal securities
and tax laws and to help ensure that the Merger will be treated as a pooling of
interests for accounting and financial reporting purposes and as a tax-free
reorganization under the Code. Further, each of the members of the Board of
Directors of Rational and certain of the non-director officers of Rational have
entered into agreements restricting sales, dispositions or other transactions
reducing their risk of investment in respect of the shares of Rational Common
Stock held by them so as to comply with the requirements of federal tax laws
and to help ensure that the Merger will be treated as a pooling of interests
for accounting and financial reporting purposes and as a tax-free
reorganization under the Code.
APPRAISAL RIGHTS
Pursuant to Section 262 of the DGCL, holders of Rational Common Stock and
Pure Atria Common Stock are not entitled to appraisal rights in connection with
the Merger because both companies are traded on the Nasdaq National Market and
holders of Pure Atria Common Stock will receive in the Merger only shares of
Rational Common Stock or cash in lieu of fractional shares thereof.
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<PAGE>
MARKET PRICE DATA
Rational Common Stock is traded on the Nasdaq National Market under the
symbol "RATL." The following table sets forth the range of high and low sale
prices reported on the Nasdaq National Market for Rational Common Stock for the
periods indicated:
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
FISCAL YEAR ENDING MARCH 31, 1998
First Quarter (through June 19, 1997)......................... $23.50 $10.00
FISCAL YEAR ENDED MARCH 31, 1997
Fourth Quarter................................................ $40.88 $17.00
Third Quarter................................................. 44.25 29.75
Second Quarter................................................ 36.00 17.50
First Quarter................................................. 33.13 19.00
FISCAL YEAR ENDED MARCH 31, 1996
Fourth Quarter................................................ $20.75 $ 7.94
Third Quarter................................................. 12.00 6.81
Second Quarter................................................ 9.31 6.56
First Quarter................................................. 6.88 5.25
Pure Atria Common Stock is traded on the Nasdaq National Market under the
symbol "PASW." The following table sets forth the range of high and low sale
prices reported on the Nasdaq National Market for Pure Atria Common Stock for
the periods indicated:
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
FISCAL YEAR ENDED DECEMBER 31, 1997
Second Quarter (through June 19, 1997)........................ $17.88 $ 6.38
First Quarter................................................. 28.00 16.25
FISCAL YEAR ENDED DECEMBER 31, 1996
Fourth Quarter................................................ $38.13 $22.88
Third Quarter................................................. 39.00 19.75
Second Quarter................................................ 42.25 32.44
First Quarter................................................. 37.00 24.50
FISCAL YEAR ENDED DECEMBER 31, 1995
Fourth Quarter................................................ $39.75 $31.50
Third Quarter (From August 2, 1995)........................... 43.75 27.75
</TABLE>
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<PAGE>
The following table sets forth the closing sale prices per share of Rational
Common Stock and Pure Atria Common Stock on the Nasdaq National Market on April
4, 1997, which closing prices were quoted prior to the announcement on April 7,
1997, of the proposed Merger, and on June 19, 1997, the latest practicable
trading day before the filing of this Prospectus/Joint Proxy Statement for
which information was obtainable, and the equivalent per share price for Pure
Atria Common Stock. The "equivalent per share price" for Pure Atria Common
Stock as of such dates equals the closing sale price per share of Rational
Common Stock on such dates multiplied by the Exchange Ratio of 0.9. See
"Proposal No. 1: The Merger--Terms of the Merger."
<TABLE>
<CAPTION>
RATIONAL PURE ATRIA EQUIVALENT
COMMON STOCK COMMON STOCK PER SHARE PRICE
------------ ------------ ---------------
<S> <C> <C> <C>
April 4, 1997...................... $23.38 $17.75 $21.04
June 19, 1997...................... $15.81 $13.38 $14.23
</TABLE>
Rational and Pure Atria believe that Pure Atria Common Stock presently trades
on the basis of the value of the Rational Common Stock expected to be issued in
exchange for such Pure Atria Common Stock in the Merger, discounted primarily
for the uncertainties associated with the Merger. Apart from the publicly
disclosed information concerning Rational which is included and incorporated by
reference in this Prospectus/Joint Proxy Statement, Rational cannot state with
certainty what factors account for changes in the market price of the Rational
Common Stock.
Pure Atria stockholders are advised to obtain current market quotations for
Rational Common Stock and Pure Atria Common Stock. No assurance can be given as
to the market prices of Rational Common Stock or Pure Atria Common Stock at any
time before the Effective Time or as to the market price of Rational Common
Stock at any time thereafter. Because the Exchange Ratio is fixed, the Exchange
Ratio will not be adjusted to compensate Pure Atria stockholders for decreases
in the market price of Rational Common Stock which could occur before the
Merger becomes effective. In the event the market price of Rational Common
Stock decreases or increases prior to the Effective Time, the value at the
Effective Time of the Rational Common Stock to be received in the Merger in
exchange for Pure Atria Common Stock would correspondingly decrease or
increase. See "Proposal No. 1: The Merger--Risk Factors--Risks Related to the
Merger--Risks Associated with Fixed Exchange Ratio."
Following the Merger, all Pure Atria Common Stock will be owned by Rational
and, as a result, Pure Atria Common Stock will no longer be listed on the
Nasdaq National Market.
Rational and Pure Atria have never paid cash dividends on their respective
shares of Common Stock. Pursuant to the Agreement, each of Rational and Pure
Atria has agreed not to pay cash dividends pending the consummation of the
Merger, without the written consent of the other. Subject to completion of the
Merger, the Pure Atria Board presently intends to continue a policy of
retaining all earnings to finance the expansion of its business. The Rational
Board currently intends to retain all earnings for use in the business of the
combined companies and has no present intention to pay cash dividends.
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<PAGE>
SELECTED HISTORICAL AND SELECTED UNAUDITED
PRO FORMA COMBINED FINANCIAL DATA
The following selected historical financial information of Rational and Pure
Atria has been derived from their respective historical consolidated financial
statements, and should be read in conjunction with such consolidated financial
statements and the notes thereto, certain of which are included in this
Prospectus/Joint Proxy Statement. The selected unaudited pro forma combined
financial information of Rational and Pure Atria is derived from the unaudited
pro forma condensed combined financial statements included in this
Prospectus/Joint Proxy Statement, which give effect to the Merger as a pooling
of interests, and should be read in conjunction with such unaudited pro forma
statements and the notes thereto. For pro forma purposes, Rational's statements
of operations for the three fiscal years ended March 31, 1995, 1996 and 1997
have been combined with the statements of operations of Pure Atria for the
three fiscal years ended December 31, 1994, 1995 and 1996, and Rational's
balance sheet at March 31, 1997, has been combined with Pure Atria's balance
sheet at March 31, 1997.
The unaudited pro forma financial information is presented for illustrative
purposes only and is not necessarily indicative of the operating results or
financial position that would have occurred if the Merger had been consummated
nor is it necessarily indicative of future operating results or financial
position.
Except as otherwise noted, all figures presented in this Prospectus/Joint
Proxy Statement have been restated to reflect stock splits by Rational through
March 31, 1997.
RATIONAL SELECTED HISTORICAL FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------------------
1993 1994 1995 1996 1997
------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues...................... $71,646 $ 71,998 $77,349 $103,952 $145,373
Gross margin.................. 49,975 46,233 51,326 75,303 109,673
In-process research and
development.................. -- -- -- 8,700 56,798
Merger and integration........ 2,500 9,922 (1,100) -- 7,201
Income (loss) from continuing
operations(1)................ (3,679) (15,493) 2,256 (3,590) (42,954)
Net income (loss)(2).......... (5,490) (15,668) 2,256 (3,590) (42,954)
Income (loss) from continuing
operations per share(3)...... $ 0.08 $ (0.10) $ (0.98)
Net income (loss) per
share(2)(3).................. 0.08 (0.10) (0.98)
Shares used in per share
computations(3)(4)........... 29,745 35,938 43,702
<CAPTION>
MARCH 31,
----------------------------------------------
1993 1994 1995 1996 1997
------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET
DATA:
Cash, cash equivalents and
short-term investments....... $15,021 $ 15,084 $13,282 $ 89,089 $230,018
Working capital............... 21,932 6,077 9,350 80,359 207,291
Total assets.................. 51,229 41,485 42,022 126,139 302,790
Long-term obligations......... 5,683 7,809 3,675 2,189 3,192
Redeemable convertible
preferred stock.............. 1,021 4,866 7,896 -- --
Total stockholders' equity.... 25,178 2,885 6,038 86,627 239,911
</TABLE>
- --------
(1) Amounts for 1996 include approximately $14,500,000 of one-time charges and
operating expenses primarily associated with Rational's acquisition of
Objectory AB and the subsequent restructuring and shaping of Rational's
business, including an $8,700,000 write-off of acquired in-process research
and development costs in connection with the acquisition. For details on
amounts related to the Objectory AB acquisition and amounts for 1997
relating to acquisitions in 1997, see Notes 3 and 4 of Notes to Rational
Consolidated Financial Statements.
(2) Amounts for 1993 and 1994 include loss from discontinued operations of
($1,811,000) and ($175,000), respectively. See Note 4 of Notes to
Consolidated Financial Statements.
(3) Net income (loss) per common share has not been presented for 1993 and
1994, due to the capitalization of SQA, Inc., a company acquired by
Rational in fiscal 1997 and accounted for as a pooling of interests. SQA's
capitalization consisted primarily of redeemable convertible preferred
stock which should not be included in historical net income (loss) per
share calculations.
(4) Computed on the basis described in Note 1 of Notes to Rational Consolidated
Financial Statements.
16
<PAGE>
PURE ATRIA SELECTED HISTORICAL FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------------------------- -----------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- -------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Revenues............... $ 8,413 $21,187 $42,758 $ 84,185 $132,495 $28,630 $ 30,035
Gross margin........... 7,405 19,338 38,776 76,320 118,113 25,816 25,222
In-process research and
development(1)........ -- -- -- 11,600 -- -- 44,117
Merger and
integration(2)........ -- -- -- 2,961 35,255 -- 1,070
Income (loss) from
operations............ 456 1,590 5,927 (563) (7,965) 5,069 (42,926)
Net income (loss)...... 223 1,646 5,427 (3,522) (6,657) 3,851 (43,161)
Net income (loss) per
share................. $ (0.17) $ 0.09 $ (1.02)
Pro forma net income
(loss)(3)............. 5,132 (4,246)
Pro forma net income
(loss) per share(3)... $ 0.14 $ (0.11)
Shares used in per
share computations.... 36,394 37,600 39,921 43,999 42,326
<CAPTION>
AS OF DECEMBER 31, AS OF
-------------------------------------------- MARCH 31,
1992 1993 1994 1995 1996 1997
------- ------- ------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA(1):
Cash, cash equivalents
and short-term
investments........... $ 7,085 $ 8,253 $42,532 $ 78,534 $ 97,377 $ 80,521
Working capital........ 7,172 7,251 35,869 65,024 75,683 59,002
Total assets........... 9,912 15,234 54,716 110,074 153,950 136,932
Total stockholders'
equity (deficit)...... (1,602) (87) 32,980 75,855 90,198 77,519
</TABLE>
- --------
(1) On March 17, 1995, Pure Atria acquired QualTrak Corporation in a business
combination accounted for as a purchase. In connection with the allocation
of purchase price, $10.1 million was assigned to in-process research and
development and charged to operations in the period of acquisition. During
the quarter ended September 30, 1995, Pure Atria recorded a charge of $1.5
million for in-process research and development in connection with
acquisition of technology. On January 31, 1997, Pure Atria acquired
Integrity QA Software, Inc. ("Integrity") in a business combination
accounted for as a purchase. In connection with the allocation of purchase
price, $43.6 million was assigned to in-process research and development
and charged to operations in the period of acquisition. Pure Atria also
recorded a charge of $0.5 million during the first quarter of 1997 for in-
process research and development in connection with the acquisition of
other technology. See Note 2 of Notes to Consolidated Financial Statements.
(2) On November 21, 1995, Pure Atria acquired Performix, Inc. ("Performix") in
a business combination accounted for as a pooling of interests. Pure Atria
incurred $3.0 million of transaction and other costs associated with the
merger that were charged to operations at the acquisition date. On August
26, 1996, Pure Atria acquired Atria Software, Inc. in a business
combination accounted for as a pooling of interests. During the third
quarter of 1996, Pure Atria recorded a $35.3 million charge to operations
related to merger and integration costs. In connection with the acquisition
of Integrity, Pure Atria incurred $1.1 million of transition costs and
these were charged to operations during the first quarter of 1997. See
Notes 2 and 5 of Notes to Consolidated Financial Statements.
(3) Prior to its acquisition by Pure Atria, Performix had elected S Corporation
status for income tax purposes and, consequently, historical results as
they relate to Performix do not include a provision for income taxes. Upon
acquisition, the S corporation status terminated resulting in a one-time
deferred tax expense of $0.7 million. Pro forma net income (loss) includes
a provision for income taxes as if Performix had been a C Corporation,
fully subject to federal and state income taxes. See Notes 1 and 2 of Notes
to Consolidated Financial Statements.
17
<PAGE>
RATIONAL AND PURE ATRIA
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------
1995 1996 1997(1)
-------- -------- --------
<S> <C> <C> <C>
UNAUDITED PRO FORMA COMBINED STATEMENT OF
OPERATIONS DATA:
Total revenues................................... $120,107 $188,137 $283,546
Operating income (loss).......................... 8,093 (4,955) (61,587)
Net income (loss)................................ 7,683 (7,112) (56,572)
Net loss per share............................... $ (0.70)
Pro forma net income (loss)(2)................... 7,388 (7,836)
Pro forma net income (loss) per share(2)......... $ 0.12 $ (0.11)
Shares used in per share computations............ 62,500 69,778 80,643
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
1997
---------
<S> <C>
UNAUDITED PRO FORMA COMBINED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments.................. $310,539
Working capital.................................................... 192,097
Total assets....................................................... 439,722
Long-term obligations.............................................. 3,192
Total stockholders' equity(3)...................................... 242,430
</TABLE>
- --------
(1) The Rational and Pure Atria selected unaudited pro forma combined statement
of operations data combines Rational's historical condensed consolidated
statements of operations for the fiscal year ended March 31, 1995, 1996 and
1997 with the Pure Atria fiscal years ended December 31, 1994, 1995 and
1996 respectively. The unaudited pro forma combined statement of operations
data for fiscal 1997 include the operations of Performance Awareness
Corporation which was acquired by Rational on March 31, 1997 and Integrity
QA Software which was acquired by Pure Atria on January 31, 1997 as if the
acquisitions, which were accounted for as purchases, took place at the
beginning of the fiscal period.
(2) Prior to its acquisition by Pure Atria, Performix had elected S Corporation
status for income tax purposes and, consequently, historical results as
they relate to Performix do not include a provision for income taxes. Upon
acquisition, the S corporation status terminated resulting in a one-time
deferred tax expense of $0.7 million. Pro forma net income (loss) includes
a provision for income taxes as if Performix had been a C Corporation,
fully subject to federal and state income taxes. See Notes 1 and 2 of Notes
to Consolidated Financial Statements.
(3) Total pro forma stockholders' equity at March 31, 1997 reflects $75 million
in estimated charges to operations expected to be incurred in connection
with the Merger, including $15 million in direct transaction costs and $60
million in additional anticipated costs associated with integrating the two
companies. See "Proposal No. 1: The Merger--Risk Factors--Risks Related to
the Merger--Costs of Integration; Transaction Expenses."
18
<PAGE>
COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share data of Rational
and Pure Atria and unaudited pro forma combined per share data after giving
effect to the Merger on a pooling-of-interests basis assuming that nine-tenths
(0.9) of one newly issued share of Rational Common Stock is issued in exchange
for each outstanding share of Pure Atria Common Stock in the Merger. This data
should be read in conjunction with the selected financial data, the unaudited
pro forma condensed combined financial statements and the separate historical
financial statements of Rational and Pure Atria and notes thereto, included
elsewhere in this Prospectus/Joint Proxy Statement. For pro forma purposes,
information relating to statements of operations from Rational's fiscal years
ended March 31, 1995, 1996, and 1997 have been combined with information
relating to statements of operations from Pure Atria for the three fiscal years
ended December 31, 1994, 1995 and 1996, respectively and Rational's balance
sheet at March 31, 1997 has been combined with Pure Atria's balance sheet at
March 31, 1997. The unaudited pro forma combined financial data are not
necessarily indicative of the operating results that would have been achieved
had the Merger been consummated as of the beginning of the periods presented
and should not be construed as representative of future operating results or
financial condition.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------
1995 1996 1997
----- ------ -------
<S> <C> <C> <C> <C>
HISTORICAL--RATIONAL
Net income (loss).................. $0.08 $(0.10) $ (0.98)
Book value(1)...................... $ 5.03
<CAPTION>
YEAR ENDED DECEMBER
31, THREE MONTHS ENDED
--------------------- MARCH 31,
1994 1995 1996 1997
----- ------ ------- ------------------
<S> <C> <C> <C> <C>
HISTORICAL--PURE ATRIA
Pro forma net income (loss)(2)..... $0.14 $(0.11)
Net income (loss).................. $ (0.17) $(1.02)
Book value(1)...................... $ 2.20 $ 1.81
<CAPTION>
YEAR ENDED MARCH 31,
---------------------
1995 1996 1997
----- ------ -------
<S> <C> <C> <C> <C>
PRO FORMA COMBINED PER RATIONAL SHARE
Pro forma net income (loss)(2)..... $0.12 $(0.11)
Net income (loss).................. $ (0.70)
Book value(1)(3)................... $ 2.81
EQUIVALENT PRO FORMA COMBINED PER
PURE ATRIA SHARE(4)
Pro forma net income (loss)(2)..... $0.11 $(0.10)
Net income (loss).................. $ (0.63)
Book value(1)(3)................... $ 2.53
</TABLE>
- --------
(1) Historical book value per share is computed by dividing stockholders'
equity by the number of shares of common stock outstanding at the end of
each period. Rational pro forma combined book value per share is computed
by dividing pro forma stockholders' equity by the pro forma number of
shares of Rational Common Stock which would have been outstanding had the
Merger been consummated as of each balance sheet date.
(2) Prior to its acquisition by Pure Atria, Performix had elected S Corporation
status for income tax purposes and, consequently, historical results as
they relate to Performix do not include a provision for income taxes. Pro
forma net income (loss) includes a provision for income taxes as if
Performix had been a C Corporation, fully subject to federal and state
income taxes. See Notes 1 and 2 of Pure Atria's Notes to Consolidated
Financial Statements.
(3) Pro forma book value reflects $75 million in estimated charges to
operations expected to be incurred in connection with the Merger, including
$15 million in direct transaction costs and $60 million in additional
anticipated costs associated with integrating the two companies. See
"Proposal No. 1: The Merger--Risk Factors--Risks Related to the Merger--
Costs of Integration; Transaction Expenses."
(4) Pure Atria equivalent pro forma combined amounts are calculated by
multiplying the Rational pro forma combined per share amounts by the
Exchange Ratio of 0.9.
19
<PAGE>
PROPOSAL NO. 2 FOR RATIONAL STOCKHOLDERS:
AMENDMENT OF RATIONAL'S CERTIFICATE OF INCORPORATION
Rational's stockholders are being asked to approve an amendment to Rational's
Certificate of Incorporation to increase the number of authorized shares of
Rational Common Stock from 75,000,000 to 150,000,000. The primary reason for
the increase in the number of authorized shares of Rational Common Stock is to
provide a sufficient number of authorized but unissued shares of Rational
Common Stock to enable Rational to consummate the Merger. IF RATIONAL'S
STOCKHOLDERS DO NOT APPROVE BOTH PROPOSAL NO. 1 AND PROPOSAL NO. 2, THE MERGER
WILL NOT BE CONSUMMATED. In addition to the foregoing, the Rational Board
believes that the proposed increase in the number of shares of authorized
Common Stock beyond that number of shares required to consummate the Merger is
desirable to preserve Rational's flexibility in connection with possible future
actions, such as stock splits, stock dividends, financings, corporate mergers,
acquisitions of property, use in employee benefit plans and for other general
corporate purposes. See "Proposal No. 2 for Rational Stockholders: Amendment of
Rational's Certificate of Incorporation."
20
<PAGE>
INTRODUCTION
This Prospectus/Joint Proxy Statement is furnished in connection with the
solicitation of proxies to be used at the Rational Special Meeting and the
Pure Atria Special Meeting. This Prospectus/Joint Proxy Statement is also
furnished by Rational to Pure Atria stockholders in connection with the
issuance of shares of Rational Common Stock in connection with the Merger
described herein.
The information set forth herein concerning Rational and Merger Sub has been
furnished by Rational and the information set forth herein concerning Pure
Atria has been furnished by Pure Atria.
RATIONAL SPECIAL MEETING
DATE, TIME AND PLACE OF RATIONAL SPECIAL MEETING
The Rational Special Meeting will be held at 2800 San Tomas Expressway,
Santa Clara, CA 95051, on July 30, 1997 at 11:30 a.m. local time.
PURPOSE
The purpose of the Rational Special Meeting is (i) to approve the
reservation and issuance of shares of Rational Common Stock to the
securityholders of Pure Atria pursuant to the Agreement and (ii) to approve
the amendment of Rational's Certificate of Incorporation to increase the
authorized number of shares of Common Stock from 75,000,000 to 150,000,000.
RECORD DATE AND OUTSTANDING SHARES
Only Rational stockholders of record at the close of business on June 17,
1997, the Rational Record Date, are entitled to notice of, and to vote at, the
Rational Special Meeting. As of the Rational Record Date, there were 998
stockholders of record of Rational Common Stock.
On or about June 27, 1997, a notice meeting the requirements of the DGCL and
accompanying a copy of this Prospectus/Joint Proxy Statement was mailed to all
stockholders of record as of the Rational Record Date.
VOTE REQUIRED
Each stockholder of record of Rational Common Stock on the Rational Record
Date will be entitled to cast one vote per share, exercisable in person or by
properly executed proxy, on each matter properly submitted for the vote of the
stockholders of Rational at the Rational Special Meeting.
Because the number of shares of Rational Common Stock to be issued or
reserved for issuance in connection with the Merger will exceed 20% of the
number of shares of Rational Common Stock outstanding prior to the Merger,
approval by holders of Rational Common Stock of the reservation and issuance
of Rational Common Stock pursuant to the Agreement is required under the
Nasdaq National Market rules. Under the Nasdaq National Market rules, the
proposal to reserve and issue Rational Common Stock pursuant to the Agreement
must be approved by a majority of the votes cast at the Rational Special
Meeting. In addition, Rational stockholders are being asked to approve an
amendment to Rational's Certificate of Incorporation to increase the
authorized number of shares of Rational Common Stock which will, among other
things, provide Rational with a sufficient number of authorized but unissued
shares of Rational Common Stock to consummate the Merger. The proposal to
amend Rational's Certificate of Incorporation requires the affirmative vote of
a majority of the shares of Rational's Common Stock outstanding as of the
Record Date. IF HOLDERS OF RATIONAL COMMON STOCK DO NOT VOTE TO APPROVE BOTH
SUCH RESERVATION AND ISSUANCE AND THE AMENDMENT OF RATIONAL'S CERTIFICATE OF
INCORPORATION, THE MERGER CANNOT BE CONSUMMATED. Rational is not a constituent
corporation to the Merger and, therefore, specific approval of the Agreement
by Rational's stockholders is not required under the DGCL or Rational's
Certificate of Incorporation or Bylaws.
21
<PAGE>
Each of the members of the Rational Board, in his respective capacity as a
stockholder of Rational, has entered into a Voting Agreement with Pure Atria,
pursuant to which each such director has agreed to vote, and to grant Pure
Atria an irrevocable proxy to vote, all of the shares of Rational stock held
by him in favor of approval of the reservation and issuance of Rational Common
Stock pursuant to the Agreement and the amendment of Rational's Certificate of
Incorporation. The outstanding shares of Rational Common Stock subject to the
Voting Agreements represent less than 1% of the votes entitled to be cast by
holders of shares of Rational Common Stock as of the Rational Record Date and
less than 1% assuming exercise of all exercisable options held by parties to
the Voting Agreement. See "Proposal; No. 1: The Merger--Terms of the Merger--
Voting Agreements."
If an executed Rational proxy is returned and the stockholder has
specifically abstained from voting on any matter, the shares represented by
such proxy will be considered present at the Rational Special Meeting for
purposes of determining a quorum and for purposes of calculating the vote, but
will not be considered to have been voted in favor of such matter. Therefore,
an abstention will have the same effect as a vote against the reservation and
issuance of shares of Rational Common Stock pursuant to the Agreement and/or
the amendment of Rational's Certificate of Incorporation. If an executed proxy
is returned by a broker holding shares in street name which indicates that the
broker does not have discretionary authority as to certain shares to vote on
one or more matters, such shares will be considered present at the meeting for
purposes of determining a quorum, but will not be considered to be represented
at the meeting for purposes of calculating the votes cast with respect to such
matter. Therefore, a broker non-vote will not affect the outcome of the vote
with respect to the reservation and issuance of shares of Rational Common
Stock pursuant to the Agreement, but will have the effect of a vote against
the amendment to Rational's Certificate of Incorporation.
The presence, in person or by properly executed proxy, of the holders of a
majority of the outstanding shares of Rational Common Stock entitled to vote
at the Rational Special Meeting shall constitute a quorum for the transaction
of business. Abstentions and broker non-votes will be considered present at
the Rational Special Meeting for the purpose of determining a quorum.
PROXIES
Each of the persons named as proxies in the proxy relating to the Rational
Special Meeting is an officer of Rational. All shares of Rational Common Stock
that are entitled to vote and are represented at the Rational Special Meeting
by properly executed proxies received prior to or at the Rational Special
Meeting and not duly and timely revoked will be voted at the Rational Special
Meeting in accordance with the instructions indicated on such proxies. If no
such instructions are indicated, such proxies will be voted in favor of the
approval of the reservation and issuance of shares of Rational Common Stock in
connection with the Merger and the amendment of Rational's Certificate of
Incorporation.
The Rational Board knows of no other matter to be presented at the Rational
Special Meeting. If any other matters are properly presented for consideration
at the Rational Special Meeting (or any adjournments or postponements thereof)
including, among other things, consideration of a motion to adjourn or
postpone the Rational Special Meeting to another time and/or place (including,
without limitation, for the purpose of soliciting additional proxies), the
persons named in the enclosed forms of proxy and voting thereunder will have
the discretion to vote on such matters in accordance with their best judgment.
Execution of a proxy does not in any way affect a stockholder's right to
attend the meeting and vote in person. 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 Rational, at
or before the taking of the vote at the Rational 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 Rational before the taking of the vote at the Rational Special
Meeting or (iii) attending the Rational Special Meeting and voting in person
(although attendance at the Rational Special Meeting will not in and of itself
constitute a revocation of a proxy). Any written notice of revocation or
subsequent proxy should be sent so as to be delivered to Rational Software
Corporation at 2800 San Tomas Expressway, Santa Clara, California 95051,
Attention: Secretary, or hand-delivered to the Secretary of Rational, in each
case at or before the taking of the vote at the Rational Special Meeting.
22
<PAGE>
SOLICITATION OF PROXIES; EXPENSES
All costs of solicitation of proxies relating to the Rational Special
Meeting will be borne by Rational. Brokers, custodians and fiduciaries will be
requested to forward proxy soliciting material to the owners of stock held in
their names, and Rational will reimburse them for their reasonable out-of-
pocket costs. In addition, proxies may also be solicited by certain directors,
officers and employees of Rational personally or by mail, telephone or
telegraph following the original solicitation. Such persons will not receive
additional compensation for such solicitation. Rational has retained Georgeson
& Co. Inc., an independent proxy solicitation firm, to assist in soliciting
proxies at an estimated fee of $9,000 plus reimbursement of reasonable
expenses.
RECOMMENDATION OF THE RATIONAL BOARD
THE RATIONAL BOARD HAS ADOPTED AND APPROVED THE AGREEMENT AND THE
TRANSACTIONS CONTEMPLATED THEREBY, AND APPROVED THE MERGER BY THE UNANIMOUS
VOTE OF ALL NON-INTERESTED DIRECTORS, AND HAS DETERMINED THAT THE RESERVATION
AND ISSUANCE OF SHARES OF RATIONAL COMMON STOCK IN CONNECTION WITH THE MERGER
AND THE MERGER ARE FAIR FROM A FINANCIAL POINT OF VIEW TO, AND IN THE BEST
INTERESTS OF RATIONAL. Daniel H. Case III, a member of the Rational Board and
the President and Chief Executive Officer of Hambrecht & Quist, which is
serving as Rational's financial advisor in connection with the Merger,
abstained from the vote on the Agreement and the transactions contemplated
thereby. After careful consideration, the Rational Board recommends a vote FOR
the reservation and issuance of shares of Rational Common Stock pursuant to
the Agreement and a vote FOR the amendment of Rational's Certificate of
Incorporation.
23
<PAGE>
PURE ATRIA SPECIAL MEETING
DATE, TIME AND PLACE OF PURE ATRIA SPECIAL MEETING
The Pure Atria Special Meeting will be held at the offices of Fenwick & West
LLP, Two Palo Alto Square, Palo Alto, California 94306, on July 30, 1997 at
9:00 a.m. local time.
PURPOSE
The purpose of the Pure Atria Special Meeting is to consider and vote upon
(i) a proposal to adopt and approve the Agreement and the transactions
contemplated thereby, pursuant to which Merger Sub will be merged with and
into Pure Atria, with Pure Atria being the surviving corporation, thereby
becoming a wholly owned subsidiary of Rational and each share of Pure Atria
Common Stock will be converted into 0.9 shares of Rational Common Stock and
(ii) such other matters as may properly come before the meeting.
RECORD DATE AND OUTSTANDING SHARES
Only stockholders of record of Pure Atria Common Stock at the close of
business on June 17, 1997 (the "Pure Atria Record Date") are entitled to
notice of, and to vote at, the Pure Atria Special Meeting. As of the Pure
Atria Record Date, there were stockholders of record holding an aggregate of
approximately 43,316,558 shares of Pure Atria Common Stock.
On or about June 27, 1997 a notice meeting the requirements of the DGCL and
accompanying a copy of this Prospectus/Joint Proxy Statement were mailed to
all stockholders of record as of the Pure Atria Record Date.
VOTE REQUIRED
Each stockholder of record of Pure Atria Common Stock on the Pure Atria
Record Date will be entitled to cast one vote per share, exercisable in person
or by properly executed proxy, on each matter properly submitted for the vote
of the stockholders of Pure Atria at the Pure Atria Special Meeting.
Pursuant to the DGCL, the Pure Atria Restated Certificate of Incorporation,
as amended, and the Pure Atria Bylaws, adoption and approval of the Agreement
and the transactions contemplated thereby, requires the affirmative vote of a
majority of the outstanding shares of Pure Atria Common Stock entitled to vote
at the Pure Atria Special Meeting. Because the required vote of the Pure Atria
stockholders is based upon the number of outstanding shares of Pure Atria
Common Stock, rather than upon the shares actually voted, the failure by the
holder of any such shares to submit a proxy or to vote in person at the Pure
Atria Special Meeting (including abstentions and "broker non-votes") will have
the same effect as a vote against adoption and approval of the Agreement and
the transactions contemplated thereby.
The representation, in person or by properly executed proxy, of a majority
of the outstanding shares of Pure Atria Common Stock entitled to vote at the
Pure Atria Special Meeting shall constitute a quorum for the transaction of
business. Abstentions and broker non-votes will be considered present at the
Pure Atria Special Meeting for the purpose of determining a quorum.
Each of the members of the Pure Atria Board has, and each of certain non-
director officers of Pure Atria has, in his respective capacity as stockholder
of Pure Atria, entered into a Voting Agreement with Rational, pursuant to
which each of such persons has agreed to vote, and to grant Rational an
irrevocable proxy to vote, all of the shares of Pure Atria stock held by him
in favor of adoption and approval of the Agreement and the transactions
contemplated thereby. The outstanding shares of Pure Atria Common Stock
subject to the Voting Agreements represent 11% of the votes entitled to be
cast at the Pure Atria Special Meeting by holders of shares of Pure Atria
Common Stock as of the Pure Atria Record Date, and 12% assuming exercise of
all exercisable options held by parties to the Voting Agreements. See
"Proposal No. 1: The Merger--Terms of the Merger--Voting Agreements."
24
<PAGE>
PROXIES
Each of the persons named as proxies in the proxy relating to the Pure Atria
Special Meeting is an officer of Pure Atria. All shares of Pure Atria Common
Stock that are entitled to vote and are represented at the Pure Atria Special
Meeting by properly executed proxies received prior to or at the Pure Atria
Special Meeting and not duly and timely revoked will be voted at the Pure
Atria Special Meeting in accordance with the instructions indicated on such
proxies. If no such instructions are indicated, such proxies will be voted in
favor of the adoption and approval of the Agreement and the transactions
contemplated thereby.
The Pure Atria Board knows of no other matter to be presented at the Pure
Atria Special Meeting. If any other matter upon which a vote may properly be
taken should be presented at the Pure Atria Special Meeting (or any
adjournments or postponements thereof) including, among other things,
consideration of or motion to adjourn or postpone the Pure Atria Special
Meeting to another time and/or place (including, without limitation, for the
purpose of soliciting additional proxies), the persons named in the enclosed
forms of proxy and voting thereunder will have the discretion to vote on such
matters in accordance with their best judgment.
Execution of a proxy does not in any way affect a stockholder's right to
attend the Special Meeting and vote in person. Any proxy may be revoked by a
stockholder at any time before it is exercised by delivering a written
revocation or a later-dated proxy to the Secretary of Pure Atria, or by
attending the Special Meeting and voting in person (although attendance at the
Pure Atria Special Meeting will not in and of itself constitute a revocation
of a proxy). Any written notice of revocation or subsequent proxy should be
sent so as to be delivered to Pure Atria Corporation at 18880 Homestead Road,
Cupertino, California 95014, Attention: Secretary, or hand-delivered to the
Secretary of Pure Atria, in each case at or before the taking of the vote at
the Pure Atria Special Meeting.
SOLICITATION OF PROXIES; EXPENSES
All costs of solicitation of proxies relating to the Pure Atria Special
Meeting will be borne by Pure Atria. Brokers, custodians and fiduciaries will
be requested to forward proxy soliciting material to the owners of stock held
in their names, and Pure Atria will reimburse them for their reasonable out-
of-pocket costs. In addition, proxies may also be solicited by certain
directors, officers and employees of Pure Atria personally or by mail,
telephone or telegraph following the original solicitation. Such persons will
not receive additional compensation for such solicitation, but may be
reimbursed for reasonable out-of-pocket expenses incurred in connection with
such solicitation. Pure Atria does not intend to retain an independent proxy
solicitation firm to assist in soliciting proxies.
RECOMMENDATION OF THE PURE ATRIA BOARD
THE PURE ATRIA BOARD, BY UNANIMOUS VOTE, HAS ADOPTED AND APPROVED THE
AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY, AND HAS DETERMINED THAT
THE MERGER IS FAIR FROM A FINANCIAL POINT OF VIEW TO, AND IN THE BEST
INTERESTS OF, PURE ATRIA AND ITS STOCKHOLDERS. After careful consideration,
the Pure Atria Board unanimously recommends a vote FOR adoption and approval
of the Agreement and the transactions contemplated thereby.
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PROPOSAL NO. 1: THE MERGER
RISK FACTORS
The following factors should be considered carefully in evaluating the
matters to be voted on at the Rational Special Meeting and the Pure Atria
Special Meeting and the acquisition of the securities offered hereby. This
Prospectus/Joint Proxy Statement contains forward-looking statements that
involve risks and uncertainties. Words such as "expects", "anticipates",
"intends", "plans", "believes", "seeks", variations of such words and similar
expressions are intended to identify these forward looking statements. The
forward looking statements reflect the best judgment of the management of
Rational and Pure Atria based on factors currently known and involve risks and
uncertainties. Actual results could differ materially from those discussed in
the forward-looking statements as a result of certain factors, including those
set forth below and elsewhere in this Prospectus/Joint Proxy Statement.
RISKS RELATED TO THE MERGER
General Risks Associated with Integration of Operations. Rational and Pure
Atria have entered into the Agreement with the expectation that the proposed
Merger will result in long-term strategic benefits. These anticipated benefits
will depend in part on whether the companies' operations can be integrated in
an efficient and effective manner. There can be no assurance that this will
occur. The successful integration of Pure Atria with Rational will require,
among other things, integration of the companies' respective product offerings
and coordination of the companies' sales and marketing efforts and research
and development efforts. It is possible that this integration will not be
accomplished smoothly or successfully. The diversion of the attention of
management from day-to-day operations and any difficulties encountered in the
transition process could have an adverse impact on the Combined Company's
business, results of operations and financial condition. The process of
combining the operations of the two organizations could cause the interruption
of, or a loss of momentum in, the activities of either or both of the
companies' businesses, which could have an adverse effect on their combined
operations. In addition, during the pre-Merger and integration phase,
competitors may try to recruit key employees of Pure Atria or Rational and to
gain a competitive advantage with Pure Atria's or Rational's prospective and
existing customers.
Execution by Combined Sales and Marketing Forces. Rational may experience
disruption in sales and marketing as a result of attempting to integrate Pure
Atria's sales force with its own, and may be unable to smoothly or effectively
correct such disruption, or to successfully execute on its sales and marketing
objectives, even after the companies' respective sales and marketing forces
have been integrated. Such difficulties may be compounded by the ongoing
efforts associated with integration of sales operations resulting from recent
acquisitions by both companies, including without limitation the merger of
Pure and Atria in August 1996 and the acquisition of SQA, Inc. by Rational in
January 1997. In addition, sales cycles and sales models for the various
products that will make up the Combined Company's new product line may vary
significantly from product to product. Sales personnel not accustomed to the
different sales cycles and approaches required for products newly added to
their portfolio may experience delays and difficulties in selling these newly
added products. Furthermore, it may be difficult to retain key sales personnel
during the period prior to and after the effectiveness of the Merger. As a
result, the Combined Company may be unable to take full advantage of the
combined sales forces' efforts, and the sales approach and distribution
channels of one company may be ineffective in promoting the products of the
other. For example, in the first calendar quarter of 1997, Pure Atria
experienced lower sales than in the preceding quarter principally due to
difficulties encountered when former Pure and newly hired field sales
representatives experienced a longer than expected sales cycle for the
ClearCase product line. Rational and Pure Atria also use a number of
distribution channels in the various geographic locations in which their
respective products are sold and channel conflicts may develop following the
Merger. In particular, both Rational and Pure Atria have distribution
agreements with different principals and subsidiaries in Japan. Resolving this
situation may require substantial short- to medium-term expense or disruption
of revenue from Japan and other countries where such channel conflicts may
exist.
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Integration of Products, Technologies and Engineering Teams. Following the
Effective Time, the Combined Company plans to integrate certain of its
products, and to create integrated bundles and suites, if practicable. The
Combined Company also plans to modify certain of its products to work together
in integrated bundles or suites covering multiple phases of the software
development lifecycle. It is possible that such integration and modification
efforts will not be accomplished in a timely manner or prove to be
technologically infeasible. In addition, the Pure Atria and Rational products
cover different programming languages, and in order to provide a more
extensive set of products for the major programming languages, the Combined
Company plans to extend certain products of one company to offer versions
written in programming languages in which products of the other currently are
offered, and vice versa. It is possible that such extension will not be
accomplished in a timely manner or prove to be technologically feasible. There
can be no assurance that either company will retain its key technical
personnel, that the engineering teams of the two companies will successfully
cooperate and realize any technological benefits, or that the focus on product
integration and extension efforts will not have an adverse impact on the
development, introduction or delivery of new or enhanced Rational or Pure
Atria products.
Financial Impact of Failure to Achieve Synergies. If the integration of
Rational's and Pure Atria's operations is not successful, or the Combined
Company does not experience business synergies as quickly as may be expected
by financial analysts, or such synergies are not achieved or are at levels
below those expected by financial analysts, or if the accretive/dilutive
effect of the Merger is not in line with the expectation of financial
analysts, the market price of the Combined Company's Common Stock will be
significantly and adversely affected. See "Risks Related to Rational and Pure
Atria--Volatility of Stock Price."
Risks of Integrating Geographically Dispersed Organizations. The
difficulties of integrating Rational's and Pure Atria's organizations will be
compounded by the fact that each company has significant operations on both
the East Coast and West Coast of the United States and in a number of foreign
countries. In particular, Rational has development and marketing sites in
California, Oregon, Massachusetts, Colorado, Wisconsin, Washington, North
Carolina, Pennsylvania, Sweden and India (development only) and Pure Atria has
development and marketing sites in California and Massachusetts. Rational
intends to maintain development and marketing teams of the Combined Company in
these various regions following the Merger, which may complicate coordination
and communication among development and marketing teams and may require
additional management resources and attention. In addition, each of Rational
and Pure Atria has a world-wide sales organization with offices in numerous
states and foreign countries, and integration of these geographically
dispersed sales operations is expected to require a significant amount of
management resources and attention.
Increased Integration Difficulties Associated with Recent Acquisitions. The
challenges of integrating Rational's and Pure Atria's organizations will be
compounded by ongoing efforts associated with the integration of recent
acquisitions by both companies, including without limitation Rational's
acquisitions in the quarter ended March 31, 1997, of SQA, Inc., Performance
Awareness Corporation, Requisite, Inc., Softlab AB and Software 9000,
Rational's acquisition of the Visual Test product in October 1996, the merger
of Pure and Atria in August 1996 and Pure Atria's acquisition of Integrity QA
Software, Inc. in January 1997. The integration of multiple organizations will
require a substantial amount of management resources and attention. See "Risks
Related to Rational and Pure Atria--Risks Associated with Recent and Future
Acquisitions."
Risks Associated with Effect of Merger on Resellers and Customers. The
announcement and consummation of the Merger could cause resellers and present
and potential customers of either company to delay or cancel orders for
products as a result of concerns and uncertainty over evolution, integration
and support of Rational's and Pure Atria's products following the Merger,
particularly load and stress-testing products. Such a delay or cancellation of
orders could have a material adverse effect on the business, results of
operations and financial condition of Rational, Pure Atria or the Combined
Company. In particular, such delays or cancellations could be expected to
disrupt revenue and earnings, which in turn would have a negative effect on
the market price of Rational Common Stock or, prior to the Merger, Pure Atria
Common Stock.
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Risks Associated with Fixed Exchange Ratio. Under the terms of the
Agreement, each outstanding share of Pure Atria Common Stock will be converted
into the right to receive 0.9 shares of Rational Common Stock at the Effective
Time of the Merger. The Agreement does not provide for adjustment of the
Exchange Ratio based on fluctuations in the price of either Rational Common
Stock or Pure Atria Common Stock. The price of Rational Common Stock has
declined significantly from its price at the date of execution of the
Agreement, and may vary significantly between the date hereof and the date on
which stockholders vote with respect to the Agreement due to, among other
factors, market perception of the synergies expected to be achieved by the
Merger, changes in the business, operations or prospects of Rational or Pure
Atria, market assessments of the likelihood that the Merger will be
consummated and the timing thereof, and general market and economic
conditions. To the extent that the market price for Rational Common Stock
increases or decreases before the Effective Time, the market value at the
Effective Time of the Rational Common Stock to be received by Pure Atria
stockholders in the Merger would correspondingly increase or decrease. Pure
Atria stockholders will not be compensated for decreases in the market price
of Rational Common Stock which could occur prior to the Effective Time. The
market prices of Rational Common Stock and Pure Atria Common Stock as of a
recent date are set forth herein under "Summary--Market Price Data."
Stockholders voting on the Merger are urged to obtain recent market quotations
for Rational Common Stock and Pure Atria Common Stock. The Rational Common
Stock and the Pure Atria Common Stock historically have been subject to
substantial price volatility. No assurance can be given as to the market
prices of Rational Common Stock or Pure Atria Common Stock at any time before
the Effective Time or as to the market price of Rational Common Stock at any
time thereafter. See "Risks Related to Rational and Pure Atria--Volatility of
Stock Price."
Costs of Integration; Transaction Expenses. Rational and Pure Atria estimate
that they will incur aggregate direct transaction costs of approximately $15
million associated with the Merger, which will result in a non-recurring
charge to operations upon consummation of the Merger. Rational expects to
incur a non-recurring charge to operations of between $40 million and $60
million primarily in the quarter ending September 30, 1997, the quarter in
which the Merger is expected to be consummated, to reflect costs associated
with integrating the two companies. Actual costs may substantially exceed such
estimates, unanticipated expenses associated with the integration of the two
companies may arise, or Rational may incur additional material charges in
subsequent quarters to reflect additional costs associated with the
integration of the two companies. Total costs associated with the Merger are
anticipated to result in an operating loss and a net loss for Rational's
quarter ending September 30, 1997, and for the fiscal year ending March 31,
1998, and could negatively impact financial results in future periods for the
reasons discussed above.
Potential Conflicts of Interest. Daniel H. Case III, a director and
stockholder of Rational, is the President and Chief Executive Officer of
Hambrecht & Quist. Hambrecht & Quist is providing financial advisory services
to Rational in connection with the Merger. Hambrecht & Quist was paid an
initial payment of $2.0 million upon delivery of its fairness opinion in
connection with the Merger. Hambrecht & Quist will be paid an additional $3.3
million upon consummation of the Merger. Hambrecht & Quist will also be
reimbursed for reasonable out-of-pocket expenses incurred in connection with
its services. Reed Hastings, an officer, director and approximately 9.5%
stockholder of Pure Atria, has been offered the position of Chief Technical
Officer of Rational, contingent upon the consummation of the Merger. See
"Terms of the Merger--Interests of Certain Persons."
Dilution of Ownership Interest of Current Stockholders. Following the
Merger, and based upon the companies' respective capitalizations as of March
31, 1997, the current stockholders of Rational and Pure Atria will own
approximately 55% and 45%, respectively, of the outstanding shares of Rational
Common Stock and 55% and 45%, respectively, of Rational's Common Stock on a
fully diluted basis. This represents substantial dilution of the ownership
interest in the Combined Company of Rational's and Pure Atria's current
stockholders compared to their ownership interests in their respective
companies prior to the Effective Time. The issuance of additional shares of
Rational Common Stock pursuant to the Pure Atria Stock Option Plans and the
Pure Atria Stock Purchase Plan being assumed by Rational and Rational's
existing employee stock option and stock purchase plans will result in further
dilution to the current stockholders of Rational and Pure Atria.
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Shares Eligible for Future Sale. If the Merger is consummated, Rational will
issue to stockholders of Pure Atria an aggregate of approximately 38,542,000
shares of Rational Common Stock, based on the number of shares of Pure Atria
Common Stock outstanding as of March 31, 1997. Immediately upon consummation
of the Merger, approximately 34,235,000 such shares will be freely tradeable.
As a result, substantial sales of Rational Common Stock could occur after the
Merger. Following publication of financial results covering 30 days of post-
merger combined operations, an additional approximately 4,307,000 shares
issued in the Merger to persons who may be deemed affiliates of Pure Atria
could be publicly sold pursuant to Rule 145 under the Securities Act, subject
to the volume and other limitations thereof. In addition, based on the number
of Pure Atria options outstanding and the level of employee stock purchase
plan participation as of March 31, 1997, approximately 6,951,000 additional
shares of Rational Common Stock will be reserved for issuance following the
Merger. Substantially all of the approximately 48 million shares of Rational
Common Stock outstanding immediately prior to the Merger, will either be
freely tradeable, or tradeable within the volume and manner of sale
restrictions imposed under Rule 144 of the Securities Act or imposed under
Rule 145 of the Securities Act as a result of prior acquisitions. Future sales
of a substantial number of shares of Rational Common Stock could adversely
affect or cause substantial fluctuations in the market price of Rational
Common Stock.
Pooling of Interests. In order to qualify the Merger as a pooling of
interests for accounting and financial reporting purposes, affiliates of
Rational and Pure Atria have agreed not to sell, or otherwise reduce their
risk with respect to, any shares of stock, except for a de minimus number as
defined by certain SEC rules and regulations, of either Rational or Pure Atria
during the period beginning 30 days preceding the Effective Time and
continuing until the second day after the day that Rational publicly announces
financial results covering at least 30 days of combined operations of Rational
and Pure Atria. Assuming that the Merger is completed and the Effective Time
occurs on or about July 30, 1997, it is not expected that such combined
financial results would be published until the latter part of October, 1997.
If affiliates of Rational or Pure Atria sell their Rational Common Stock or
Pure Atria Common Stock despite their contractual obligation not to do so, the
Merger may not qualify for accounting as a pooling of interests for financial
reporting purposes in accordance with generally accepted accounting
principles, which would in turn materially and adversely affect Rational's
reported earnings and, potentially, its stock price. See "Approval of the
Merger and Related Transactions--Accounting Treatment."
RISKS RELATED TO RATIONAL AND PURE ATRIA
Fluctuations in Operating Results. Revenue in any quarter is substantially
dependent on orders booked and shipped in that quarter. Because staffing and
operating expenses are based on anticipated revenue levels, and a high
percentage of the costs are fixed, small variations in the timing of the
recognition of specific revenues could cause significant variations in
operating results from quarter to quarter. Historically, both companies have
earned a substantial portion of their revenues in the last weeks of the
quarter. To the extent these trends continue following the Merger, the failure
to achieve such revenues in the last weeks of any given quarter will have a
material adverse effect on the Combined Company's financial results for that
quarter. Following the Merger, the Combined Company's revenue will continue to
be difficult to forecast due to the fact that both Rational's and Pure Atria's
sales cycles, from initial evaluation to purchase, vary substantially from
customer to customer and from product to product, and because the markets for
Rational's and Pure Atria's products are rapidly evolving. The Combined
Company's revenues will be particularly difficult to forecast while the
Rational and Pure Atria sales forces and channels of distribution are
undergoing integration following the Merger. In addition, the Combined
Company's results will be affected by the number, timing and significance of
new product announcements by it and its competitors, its ability to develop,
introduce and market new and enhanced and integrated versions of its products
on a timely basis, the level of product and price competition, changes in
operating expenses, changes in average selling prices and product mix, any
changes in its sales incentive strategy, the experience level of and any
changes in sales personnel, any changes in sales cycles, the mix of direct and
indirect sales, product returns and general economic factors, among others.
The Combined Company's sales will also be sensitive to existing and
prospective customers' budgeting practices and to potential cutbacks in
defense spending, which has historically been a significant factor for
Rational.
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An example of fluctuating revenues occurred for the quarter ended March 31,
1997, when Pure Atria experienced lower revenues than for the preceding
quarter principally as a result of a longer than expected sales cycle for the
ClearCase product line encountered by former Pure and newly-hired field
representatives. Pure Atria has been experiencing an increasing number of
orders occurring later in the quarter, making fluctuations in revenues more
difficult to predict. Rational's operating results may be subject to similar
sales cycle and sales execution risks before and after the Merger.
Although Rational has experienced increasing revenues in each of the past
eleven quarters, its sales compensation structure has historically resulted in
revenues for the first quarter of a fiscal year being lower than revenues for
the fourth quarter of the prior fiscal year. Pure Atria is subject to similar
fluctuations. There can be no assurance that similar fluctuations will not
occur again in the future, or that the integration of Pure Atria into Rational
will not reinforce this pattern.
Rational recorded a net loss for the quarter and year ended March 31, 1997,
primarily as a result of certain one-time charges associated with acquisitions
of businesses and assets in the second half of the fiscal year. Pure Atria
also recorded a significant net loss for the quarter ended March 31, 1997, due
to certain one-time charges primarily associated with Pure Atria's acquisition
of Integrity QA Software, Inc. which was completed in January 1997. Rational,
Pure Atria, or the Combined Company may experience unanticipated costs related
to these or other acquisitions in future periods, and difficulties in
integrating these or other acquisitions into Rational's, Pure Atria's or the
Combined Company's operations may materially and adversely affect Rational's
results of operations and financial condition in the future.
Transaction expenses associated with the Merger and costs of integrating the
two companies are anticipated to result in an operating loss and a net loss
for the Combined Company's quarter ending September 30, 1997, and for the
fiscal year ending March 31, 1998, and could negatively impact financial
results in future periods as well. See "Risks Related to the Merger--Costs of
Integration; Transaction Expenses."
Although Rational and Pure Atria have experienced growth in revenues in
recent years, there can be no assurance that, in the future, Rational, Pure
Atria or the Combined Company will sustain revenue growth or be profitable on
a quarterly or annual basis. Further, the revenues and operating income
(exclusive of nonrecurring operating, restructuring and merger-related
expenses) experienced by Rational and Pure Atria in recent quarters are not
necessarily indicative of future results, and period-to-period comparisons of
Rational's or Pure Atria's financial results should not be relied upon as an
indication of future performance. Fluctuations in operating results may also
result in volatility in the prices of Rational's Common Stock and Pure Atria's
Common Stock prior to the Merger, and in the price of the Combined Company's
Common Stock following the Merger.
Due to all of the foregoing factors, it is possible that in some future
quarter Rational's, Pure Atria's and/or the Combined Company's operating
results will be below the expectations of public market analysts and
investors. In such event, the price of Rational's, Pure Atria's and/or the
Combined Company's Common Stock would likely be materially adversely affected,
and significant declines in stock prices frequently result in costly and
lengthy securities litigation, with its attendant costs, distraction and
liability exposure.
Volatility of Stock Price. The market prices of Rational's Common Stock and
Pure Atria's Common Stock have been, and are likely to continue to be,
volatile. Factors such as new technical innovations and product announcements
or changes in product pricing policies by either company or their respective
competitors, quarterly fluctuations in operating results, announcements of
technical innovations, announcements relating to strategic relationships or
acquisitions, changes in earnings estimates by analysts, and general
conditions or stock prices of companies which develop tools for automating
software application development and management, among other factors, may have
a significant impact on the market price of the companies' respective Common
Stock prior to the Merger, and the market price of the Combined Company's
Common Stock following the Merger. Should the companies fail to introduce,
enhance or integrate products on the schedules expected, their stock prices
could be adversely affected.
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Any shortfall in anticipated operating results could have an immediate and
significant adverse effect on the market price of the Combined Company's
Common Stock. The Combined Company's net income per share may decrease as a
result of the Merger, and potential business synergies, if achieved, of
Rational and Pure Atria may not offset any such dilution. Further, the
Combined Company will incur substantial Merger-related charges primarily in
the quarter in which the Merger is consummated. Rational and Pure Atria expect
the Merger to be accretive in the long-term. However, this forward-looking
statement may not prove to be an accurate prediction due to unforseen changes,
inaccurate or incomplete assumptions regarding the current business or future
prospects of either or both of the companies, or other reasons, including
without limitation those described in "Risk Factors" or elsewhere in this
Prospectus/Joint Proxy Statement. Rational and Pure Atria expect that the
Merger may be dilutive in the initial periods following the Effective Time,
and there can be no assurance as to when the Merger will become accretive, if
ever. Any failure of the Merger to meet expectations as to potential business
synergies or any failure of the Merger to be accretive in any quarter could
have an immediate and significant adverse effect on the market price of the
Combined Company's Common Stock.
Statements or changes in opinions, ratings, or earnings estimates made by
brokerage firms or industry analysts relating to the market for software and
high technology company stocks or relating to Rational and Pure Atria
specifically have resulted, and could in the future result, in an immediate
and adverse effect on the market price of Rational's Common Stock, Pure
Atria's Common Stock or, after the Merger, the Combined Company's Common
Stock. Statements by financial or industry analysts regarding the extent of
the dilution in Rational's or Pure Atria's net income per share resulting from
operating results, the Merger or other developments and the extent to which
such analysts expect potential business synergies to offset such dilution can
be expected to contribute to volatility in the market price of Rational's
Common Stock, Pure Atria's Common Stock or the Combined Company's Common
Stock. In addition, in recent years the stock market in general, and the
shares of technology companies in particular, have experienced extreme price
fluctuations. This volatility has had a substantial effect on the market
prices of securities issued by many companies, including Rational and Pure
Atria, in certain cases for reasons unrelated to the operating performance of
the specific companies. These broad market fluctuations may adversely affect
the market price of the Rational Common Stock and Pure Atria Common Stock
prior to the Effective Time of the Merger, and of the Combined Company's
Common Stock thereafter.
Risks Associated With Recent and Future Acquisitions. During approximately
the past three years, and the past year in particular, Rational and Pure Atria
have made a number of strategic acquisitions. Rational acquired SQA, Inc.,
Performance Awareness Corporation, Requisite, Inc., Softlab AB, and Software
9000 in the quarter ended March 31, 1997; the Visual Test product from
Microsoft in October 1996; and made other acquisitions in earlier periods.
Prior to the merger of Pure and Atria, Pure acquired Performix, Inc. and
QualTrak; the merger of Pure and Atria occurred in August 1996; and Pure Atria
acquired Integrity QA Software, Inc. in January 1997. Acquisitions may result
in the diversion of management's attention from day-to-day operations and may
include numerous other risks, including difficulties in the integration of
operations, products and personnel. To the extent that acquisitions have in
the past resulted, or may in the future result, in a diversion of resources or
that efforts to integrate recent and future acquisitions fail, there could be
a material adverse effect on Rational's, Pure Atria's or the Combined
Company's business, results of operations and financial condition.
Acquisitions have the potential to result in dilutive issuances of equity
securities, the incurrence of additional debt, and amortization expenses
related to goodwill and other intangible assets. Rational and Pure Atria
management have historically evaluated on an ongoing basis the strategic
opportunities available to them. Rational or the Combined Company may in the
near- or long-term future pursue acquisitions of complementary products,
technologies or businesses. Pursuant to the terms of the Agreement, while the
Merger is pending, both Rational and Pure Atria are limited in their ability
to undertake material acquisitions without first obtaining the consent of the
other. As a result, future acquisition opportunities which the Rational Board
or Pure Atria Board might consider to be advantageous to Rational or Pure
Atria, respectively, could be materially more difficult to pursue, and could
be lost to competitors of Rational or Pure Atria.
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Competition. The industry for tools for automating software application
development and management is extremely competitive and rapidly changing. Both
Rational and Pure Atria expect that the Combined Company will continue to
experience significant and increasing levels of competition in the future.
Bases of competition include corporate and product reputation, innovation with
frequent product enhancement, breadth of integrated product line, the
availability of integrated suites and bundles, product architecture,
functionality and features, product quality, performance, ease-of-use,
support, availability of technical consulting services and price. Both
Rational and Pure Atria face intense competition for each product within their
respective product lines, generally from both Windows and UNIX vendors.
Because individual product sales are often the first step in a broader
customer relationship, the Combined Company's success will depend in part upon
its ability to successfully compete with numerous competitors at each point
within its product line.
Rational faces competition from software development tools and processes
developed internally by customers, including ad hoc integrations of numerous
stand-alone development tools. The Combined Company's customers may be
reluctant to purchase products offered by independent vendors such as the
Combined Company. As a result, the Combined Company must educate prospective
customers as to the advantages of the Combined Company's products versus
internally developed software quality systems.
Rational faces competition from, among others, Intersolv, Inc., Platinum
Technology, Inc., Select Software Tools plc, Cayenne, Oracle, IBM Corporation
("IBM"), Sun Microsystems, and Sybase Inc. as well as numerous privately held
tool suppliers offering traditional CASE tools that compete with the Rational
Rose approach to visual modeling and component-based development. Rational's
RequisitePro requirements management product faces competition from companies
such as GEC-Marconi. Rational's software testing tools--SQA Suite, Rational
Visual Test and preVue--face competition from Compuware, Mercury Interactive
Corporation, Segue Software, Inc., Intersolv, Inc., Computer Associates,
Platinum Technologies, Terodyne, Cyrano, SQL Bench International, Inc., and
several private companies offering testing automation tools. Microsoft,
Compuware, Oracle, Sybase and several of the major UNIX platform vendors,
including Sun Microsystems, Hewlett Packard, Digital Equipment Corporation,
Silicon Graphics Inc., and IBM, also compete with Rational with respect to
software quality products and testing tools, with testing products customized
to certain of their other software products. Rational Apex for C/C++ faces
competition from, among others, major UNIX platform vendors such as Sun
Microsystems, Hewlett-Packard and Digital Equipment Corporation, which have
C/C++ compilers and debuggers and in some cases programming environments for
their platforms. In addition, numerous privately held companies offer
compilers, debuggers and programming environments which compete with Rational
Apex. The Rational Summit product line faces competition from various
suppliers offering products with change management functions, including
Continuus Software Corporation, Hewlett Packard, True Software, SQL Software,
LTD., Intersolv, Inc., Sun Microsystems and IBM. Rational's Apex Ada and VADs
product lines face competition from Aonix, Green Hills Software, Inc. and a
large number of other suppliers offering Ada products for native and embedded
systems.
Pure Atria experiences competition with respect to a number of its products,
both from utilities commonly bundled with versions of operating systems and
from stand-alone product offerings. For example, versions of UNIX are commonly
bundled with utilities (such as SCCS and RCS) that provide version control,
which is part of the functionality provided by ClearCase. Some system vendors,
such as Sun, already have products, such as Workshop, that provide features
similar to those in Purify or other of Pure Atria's products and would compete
directly with such products if offered on a stand-alone basis. There can be no
assurance that Sun, which has a license to some of Pure Atria's patents, will
not introduce stand-alone products that compete with products of Pure Atria.
Companies offering products competitive with ClearCase in the UNIX marketplace
include Sun, which offers TeamWare, IBM, which offers Configuration
Management/Version Control ("CMVC"), Computer Associates ("CA") through its
acquisition of LEGENT Corporation, which offers the Endeavor WSX product, and
Platinum through its acquisition of Softool Corp., which markets CCC Harvest.
In addition, there are several smaller, privately-held companies that market
competitive products, including Continuus Software Corporation, which markets
Continuus/CM. Other companies have offered version control or configuration
management products outside the UNIX market. Companies in this category
include CA, Intersolv and Microsoft. CA has a
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large installed base of its configuration management product on IBM
mainframes. Intersolv has a large installed base of DOS and Windows software
developers. In 1994, Microsoft acquired OneTree Software, which offers a
version control product. Pure Atria expects additional competition from other
established and emerging companies. Digital Equipment Corporation has spun-off
an independently operated subsidiary, TracePoint Technology, Inc., which has
stated that it intends to produce development and testing tools and compete
against Pure Atria.
Rational and Pure Atria believe that the increased level of competition each
observed in the last half of 1996 and the first half of 1997 will continue to
increase. Certain competitors are more experienced than Rational and Pure
Atria in the development of software-engineering tools, databases or software-
development products. Some competitors have, and new competitors may have,
larger technical staffs, more established distribution channels and greater
financial resources than the Combined Company. There can be no assurance that
either existing or new competitors will not develop products that are superior
to the Combined Company's products or that achieve greater market acceptance.
The Combined Company's future success will depend in large part upon its
ability to increase its share of its target markets and to license additional
products and product enhancements to existing customers. Future competition
may result in price reductions, reduced margins or loss of sales which in turn
would have a material adverse effect on the Combined Company's business,
results of operations and financial condition.
Dependence Upon Sales Force and Other Channels of Distribution. Rational and
Pure Atria currently distribute their respective products primarily through
field sales personnel teamed with highly trained technical support personnel.
Rational and Pure Atria believe that a high level of technical consulting,
training and customer support is essential to maintaining their respective
competitive positions, and have found that the ability to deliver a high level
of technical consulting, training and customer support is an important selling
point with respect to its products. While complementary to Rational's and Pure
Atria's products, the services provided by these personnel have historically
yielded lower margins for Rational and Pure Atria than their respective
product businesses. If these services constitute a higher proportion of total
revenues in the future, the Combined Company's margins will be adversely
affected. Both companies have developed other direct and indirect sales
channels, including telesales, the World Wide Web, and partnering with
external service providers and value-added resellers ("VARs"). There can be no
assurance that such channels will be successful in increasing sales of the
Combined Company's products or in reducing its sales costs on a percentage
basis.
Dependence Upon Growth of Emerging Industries. The Combined Company's future
growth and financial performance will depend in part upon continued growth in
the need for and sales of tools for automating software application
development and management. Sales of these products may not continue to grow
or the Combined Company may be unable to respond effectively to evolving
customer requirements. The number of software developers using Rational's and
Pure Atria's products is relatively small compared to the number of developers
using more traditional technology and products. The adoption of the Combined
Company's products by software programmers who have traditionally used other
technology requires re-orientation to significantly different programming
methods. The acceptance of the Combined Company's products, therefore, may not
expand beyond sophisticated programmers who are early adopters of the
technology. Furthermore, potential customers may be unwilling to make the
investment required to retrain programmers to build software using the
Combined Company's products rather than traditional programming techniques.
Many of Rational's and Pure Atria's customers have purchased only small
quantities of the companies' products, and these or new customers may decide
not to broadly implement or purchase additional units of such products.
Expansion of Product Lines; Dependence Upon New Product Introductions. The
continued success of the Combined Company will depend in part upon its ability
to provide a tightly integrated line of software application development
tools, as well as integrated product suites and bundles, that support software
development for a number of implementation languages. This integration will
require the Combined Company to modify and enhance certain of the current
Rational and Pure Atria products and to continue to develop, introduce and
integrate products. Rational and Pure Atria also believe that the Combined
Company's continued success
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will become increasingly dependent on its ability to support the Microsoft
platform, including Windows 95 and Windows NT operating systems. Rational and
Pure Atria believe that it will be particularly important to successfully
develop and market a broader line of software development products for C++,
Visual Basic, Java and other implementation languages in order for the
Combined Company to be successful in its efforts to broaden its customer base
and to further increase its share within its existing market segments. The
Combined Company may be unable to successfully develop and market such a broad
line of products, or may encounter unexpected difficulties and delays in
integrating new products with existing product lines. In addition, efforts to
integrate Rational and Pure Atria products may have an adverse impact on the
development, introduction or delivery of new or enhanced Rational or Pure
Atria products.
Both Rational and Pure Atria have plans to introduce new products and
enhanced versions of current products during the next few fiscal quarters. In
addition, the Combined Company will seek to offer integrated suites and
bundles consisting of certain existing Rational and Pure Atria products. Delay
in the start of shipment of new, enhanced or integrated products, suites and
bundles would have an adverse effect on the Combined Company's revenues, gross
profit and operating income. As a result of Rational's business alliance with
Microsoft, certain of Rational's new product releases are expected to be
tightly integrated with new releases of certain Microsoft products. To the
extent that scheduled Microsoft product releases are delayed, there could be a
material adverse effect on Rational's revenues from new products.
Both Rational and Pure Atria attempt to make adequate allowances in their
new product release schedules for both internal and beta-site testing of
product performance. Because of the complexity of the companies' products,
however, the release of new products may be postponed should test results
indicate the need for redesign and retesting, or should the companies elect to
add product enhancements in response to beta customer feedback.
Dependence on Key Personnel. Both Rational and Pure Atria believe that the
hiring and retaining of qualified individuals at all levels in the Combined
Company will be essential to the Combined Company's ability to manage growth
successfully, and there can be no assurance that the Combined Company will be
successful in attracting and retaining the necessary personnel. The Combined
Company will be particularly dependent upon the efforts and abilities of its
senior management personnel. The departure of any of the senior management
members or other key personnel of the Combined Company could have a material
adverse effect on the Combined Company's business, financial condition, or
results of operations depending upon the timing of the departure, changes in
the Combined Company's business prior to such time, the availability of
qualified personnel to replace them, and whether such personnel depart singly,
contemporaneously, or as a group, among other factors. Transactions such as
the Merger can be accompanied or followed by the departure of key personnel,
which can compound the difficulty of integrating the operations of the parties
to the business combination. For example, shortly following the merger of Pure
and Atria, the former Atria Senior Vice President of Sales resigned from Pure
Atria. None of the Rational executive officers is subject to any agreement not
to compete or severance agreement with Rational or the Combined Company. Reed
Hastings has entered into a two-year non-competition and non-hire agreement
with Rational, which will become effective at the Effective Time of the
Merger. There can be no assurance that the non-competition and non-hire
provisions of that agreement are enforceable.
The ability of the Combined Company to attract and retain the highly trained
technical personnel that are integral to its direct sales and product
development teams may limit the rate at which the Combined Company can develop
products and generate sales. Competition for qualified personnel in the
software industry is intense, and there can be no assurance that the Combined
Company will be successful in attracting and retaining such personnel. The
proposed Merger may have a destabilizing effect on employee retention at all
levels within Rational and Pure Atria. Departures of existing personnel,
particularly in key technical, sales, marketing or management positions, can
be disruptive and can result in departures of other existing personnel, which
in turn could have a material adverse effect upon the Combined Company's
business, operating results and financial condition.
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A traditional means of retaining employees following declines in a
corporation's stock price, such as those experienced recently by Rational and
Pure Atria, is to reprice "underwater" stock options, both to offer an equity
incentive to existing employees and to avoid inequities relative to new
employees offered lower-priced options. However, attempts to address potential
employee attrition by repricing employee stock options, could be negatively
interpreted by analysts and investors and possibly negatively affect the
proposed pooling-of-interests accounting treatment for the Merger. As long as
substantial numbers of options remain underwater, Rational, Pure Atria and/or
the Combined Company may suffer employee attrition in excess of historical
rates, which could have a material adverse effect on the Combined Company's
business, results of operations and financial condition. See "Risks Related to
the Merger--Pooling of Interests."
Rapid Technological Change. The industry for tools for automating software
application development and management is characterized by rapid technological
advances, changes in customer requirements and frequent new product
introductions and enhancements. The introduction of products embodying new
technologies and the emergence of new industry standards and practices can
render existing products obsolete and unmarketable. The Combined Company must
respond rapidly to developments related to Internet and intranet applications,
hardware platforms, operating systems and applicable programming languages.
Such developments will require the Combined Company to make substantial
product development investments. Any failure by the Combined Company to
anticipate or respond adequately to technology developments and customer
requirements, or any significant delays in product development, introduction
or integration could result in a loss of competitiveness or revenue. To the
extent the Combined Company does respond to technological change or evolving
customer requirements with new products or product enhancements, such new
products or product enhancements may fail to achieve market acceptance.
In addition, rapid growth of interest in and use of Internet and intranet
environments is a recent and emerging phenomenon. The Combined Company's
success may depend, in part, on the compatibility of its products with
Internet and intranet applications. The Combined Company may fail to
effectively adapt its products for use in Internet or intranet environments or
to produce competitive Internet and intranet applications.
Rational and Pure Atria believe that factors affecting the ability of their
respective products to achieve broad consumer acceptance include product
performance, price, ease of adoption, displacement of existing approaches and
adaptation to rapid technological change and competitive product offerings.
The Combined Company may be unable to respond promptly and effectively to the
challenges of technological change and its competitors' innovations, and it is
possible that the Combined Company will be unable to achieve the necessary
market acceptance, or compete effectively, in new markets.
Management of Growth. Each of Rational and Pure Atria has experienced rapid
growth, particularly as a result of the companies' respective acquisitions,
and both companies are experiencing a period of aggressive product
introductions that have placed, and may continue to place, a significant
strain on their respective financial, operational, management, marketing and
sales systems and resources, including their personnel. Projects such as the
expansion of or enhancements to product lines, efforts to address broader
markets and to expand distribution channels, numerous acquisitions as
described in "Risks Associated with Recent and Future Acquisitions" and
business alliances such as the recent arrangement between Rational and
Microsoft, when added to the day-to-day activities of Rational, Pure Atria, or
the Combined Company, have placed and will continue to place further strain on
management resources and personnel. If Rational's, Pure Atria's or the
Combined Company's management is unable to effectively manage growth, their
respective businesses, competitive positions, results of operations and
financial conditions will be materially and adversely affected.
Risk of Software Defects. Software products as complex as those offered by
Rational and Pure Atria often contain undetected errors, or "bugs," or
performance problems. Such defects are most frequently found during
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the period immediately following introduction of new products or enhancements
to existing products. Despite extensive product testing prior to introduction,
certain of Rational's and Pure Atria's products have in the past contained
software errors that were discovered after commercial introduction. Errors or
performance problems may also be discovered in the future. Any future software
defects discovered after shipment of Rational's or Pure Atria's products could
result in loss of revenues or delays in customer acceptance, which could have
a material adverse effect on the Combined Company's business, operating
results and financial condition. Further, because Rational and Pure Atria rely
on their own products in connection with the development of their respective
software, any such errors could make it more difficult to sell such products
in the future. Both Rational and Pure Atria attempt to make adequate allowance
in their new product release schedules for both internal and beta-site testing
of product performance. Because of the complexity of the Companies' products,
however, the release of new products by the Combined Company may be postponed
should test results indicate the need for redesign and retesting, or should
the Combined Company elect to add product enhancements in response to beta
customer feedback.
Risks Associated with International Operations. International sales
accounted for approximately 33%, 35%, and 32% of Rational's revenues in fiscal
1995, 1996 and 1997, respectively, and represented 19%, 28%, 30% and 31% of
Pure Atria's revenues in fiscal 1994, 1995, 1996 and the three months ended
March 31, 1997, respectively. Both Rational and Pure Atria expect that
international sales will continue to account for a significant portion of the
Combined Company's revenues in future periods. International sales are subject
to inherent risks, including unexpected changes in regulatory requirements and
tariffs, difficulties in staffing and managing foreign operations, longer
payment cycles, greater difficulty in accounts receivable collection,
potentially adverse tax consequences, price controls or other restrictions on
foreign currency, difficulties in obtaining export and import licenses, costs
of localizing products for foreign markets, lack of acceptance of localized
products in foreign markets, and the efforts of high local wage scales and
other expenses. Any material adverse effect on the Combined Company's
international business would be likely to materially and adversely affect the
Combined Company's business, operating results and financial condition as a
whole. Rational's and Pure Atria's international sales are generally
denominated in foreign currencies. Rational has engaged in only limited
hedging activities, and Pure Atria does not currently engage in any hedging
activities. Gains and losses on the conversion of foreign payments into U.S.
dollars may contribute to fluctuations in the Combined Company's results of
operations. Although neither Company has experienced a material adverse impact
to date from fluctuations in foreign currencies, there can be no assurance
that the Combined Company will not experience a material adverse impact on its
financial condition and results of operations from fluctuations in foreign
currencies in the future.
Limited Protection of Intellectual Property and Proprietary Rights. Rational
and Pure Atria rely on a combination of copyright, trademark and trade secret
laws, employee and third-party nondisclosure agreements and other methods to
protect their respective proprietary rights. Despite these precautions, it may
be possible for unauthorized third parties to copy certain portions of the
companies' respective products or reverse engineer or obtain and use
information that Rational or Pure Atria regards as proprietary. Rational and
Pure Atria generally license their respective software products to end-users
on a "right to use" basis pursuant to a perpetual license. Rational and Pure
Atria license their respective products primarily under "shrink-wrap" licenses
(i.e., licenses included as part of the product packaging). Shrink-wrap
licenses are not negotiated with or signed by individual licensees, and
purport to take effect upon the opening of the product package. Certain
license provisions protecting against unauthorized use, copying, transfer and
disclosure of the licensed program may be unenforceable under the laws of
certain jurisdictions and foreign countries. In addition, the laws of some
foreign countries do not protect proprietary rights to the same extent as do
the laws of the United States. There can be no assurance that these
protections will be adequate. To the extent that the Combined Company
increases its international activities, its exposure to unauthorized copying
and use of its products and proprietary information will increase.
The scope of United States patent protection in the software industry is not
well defined and will evolve as the United States Patent and Trademark Office
grants additional patents. Because patent applications in the United States
are not publicly disclosed until the patent is issued, applications may have
been filed which would relate to Rational's or Pure Atria's products.
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Rational and Pure Atria also each rely on certain software that it licenses
from third parties, including software that is integrated with internally
developed software and used in its products to perform key functions. There
can be no assurance that these third-party software licenses will continue to
be available to the Combined Company on commercially reasonable terms, or that
the software will be appropriately supported, maintained or enhanced by the
licensors. The loss of licenses to, or inability to support, maintain and
enhance any of such software could result in increased costs, or in delays or
reductions in product shipments until equivalent software could be developed,
identified, licensed and integrated, which would materially adversely affect
the Combined Company's business, operating results and financial condition.
Risks of Litigation. Competitors and potential competitors may resort to
litigation as a means of competition. Such litigation or other legal disputes
may be costly and expose the Combined Company to new claims that it may not
have anticipated. In the past, Pure Atria and Rational have instituted
litigation against several companies. Although patent and intellectual
property disputes in the software area have often been settled through
licensing, cross-licensing or similar arrangements, costs associated with such
arrangements may be substantial. Any litigation involving the Combined
Company, whether as plaintiff or defendant, regardless of the outcome, may
result in substantial costs and expenses to the Combined Company and
significant diversion of effort by the Combined Company's technical and
management personnel. In addition, there can be no assurance that litigation,
either instituted by or against the Combined Company, will not be necessary to
resolve issues that may arise from time to time in the future. Any such
litigation could have a material adverse effect upon the Combined Company's
business, operating results and financial condition.
Rational and Pure Atria expect that software product developers will be
increasingly subject to infringement claims as the number of products and
competitors grows and the functionality of products in different industry
segments overlaps. There can be no assurance that third parties will not
assert infringement claims against the Combined Company in the future or that
such claims will not be successful. The Combined Company could incur
substantial costs in defending itself and its customers against any such
claims. Parties making such claims may be able to obtain injunctive or other
equitable relief that could effectively block the Combined Company's ability
to sell its products in the United States and abroad, and could result in an
award of substantial damages. In the event of a claim of infringement, the
Combined Company and its customers may be required to obtain one or more
licenses from third parties. There can be no assurance that the Combined
Company or its customers could obtain necessary licenses from third parties at
a reasonable cost or at all. Defense of any lawsuit or failure to obtain any
such required license would have a material adverse effect on the Combined
Company's business, results of operations and financial condition.
RISKS RELATED TO RATIONAL
Dependence Upon Strategic Relationships. Rational's development, marketing
and distribution strategies rely increasingly on its ability to form long-term
strategic relationships with major software and hardware vendors, many of whom
are substantially larger than Rational. These business relationships often
consist of cooperative marketing programs, joint customer seminars, lead
referrals or joint development projects. Although certain aspects of some of
these relationships are contractual in nature, many important aspects of these
relationships depend upon the continued cooperation of each party with
Rational. The Merger may disrupt these relationships or activities, and
certain partners may reassess the value of their relationship with Rational as
a result of the Merger. Divergence in strategy between Rational and any given
partner, a change in focus by any given partner, or competitive product
offerings introduced by any given partner, may interfere with Rational's
ability to develop, market, sell or support its products, which in turn would
have a material adverse effect on Rational's business, results of operations
and financial condition. See "Business Alliance with Microsoft."
Business Alliance with Microsoft. On October 2, 1996, Rational and Microsoft
announced the formation of a business alliance which consists of Rational's
acquisition of Microsoft's Visual Test product, technology cross-licensing,
joint development projects and joint marketing programs. While Rational
believes that Microsoft's current strategy in relation to the enterprise
information systems market is based on component-based development, there can
be no assurance that this strategy will continue or that, if it does continue,
Microsoft's
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emphasis or priorities will not change in the future, resulting in less
attention and fewer resources being devoted to Microsoft's relationship with
Rational. Although certain aspects of the business alliance are contractual in
nature, many important aspects of the relationship depend on the continued
cooperation of the two companies, and there can be no assurance that Rational
and Microsoft will be able to work together successfully over an extended
period of time. In addition, there can be no assurance that Microsoft will not
use the information it gains in its relationship with Rational to develop or
market competing products.
Acquisition of the Visual Test Product. Rational acquired the Visual Test
product from Microsoft in October 1996. There can be no assurance that
Rational will be able to successfully incorporate Visual Test into its
integrated family of products, or that it will be able to achieve significant
sales of the Visual Test product. Many potential customers for Visual Test
differ from Rational's historical customer base in terms of component-based
software development expertise, purchasing processes, financial resources and
expectations regarding software-engineering tools. There can be no assurance
that Rational will not encounter unanticipated concerns of Visual Test
customers that are different from the concerns of Rational's traditional
customers, or that Rational will have the infrastructure and experience
necessary to adequately respond to the volume and type of such concerns.
Rational has granted Microsoft a non-exclusive, perpetual license to the
Visual Test product source code for the purpose of creating derivative works
and for the purpose of distributing portions of the Visual Test product and
derivative works as part of Microsoft products that do not directly compete
with the Visual Test product in the software testing tools area. There can be
no assurance that Microsoft will not use such rights to create and distribute
products that compete with other products of the Combined Company, including
without limitation Pure Atria testing tools. Rational has also granted
Microsoft a five-year option to obtain a license to incorporate certain
elements of Visual Test technology into Microsoft development tool products,
including Visual Basic, Visual C++ and Visual J++. Should Microsoft exercise
such right, sales of the Visual Test product or other products of the Combined
Company could be materially and adversely impacted. See "Risks Related to
Rational and Pure Atria--Fluctuations in Operating Results."
Licensing of Rose Technology to Microsoft. Microsoft and Rational have
entered into a two-year agreement providing for the inclusion of a subset of
the Rational Rose visual modeling technology in future versions of Microsoft's
enterprise-oriented visual tools. Rational's objective in entering into this
arrangement is to expose Rational's technology to a broader customer base, not
to generate direct product revenue from Microsoft. Rational expects that
changes in its pricing models and combinations of features within product
lines will be required to appeal to this customer base, and there can be no
assurance that such changes will achieve customer acceptance. Rational does
not expect the licensing of its Rose technology to Microsoft to directly
result in a material increase in product revenue. In addition, there can be no
assurance that developers introduced to the Rose technology incorporated into
Microsoft products will become purchasers of Rational products in the future.
Rational has granted Microsoft the option to obtain a perpetual, non-exclusive
right to source code for certain aspects of Rational's Rose technology after
the expiration of the agreement. While Rational believes that Microsoft's and
Rational's strategies currently are complementary, there can be no assurance
that Microsoft will not use this right to develop and market competing
products in the future.
Dependence Upon Major Operating Systems. Many of Rational's major products
have historically been licensed for use principally on certain versions of the
UNIX platform. These products constitute a substantial portion of Rational's
product and service revenues. Any factors adversely affecting the demand for,
or use of, the UNIX operating system that would require changes to Rational's
products would have a material adverse effect upon the business, operating
results and financial condition of Rational. Likewise, other of Rational's
major products have historically been licensed for use purely on the Windows
operating system. These products also constitute a substantial portion of
Rational's product and service revenues. Any factors adversely affecting the
demand for, or use of, the Windows operating system that would require changes
to Rational's products would have a material adverse effect upon the business,
operating results and financial condition of Rational. In addition, any
changes to the underlying components of or interfaces to the UNIX or Windows
operating systems that would require changes to Rational's products for those
platforms would materially adversely affect Rational if it were not able to
successfully develop or implement such changes in a timely fashion.
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Adverse Impact of Promotional Product Versions on Actual Product
Sales. Rational's marketing strategy relies in part on making elements of its
technology available for no charge or at a very low price, either directly or
by incorporating such elements into products offered by Rational's partners,
such as Microsoft. This strategy is designed to expose Rational's products to
a broader customer base than its historical customer base, and to encourage
potential customers to purchase an upgrade or other higher-priced product from
Rational. There can be no assurance that Rational will be able to introduce
enhancements to its full-price products or versions of its products with
intermediate functionality at a rate necessary to adequately differentiate
them from the promotional versions, particularly in cases where Rational's
partners are distributing versions of Rational's products with other desirable
features.
Development of Industry Standards. Rational's future growth and financial
performance may depend upon the development of industry standards that
facilitate the adoption of component-based development, as well as Rational's
ability to play a leading role in the establishment of those standards.
Rational believes that the Unified Modeling Language ("UML") developed at
Rational has become the de facto standard language for visual modeling and has
submitted an application to the Object Management Group ("OMG"), an industry
consortium, for inclusion of the UML in their Object Analysis and Design
Facility specification. Competing standards, including some that support the
UML as well as other notations, also are expected to be submitted to the OMG.
The official sanction of a competing standard by the OMG could have a material
adverse effect on Rational's marketing and sales efforts and, in turn, on
Rational's business, operating results and financial condition.
Deferred Tax Assets. Based upon the weight of available evidence, which
includes Rational's historical operating performance and the reported
cumulative net loss for the prior three years, Rational has provided a full
valuation allowance against its net deferred tax assets as it is more likely
than not that the deferred tax assets will not be realized.
RISKS RELATED TO PURE ATRIA
Risks Associated with Expansion into New Product Areas. Pure Atria intends
to introduce new products and expand its product offerings in the
client/server development environments. Broad consumer acceptance of Pure
Atria's existing and yet to be released products in new markets, including
markets characterized by greater usage of the Windows and Windows NT operating
systems, is critical to Pure Atria's future success. Although Pure Atria has
adapted certain of its products to the Windows and Windows NT operating
systems, Pure Atria's products have historically been licensed for use
principally on certain versions of the UNIX operating system, and Pure Atria
has traditionally promoted and distributed a substantial portion of its
products for the UNIX operating system. To adapt Pure Atria products that were
originally developed for the UNIX operating system to the Windows and Windows
NT operating systems can be technically difficult, time consuming and subject
to delays. There can be no assurance that Pure Atria will be successful in
adapting its products to the Windows and Windows NT operating systems.
Further, there can be no assurance that Pure Atria will be successful in
marketing and selling products developed for the Windows NT operating system,
particularly in areas in which Pure Atria has not traditionally promoted or
sold its products, or that Pure Atria will be able to achieve the necessary
acceptance, or compete effectively, in new markets.
Dependence on UNIX Operating System. Although Pure Atria has adapted certain
of its products to other operating systems, Pure Atria's products have
historically been licensed for use principally on certain versions of the UNIX
operating system. The revenues of Pure Atria have been primarily attributable
to UNIX related products and services. Any factor adversely affecting the
demand for, or the use of, the UNIX operating system that would require
changes to Pure Atria's products would have a material adverse effect upon the
business, operating results and financial condition of Pure Atria. In
addition, any changes to the underlying components of the UNIX operating
system that would require changes to the products of Pure Atria would
materially adversely affect Pure Atria if it were not able to successfully
develop or implement such changes in a timely fashion.
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Pure Atria expects that it will, in the future, introduce enhanced versions
of current products, as well as versions of current products that are ported
to different UNIX platforms or developed for use on platforms other than UNIX.
Products that are ported to additional platforms or developed for use on
platforms other than UNIX entail significant technical risks. Relative to
other software products, a number of Pure Atria's products are difficult to
port across different UNIX platforms and Pure Atria's products may require
significant development efforts for use on platforms other than UNIX. There
can be no assurance that Pure Atria will be successful in developing,
introducing and marketing product enhancement, new products, or versions of
existing products for other UNIX platforms or platforms other than UNIX on a
timely basis, if at all, or that it will not experience difficulties that
could delay or prevent the successful development, introduction or marketing
of these products, or that its new products and product enhancements will
adequately meet the requirements of the marketplace and achieve consumer
acceptance.
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APPROVAL OF THE MERGER AND RELATED TRANSACTIONS
The following discussion summarizes the proposed Merger and related
transactions. The following is not, however, a complete statement of all
provisions of the Agreement and related agreements. Detailed terms of and
conditions to the Merger and certain related transactions are contained in the
Agreement, a copy of which is attached to this Prospectus/Joint Proxy
Statement as Annex A. Reference is also made to the Stock Option Agreements
attached to this Prospectus/Joint Proxy Statement as Annexes C and D, and to
the other Annexes hereto. Statements made in this Prospectus/Joint Proxy
Statement with respect to the terms of the Merger and such related
transactions are qualified in their respective entireties by reference to the
more detailed information set forth in the Agreement and the Annexes hereto.
This section contains forward-looking statements that involve risks and
uncertainties. Words such as "expects", "anticipates", "intends", "plans",
"believes", "seeks", variations of such words and similar expressions are
intended to identify these forward looking statements. The forward looking
statements reflect the best judgment of the management of Rational and Pure
Atria based on factors correctly known and involve risks and uncertainties.
Actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth in "Risk Factors" and elsewhere in this Prospectus/Joint Proxy
Statement.
JOINT REASONS FOR THE MERGER
Rational and Pure Atria have identified several potential mutual benefits of
the Merger that they believe will contribute to the success of the Combined
Company. These reasons include the following:
Creating a Comprehensive Suite of Integrated Products that Support
Component-Based Software Development. Rational offers an integrated family of
software products that automates component-based development of software
through key phases of the development process. These phases include
requirements analysis, software design and delivery, maintenance, and certain
elements of the software testing process. Pure Atria offers software products
that allow users to automate additional elements of the software testing
process, and software products that provide software configuration management
to help users manage changes in their software. Rational and Pure Atria
believe that the industry for tools for automating software application
development and management is very fragmented, with numerous suppliers
offering products that are not well-integrated with one another. Many of each
company's customers have expressed an interest in obtaining a more complete
set of products from a single vendor that can be more easily integrated to
support the customers' software development efforts. Rational and Pure Atria
believe that by combining the companies' product lines, the Merger will allow
the Combined Company to offer more extensive and integrated suites and bundles
of software products supporting more of the software development lifecycle,
thereby creating more integrated and robust solutions than competitors whose
product lines are less inclusive. See "Risk Factors--Risks Related to the
Merger--General Risks Associated with Integration of Operations," "--Execution
by Combined Sales and Marketing Forces," "--Integration of Products,
Technologies and Engineering Teams," "--Risks Associated with Effect of Merger
on Resellers and Customers," "--Increased Integration Difficulties Associated
with Recent Acquisitions," "--Risks Related to Rational and Pure Atria--
Expansion of Product Lines; Dependence Upon New Product Introductions," and
"--Competition."
Accelerating Tighter Integration of Product Lines by Leveraging Combined
Software Development Teams and Technologies. By combining their existing
technologies and development teams, Rational and Pure Atria believe that they
will be able to integrate their product lines to provide a more comprehensive
suite of products more efficiently than if either company were to attempt to
expand its product line without the assistance of the other. For example,
Rational plans to integrate its SQA Suite client/server testing products with
Pure Atria's Purify and PureCoverage testing products, allowing users to more
thoroughly test their software. As another example, Rational plans to
integrate its Rose visual modeling products with Pure Atria's ClearCase
software configuration management products, allowing users to manage multiple
versions of design models built using Rational Rose. See "Risk Factors--Risks
Related to the Merger--General Risks Associated with Integration of
Operations" "--Integration of Products, Technologies and Engineering Terms,"
"--Risks Associated with
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Effect of Merger on Resellers and Customers," "--Increased Integration
Difficulties with Recent Acquisitions," "--Risks Related to Rational and Pure
Atria--Expansion of Product Lines; Dependence Upon New Product Introductions,"
"--Rapid Technological Change," and "--Competition."
Accelerating Sales Force Development by Adding the Pure Atria Sales Force
Capacity to, and Increasing the Number of Products that Flow through,
Rational's Worldwide Sales Organization. Rational has an extensive worldwide
sales and support organization that employs a direct selling approach through
its major-account sales and technical consulting organization in the United
States, Canada, Europe and in the Asia/Pacific/Latin America region, as well
as telesales and additional channels such as original equipment manufacturers
("OEMs"), value added resellers ("VARs") and independent software vendors
("ISVs"). Pure Atria has an extensive sales and support organization in the
United States, Canada, Europe and the Asia Pacific region that employs direct
selling, VARs and telesales. Both companies' ability to grow has been limited
in part by the need to find capable and experienced sales personnel. Rational
and Pure Atria believe that the Merger will establish a more comprehensive and
pervasive worldwide distribution channel for the Combined Company than either
company has today more easily and more quickly than either company could
develop on its own, adding substantial sales and service capacity.
Specifically, under the leadership of Rational's management team, Rational
plans to integrate the Pure Atria sales force with the Rational sales
organization to form a single worldwide sales organization handling all of the
Combined Company's products. Among other things, Rational intends to integrate
Pure Atria's major account sales force into Rational's existing major account
structure, and to integrate Pure Atria's telesales organization into
Rational's existing telesales structure. Rational and Pure Atria also believe
that the Merger will allow the Combined Company to use its worldwide channel
more efficiently by offering more products through a single sales
organization. See "Risk Factors--Risks Related to the Merger--General Risks
Associated with Integration of Operations," "--Risks Associated with Effect of
Merger on Resellers and Customers," "--Execution by Combined Sales and
Marketing Forces," "--Increased Integration Difficulties Associated with
Recent Acquisitions," "--Risks Related to Rational and Pure Atria--Risks
Associated with International Operations," "--Dependence Upon Sales Force and
Other Channels of Distribution," "--Dependence on Key Personnel," "--Risks
Related to Rational--Dependence Upon Strategic Relationships," and "--Risks
Related to Pure Atria--Risks Associated with Expansion into New Product
Areas."
Enhancing the Business Model by Combining Increased Product Offerings and
Customer Base to Improve Consistency of Financial Results. Rational and Pure
Atria believe that the Combined Company will be able to offer more products to
more customers than either company currently covers alone with a wider range
of solutions, thus reducing the dependency on any particular product.
Moreover, Pure Atria views Rational as having an experienced management team
with a history of consistent financial performance. While there can be no
assurance as to the future operating results of the Combined Company, Rational
and Pure Atria believe that, under the direction of Rational's management
team, the Combined Company will be well suited to take advantage of the
increased business opportunities expected to result from the Merger. See "Risk
Factors--Risks Related to the Merger--General Risks Associated with
Integration of Operations," "--Execution by Combined Sales and Marketing
Forces," "--Integration of Products, Technologies and Engineering Teams," "--
Risks Associated with Effect of Merger on Resellers and Customers," "--
Increased Integration Difficulties with Recent Acquisitions," "--Costs of
Integration; Transaction Expenses," "--Risks Related to Rational and Pure
Atria--Dependence Upon Growth of Emerging Industries," "--Expansion of Product
Lines; Dependence Upon New Product Introductions," "Risks Related to
Rational--Dependence Upon Strategic Relationships," "Risks Related to Rational
and Pure Atria--Fluctuations in Operating Results," "--Volatility of Stock
Price," "--Management of Growth," "--Competition," "--Risks Associated with
Recent and Future Acquisitions," "--Dependence Upon Sales Force and Other
Channels of Distribution," and "--Rapid Technological Change."
Sharing Administrative and Operational Expenses. Rational and Pure Atria
believe that the Merger will result in business synergies through, among other
matters, the sharing of certain administrative, operational and research and
development expenses, which will permit cost savings through the elimination
of certain duplicate costs. However, Rational and Pure Atria expect that near-
term costs will increase as a result of Merger and integration related
expenses, and that cost savings arising from reduced headcount and
consolidation of facilities
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immediately following the Merger will be less significant than long-term
economies of scale. See "Risk Factors --Risks Related to the Merger--General
Risks Associated with Integration of Operations" and "--Costs of Integration;
Transaction Expenses," "--Execution by Combined Sales and Marketing Forces,"
"--Integration of Products, Technologies and Engineering Teams," "--Risks of
Integrating Geographically Dispersed Organizations," "--Financial Impact of
Failure to Achieve Synergies," "Risks Related to Rational and Pure Atria--
Management of Growth," and "--Risks Associated with Recent and Future
Acquisitions."
RATIONAL'S REASONS FOR THE MERGER
In addition to the anticipated joint benefits described above, the Rational
Board believes that the following are reasons that the Merger will be
beneficial to Rational and for stockholders of Rational to vote FOR the
proposals set forth herein:
Maintaining Technology Leadership. Rational's business strategy includes
maintaining technology leadership by continuing to enhance its products and
integrate additional products that strengthen and extend its support for
automating the component-based development of software. Rational believes that
the addition of Pure Atria's software configuration management tools and
automated software testing products to Rational's product line will further
this strategy. See "Risk Factors--Risks Related to the Merger--General Risks
Associated with Integration of Operations," "--Integration of Products,
Technologies and Engineering Teams," "--Risks Related to Rational and Pure
Atria--Rapid Technological Change," "--Dependence on Key Personnel," "--
Competition," "--Management of Growth," "--Limited Protection of Intellectual
Property and Proprietary Rights," "--Risks Related to Rational--Dependence
Upon Strategic Relationships," "--Business Alliance with Microsoft," "--
Acquisition of the Visual Test Product," "--Licensing of Rose Technology to
Microsoft," "--Development of Industry Standards," and "--Adverse Impact of
Promotional Product Versions on Actual Product Sales."
Accelerating Rational's Software Configuration Management Business. Rational
believes that software configuration management ("SCM") tools, which help
users manage different versions of their software through the development
process, represent an important element of an integrated software development
automation product suite. Rational believes that it has developed expertise in
some elements of SCM through its Rational Apex product family of integrated
programming environments. However, Rational does not have an established SCM
product applicable to the major software implementation languages, either on
Windows or UNIX. Rational believes that Pure Atria's ClearCase family of SCM
products is of high quality, is well-regarded by Pure Atria's customers, and
will be of interest to many of Rational's existing customers. Because Pure
Atria's SCM product family is complementary to the rest of Rational's
products, the acquisition of Pure Atria will accelerate Rational's ability to
integrate SCM products as part of the Combined Company's product suite. See
"Risk Factors--Risks Related to the Merger--General Risks Associated with
Integration of Operations," "--Risks Associated with Effect of Merger on
Resellers and Customers," "--Execution by Combined Sales and Marketing
Forces," "--Integration of Products, Technologies and Engineering Teams," "--
Risks Related to Rational and Pure Atria--Rapid Technological Change," "--
Competition," "--Dependence Upon Sales Force and Other Channels of
Distribution," "--Expansion of Product Lines; Dependence Upon New Product
Introductions," "--Risks Related to Rational--Dependence Upon Strategic
Relationships," and "--Risks Related to Pure Atria--Risks Associated with
Expansion into New Product Areas."
Extending Rational's Automated Software Quality Product Suite. Rational has
a product line that automates certain elements of the software testing
process, namely client/server testing and load and stress testing, through its
SQA Suite, preVue, and Visual Test products. However, Rational believes that
customer demand for automated software testing goes beyond client/server
testing and load and stress testing to include capabilities which Rational's
current products do not provide, such as memory leak detection, code coverage
analysis, profiling and "hot spot" analysis, and test case generation.
Rational believes that Pure Atria's Purify, PureCoverage and Quantify products
and its Integrity QA technology may provide solutions for these problems and
complement the rest of Rational's testing products. Rational intends to
enhance its overall line of testing products by combining certain features and
technologies from Rational products and Pure Atria products, and to add new
capabilities through the integration of Pure Atria's testing products with
other elements of Rational's
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product line. See "Risk Factors--Risks Related to the Merger--General Risks
Associated with Integration of Operations," "--Integration of Products,
Technologies and Engineering Teams," "--Risks Related to Rational and Pure
Atria--Rapid Technological Change," and "--Expansion of Product Lines;
Dependence upon New Product Introductions."
Expanding Sales by Gaining Access to Pure Atria Customer Base. Rational
believes that Pure Atria has been successful in gaining acceptance among
customers that Rational has not traditionally reached with its testing
products. For example, Rational's SQA Suite testing products have been used
primarily by professional software QA personnel, whereas Pure Atria's Purify,
PureCoverage, and Quantify products have been used mainly by software
developers. Rational believes that the acquisition of Pure Atria will provide
it with additional ways of introducing its entire product line to many more
customers than previously possible. Because sales of individual products are
often the first step in a broader customer relationship, Rational believes
that gaining access to existing and future customers of Pure Atria's testing
products and software configuration management products will increase its
opportunities to sell additional Rational products and integrated multi-
product suites and bundles. See "Risk Factors--Risks Related to the Merger--
Execution by Combined Sales and Marketing Forces," "--Integration of Products,
Technology and Engineering Teams," "--Risks Associated with Effect of Merger
on Resellers and Customers," "--Risks Related to Rational and Pure Atria--
Competition," "--Expansion of Product Lines; Dependence upon New Product
Introductions," "--Rapid Technological Change," and "--Risks Related to
Rational--Risks Related to Strategic Relationships."
Strengthening Rational's UNIX-based Product Suite. Rational's business
strategy includes offering its major products on the UNIX platform. Rational's
existing testing products are primarily available on the Windows NT platform,
and not on the UNIX platform. Pure Atria's product line includes testing
products available both on UNIX as well as on Windows NT, and acquiring those
products extends Rational's overall product suite for the UNIX environment.
Likewise, Pure Atria's software configuration management products are
available on UNIX and Windows, strengthening Rational's UNIX offering both
directly and by integration with other Rational products such as the UNIX
versions of Rational Rose. See "Risk Factors--Risks Related to the Merger--
General Risks Associated with Integration of Operations," "--Execution by
Combined Sales and Marketing Forces," "--Integration of Products, Technologies
and Engineering Teams," "--Risks Associated with Effect of Merger on Resellers
and Customers," "--Risks Related to Rational and Pure Atria--Competition," "--
Rapid Technological Change," "--Expansion of Product Lines; Dependence upon
New Product Introductions," "--Risks Related to Pure Atria--Risks Associated
with Expansion into New Markets," and "--Dependence on UNIX Operating System."
Rational's Control of Combined Company. Rational believes that the structure
of its acquisition of Pure Atria, which provides that Rational's management
will manage the Combined Company and that Rational's Board of Directors
immediately prior to the acquisition will be the sole directors of the
Combined Company following the Merger, will provide Rational's existing
management with the level of control necessary to achieve a successful
integration of Rational and Pure Atria's products and sales forces. See "Risk
Factors--Risks Related to the Merger--General Risks Associated with
Integration of Operations," "--Execution by Combined Sales and Marketing
Forces," "--Integration of Products, Technologies and Engineering Teams," "--
Risks of Integrating Geographically Dispersed Organizations," "--Increased
Integration Difficulties with Recent Acquisitions," "--Risks Associated with
Effect of Merger on Resellers and Customers," "--Costs of Integration;
Transaction Expenses," "--Risks Related to Rational and Pure Atria--
Fluctuations in Operating Results," "--Risks Associated with Recent and Future
Acquisitions," "--Competition," "--Dependence on Key Personnel," --Management
of Growth," "--Risks Related to Rational--Dependence upon Strategic
Relationships," and "--Business Alliance with Microsoft."
In the course of its deliberations in meetings held on April 4, 1997, April
5, 1997 and April 6, 1997, the Rational Board also considered a number of
factors relevant to the Merger in addition to the benefits of the
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Merger outlined above under "--Joint Reasons for the Merger" and "--Rational's
Reasons for the Merger." In particular, (i) the Board considered historical
information concerning Rational's and Pure Atria's respective businesses,
financial positions, results of operations, product development schedules and
technologies, including information filed with the SEC by Pure Atria since
1995; (ii) the Board considered Rational management's view of the financial
condition, results of operations and business of Pure Atria, based on Rational
management's due diligence and on publicly available industry analysts'
reports and earnings estimates; (iii) the Board considered information
regarding the major companies in the software-testing tools industry and the
software configuration management industry; (iv) the Board considered, with
the assistance of Rational's financial advisor, the comparative stock prices
of Rational Common Stock and Pure Atria Common Stock; current financial market
conditions; historical market prices, volatility and trading information with
respect to Rational Common Stock and Pure Atria Common Stock; the premiums to
market and multiples paid in other comparable merger and acquisition
transactions; an analysis of the respective contributions to revenues, gross
profits, operating income and net income of the combined companies based on
industry analysts' reports and estimates; and an analysis of the impact of the
proposed Merger on Rational's earnings per share; (v) the Board considered the
oral opinion of Hambrecht & Quist delivered on April 6, 1997, subsequently
confirmed in writing, that as of such date, the Exchange Ratio of 0.9 of a
share of Rational Common Stock for each outstanding share of Pure Atria Common
Stock is fair, from a financial point of view, to Rational; (vi) the Board
considered the number of shares of Pure Atria Common Stock that were
currently, or could become prior to the Effective Date, subject to outstanding
options or employee stock purchase plan rights, and the number of additional
shares of Rational Common Stock that would be necessary to satisfy such
obligations following the Merger; (vii) the Board considered the expectation
that the Merger will qualify for pooling of interests treatment for financial
reporting purposes; (viii) the Board considered the expectation that the
Merger will be tax free for federal income tax purposes; (ix) the Board
considered, with the assistance of Rational's legal counsel, the terms of the
Agreement and the Stock Option Agreements, including without limitation the
break-up fee provisions, Rational's ability to exercise its right to purchase
Pure Atria Common Stock under the Stock Option Agreement therefor, Pure
Atria's ability to exercise its right to purchase Rational Common Stock under
the Stock Option Agreement therefor, the circumstances under which either
Rational or Pure Atria can terminate the Agreement and the conditions to
closing the Merger; (x) the Board considered the compatibility of the sales
and technical organizations of Rational and Pure Atria, which the Board
considered important for the successful integration of the companies; (xi) the
Board considered information provided by management, and legal, accounting and
financial advisors as to the results of their due diligence investigation of
Pure Atria; and (xii) the Board considered the level of Rational stockholder
and Pure Atria stockholder approval that would be required in order to
consummate the Merger.
The Rational Board also identified and considered a variety of potentially
negative factors in its deliberations concerning the Merger, including without
limitation the following factors: (i) the risk that, despite the intentions
and efforts of the parties, the benefits sought to be achieved in the Merger
will not be achieved, or that integration of the technologies, products, sales
organizations or other operations of the two companies, if possible at all,
may require more time, expense and management attention than anticipated; (ii)
the difficulties of integrating and managing operations involving the separate
geographic locations of certain aspects Rational's and Pure Atria's respective
businesses, compounded by the SQA acquisition and other acquisitions recently
effected by Rational and by Pure Atria, and by the ongoing execution
challenges associated with the integration of the California-based Pure
business with the Massachusetts-based Atria business following their August
1996, merger; (iii) the risk that the market price of Rational Common Stock
might be adversely affected by public announcement of the terms of the Merger
particularly in light of Pure Atria's results of operations for the quarter
ended March 31, 1997, and that customer and reseller confusion could arise
from the public announcement of the Merger; (iv) the potential dilutive effect
of the issuance of Rational Common Stock in the Merger; (v) the substantial
charges expected to be incurred, primarily in the quarter ending September 30,
1997, in connection with the Merger, including the transaction expenses
arising from the Merger and costs associated with combining the operations of
the two companies; (vi) the risk that, despite the intentions and efforts of
the parties, certain key technical, sales and management personnel of Pure
Atria or Rational might leave before or after consummation of the Merger,
compounded by the fact that certain key technical, sales and management
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personnel of Pure and Atria left in connection with and following the Pure
Atria merger in August 1996; (viii) the potential for the announcement or
consummation of the Merger to have a destabilizing effect on the Rational
organization, particularly in light of the amount of management attention that
will be diverted from day-to-day operations to consummating the Merger and
integrating the operations of Rational and Pure Atria; (ix) the adverse
effects on Rational's business, operating results and financial condition if
the Merger were not consummated following public announcement that the
Agreement had been entered into; and (x) the other risks described above under
"Risk Factors." The Rational Board believed that these risks were outweighed
by the potential benefits of the Merger.
PURE ATRIA'S REASONS FOR THE MERGER
In addition to the anticipated joint benefits described above, the Pure
Atria Board believes that the following are additional reasons the Merger will
be beneficial to Pure Atria and for stockholders of Pure Atria to vote FOR the
proposals set forth herein:
Premium To Trading Price. At the time the Agreement was announced, the
Exchange Ratio represented a premium to the trading price of Pure Atria Common
Stock. In addition, the Board of Directors believes that there is greater
opportunity for enhanced shareholder value as part of the Combined Company
rather than if Pure Atria continued as an independent entity, particularly in
light of the potential impact on Pure Atria, its business, stock price and
employees of the financial results for the quarter ended March 31, 1997. See
"Risk Factors--Risks Related to the Merger--Risks Associated with Fixed
Exchange Ratio," and "--Risks Related to Rational and Pure Atria--Volatility
of Stock Price."
Rational's Experienced Management Team. Pure Atria views Rational as having
an experienced, strong and disciplined management team with a history of
consistent performance. While there can be no assurance as to the results of
the Combined Company, Rational and Pure Atria believe that, under the
direction of Rational's management team, the Combined Company will be well
suited to take advantage of the business opportunities expected to result from
the Merger. See "Risk Factors--Risks Related to the Merger--General Risks
Associated with Integration of Operations," "--Execution by Combined Sales and
Marketing Forces," "--Integration of Products, Technologies and Engineering
Teams," "--Risks of Integrating Geographically Dispersed Organizations," "--
Increased Integration Difficulties with Recent Acquisitions," "--Costs of
Integration; Transaction Expenses," "--Risks Related to Rational and Pure
Atria--Risks Associated with Recent and Future Acquisitions," "--Competition,"
"--Dependence on Key Personnel," "--Management of Growth," and "--Risks
Related to Rational--Risks Related to Strategic Relationships."
Rational's Experienced Sales Force. Rational has an experienced sales force
that appears well positioned to leverage the Combined Company's products.
Further, the Rational field sales and consulting organization currently sells
products and technical consulting services that are complementary to, and that
have a sales cycle and require a selling approach similar to, the Pure Atria
Enterprise Product Line. See "Risk Factors--Risks Related to the Merger--
General Risks Associated with Integration of Operations," "--Execution by
Combined Sales and Marketing Forces," "--Risks Associated with Effect of
Merger on Resellers and Customers," "--Risks Related to Rational and Pure
Atria--Risks Associated with International Operations," "--Dependence Upon
Sales Force and Other Channels of Distribution" "--Risks Related to Rational--
Dependence Upon Strategic Relationships," and "--Risks Related to Pure Atria--
Expansion of Indirect Channels; Potential for Channel Conflict."
Complementary Nature of Product Lines. Given the complementary nature of the
product lines of Pure Atria and Rational, the Merger will enhance the
opportunity for the potential realization of Pure Atria's strategic objective
of achieving greater scale and presence in the industry for tools for
automating software application development and management, potentially
enabling the Combined Company to become a leading vendor serving the broad
needs of software application development. See "Risk Factors--Risks Related to
the Merger--General Risks Associated with Integration of Operations," "--
Execution by Combined Sales and Marketing Forces "--Integration of Products,
Technologies and Engineering Teams," "--Risks Associated with Effect of Merger
on Resellers and Customers," "--Risks Associated with Rational and Pure
Atria," "--Expansion of Product Lines; Dependence upon New Product
Introductions," and "--Rapid Technological Change."
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Extended Distribution. Combining with Rational would provide an opportunity
for expanded distribution of Pure Atria's products to current Rational
customers. See "Risk Factors--Risks Related to the Merger--Execution of
Combined Sales and Marketing," "--Integration of Products, Technologies and
Engineering Teams," "--Increased Integration Difficulties with Recent
Acquisitions," "--Risks Associated with Effect of Merger on Resellers and
Customers," "--Risks Related to Rational and Pure Atria--Competition," "--
Dependence on Sales Force and Other Channels of Distribution," "--Expansion of
Product Lines; Dependence upon New Product Introductions," "--Dependence upon
Key Personnel," and "--Risks Related to Pure Atria--Risks Associated with
Expansion into New Product Areas."
Participation in Future Growth. The Pure Atria stockholders would have the
opportunity to participate in the potential for growth of the Combined Company
after the Merger. See "Risk Factors."
In the course of its deliberations during Pure Atria Board meetings held on
April 1 and 3, 1997 and its two meetings on April 6, 1997, the Pure Atria
Board reviewed a number of additional factors relevant to the Merger,
including (i) historical information concerning Pure Atria's and Rational's
respective businesses, prospects, financial performance and condition,
operations, technology, management and competitive position, including as to
Rational, public reports concerning results of operations during the prior
several fiscal years and the most recent three fiscal quarters filed with the
SEC; (ii) Pure Atria management's view as to the financial condition, results
of operations, businesses, technology and products of Pure Atria and Rational
before and after giving effect to the Merger based as to Rational, on
management due diligence and publicly available financial and other
information; (iii) current financial market conditions and historical market
prices, volatility and trading information with respect to Rational Common
Stock and Pure Atria Common Stock; (iv) management's assessment of the
strategic and other benefits expected to result from the Merger; (v) the
consideration to be received by Pure Atria stockholders in the Merger and the
relationship between the market value of the Rational Common Stock to be
issued in exchange for each share of Pure Atria Common Stock and a comparison
of comparable merger transactions; (vi) Pure Atria's view of the strength of
Rational's overall management and sales organization; (vii) the belief that
the terms of the Agreement, including the parties' representations, warranties
and covenants, and the conditions to their respective obligations, are
reasonable; (viii) Pure Atria management's view as to the prospects of Pure
Atria as an independent company, particularly in light of the impact on Pure
Atria, its business and employees of its first quarter 1997 earnings
announcement; (ix) Pure Atria management's view as to the potential for other
third parties to enter into strategic relationships with or to acquire Pure
Atria or Rational; (x) the impact of the Merger on Pure Atria's customers and
employees; and (xi) reports from management, legal, accounting and financial
advisors as to the results of their due diligence investigation of Rational.
The Pure Atria Board also considered, with the assistance of legal counsel,
the terms of the proposed Agreement including the circumstances under which
Rational or Pure Atria can terminate the Agreement, the conditions to closing
the Merger, limitations on Pure Atria's and Rational's respective rights to
consider and negotiate other acquisition proposals in certain circumstances,
as well as the possible effects of the provisions regarding the termination
fees, the Voting Agreements and the Stock Option Agreements. In addition, the
Pure Atria Board noted that the Merger is expected to be accounted for as a
pooling of interests and that no goodwill is expected to be created on the
books of the Combined Company as a result thereof and that the Merger was
expected to be tax-free for Federal income tax purposes. The Pure Atria Board
considered the financial presentations by DMG, including the oral opinion of
DMG delivered at the first meeting of the Pure Atria Board of Directors on
April 6, 1997, and subsequently confirmed in writing as of April 6, 1997,
that, as of such date, the Exchange Ratio pursuant to the Agreement was fair
to Pure Atria's stockholders from a financial point of view. The full text of
the written opinion of DMG dated April 6, 1997 is attached hereto as Annex F,
and stockholders are urged to carefully review the opinion.
The Pure Atria Board also identified and considered a variety of potentially
negative factors in its deliberations concerning the Merger, including, but
not limited to: (i) the timing and risks associated with the integration of
Rational and Pure Atria and the respective business that each has recently
acquired and whether the potential benefits sought in the Merger and such
other acquisitions might not be fully realized; (ii) the possibility that the
Merger might not be consummated and the effect of public announcement of the
Merger on
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(a) Pure Atria's sales and operating results, (b) Pure Atria's ability to
attract and retain key management, marketing and technical personnel, (c)
progress of certain development projects, and (d) the respective trading price
of the Common Stock of each of Rational and Pure Atria; (iii) the potential
dilutive effect of the issuance of Rational Common Stock in the Merger; (iv)
the substantial charges to be incurred, primarily in the quarter ending
September 30, 1997, in connection with the Merger, including costs of
integrating the businesses and transaction expenses arising from the Merger,
(v) the risk that despite the efforts of the Combined Company, key technical,
sales and management personnel might not remain employed by the Combined
Company, (vi) the risks associated with the fact that no Pure Atria director
would serve on the Board of the Combined Company following the Merger and
(vii) the other risks described under "Risk Factors" herein. The Pure Atria
Board believed that these risks were outweighed by the potential benefits of
the Merger.
DISADVANTAGES OF THE MERGER
Stockholders should be aware that there are certain disadvantages inherent
in the Merger, even if the expected benefits of the Merger are realized.
Following the announcement of the Merger and the announcement of Pure Atria's
anticipated results of operations for the fiscal quarter ended March 31, 1997,
there occurred an immediate and substantial drop in the price of the Common
Stock of both Pure Atria and Rational, and there can be no assurance that the
trading price of Rational's Common Stock will return to pre-Agreement levels
in the near future or ever. The Merger will result in increased organizational
complexity and administrative burdens and may dilute the focus of the Combined
Company's management, sales and marketing and technical personnel. For
example, the Combined Company's sales and marketing personnel will be required
to divert some portion of their efforts from communicating with customers to
integrating the two companies' distribution channels. Similarly, some portion
of the Combined Company's engineering resources will be diverted from product
development and enhancement to integration of Pure Atria's and Rational's
products. The disadvantages of the Merger may be compounded by the fact that
the Merger follows a period of significant acquisition activity by both
Rational and Pure Atria and that certain of such prior acquisitions have not
yet been fully integrated. In addition, given that Rational's headquarters are
located in California and substantial portions of the work forces and
operations of Pure Atria and other companies recently acquired by Rational and
Pure Atria are located outside of California, Rational will experience some
additional administrative burden on an ongoing basis in integrating
Rational's, Pure Atria's and such other recently acquired companies'
operations. The Boards of Directors of Rational and Pure Atria recognize that
announcement and consummation of the Merger may result in delays or reductions
of product orders and an adverse impact on near-term revenue. However, the
Boards of Directors of Rational and Pure Atria believe that the reasons for
the Merger discussed above outweigh these disadvantages. See "Risk Factors--
Risks Related to the Merger."
MATERIAL CONTACTS AND BOARD DELIBERATIONS
The industry for tools for automating software application development and
management is increasingly competitive and rapidly changing. As a result of
these factors, both Rational and Pure Atria have frequently evaluated
strategic relationships of various forms, such as potential OEM arrangements,
joint-marketing relationships, and potential business combinations with other
companies in the same and closely related fields.
As early as 1994, Rational became aware of Atria's emerging presence in the
configuration management area, due to the fact that Rational and Atria had
certain common customers, particularly in the defense, aerospace and
telecommunications industries. Rational and Atria explored the possibility of
an OEM or other distribution relationship in 1995, because of joint customers'
desires to integrate Atria's ClearCase product with certain Rational products.
In 1996, Rational began adding automated software quality testing capabilities
to the company's existing product lines, beginning with its purchase of the
Visual Test product from Microsoft in October 1996. In November 1996, Rational
announced its agreement to acquire SQA, a leading provider of automated
software quality testing tools, and the acquisition was consummated on
February 26, 1997. In March 1997, Rational acquired Performance Awareness
Corporation, a provider of automated software testing tools. In conducting and
reviewing valuation analyses in connection with these recent acquisition
activities, the Rational Board and senior management have become increasingly
familiar with the businesses of several companies providing software
development products, including Pure Atria.
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In 1995 and 1996, both Pure and Atria explored the possibility of expanding
and integrating their respective product lines with additional software
development products, through mergers, acquisitions, alliances and other
strategic combinations. These activities resulted in Pure's acquisition of
QualTrack Corporation and Performix Corporation in 1995. In late 1995 and
early 1996, Atria had preliminary and exploratory discussions with a number of
different companies, including SQA and Rational, but none of these discussions
resulted in a completed transaction. Pure and Atria had also become familiar
to one another through joint marketing activities and interactions with mutual
customers. In April of 1996, Pure and Atria entered discussions regarding the
possibility of a combination of the two companies. In June, 1996, Pure and
Atria announced that they had entered into a definitive Agreement and Plan of
Reorganization to combine the two companies. The combination was completed in
August 1996, to form Pure Atria. Finally, in February, 1997, Pure Atria
completed the acquisition of Integrity QA Software, Inc., a developer of
quality assurance software tools. Through these activities and discussions,
Pure Atria had become familiar with Rational and its wholly owned subsidiary,
SQA.
Initial contacts between Rational management and Pure Atria management were
informal and unrelated to any relationship between the two companies. Paul
Levy, Rational's Chairman and Chief Executive Officer, was introduced to Reed
Hastings, Pure Atria's Chairman and Chief Executive Officer, at a conference
in New York in June 1996. Mr. Levy thereafter advised Daniel H. Case III, CEO
of Hambrecht & Quist and a director of Rational, of his conversation with Mr.
Hastings, and Mr. Case and Mr. Levy generally discussed the strategic fit
between the two companies. Mike Devlin, Rational's President, met with Mr.
Hastings informally in October 1996 and engaged in a wide-ranging discussion
of the software development tool business, but the discussion did not involve
specific proposals related to Rational or Pure Atria. Mr. Devlin subsequently
reviewed the substance of this discussion with Mr. Levy and Mr. Case.
On February 18, 1997, Messrs. Levy and Hastings met while attending a
conference in Scottsdale, Arizona. Messrs. Levy and Hastings discussed their
respective companies, and spoke in general terms about the possible merits of
collaboration in some form between Rational and Pure Atria in the future. No
specific understandings or arrangements were proposed or reached at this
meeting.
On March 12, Messrs. Levy and Hastings met in Sunnyvale, California near
Pure Atria's headquarters. Messrs. Levy and Hastings discussed the possibility
of pursuing a potential business combination or other relationship between
Rational and Pure Atria, but Mr. Hastings observed that pursuing any such
relationship would require substantial review by Pure Atria management and
might not be feasible at that time. Mr. Hastings explained that Pure Atria
management was then focused on the current quarter's sales and operations.
Messrs. Levy and Hastings agreed to an exploratory meeting to be held later in
March, and agreed to include in that meeting Mr. Devlin and Robert Dickerson,
Pure Atria's Vice President, Developer Products Group. Mr. Levy subsequently
reviewed with Mr. Case the substance of the March 12 discussions with Mr.
Hastings. Both Mr. Levy and Mr. Case agreed that a potential business
combination or other relationship between Rational and Pure Atria was
strategically attractive and that a transaction with Pure Atria may be
achievable on attractive terms.
On March 24, Messrs. Levy, Devlin, Hastings and Dickerson met near San
Francisco International Airport for approximately six hours. In the meeting,
Messrs. Levy and Devlin provided a detailed explanation of Rational's products
and business strategy, and Messrs. Hastings and Dickerson made a similar
presentation with respect to Pure Atria. The ensuing discussion of the two
companies covered possible synergies in operations and technology, alternative
forms of potential collaboration between the two companies, and an assessment
of each party's concerns relating to such alternate collaborative strategies.
At the conclusion of the discussion it was agreed that there were potential
benefits for both companies in some form of collaboration, but that each
company would need to do further internal analysis of its own operations,
financial condition and the possibilities for collaborative efforts before
reconvening the discussions between Rational and Pure Atria.
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On March 27, Pure Atria management retained DMG, subject to the approval of
the Pure Atria Board, to advise Pure Atria regarding any possible business
combination with Rational.
On March 31, Mr. Hastings called Mr. Levy and advised him that, based on
preliminary information then available, it appeared that Pure Atria could fail
to meet revenue forecasts of financial analysts for the March quarter, and
that the Pure Atria Board was to meet the next day to discuss these
preliminary results. Mr. Hastings explained that he intended to discuss with
the Pure Atria Board the company's strategic alternatives, including whether
to consider an acquisition or merger partner, or continue to pursue an
independent course. In preparation for that meeting, Mr. Hastings asked Mr.
Levy if Rational would be interested in exploring a business combination with
Pure Atria if the Pure Atria Board deemed that to be a possible alternative
for Pure Atria. Mr. Levy responded that Rational would be willing to explore a
possible business combination with Pure Atria.
On April 1, the Pure Atria Board met in Palo Alto, California with four
directors participating by telephone and all other directors attending in
person. Mr. Larry W. Sonsini, a member of Wilson Sonsini Goodrich & Rosati,
P.C., ("WSGR") recused himself from the meeting due to the potential conflict
of interest involving any transaction between Pure Atria and Rational, both of
which were clients of WSGR. Pure Atria management discussed with the Pure
Atria Board management's preliminary assessment, based on the incomplete
information then available, of Pure Atria's financial results for the March
quarter. Management indicated that these preliminary results were expected to
be significantly below current estimates for the quarter issued by financial
analysts, and discussed some of the potential effects of a revenue and
earnings shortfall. Mr. Hastings then introduced representatives of DMG, who
reviewed DMG's analysis of other similarly situated companies that had not met
earnings and revenues expectations of financial analysts. There followed
extensive discussions regarding Pure Atria's product line composition, the
ability of Pure Atria to enter and compete in markets outside Pure Atria's
traditional UNIX based markets, and the possible impact of not meeting
earnings and revenues expectations in light of senior management's analysis
and the history of other similarly situated companies, including the effect on
Pure Atria's operations, employee morale, equity value, and general prospects.
Mr. Hastings then described the prior discussions he had had with Mr. Devlin
and Mr. Levy regarding Rational's willingness to explore a possible business
combination with Pure Atria. Mr. Hastings also reviewed management's analysis
of Rational, including its operating history, strengths and weaknesses,
management team, product line and revenue mix, as well as management's current
assessment of the proposed business combination. There followed a general
discussion involving the directors, management and representatives of DMG
regarding the strategic benefits associated with the proposed transaction, and
the merits and risks involved in the proposed transaction and the alternative
of continuing as an independent company. Mr. Hastings and Mr. Chuck Bay, Pure
Atria's Vice President of Finance and Chief Financial Officer, answered
questions from the directors regarding the proposed transaction and Pure
Atria's overall strategy as it relates to the proposed transaction and the
alternative of continuing as an independent company.
The Pure Atria Board discussed their respective opinions as to the risks and
merits of the proposed transaction with Rational. There was general agreement
that Pure Atria should continue its discussions with Rational. At the
conclusion of the meeting, the Pure Atria Board confirmed the retention of DMG
as Pure Atria's financial advisor and instructed management to initiate
discussions with Rational about a potential business combination and to
continue evaluating the relative merits of a combination with Rational versus
maintaining an independent course for Pure Atria.
On April 1, 1997, after the Pure Atria Board meeting, Mr. Levy advised Mr.
Case that he would be meeting with Pure Atria and representatives of DMG to
discuss a possible business combination involving Rational and Pure Atria, and
retained Hambrecht & Quist to act as Rational's financial advisor in
connection with any possible business combination with Pure Atria. Such
engagement of Hambrecht & Quist was subsequently confirmed by letter dated
April 14, 1997.
After the Pure Atria Board meeting on April 1, Messrs. Levy, Devlin,
Hastings and Bay, met with representatives of DMG to discuss a possible
business combination involving Rational and Pure Atria. At this time, Rational
and Pure Atria entered into a mutual non-disclosure agreement, which provided
that the information disclosed in connection with such discussions would be
used solely for the purpose of evaluating a
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possible business transaction or strategic relationship. Discussion at the
meeting focussed on the relative market valuations of Rational and Pure Atria,
recent financial results of both companies, including preliminary estimated
results for each company in the March quarter and for the Rational fiscal year
ended March 31, 1997, likely market reactions to the announcement of such
results, issues that might arise if the operations of Rational and Pure Atria
were to be integrated, and the basic terms of an acquisition of Pure Atria by
Rational. Based on these discussions, the Rational and Pure Atria executives
preliminarily discussed the range of premiums that would be acceptable to both
companies, and agreed to have their respective financial advisors assist them
in further due diligence in establishing an appropriate exchange ratio. At the
conclusion of this meeting, it was agreed that representatives of Rational and
Pure Atria should begin intensive due diligence reviews of legal and financial
matters relevant to the proposed transaction, and that technical and sales
teams of the two companies should begin meeting to analyze the operational
issues and possible synergies related to a potential acquisition of Pure Atria
by Rational.
Following the Pure Atria Board Meeting on April 1, Mr. Sonsini resigned
from the Pure Atria Board of Directors and Pure Atria agreed to the
representation of Rational by WSGR in connection with the Merger. Also after
the April 1 meeting of the Pure Atria Board, Pure Atria retained Fenwick &
West LLP ("F&W"), and Rational retained WSGR, as their respective special
counsel with respect to the possible business combination.
Beginning on April 2, management of each company spoke in detail with their
respective legal counsel and financial advisors regarding the potential
acquisition of Pure Atria by Rational, and discussed various strategic and
structural alternatives and timing issues. Among other activities in this
regard, on April 3, Robert Bond, Rational's Chief Operating Officer and Chief
Financial Officer, conferred with Rational's legal counsel to review issues
and requirements involved in the proposed acquisition, and to commence the
documentation process in parallel with further management discussions of terms
and conditions.
Between April 2 and April 6, representatives of the two companies and their
respective legal, financial and accounting advisors met to conduct additional
due diligence, to further explore potential synergies in the proposed
combination and to discuss price and various transaction terms. Among the
numerous meetings and conversations during this time period, (i) Messrs. Levy
and Devlin met with the Pure Atria Board, as detailed below, to discuss the
proposed Merger and to address the Pure Atria Board's questions and concerns
and Mr. Hastings met with the Rational Board, as detailed below, to discuss
the proposed Merger and to address the Rational Board's questions and
concerns; (ii) Messrs. Levy, Devlin and Bond held numerous meetings and
conversations with Messrs. Hastings, Bay and other members of Pure Atria
management to discuss integration of products, marketing strategies, sales
forces, distribution channels, product development plans, administrative
organizations, personnel and employee benefit plans; (iii) representatives of
Rational's financial advisor, Hambrecht & Quist, conducted due diligence
interviews with members of Pure Atria's management team and Pure Atria's
financial advisor, DMG; (iv) representatives of DMG conducted due diligence
interviews with members of Rational's management team and Hambrecht & Quist;
(v) representatives of Pure Atria's independent auditors, KPMG Peat Marwick
LLP ("KPMG"), conducted due diligence of Rational in the offices of WSGR,
during which Mr. Bond was available and responded to questions of KPMG, and
during and after which the representatives communicated the results of their
review to Pure Atria's management; (vi) representatives of Ernst & Young LLP
performed certain due diligence procedures at the request of Rational
management, of Pure Atria in the offices of WSGR, during which Mr. Bay was
available and responded to questions, and during and after which the
representatives of Ernst & Young LLP communicated their findings to Mr. Bond
and Timothy Brennan, Rational's Vice President, Finance and Administration;
(vii) technical teams of Rational and Pure Atria met to conduct product due
diligence and explore potential synergies and cost savings from integrating
the products and product lines of Rational and Pure Atria, and reported their
findings to their respective management teams; (viii) sales teams of Rational
and Pure Atria met to discuss each other's marketing and sales operations and
to evaluate the possibilities of integrating sales operations of the two
companies; (ix) Pure Atria's in-house counsel and attorneys from Pure Atria's
legal counsel, F&W, conducted due diligence concerning certain Rational
agreements and corporate records at the offices of WSGR and discussed with
attorneys at WSGR certain other legal matters pertaining to Rational, reviewed
reports filed by Rational with the SEC, and reported their findings to Pure
Atria management; and (x) attorneys from WSGR reviewed certain Pure Atria
agreements and corporate records at the offices of WSGR, discussed with
attorneys at F&W and Pure
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Atria's in-house counsel certain other legal matters pertaining to Pure Atria,
reviewed reports filed by Pure Atria with the SEC, and reported their findings
to Rational management. Also between April 2 and April 6, Rational's and Pure
Atria's respective legal counsel, financial advisors, independent auditors and
executive officers had extensive meetings and conversations regarding the
terms of the Agreement and related documents, including without limitation the
Exchange Ratio and the terms of the proposed Stock Option Agreements, the
Voting Agreements, the circumstances under which Rational or Pure Atria could
terminate the Agreement, the conditions upon which any break-up fees would be
payable and the amount of such fees, the representations, warranties,
covenants and conditions to closing to be set forth in the Agreement, the
availability of pooling-of-interest accounting treatment for the proposed
Merger, the qualification of the Merger as a tax-free reorganization pursuant
to Section 368(a) of the Internal Revenue Code and the ability of the Merger
to be consummated in compliance with applicable anti-trust laws.
On April 3, the Pure Atria Board met, with all attendees participating by
telephone. Also participating in the meeting were Messrs. Bay and Stein,
representatives of DMG, and representatives of F&W, Pure Atria's legal
counsel. F&W representatives reviewed the Pure Atria Board's fiduciary duties
in considering the proposed strategic business combination. The Pure Atria
Board and management and DMG and F&W representatives then engaged in extensive
discussion regarding the strategic advantages of the proposed Merger, as well
as a comparison of entering into the proposed business combination as opposed
to continuing as an independent company, particularly in light of Pure Atria's
estimated results for the quarter ended March 31, 1997, the anticipated impact
on financial markets of the announcements of those results and the anticipated
consequent impact on long-term stockholder value. The Pure Atria Board
discussed the possibility that failure to reach agreement with Rational prior
to the planned April 7 announcement of Pure Atria's preliminary results for
the quarter ended March 31, 1997, could jeopardize the ability of the two
companies to come to terms on a Merger transaction that was more favorable to
the stockholders of Pure Atria than continuing as an independent company. The
Board also discussed the importance of promptly reaching a final decision as
to which course Pure Atria would pursue in order to minimize employee
attrition and customer uncertainty. The Board discussed with management the
steps that would need to be taken in order to build long-term value for the
Pure Atria stockholders if the Company followed an independent course. Members
of management indicated their belief that if certain actions were taken to
address employee retention and sales execution issues, remaining independent
was a viable alternative to consummating a transaction with Rational on
unfavorable terms. It was noted that a repricing of outstanding options for
the purchase of shares of Pure Atria Common Stock, which would likely be
required to address employee retention concerns if Pure Atria were to remain
as an independent company, could restrict the ability of Pure Atria to
consummate a pooling of interests business combination for an unspecified
period. The Board instructed management to convey to Rational that if a merger
agreement on acceptable terms was not finalized by April 7, Pure Atria
intended to turn its focus from the proposed business combination with
Rational to a strategy of building the long-term business of Pure Atria as an
independent company. The Board then discussed a number of matters relating to
the proposed Merger, including without limitation (i) the terms of the
proposed Merger, including the exchange ratio, conditions to closing, and
interim covenants and termination events, (ii) potential market reaction to
the proposed combination and (iii) issues related to the integration of
operations and products following a merger. The Pure Atria Board authorized
and instructed Pure Atria management to continue discussions with
representatives of Rational regarding the proposed Merger and gave negotiating
instructions to management as to the exchange ratio and the definitive
agreement.
On April 4, the Rational Board met via telephone conference call for
approximately two and a half hours, with all directors, Mr. Bond, and
representatives of Hambrecht & Quist and WSGR participating, to discuss the
elements of a potential acquisition of Pure Atria by Rational. WSGR's
representatives commenced the meeting by reviewing the Rational Board's
fiduciary duties in considering the proposed strategic business combination.
Mr. Levy then described for the Rational Board the familiarity of the Rational
management team with the business of Pure Atria as a result of the two
companies' prior contacts and Rational's prior acquisitions. Mr. Levy outlined
for the Rational Board the events and discussions leading up to the proposal
to acquire Pure Atria, including without limitation, the possibility of Pure
Atria issuing a preliminary announcement of financial results for the March
quarter and the likely negative impact of such an announcement on the price of
Pure Atria
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Common Stock. Mr. Levy then gave a detailed presentation regarding Pure
Atria's product line and financial results (including its management's
preliminary analysis regarding its results for the quarter ended March 31,
1997, and reasons therefor). Mr. Levy then described extensive due diligence
meetings between the managements, financial advisers and legal advisers of
Rational and Pure Atria. Mr. Levy described scheduled future due diligence
meetings between the respective managements and their respective financial and
legal advisers which would focus on, among other things, Pure Atria's sales
force, product roadmap and product rollout schedules, Pure Atria's financial
models and detailed investigations of the potential cost savings from the
acquisition. Mr. Devlin then gave a presentation on the Pure Atria product
line, Pure Atria's product roadmap, and integration and potential cost savings
issues involved in combining the Pure Atria and Rational product lines and
sales forces. Rational's financial advisor then reviewed timing and work done
to date on the separate and combined company financial models, including the
cost savings required to make the proposed transaction accretive to Rational
stockholders. Rational's financial advisor also discussed with the Rational
Board the anticipated substantial negative effect on Pure Atria's stock price
of an announcement of their preliminary results for the quarter ended March
31, 1997, both with or without an announcement of a merger with Rational. Mr.
Levy then conveyed to the Rational Board Pure Atria's strong desire to reach
agreement no later than April 7, and the reasons therefor. Following the
presentations by Rational's management, legal and financial advisors, the
Rational Board discussed the potential merger with Pure Atria, and identified
a number of areas that Rational's management should consider further. In
particular, the Rational Board stressed the importance of analyzing execution
risks and means of mitigating such risks, management issues, Board
composition, valuation in light of current market conditions and Pure Atria's
preliminary results for the quarter ended March 31, 1997, regulatory issues,
pooling issues and potential reaction from Microsoft and other strategic
partners. The Rational Board stressed the need to focus on operational
integration. The Rational Board authorized and instructed Rational management
to continue discussions with representatives of Pure Atria regarding the
proposed Merger. At the conclusion of the call, directors John Montague and Al
Schleicher agreed to fly to California immediately in order to participate in
future board deliberations in person.
Effective April 5, 1997, Mr. Ron Nordin resigned from the Rational Board for
reasons unrelated to the Merger.
On April 5, the Rational Board met for approximately five and one half hours
with senior members of Rational's management, and representatives of
Rational's financial advisor and legal counsel. All Rational directors were
present in person, as were representatives of Hambrecht & Quist and WSGR.
Representatives of WSGR began the meeting with a review of the issues relating
to the acquisition before the Rational Board in the context of the Board's
fiduciary obligations to Rational stockholders. Next, Rational's management
made presentations regarding Rational's and Pure Atria's product roadmaps,
Rational's integration of SQA products and its proposed integration of Pure
Atria products, Rational's analysis of Pure Atria's sales model and Rational's
proposed sales force integration with Pure Atria, Rational's analysis of Pure
Atria's anticipated results for the quarter ended March 31, 1997, and the
reasons therefor, the qualification of the proposed Merger for pooling-of-
interests treatment, an analysis of synergies and cost savings, and management
reporting responsibility following the proposed Merger. The Rational
Management presentation specifically addressed the issues raised by the
Rational Board at its previous meeting. Next, Mr. Hastings made a presentation
to the Rational Board and answered questions of Rational directors. Mr.
Hastings then left the meeting. Representatives of Hambrecht & Quist then made
a presentation regarding the financial aspects of the proposed transaction,
including (i) the trading history of the common stock of Rational and Pure
Atria, (ii) an analysis of selected comparable merger and acquisition
transactions, and (iii) an analysis of selected publicly traded companies.
Rational's financial advisor then discussed with the Rational Board the
expected negative effect on Pure Atria's stock price of an announcement of its
anticipated results for the quarter ended March 31, 1997, in light of other
recent announcements which fell short of analysts' estimates and their effect
on the relevant company's stock price. Rational's Board also discussed with
Hambrecht & Quist representatives the control premiums which had been paid in
prior transactions where substantially all of the senior management positions
in the surviving company were held by executives from the acquiring company,
and the factors which could prevent the proposed transaction from being
consummated if it were not agreed upon and announced promptly. Next,
management
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and legal counsel reported to the Rational Board on the principal terms and
structure of the transactions, including, without limitation, the fixed
exchange ratio, conditions to close, the Stock Option Agreements, the Voting
Agreements, the circumstances in which either party could terminate the
Agreement or in which break-up fees would be paid by the parties and the
amount of such fees, and responded to the Board's questions on the status of
the transaction as a "tax-free reorganization" and as a pooling-of-interests
transaction, on the Hart-Scott-Rodino antitrust filing and review
requirements, and the status of negotiations on the Agreement and related
documents. The Board authorized Rational management to continue negotiations
with Pure Atria on the basis of an exchange ratio of 0.9 shares of Rational
Common Stock for each share of Pure Atria Common Stock, provided that final
due diligence was satisfactory and the other open negotiating issues were
satisfactorily resolved. The Rational Board stressed the importance of
ensuring that the management and the Board of Directors of the Combined
Company immediately following the Merger would be comprised of Rational's
current management and Rational's current Board of Directors, respectively, in
order to maximize the ability to successfully integrate the two companies'
product lines and sales forces.
Following the April 5 meeting of Rational's Board, representatives of
Rational and Pure Atria continued their negotiations during the night of April
5 and all day on April 6.
The Pure Atria Board met twice on April 6. At the first meeting, the Pure
Atria Board met for several hours at Pure Atria's Sunnyvale, California
headquarters, with two board members attending in person, three participating
by video conference from the Company's Lexington, Massachusetts offices and
one by teleconference. The Pure Atria Board met with the members of senior
management of Pure Atria and Pure Atria's legal counsel, financial advisors
and auditors to discuss the status of negotiations with Rational. Pure Atria's
legal counsel discussed the Pure Atria Board's fiduciary duties in considering
the proposed strategic business combination in the context of issues before
the Pure Atria Board. Management of Pure Atria reported on the agreement that
had been reached with respect to the principal remaining issues relating to
the proposed acquisition. Pure Atria's legal counsel reviewed for the Pure
Atria Board the proposed terms of the Agreement and related documents,
including without limitation the fixed exchange ratio, the Stock Option
Agreements, the Voting Agreements, the ability to consider competing offers,
the circumstances in which either party could terminate the Agreement or in
which break-up fees would be paid by the parties and the amount of such fees,
the expectation that the Merger would be tax free for federal income tax
purposes and would be accounted for as a pooling of interests, the
representations and warranties of each party and remedies for breach thereof,
the various closing conditions, and the composition of the Rational Board
following the Merger. DMG then reviewed its financial analysis of the proposed
transaction and delivered its oral opinion (subsequently confirmed in writing)
to the Pure Atria Board that, as of such date, the proposed Exchange Ratio of
0.9 was fair from a financial point of view to the holders of Pure Atria
Common Stock. See "Opinion of Pure Atria's Financial Advisor." As a further
aspect of its diligence review of Rational, Mr. Hastings then invited Messrs.
Levy and Devlin to join the meeting. Messrs. Levy and Devlin explained to the
Pure Atria Board their strategy regarding the overall operation of Rational
and bringing value to the stockholders of Rational. Messrs. Levy and Devlin
also discussed the advantages that they believed would accrue to both
companies in the event that the companies were combined. Mr. Devlin discussed
Rational's financial position and operating history, and its recent
acquisitions experience. Mr. Levy discussed the Rational management team,
including their experience and the long period of time that the company's
senior management has worked together. Messrs. Levy and Devlin then responded
to questions from members of the Pure Atria Board. After answering all
questions, Messrs. Levy and Devlin left the meeting. The Board also reviewed
with management, legal counsel, and its auditors, the proposed accounting
treatment for the Merger and various open issues. A KPMG representative
confirmed that Pure Atria qualified as an entity that may be a party to a
business combination for which the pooling-of-interests method of accounting
was available. The KPMG representative also advised the Board that KPMG was
awaiting confirmation from Ernst & Young LLP, Rational's independent auditors,
as to that firm's concurrence with Rational management's conclusion as to the
appropriateness of pooling-of-interests accounting treatment for the proposed
Merger. The Pure Atria Board's advisors and members of Pure Atria's management
also reviewed with the Pure Atria Board the results of the due diligence
investigation of Rational conducted by Pure Atria's management and advisors.
Mr. Hastings presented management's view on the merits and risks involved in
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accepting the proposal to be acquired by Rational, or continuing as an
independent company. Each of the directors then discussed their respective
opinion as to the risks and merits of the proposed transaction with Rational.
There followed extensive discussion regarding the proposed merger and the
terms of the proposed Agreement. The Pure Atria Board thereupon resolved that
the Merger, as contemplated by the Agreement, is fair from a financial point
of view to, and in the best interests of, Pure Atria and its stockholders and
adopted and approved the Agreement and the transactions contemplated thereby.
The Pure Atria Board then instructed Pure Atria's management team to continue
negotiations with Rational, with particular attention to protecting the
interests of Pure Atria stockholders with respect to the issues discussed
during the course of the meeting. See "Approval of the Merger and Related
Transactions--Opinion of Pure Atria's Financial Advisor."
On April 6, the Rational Board, with all directors again attending in
person, together with representatives of WSGR and Hambrecht and Quist, met at
the offices of WSGR for over three hours, with senior members of Rational's
management to review and vote on the Agreement and the transactions
contemplated thereby. At this meeting, (i) WSGR's representatives reminded the
Rational Board of its fiduciary obligations with respect to the proposed
transaction, (ii) management of Rational and WSGR reported on the agreement
that had been reached with respect to the principal remaining open issues
relating to the proposed acquisition, (iii) management responded to questions
regarding various aspects of the proposed acquisition and (iv) representatives
of WSGR reviewed the proposed definitive terms of the Agreement and related
documents. Hambrecht & Quist made a presentation to the Rational Board
regarding its financial analysis of the Exchange Ratio and delivered its oral
opinion, subsequently confirmed in writing, to the Rational Board that the
proposed Exchange Ratio of 0.9 of a share of Rational Common Stock for each
share of Pure Atria Common Stock was fair to Rational from a financial point
of view as of such date. See "Opinion of Rational's Financial Advisor." Mr.
Bond reported that Rational's accountants had confirmed that pooling-of-
interests accounting treatment was available for the proposed Merger. The
Rational Board then engaged in extensive discussion of the risks associated
with announcing a proposed business combination if the Merger were not
ultimately consummated. The discussion included a detailed review of the
negotiated terms that increased and decreased such risks, including the
circumstances under which Pure Atria could consider competing offers or
terminate the Agreement, the conditions to closing the Merger, the amount and
conditions to triggering break-up fees, the terms of the Stock Option
Agreements, and the terms and proposed parties to the Voting Agreements.
Rational's financial advisor commented on the comparability of such terms
considered on a stand alone basis and also in conjunction with the anticipated
substantial negative effects of Pure Atria's announcement of preliminary
results for the quarter ended March 31, 1997, to terms negotiated in similar
transactions. The Rational Board then discussed with its financial advisors
the potential premium to be paid in the proposed transaction after taking into
account the anticipated substantial decline in Pure Atria's stock price. The
Board also discussed the proposed press release of Pure Atria with respect to
its March 31, 1997, anticipated quarterly results and acknowledged the
likelihood that such announcement, when coupled with a press release
announcing Rational's execution of a definitive agreement to acquire Pure
Atria, would cause the price of Rational's Common Stock to decrease.
At the conclusion of the April 6 meeting, after extensive discussion on the
merits and risks of the proposed transaction, the Rational Board determined
that the Merger, and the reservation at issuance of shares of Rational Common
Stock pursuant to the Merger, were fair from a financial point of view to, and
in the best interests of, Rational, and adopted and approved the Agreement and
the transactions contemplated thereby. Daniel H. Case III, a member of the
Rational Board and President and Chief Executive Officer of Hambrecht & Quist,
Rational's financial advisor actively participated in the discussions at all
three Rational Board meetings as well as in the numerous meetings and
discussions summarized above between April 2, 1997, and April 6, 1997, but
abstained from voting on the Agreement and the related transactions. All other
Rational directors approved the Agreement and the related transactions. See
"Risk Factors--Risks Related to the Merger--Potential Conflicts of Interest"
and "Approval of the Merger and Related Transactions--Opinion of Rational's
Financial Advisor."
At its second meeting on April 6, the Pure Atria Board convened by
teleconference. All directors attended the meeting, as well as Mr. Hastings,
Mr. Bay, legal counsel, representatives of DMG and a representative of KPMG.
Pure Atria management, legal counsel and financial advisors updated the Pure
Atria Board as to the status of negotiations during the day, noting that the
Agreement and other related agreements were essentially in
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final form and that these agreements did not change materially from those
discussed at the Board meeting earlier that morning. The Pure Atria Board
reviewed with legal counsel, management and a representative of KPMG the
accounting treatment of the Merger and then questioned Pure Atria's
management, legal counsel and financial advisors and auditors as to various
matters regarding the transaction. There followed general discussion regarding
the transaction. At the conclusion of the second meeting on April 6, the Pure
Atria Board again confirmed that the Merger was fair from a financial point of
view to, and in the best interests of, Pure Atria and its stockholders. See
"Approval of the Merger and Related Transactions--Opinion of Pure Atria's
Financial Advisor."
On April 7, following the approvals by the Rational Board and the Pure Atria
Board on April 6 of the Agreement and the transactions contemplated thereby,
the Agreement and the Stock Option Agreements were executed by both companies
and Rational and Pure Atria issued a press release announcing the Merger.
OPINION OF RATIONAL'S FINANCIAL ADVISOR
Rational retained Hambrecht & Quist to deliver a financial opinion letter in
connection with the Merger. Hambrecht & Quist was selected by the Rational
Board to provide a written opinion (the "Hambrecht & Quist Opinion") based on
Hambrecht & Quist's qualifications, expertise and reputation, as well as
Hambrecht & Quist's investment banking relationship and familiarity with
Rational.
The full text of the written Hambrecht & Quist Opinion dated April 6, 1997,
which sets forth, among other things, assumptions made, procedures followed,
matters considered, and limitations on the scope of the review undertaken by
Hambrecht & Quist in rendering the Hambrecht & Quist Opinion, is attached as
Annex E to this Prospectus/Joint Proxy Statement. Rational stockholders are
urged to read the Hambrecht & Quist Opinion carefully and in its entirety.
Rational engaged Hambrecht & Quist to act as its financial advisor in
connection with the Merger and to render an opinion as to the fairness from a
financial point of view to Rational of the consideration to be paid by
Rational in connection with the Merger. The Exchange Ratio was determined
through negotiations between Rational and Pure Atria, and not by Hambrecht &
Quist. Hambrecht & Quist rendered its oral opinion, subsequently confirmed in
writing, on April 6, 1997, to the Rational Board that, as of such date, the
consideration to be paid by Rational pursuant to the Agreement is fair to
Rational from a financial point of view. No limitations were placed on
Hambrecht & Quist by the Rational Board with respect to the investigation made
or the procedures followed in preparing and rendering its opinion.
In its review of the Merger, and in arriving at its opinion, Hambrecht &
Quist, among other things: (i) reviewed the publicly available financial
statements of Rational for recent years and interim periods to date and
certain other relevant financial and operating data of Rational made available
to Hambrecht & Quist from published sources; (ii) discussed with certain
members of the management of Rational the business, financial condition and
prospects of Rational; (iii) reviewed the publicly available financial
statements of Pure Atria for recent years and interim periods to date and
certain other relevant financial and operating data of Pure Atria obtained by
Hambrecht & Quist from published sources; (iv) discussed with certain members
of the management of Pure Atria the business, financial condition and
prospects of Pure Atria; (v) analyzed the pro forma impact of the Merger on
earnings per share ("EPS"), consolidated capital and other financial ratios of
Rational and Pure Atria; (vi) reviewed and discussed with management of
Rational and Pure Atria, the strategic rationale for the Merger;
(vii) reviewed the recent reported prices and trading activity for Rational's
and Pure Atria's Common Stock and compared such information and certain
financial information of Rational and Pure Atria with similar information for
certain other companies engaged in businesses Hambrecht & Quist considered
comparable to those of Rational and Pure Atria; (viii) reviewed the financial
terms, to the extent publicly available, of certain comparable merger and
acquisition transactions; (ix) reviewed the Agreement; (x) discussed the tax
and accounting treatment of the Merger with Rational and Rational's legal
counsel and accountants; and (xi) performed such other analyses and
examinations and considered such other information, financial studies,
analyses and investigations and financial, economic and market data as
Hambrecht & Quist deemed relevant.
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Hambrecht & Quist did not independently verify any of the information
concerning Rational or Pure Atria considered in connection with their review
of the Merger and, for purposes of its opinion, Hambrecht & Quist assumed and
relied upon the accuracy and completeness of all such information. In
connection with its opinion, Hambrecht & Quist did not prepare or obtain any
independent evaluation or appraisal of any of the assets or liabilities of
Rational or Pure Atria, nor did they conduct a physical inspection of the
properties and facilities of Rational or Pure Atria. Hambrecht & Quist also
assumed that neither Rational nor Pure Atria was a party to any pending
transactions, including external financings, recapitalization or merger
discussions, other than the Merger and those in the ordinary course of
conducting their respective businesses. For purposes of their opinion,
Hambrecht & Quist assumed that the Merger will qualify as a tax-free
reorganization under the Code for the stockholders of Rational and that the
Merger will be accounted for as a pooling of interests. Hambrecht & Quist's
opinion is necessarily based upon market, economic, financial and other
conditions as they exist and can be evaluated as of the date of the opinion
and any subsequent change in such conditions would require a reevaluation of
such opinion.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. The
summary of the Hambrecht & Quist analyses set forth below does not purport to
be a complete description of the presentation by Hambrecht & Quist to the
Rational Board. In arriving at its opinion, Hambrecht & Quist did not
attribute any particular weight to any analyses or factor considered by it,
but rather made qualitative judgments as to the significance and relevance of
each analysis and factor. Accordingly, Hambrecht & Quist believes that its
analyses and the summary set forth below must be considered as a whole and
that selecting portions of its analyses, without considering all analyses, or
of the following summary, without considering all factors and analyses, could
create an incomplete view of the processes underlying the analyses set forth
in the Hambrecht & Quist presentation to the Rational Board and its opinion.
In performing its analyses, Hambrecht & Quist made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of Rational and Pure
Atria. The analyses performed by Hambrecht & Quist (and summarized below) are
not necessarily indicative of actual values or actual future results, which
may be significantly more or less favorable than suggested by such analyses.
Additionally, analyses relating to the values of businesses do not purport to
be appraisals or to reflect the prices at which businesses actually may be
acquired.
The following is a brief summary of certain financial analyses performed by
Hambrecht & Quist in connection with providing its written opinion to the
Rational Board dated April 6, 1997:
Contribution Analysis: Hambrecht & Quist analyzed the contribution of each
of Rational and Pure Atria to certain financial statement categories of the
pro forma Combined Company, assuming no revenue or expense adjustments to the
Combined Company, including revenue, gross profit, operating income, and net
income. This contribution analysis was then compared to the respective pro
forma ownership percentages of Rational and Pure Atria stockholders in the pro
forma Combined Company. Hambrecht & Quist examined the expected contributions
to the Combined Company's revenues, gross profit, operating income and pro
forma net income by Rational for fiscal 1997 and 1998 (i.e., the four quarters
ending March 31), derived from Hambrecht & Quist's analyst's published
estimates, and by Pure Atria for calendar years 1997 and 1998 (i.e., the four
quarters ending December 31), derived from Wall Street's consensus estimates
as adjusted by Hambrecht & Quist. Hambrecht & Quist observed that Rational
stockholders are expected to own approximately 56% of the Combined Company
equity at the close of the Merger, calculated on a fully diluted basis, and
the Pure Atria stockholders are expected to own approximately 44% of the
Combined Company equity at the close of the Merger. In fiscal 1997, assuming
no revenue or expense adjustment to the Combined Company it was estimated that
Rational and Pure Atria would have contributed approximately 52% and 48%,
respectively, of the combined revenues; approximately 48% and 52%,
respectively, of the combined gross profit; approximately 49% and
51%, respectively, of the combined operating income; and approximately 57% and
43%, respectively, of the combined pro forma net income. With respect to
fiscal 1998 financial performance, assuming no revenue or expense adjustment
to the Combined Company it was estimated that Rational and Pure Atria would
have contributed approximately 53% and 47%, respectively, of the combined
revenues; approximately 50% and 50%, respectively, of the combined gross
profit;
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approximately 52% and 48%, respectively, of the combined operating income; and
approximately 58% and 42%, respectively, of the combined pro forma net income.
Pro Forma Merger Analysis: Hambrecht & Quist analyzed the pro forma impact
of the Merger assuming revenue and expense adjustments to the Combined
Company, using Hambrecht & Quist's analyst's published estimates of EPS for
Rational in fiscal 1997 and fiscal 1998 of $0.53 and $0.74, respectively. The
analysis indicated that EPS of the pro forma Combined Company would be the
same for the June and September 1997 quarters and higher for the subsequent
quarters than for Rational as a stand-alone company. The actual results and
savings achieved by the Combined Company resulting from the Merger may vary
from the projected results and variations may be material.
Premium Analysis: Hambrecht & Quist compared the implied price per share of
the offer as of April 6, 1997, to the last sale price of Pure Atria Common
Stock on both April 4, 1997, and March 7, 1997 (the twenty-eighth day
preceding the announcement of the Merger), to similar premiums for certain
technology transactions announced since January 1, 1994. Hambrecht & Quist
analyzed over 30 such public and private company technology transactions and
additionally analyzed a larger subset of public and private company
transactions that were in the software sector. Hambrecht & Quist observed that
the average one-day premium and four-week premiums paid in the selected public
and private company technology transactions were 37% and 52%, respectively.
This compared with the proposed merger in which the one-day premium offered
was 19% and the four-week premium offered was 19%.
Discounted Cash Flow Analysis: Hambrecht & Quist analyzed the theoretical
valuation of Pure Atria based on the unleveraged discounted cash flow of the
projected financial performance estimates as to Pure Atria. However, because
of the nature of Pure Atria's business and the current market valuations for
software companies, Hambrecht & Quist determined that this analysis did not
provide meaningful information in the context of analyzing the fairness from a
financial point of view of the Merger.
Analysis of Publicly Traded Comparable Companies: Hambrecht & Quist compared
selected historical and projected financial information of Pure Atria to
publicly traded companies that Hambrecht & Quist deemed to be comparable to
Pure Atria. Such data and ratios included market value, market value to
historical net income, price per share to historical and projected earnings
per share, market value to historical book value, and earnings per share
growth rates. Hambrecht & Quist also examined the ratio of the enterprise
value (market value plus debt less cash and marketable securities) to the
earnings before interest and taxes and earnings before interest, taxes,
depreciation and amortization. Companies used as comparables included selected
high growth software companies including Business Objects, Forte Software,
Integrated Systems, Intersolv, Legato, Logic Works, Mercury Interactive,
Platinum Technology, Progress Software, Seer Technologies, Segue Software,
Visigenic Software and Wind River Systems. The foregoing multiples were
applied to historical financial results of Pure Atria for the twelve-month
period ended December 31, 1996, and projected financial results of Pure Atria
derived from Wall Street's analyst's published consensus estimates as adjusted
by Hambrecht & Quist. Hambrecht & Quist determined that the average multiple
of the last-twelve-months revenues for these companies was 3.4. Hambrecht &
Quist determined that the average multiple of book value for these companies
was 4.0. Hambrecht & Quist determined that the average multiple of earnings
for these companies was 52.4. Hambrecht & Quist determined that the average
multiple of earnings before interest and taxes or these companies was 48.3.
Hambrecht & Quist determined that the average multiple of earnings before
interest, taxes, depreciation and amortization for these companies was 26.5.
Hambrecht & Quist determined that, for the expected results for calendar year
1997, the average multiple of earnings per share for these companies was 27.3.
Based on the analysis of publicly traded comparable companies, Pure Atria's
implied equity value ranged from approximately $361 million to approximately
$1,416 million. This compared with an implied equity value of $947 million of
Pure Atria in the Merger, based on the closing price of Rational Common Stock
on April 4, 1997.
Analysis of Selected Merger and Acquisition Transactions: Hambrecht & Quist
compared the proposed merger with selected comparable merger and acquisition
transactions. This analysis included over 30 comparable public and private
company software transactions. In examining these transactions, Hambrecht &
Quist analyzed
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certain income statement and balance sheet parameters of the acquired company
relative to the consideration offered. The foregoing multiples were applied to
historical financial results of Pure Atria for the twelve-month period ended
December 31, 1996. Multiples analyzed included consideration offered to
historical revenue, to historical cash flow from operations, to historical
earnings before depreciation, interest and taxes, to historical earnings
before interest and taxes, to historical net cash flow from operations, to
historical earnings, to historical book value, and to historical net operating
assets. Selected software transactions analyzed include Synopsys/Epic, Coopers
& Chyan/Cadence, Edmark/IBM, Cheyenne Software/Computer Associates, Red Pepper
Software/PeopleSoft, Meta-Software/Avant!, Davidson & Associates/CUC
International, Tivoli Systems/IBM and Integrated Silicon Systems/Arcsys. The
consideration offered in the transactions was an average multiple of 7.0 times
revenue, 32.5 times earnings before depreciation, interest and taxes, 38.2
times earnings before interest and taxes, 53.4 times earnings, 13.4 times book
value and 48.6 times cash flow from operations. Based on the analysis of
selected merger and acquisition transactions, Pure Atria's implied equity
value ranged from approximately $1,025 million to $1,209 million. This
compared with an implied value of $947 million of Pure Atria in the Merger.
No company or transaction used in the above analyses is identical to
Rational or Pure Atria or the Merger. Accordingly, an analysis of the results
of the foregoing is not mathematical; rather it involves complex
considerations and judgments concerning differences in financial and operating
characteristics of the companies and other factors that could affect the
public trading values of the companies or company to which they are compared.
The foregoing description of Hambrecht & Quist's opinion is qualified in its
entirety by reference to the full text of such opinion which is attached as
Annex E to this Joint Proxy Statement/ Prospectus.
Hambrecht & Quist, as part of its investment banking services, is regularly
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, corporate restructurings, strategic alliances,
negotiated underwritings, secondary distributions of listed and unlisted
securities, private placements and valuations for corporate and other
purposes. Hambrecht & Quist is familiar with Rational, having acted as advisor
of its merger with a publicly traded corporation formerly known as Verdix
Corporation in March 1994, and as managing underwriter of its follow-on
offerings in June 1995 and October 1996. Hambrecht & Quist received customary
compensation in connection with such transactions. In November 1996, Hambrecht
& Quist acted as financial advisor to Rational in connection with Rational's
acquisition of SQA Inc., and received a fee for this service. In the ordinary
course of business, Hambrecht & Quist acts as a market maker and broker in the
publicly traded securities of Rational and receives customary compensation in
connection therewith, and also provides research coverage for Rational. In the
ordinary course of business, Hambrecht & Quist actively trades in the equity
and derivative securities of Rational for its own account and for the accounts
of its customers and, accordingly, may at any time hold a long or short
position in such securities. In addition, Daniel H. Case III, the President
and Chief Executive Officer of Hambrecht & Quist, is a director of Rational.
Pursuant to an engagement letter dated April 4, 1997, Rational has agreed to
pay Hambrecht & Quist a fee ("Transaction Fee") equal to $5.3 million in
connection with its services as financial advisor to Rational in connection
with the Merger, including the rendering of a fairness opinion. Such
Transaction Fee, with the exception of $2.0 million payable to Hambrecht &
Quist at the time of the delivery of its fairness opinion which sum will be
credited against the Transaction Fee, is payable upon consummation of the
Merger. Rational also has agreed to reimburse Hambrecht & Quist for its
reasonable out-of-pocket expenses and to indemnify Hambrecht & Quist against
certain liabilities, including liabilities under the federal securities laws
or relating to or arising out of Hambrecht & Quist's engagement as financial
advisor.
OPINION OF PURE ATRIA'S FINANCIAL ADVISOR
Pure Atria retained Deutsche Morgan Grenfell Inc. ("DMG") to act as its
financial advisor in connection with the Merger. DMG was selected by Pure
Atria's Board of Directors to act as Pure Atria's financial advisor based on
DMG's qualifications, expertise and reputation, as well as DMG's investment
banking relationship and familiarity with Pure Atria.
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At the first meeting of Pure Atria's Board of Directors on April 6, 1997,
DMG rendered its oral opinion, subsequently confirmed in writing as of April
6, 1997 (the "DMG Opinion"), that, as of such date, based upon and subject to
the various considerations set forth in the DMG Opinion, the Exchange Ratio
pursuant to the Agreement was fair from a financial point of view to the
holders of Pure Atria Common Stock.
The full text of the DMG Opinion, which sets forth, among other things,
assumptions made, procedures followed, matters considered and limitations on
the scope of the review undertaken by DMG in rendering the DMG Opinion, is
attached as Annex F to this Prospectus/Joint Proxy Statement. Pure Atria
stockholders are urged to read the DMG Opinion carefully and in its entirety.
DMG did not recommend to Pure Atria that any specific exchange ratio
constituted the appropriate exchange ratio for the Merger. The DMG Opinion
addresses only the fairness of the Exchange Ratio from a financial point of
view to the holders of Pure Atria Common Stock as of the date of the DMG
Opinion, and does not constitute a recommendation to any stockholder as to how
such stockholder should vote at the Pure Atria Special Meeting. The summary of
the DMG Opinion set forth in this Prospectus/Joint Proxy Statement is
qualified in its entirety by reference to the full text of the DMG Opinion.
In rendering the DMG Opinion, DMG, among other things: (i) analyzed certain
publicly available financial statements and other information of Rational and
Pure Atria, respectively; (ii) analyzed certain historical internal financial
statements and other financial and operating data concerning Pure Atria
prepared by the management of Pure Atria; (iii) discussed the past and current
operations and financial condition and the prospects of Pure Atria with senior
executives of Pure Atria; (iv) analyzed certain historical internal financial
statements and other financial and operating data concerning Rational prepared
by the management of Rational; (v) discussed the past and current operations
and financial condition and the prospects of Rational with senior executives
of Rational and Pure Atria; (vi) analyzed the pro forma impact of the Merger
on the earnings per share and consolidated capitalization of Rational; (vii)
reviewed the reported prices and trading activity for the Rational Common
Stock and the Pure Atria Common Stock; (viii) compared the financial
performance of Rational and Pure Atria and the prices and trading activity of
the Rational Common Stock and the Pure Atria Common Stock, respectively, with
that of certain other comparable publicly-traded companies which DMG deemed to
be relevant and their securities; (ix) reviewed the financial terms, to the
extent publicly available, of certain comparable merger and acquisition
transactions which DMG deemed to be relevant; (x) reviewed and discussed with
the senior managements of Rational and Pure Atria (a) the strategic rationale
for the Merger and their assessment as to the benefits expected to be derived
from the Merger; and (b) certain alternatives to the Merger, including
independence, particularly in light of the impact on Pure Atria, its business
and its employees of the intended first quarter earnings announcement; (xi)
participated in discussions and negotiations among representatives of Rational
and Pure Atria and their respective financial and legal advisors; (xii)
reviewed the Agreement and certain related agreements; and (xiii) performed
such other analyses and considered such other factors as DMG deemed
appropriate.
In rendering the DMG Opinion, DMG assumed and relied upon, without
independent verification, the accuracy and completeness of the information
reviewed by it for the purposes of the DMG Opinion. With respect to the
information furnished by Rational and Pure Atria, and with respect to the
information discussed with the managements of Rational and Pure Atria
regarding their views of future operations, DMG assumed that such information
was reasonably prepared and reflected the best currently available estimates
and judgments of Rational's and Pure Atria's management as to the competitive
and operating environments and related financial performance of Rational and
Pure Atria, as the case may be, for the relevant periods. For purposes of the
DMG Opinion, DMG also relied upon, without independent verification, the
assessment by the management of each of Rational and Pure Atria of the
strategic and other benefits expected to result from the Merger. DMG also
relied upon, without independent verification, the assessment by Pure Atria's
management of Rational's technology and products, the timing and risks
associated with the integration of Rational with Pure Atria, and the validity
of, and risks associated with, Rational's future products and technology. DMG
did not make any independent valuation or appraisal of the assets, liabilities
or technology of Rational or Pure Atria, respectively, nor was DMG furnished
with any such appraisals. DMG also assumed that the Merger will be accounted
for as a tax-free "pooling-of-interests" business combination in accordance
with U.S. Generally Accepted Accounting Principles
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and will be consummated in accordance with the terms set forth in the
Agreement. The DMG Opinion is necessarily based on economic, market and other
conditions as in effect on, and the information made available to DMG as of,
the date of the DMG Opinion.
Certain analyses performed by DMG utilized revenue and earnings per share
estimates for Pure Atria and Rational based on estimates published by
securities research analysts in the investment community. In the case of Pure
Atria, such estimates were adjusted to generate two cases reflecting an
anticipated shortfall in financial results for the first quarter relative to
investment community expectations about such results. The "Reset Case" is a
standalone case developed by DMG that was intended to reflect Pure Atria's
shortfall in financial results for the first quarter, coupled with the
expectation that securities research analysts would subsequently reduce their
calendar year 1997 revenue and earnings estimates. In addition, for certain
analyses DMG also assumed a concurrent reduction in the trading price of Pure
Atria Common Stock, to a trading range of $8.00 to $10.00 per share (the
"Adjusted Market" price). The "Sensitivity Case" is a Merger case that
reflects Pure Atria's shortfall in financial results for the first quarter and
less severe anticipated adjustments by securities research analysts in their
calendar year 1997 revenue and earnings estimates.
The following is a summary of the analysis performed by DMG in preparation
of the DMG Opinion, and reviewed with the Pure Atria Board of Directors at its
first meeting held on April 6, 1997.
Historical Exchange Ratio Analysis: DMG reviewed the historical trading
prices for Pure Atria Common Stock and Rational Common Stock, separately, and
in comparison to each other. DMG also reviewed the ratios of the daily closing
stock prices of Pure Atria Common Stock to Rational Common Stock for each day
over various periods, starting as far back as August 1, 1995, the date of Pure
Software's Initial Public Offering, and ending April 4, 1997, and computed the
premiums/(discounts) represented by the Exchange Ratio over the average of
these ratios. The average of the ratios of the daily closing stock prices of
Pure Atria Common Stock to Rational Common Stock for the various periods
ending on April 4, 1997, were 1.933 for the period since August 1, 1995; 0.836
for the previous 180 days; 0.738 for the previous 90 days; 0.757 for the
previous 60 days; 0.756 for the previous 30 days; 0.745 for the previous 10
days; and 0.759 for April 4, 1997. DMG observed that the Exchange Ratio
represented a premium/(discount) of (53.4%), 7.6%, 21.9%, 18.8%, 19.0%, 20.8%
and 18.5%, respectively, over the aforementioned ratios of the prices of Pure
Atria Common Stock and Rational Common Stock. In addition, DMG reviewed the
ratios of a range of Adjusted Market prices of Pure Atria Common Stock to
Rational Common Stock for April 4, 1997. The average of the ratios were 0.342
for $8.00 per share of Pure Atria Common Stock, 0.385 for $9.00 per share of
Pure Atria Common Stock, and 0.428 for $10.00 per share of Pure Atria Common
Stock. DMG observed that the Exchange Ratio represented a premium of 163.0%,
133.8% and 110.4%, respectively, over the aforementioned ratios of the prices
of Pure Atria Common Stock and Rational Common Stock.
Premium Analysis: DMG reviewed 26 stock-for-stock acquisition transactions
involving companies in the software sector, none of which were deemed directly
comparable to the Merger. Such analysis showed transaction exchange ratios
resulting in average premiums of approximately 29.7%, 33.7%, 39.9%, 40.3%, and
35.7% over the average of the ratios of the closing stock prices of the
companies involved in such mergers over the 90 day, 60 day, 30 day, 10 day and
one day periods ending the day preceding the public announcement of these
transactions, respectively. DMG also reviewed 31 stock-for-stock transactions
in sectors within technology but outside the software sector. Such analysis
showed transaction exchange ratios resulting in average premiums of
approximately 32.0%, 37.1%, 37.5%, 32.4% and 26.0% over the average of the
ratios of the closing stock prices of the companies involved in such mergers
over the 90 day, 60 day, 30 day, 10 day and one day periods ending the day
preceding the public announcement of these transactions, respectively. DMG
also reviewed 13 of the above 57 stock-for-stock transactions in which the
acquired company's pro forma ownership percentage in the combined company was
greater than 30%. Such analysis showed transaction exchange ratios resulting
in average premiums of approximately 21.8%, 22.9%, 27.4%, 31.5% and 25.9% over
the average of the ratios of the closing stock prices of the companies
involved in such mergers over the 90 day, 60 day, 30 day, 10 day and one day
periods ending the day preceding the public announcement of these
transactions, respectively. DMG observed that the Exchange Ratio represented
average premiums of approximately 21.9%, 18.8%, 19.0%, 20.8%,
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and 18.5% over the average of the ratios of the daily closing stock prices of
Pure Atria Common Stock to Rational Common Stock for the respective comparable
periods ending on April 4, 1997. DMG also observed that the Exchange Ratio
represented a premium of 133.8% over the ratio of an Adjusted Market price of
$9.00 per share of Pure Atria Common Stock to Rational Common Stock.
Selected Precedent Transactions: DMG reviewed the publicly available
financial terms of 68 precedent transactions in the software sector (the
"Software Transactions"), including two recent notable Software Transactions:
the merger of Pure and Atria and the acquisition by Rational of SQA. DMG
observed multiples of share price to next twelve months earnings per share of
a mean of 42.1 times, 88.4 times and 64.1 times for the Software Transactions,
Atria and SQA, respectively. DMG also observed the multiples implied by the
Merger. Such analysis was based on the Reset Case for Pure Atria. DMG observed
a multiple of 70.1 times 1997 earnings per share estimates for Pure Atria.
Contribution Analysis: DMG analyzed the pro forma contribution by each of
Pure Atria and Rational to the revenue and earnings per share of the Combined
Company if the Merger were to be consummated. Such analysis was based on the
Reset Case and Sensitivity Case for Pure Atria and the most recent published
estimates by Goldman Sachs' securities research analyst (the "Rational Street
Estimates") for Rational. DMG observed that for the latest twelve months, Pure
Atria would contribute approximately 49.5% of the revenues of the Combined
Company. DMG observed that using the Reset Case for Pure Atria for the
estimated calendar year ended 1997, Pure Atria would contribute approximately
45.5% of the revenues of the Combined Company. DMG observed that using the
Sensitivity Case for Pure Atria for the estimated calendar year ended 1997,
Pure Atria would contribute approximately 48.2% of the revenues of the
Combined Company. When adjusted to reflect net debt (cash) balances of
Rational and Pure Atria, these figures implied pro forma fully diluted
ownership of the Combined Company by Pure Atria stockholders of 46.3%, 43.0%
and 45.2%, respectively. The estimated earnings per share for calendar year
1997 based on the Reset Case and the Sensitivity Case implied pro forma fully
diluted ownership of the Combined Company by Pure Atria stockholders of 27.3%
and 42.5%, respectively. These figures compared to the pro forma ownership of
the Combined Company by Pure Atria stockholders of 43.6% on a fully diluted
basis based on the Exchange Ratio.
Pro Forma Analysis of the Merger: DMG analyzed certain pro forma effects of
the Merger on the earnings and capitalization of Rational. Such analysis was
based on the Rational Street Estimates for Rational and the most recent
published estimates by Wessels Arnold & Henderson securities research analyst
(the "Pure Atria Street Estimates") for Pure Atria as well as the Sensitivity
Case for Pure Atria. Based on such analysis, DMG observed that, based on the
Exchange Ratio and assuming that the Merger was treated as a pooling-of-
interests business combination for accounting purposes, before taking into
account any one-time restructuring charges, the Merger would result (i) using
the Rational Street Estimates for Rational and the Pure Atria Street Estimates
for Pure Atria, in earnings per share accretion/(dilution) for Rational
stockholders of 3.6%, 2.5% and (2.6%) for third calendar quarter 1997, fourth
calendar quarter 1997 and calendar year ended 1998, respectively; (ii) using
the Rational Street Estimates for Rational and the Sensitivity Case estimates
for Pure Atria, in earnings per share accretion/(dilution) for Rational
stockholders of 7.1%, 5.4% and (2.6%) for third calendar quarter 1997, fourth
calendar quarter 1997 and calendar year ended 1998, respectively. The pro
forma analysis of the Merger referred to above did not include any estimates
of potential synergies resulting from the transaction.
Terminal Value Analysis: DMG performed an analysis of the present value per
share of Pure Atria Common Stock on a standalone basis based on the estimated
current and discounted present value of the future trading prices of Pure
Atria Common Stock. This analysis applied a range of illustrative multiples of
earnings per share ranging from 25.0 times to 40.0 times to estimated earnings
per share of Pure Atria Common Stock based on the Reset Case in 1997 and
illustrative growth rates of 35% and 45% applied to the Sensitivity Case in
1998, which results in 1999 and 2000 results, for one and two years,
respectively, and used an illustrative discount rate of 25.0%. Based on this
analysis, DMG estimated a present value of the potential current and future
trading price per share ranging from $7.50 to $69.17 for Pure Atria Common
Stock. Additionally, DMG performed an analysis of the pro forma present value
per Pure Atria share equivalent assuming consummation of the Merger. This
analysis applied the same range of illustrative multiples of earnings per
share to estimated earnings per share
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based on the Sensitivity Case for Pure Atria and the Rational Street Estimates
for Rational and used an illustrative discount rate of 20.0%. This analysis
showed per share equivalent values ranging from $14.89 to $71.05 for Pure
Atria Common Stock.
Post-Announcement Stock Price Analysis: DMG performed an analysis of the
potential impact on the current trading prices of Rational Common Stock upon
announcement of the Merger based on the Rational Street Estimates for Rational
and a range of earnings per share estimates for Pure Atria for calendar years
1997 and 1998, illustrative multiples of earnings per share ranging from 20.0
times to 34.7 (Rational's then current multiple) times the 1997 calendar
year's earnings per share and illustrative multiples of earnings per share
ranging from 15.0 times to 24.1 (Rational's then current multiple) times the
1998 calendar year's earnings per share. Based on this analysis, DMG estimated
trading prices per share ranging from $10.28 to $22.74 for Rational Common
Stock.
In connection with the review of the Merger by the Pure Atria Board, DMG
performed a variety of financial and comparative analyses for purposes of the
DMG Opinion. While the foregoing summary describes all material analyses and
factors reviewed by DMG with the Pure Atria Board, it does not purport to be a
complete description of the presentations by DMG to the Pure Atria Board or
the analyses performed by DMG in arriving at the DMG Opinion. The preparation
of a fairness opinion is a complex process and is not necessarily susceptible
to partial analysis or summary description. DMG believes that its analyses
must be considered as a whole and that selecting portions of its analyses and
of the factors considered by it, without considering all analyses and factors,
could create a misleading view of the processes underlying the DMG Opinion. In
addition, DMG may have given various analyses more or less weight than other
analyses, and may have deemed various assumptions more or less probable than
other assumptions, so that the range of valuation resulting from any
particular analysis described above should not be taken to be DMG's view of
the actual value of Pure Atria or Rational. In performing its analyses, DMG
made numerous assumptions with respect to industry performance, general
business and economic conditions and other matters, many of which are beyond
the control of Pure Atria or Rational. The analyses performed by DMG are not
necessarily indicative of actual values or actual future results, which may be
significantly more or less favorable than suggested by such analyses. In
addition, analyses relating to the value of businesses or assets do not
purport to be appraisals or to necessarily reflect the prices at which
businesses or assets may actually be sold. The analyses performed were
prepared solely as part of DMG's analysis of the fairness of the Exchange
Ratio, from a financial point of view, to the holders of Pure Atria Common
Stock and were provided to the Pure Atria Board in connection with the
delivery of the DMG Opinion.
The Pure Atria Board retained DMG to act as Pure Atria's financial advisor
in connection with the Merger. DMG was selected by the Pure Atria Board based
on DMG's qualifications, expertise and reputation, as well as DMG's investment
banking relationship and familiarity with Pure Atria. In the past, DMG has
provided financial advisory services for Pure Atria. DMG is an internationally
recognized investment banking and advisory firm. DMG, as part of its
investment banking business, is continuously engaged in the valuation of
businesses and securities in connection with mergers and acquisitions,
negotiated underwritings, competitive biddings, secondary distributions of
listed and unlisted securities, private placements and valuations for
corporate and other purposes. In the ordinary course of its business, DMG may
actively trade the securities and loans of Pure Atria and Rational for its own
account and for the accounts of its customers and, accordingly, may at any
time hold a long or short position in such securities and loans.
Pure Atria has agreed to pay DMG a fee for its financial advisory services
in connection with the Merger, including, among other things, rendering the
DMG Opinion and making the presentation referred to above. Pursuant to a
letter agreement between Pure Atria and DMG dated March 27, 1997, Pure Atria
has agreed to pay DMG (i) an opinion fee of $1,000,000 upon delivery of an
opinion letter with respect to the fairness from a financial point of view of
the consideration to be received by Pure Atria's stockholders to the Pure
Atria Board of Directors, and (ii) in the event the Merger is consummated, a
transaction fee of $5,300,000, against which the amount paid pursuant to
clause (i) would be credited. In addition, Pure Atria has agreed to reimburse
DMG for its out-of-pocket expenses (including fees and expenses of its legal
counsel) incurred in connection with its engagement, and to indemnify DMG and
certain related persons against certain liabilities and expenses arising
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out of or in conjunction with its rendering of services under its engagement,
including certain liabilities under the federal securities laws.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the material federal income tax
considerations of the Merger that are generally applicable to holders of Pure
Atria Common Stock. This discussion does not deal with all income tax
considerations that may be relevant to particular Pure Atria stockholders in
light of their particular circumstances, such as stockholders who are dealers
in securities, foreign persons, stockholders who acquired their shares in
connection with previous mergers involving Pure Atria or an affiliate, or
stockholders who acquired their shares in connection with stock option or
stock purchase plans or in other compensatory transactions. In addition, the
following discussion does not address the tax consequences of transactions
effectuated prior to or after the Merger (whether or not such transactions are
in connection with the Merger), including without limitation transactions in
which shares of Pure Atria Common Stock were or are acquired or shares of
Rational Common Stock were or are disposed of. Furthermore, no foreign, state
or local tax considerations are addressed herein. ACCORDINGLY, PURE ATRIA
STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC
TAX CONSEQUENCES OF THE MERGER, INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL
AND FOREIGN TAX CONSEQUENCES TO THEM OF THE MERGER.
The Merger is intended to constitute a "reorganization" within the meaning
of Section 368(a) of the Code, with each of Rational, Merger Sub and Pure
Atria intended to qualify as a "party to the reorganization" under Section
368(b) of the Code, in which case the following federal income tax
consequences will result (subject to the limitations and qualifications
referred to herein):
(a) No gain or loss will be recognized by holders of Common Stock of Pure
Atria solely upon their receipt of Rational Common Stock in the Merger
(except to the extent of cash received in lieu of a fractional share
thereof) in exchange therefor;
(b) The aggregate tax basis of the Rational Common Stock received in the
Merger by a Pure Atria stockholder will be the same as the aggregate tax
basis of Pure Atria Common Stock surrendered in exchange therefor;
(c) The holding period of the Rational Common Stock received in the
Merger by a Pure Atria stockholder will include the period during which the
stockholder held the Pure Atria Common Stock surrendered in exchange
therefor, provided that the Pure Atria Common Stock is held as a capital
asset at the time of the Merger;
(d) Cash payments received by holders of Pure Atria Common Stock in lieu
of a fractional share will be treated as if such fractional share of
Rational Common Stock had been issued in the Merger and then redeemed by
Rational. A Pure Atria stockholder receiving such cash generally will
recognize gain or loss, upon such payment, measured by the difference (if
any) between the amount of cash received and the basis in such fractional
share; and
(e) None of Rational, Merger Sub or Pure Atria will recognize material
amounts of gain or loss solely as a result of the Merger.
The parties are not requesting a ruling from the Internal Revenue Service
("IRS") in connection with the Merger. Rational and Pure Atria have each
received an opinion from their respective legal counsel, WSGR and F&W,
respectively, that, for federal income tax purposes, the Merger will
constitute a "reorganization" within the meaning of Section 368(a) of the
Code. These opinions, which are collectively referred to herein as the "Tax
Opinions," neither bind the IRS nor preclude the IRS from adopting a contrary
position. In addition, the Tax Opinions are subject to certain assumptions and
qualifications and are based on the truth and accuracy of certain
representations made by Rational, Merger Sub and Pure Atria, including
representations in certificates delivered to counsel by the respective
managements of Rational, Merger Sub and Pure Atria.
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A successful IRS challenge to the "reorganization" status of the Merger
would result in a Pure Atria stockholder recognizing gain or loss with respect
to each share of Pure Atria Common Stock surrendered equal to the difference
between the stockholder's basis in such share and the fair market value, as of
the Effective Time of the Merger, of the Rational Common Stock received in
exchange therefor. In such event, a stockholder's aggregate basis in the
Rational Common Stock so received would equal its fair market value and such
stockholder's holding period would begin the day after the Merger.
GOVERNMENTAL AND REGULATORY APPROVALS
Transactions such as the Merger are reviewed by the Department of Justice
and the FTC to determine whether they comply with applicable antitrust laws.
Under the provisions of the HSR Act, the Merger may not be consummated until
such time as certain information has been furnished to the Department of
Justice and the FTC and the specified waiting period requirements of the HSR
Act have been satisfied. Rational and Pure Atria each filed its respective
notification and report forms under the HSR Act on April 28, 1997. The parties
were subsequently notified that the Merger had been assigned to the Antitrust
Division of the Department of Justice for review. On May 28, 1997, the parties
received a request from the Department of Justice for additional information
and documents in connection with the review of the Merger.
At any time before or after the Effective Time, the Department of Justice,
the FTC, state attorneys general, foreign regulatory agencies or a private
person or entity could challenge the Merger under the antitrust laws and seek,
among other things, to enjoin the Merger or to cause Rational to divest
itself, in whole or in part, of Rational and Pure Atria. Based on information
available to them, Rational and Pure Atria believe that the Merger will not
violate federal or state antitrust laws. However, there can be no assurance
that a challenge to the Merger on antitrust grounds will not be made or that,
if such a challenge is made, Rational and Pure Atria will prevail or will not
be required to accept certain conditions, possibly including certain
divestitures or hold-separate agreements, or certain mandatory licensing in
order to consummate the Merger.
Under the Agreement, conditions to both Rational's and Pure Atria's
obligations to consummate the Merger include the expiration or termination of
all waiting periods under the HSR Act and the absence of any temporary
restraining order, injunction or other legal, contractual or regulatory
restraint which would restrict the conduct or operation of Rational's business
or the business of Pure Atria following the Merger, except where the existence
of any such order, injunction or restraint would not have a material adverse
effect on Rational.
Rational and Pure Atria each conduct operations in a number of foreign
countries where regulatory filings may be required as a result of the Merger.
Rational and Pure Atria will make such filings as they determine are necessary
or appropriate.
Rational and Pure Atria are aware of no other material governmental or
regulatory approvals required for consummation of the Merger, other than
compliance with the federal securities laws and applicable securities and
"blue sky" laws of the various states.
ACCOUNTING TREATMENT
The Merger is intended to qualify as a pooling of interests for financial
reporting purposes in accordance with generally accepted accounting
principles. Consummation of the Merger is conditioned upon (i) receipt by Pure
Atria of a letter from its independent auditors to the effect that Pure Atria
qualifies as an entity that may be a party to a business combination for which
the pooling-of-interests method of accounting would be available and (ii)
receipt by Rational of a letter from its independent auditors regarding
concurrence with Rational management's conclusion as to the appropriateness of
pooling-of-interests accounting treatment for the Merger under APB No. 16, if
consummated in accordance with the Agreement.
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TERMS OF THE MERGER
The following discussion summarizes the definitive terms of the Agreement,
including the other agreements and transactions contemplated thereby. The
following is not, however, a complete statement of all provisions of the
Agreement and related agreements. Detailed terms of and conditions to the
Merger and certain related transactions are contained in the Agreement, a copy
of which is attached to this Prospectus/Joint Proxy Statement as Annex A and
incorporated herein by reference. Reference is also made to the Stock Option
Agreements attached to this Prospectus/Joint Proxy Statement as Annex C and
Annex D, and to the other Annexes hereto. Statements made in this
Prospectus/Joint Proxy Statement with respect to the terms of the Merger and
such related transactions are qualified by reference to the more detailed
information set forth in the Annexes hereto.
EFFECTIVE TIME
The Merger will become effective upon the filing of the Certificate of
Merger with the Secretary of State of the State of Delaware or at such later
time as may be agreed in writing by Rational, Pure Atria and Merger Sub (the
"Effective Time"). The Certificate of Merger is attached as Annex B of this
Prospectus/Joint Proxy Statement. The Closing Date will occur at a time and
date to be specified by Rational, Pure Atria and Merger Sub after the
satisfaction or waiver of the conditions to the Merger, or at such other time
as Rational, Pure Atria and Merger Sub agree in writing. Assuming all
conditions to the Merger are met or waived prior thereto, it is anticipated
that the Closing Date and Effective Time will be on or about July 30, 1997.
MANNER AND BASIS OF CONVERTING SHARES
At the Effective Time of the Merger, Merger Sub will merge with and into
Pure Atria, the separate corporate existence of Merger Sub will cease, and
Rational will own all of the capital stock of Pure Atria. As a result of the
Merger, each share of Pure Atria Common Stock will be converted into the right
to receive 0.9 shares of Rational Common Stock, and each outstanding option or
right to purchase Pure Atria Common Stock under the Pure Atria Stock Option
Plans and Pure Atria Stock Purchase Plan will be assumed by the Combined
Company and will become an option or right to purchase Rational Common Stock,
with appropriate adjustments to be made to the number of shares issuable
thereunder and the exercise price thereof based on the Exchange Ratio. Also as
a result of the Merger, each share of Pure Atria Common Stock held in the
treasury of Pure Atria or owned by Merger Sub, Rational or any wholly owned
subsidiary of Rational or Pure Atria, will be canceled and extinguished
without any conversion thereof.
No fractional shares will be issued by virtue of the Merger, but in lieu
thereof each holder of Pure Atria Common Stock who would otherwise be entitled
to a fraction of a share of Rational Common Stock (after aggregating all
fractional shares to be received by such holder) will receive from the
Combined Company an amount of cash (rounded to the nearest whole cent) equal
to the product of (i) such fraction, multiplied by (ii) the average closing
price of a share of Rational Common Stock for the ten most recent days that
Rational Common Stock has traded ending on the trading day immediately prior
to the Effective Time, as reported on the Nasdaq National Market.
Promptly after the Effective Time, the Combined Company, acting through an
exchange agent selected by Rational, will deliver to each Pure Atria
stockholder of record a letter of transmittal with instructions to be used by
such stockholder in surrendering certificates which, prior to the Merger,
represented shares of Pure Atria Common Stock. CERTIFICATES SHOULD NOT BE
SURRENDERED BY THE HOLDERS OF PURE ATRIA COMMON STOCK UNTIL SUCH HOLDERS
RECEIVE THE LETTER OF TRANSMITTAL FROM THE EXCHANGE AGENT. At the Effective
Time, each then outstanding option or other right to purchase Pure Atria
Common Stock, whether vested or unvested, will be assumed by the Combined
Company without any action on the part of the holder thereof. OPTION
AGREEMENTS NEED NOT BE SURRENDERED.
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No later than five business days after the Closing Date, the Combined
Company will file a registration statement on Form S-8 under the Securities
Act covering the shares of Rational Common Stock issuable upon exercise of
options and other rights to purchase Pure Atria Common Stock to be assumed by
Rational at the Effective Time.
STOCK OWNERSHIP FOLLOWING THE MERGER
Based upon the capitalization of Pure Atria as of the close of business on
March 31, 1997 (including the number of shares of Pure Atria Common Stock
outstanding, the number of shares issuable upon exercise of outstanding
options to purchase Pure Atria Common Stock and the level of participation in
the Pure Atria stock purchase plan), an aggregate of approximately
38,542,000 shares of Rational Common Stock will be issued to Pure Atria
stockholders in the Merger and Rational will assume options and rights to
purchase Pure Atria Common Stock for up to approximately 6,951,000 additional
shares of Rational Common Stock. Based upon the capitalization of Rational and
Pure Atria as of the close of business on March 31, 1997, (including the
number of shares issuable upon exercise of outstanding options for the
purchase of the Common Stock of Pure Atria or the Common Stock of Rational,
and the level of participation in Rational's and Pure Atria's respective stock
purchase plans), immediately following the Merger, the former securityholders
of Pure Atria will hold approximately 45% of the Combined Company's
outstanding voting power, and approximately 45% of the Combined Company's
capital stock calculated on a fully diluted basis. The foregoing numbers of
shares and percentages are subject to change in the event that the
capitalization of either Rational or Pure Atria changes subsequent to March
31, 1997, and prior to the effective time of the Merger.
Under the terms of the Pure Atria 1995 Stock Option Plan and the agreements
issued thereunder, (i) options to purchase 56,250 shares of Pure Atria Common
Stock granted to non-employee directors of Pure Atria under the Automatic
Option Grant Program of such Plan will automatically vest in full at the
Effective Time, and (ii) based on the number of shares of Pure Atria Common
Stock subject to unvested options issued and outstanding on the Pure Atria
Record Date, options to purchase up to 6,334,572 shares of Pure Atria Common
Stock granted to employees of Pure Atria under the Discretionary Option Grant
Program of the Pure Atria Corporation Stock Option Plan, will automatically
vest if the optionee is actually or constructively terminated under certain
circumstances following the Effective Time.
CONDUCT OF THE COMBINED COMPANY FOLLOWING THE MERGER
Once the Merger is consummated, Merger Sub will cease to exist as a
corporation, and all of the business, assets, liabilities and obligations of
Merger Sub will be merged into Pure Atria with Pure Atria remaining as the
surviving corporation (the "Surviving Corporation"). Following the Merger, the
headquarters of the Combined Company will be in Santa Clara, California.
Pursuant to the Agreement, the Certificate of Incorporation of Merger Sub in
effect immediately prior to the Effective Time will become the Certificate of
Incorporation of the Surviving Corporation and the Bylaws of Merger Sub will
become the Bylaws of the Surviving Corporation. The Board of Directors of the
Surviving Corporation will consist of the directors who are serving as
directors of Merger Sub immediately prior to the Effective Time. The officers
of Merger Sub immediately prior to the Effective Time will remain as officers
of the Surviving Corporation, until their successors are duly elected or
appointed or qualified.
Immediately after the Effective Time, the Combined Company's Board of
Directors will consist of the Rational Board immediately prior to the
Effective Time. The present directors of Rational are Paul D. Levy, Michael T.
Devlin, James S. Campbell, Daniel H. Case III, Leslie G. Denend, John E.
Montague and Allison R. Schleicher. Immediately after the Effective Time the
Audit and Compensation Committees of the Combined
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Company shall be the Audit and Compensation Committees of Rational immediately
prior to the Effective Time. Immediately after the Effective Time, the
executive officers of the Combined Company will be the executive officers of
Rational immediately prior to the Effective Time.
CONDUCT OF RATIONAL'S AND PURE ATRIA'S BUSINESSES PRIOR TO THE MERGER
Prior to the earlier of the termination of the Agreement or the Effective
Time, each of Pure Atria and Rational has agreed, to carry on its business
diligently and in accordance with good commercial practice and to carry on its
business in the usual, regular and ordinary course, in substantially the same
manner as conducted prior to the Agreement and in compliance with all
applicable laws and regulations, to pay its debts and taxes when due subject
to good faith disputes over such debts or taxes, to pay or perform other
material obligations when due, and to use its commercially reasonable efforts
consistent with past practices and policies to preserve intact its present
business organization, keep available the services of its present officers and
employees and preserve its relationships with customers, suppliers,
distributors, licensors, licensees, and others with which it has business
dealings.
In addition, except as permitted by the Agreement, each of Pure Atria and
Rational has agreed that it will not without prior written consent of the
other (i) waive any stock repurchase rights, accelerate, amend or change the
period of exercisability of options or restricted stock, or reprice options
granted under any employee, consultant or director stock plans or authorize
cash payments in exchange for any options granted under any of such plans;
(ii) grant any severance or termination pay to any officer, employee or
consultant, except payments in amounts consistent with policies and past
practices or pursuant to written agreements existing as of the date of the
Agreement or adopt any new severance plan; (iii) transfer or license to any
person or entity or otherwise extend, amend or modify in any material respect
any rights to the Pure Atria Intellectual Property Rights or the Rational
Intellectual Property Rights, as the case may be, or enter into grants to
future patent rights, other than in the ordinary course of business; (iv)
declare or pay any dividends on or make any other distributions in respect of
any capital stock or split, combine or reclassify any capital stock or issue
or authorize the issuance of any other securities in respect of, in lieu of or
in substitution for any capital stock; or (v) repurchase or otherwise acquire,
directly or indirectly, any shares of capital stock, except pursuant to rights
of repurchase of any such shares under any employee, consultant or director
stock plan existing on the date of the Agreement.
Further, each of Pure Atria and Rational has agreed not to, without written
consent of the other, issue, deliver, sell, authorize or propose the issuance,
delivery or sale of, any shares of capital stock or any securities convertible
into shares of capital stock, or subscriptions, rights, warrants or options to
acquire any shares of capital stock or any securities convertible into shares
of capital stock, or enter into other agreements or commitments of any
character obligating it to issue any such shares or convertible securities,
other than the issuance of shares of Pure Atria Common Stock or Rational
Common Stock, as the case may be, pursuant to the (i) exercise of stock
options therefor outstanding as of the date of the Agreement, (ii) options to
purchase shares of Pure Atria Common Stock or Rational Common Stock, as the
case may be, to be granted at fair market value in the ordinary course of
business, consistent with past practice and in accordance with stock option
plans existing on the date of the Agreement (and provided that Pure Atria will
not, without the prior written consent of Rational, issue options to purchase
more than an aggregate of 100,000 shares of Pure Atria Common Stock)
(iii) shares of Pure Atria Common Stock or Rational Common Stock, as the case
may be, issuable upon the exercise of the options referred to in clause (ii),
(iv) shares of Pure Atria Common Stock or Rational Common Stock, as the case
may be, issuable to participants in the Pure Atria Stock Purchase Plan or the
Rational Stock Purchase Plan, as the case may be, consistent with past
practice and the terms thereof and (v) shares of the Pure Atria Common Stock
or Rational Common Stock, as the case may be, issuable pursuant to the Stock
Option Agreements each party has entered into in connection with the Merger.
See "--Stock Option Agreements."
Each of Pure Atria and Rational has also agreed not to except as
contemplated by the Agreement or with the prior written consent of the other
party; alter any charter document or Bylaw; acquire or agree to acquire any
business or any corporation, partnership interest, association or other
business organization or division thereof, or otherwise acquire or agree to
acquire any assets which are material, individually or in the aggregate, to
the
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business of Pure Atria or Rational, as the case may be; sell, lease, license,
encumber or otherwise dispose of any properties or assets which are material,
individually or in the aggregate, to the business of Pure Atria or Rational,
as the case may be, except in the ordinary course of business consistent with
past practice; incur any indebtedness for borrowed money (other than ordinary
course trade payables or pursuant to existing credit facilities in the
ordinary course of business) or guarantee any such indebtedness or issue or
sell any debt securities or warrants or rights to acquire debt securities of
Pure Atria or Rational, as the case may be, or guarantee any debt securities
of others; adopt or amend any employee benefit or employee stock purchase or
employee option plan, or enter into any employment contract, pay any special
bonus or special remuneration to any director or employee, or increase the
salaries or wage rates of its officers or employees, in each case other than
in the ordinary course of business, consistent with past practice; pay,
discharge or satisfy any claim, liability or obligation (absolute, accrued,
asserted or unasserted, contingent or otherwise), other than the payment,
discharge or satisfaction in the ordinary course of business; make any grant
of exclusive rights to any third party, other than in the ordinary course of
business; enter into any agreement, contract or commitment containing any
covenant limiting its freedom to engage in any line of business or compete
with any person; commence a lawsuit other than (i) for the routine collection
of bills, (ii) in such cases where it in good faith determines that failure to
commence suit would result in the material impairment of a valuable aspect of
its business or material impairment or loss of a Pure Atria intellectual
property Right or a material asset, provided that it consults with the other
prior to the filing of such a suit, or (iii) for a breach or threatened breach
of the Agreement; other than in the ordinary course of business, make or
change any material election in respect of taxes, adopt or change any
accounting method in respect of taxes to the extent material to it or its
subsidiaries, enter into any material closing agreement, settle any material
claim or assessment in respect of taxes, or consent to any extension or waiver
of the limitation period applicable to any material claim or assessment in
respect of taxes; revalue any of its assets, including without limitation
writing down the value of inventory or writing off notes or accounts
receivable other than in the ordinary course of business; enter into any
partnership arrangements, joint ventures, joint development agreements,
strategic partnership or alliances, or other material contracts other than in
the ordinary course of business consistent with past practice, or violate,
amend or otherwise modify or waive any material contract, except, in the case
of Rational, where such action would not have a material adverse effect; take
any action that would be reasonably likely to interfere with Rational's
ability to account for the Merger as a pooling of interests; or intentionally
take or agree in writing or otherwise to take any of the actions described
above, or any action which would make any of its representations or warranties
contained in the Agreement untrue or incorrect or prevent it from performing
or cause it not to perform its covenants thereunder, except to the extent that
such action would not be reasonably expected to result in a material adverse
effect with respect to such party or otherwise interfere with, delay or impede
the consummation of the transactions contemplated hereby in any material
respect.
Notwithstanding the foregoing, Rational may acquire or agree to acquire any
business organization or any assets unless such acquisition or division
thereof would (i) reasonably be expected to have a material adverse affect on
Rational, Pure Atria, or the Combined Company, (ii) interfere with, delay or
impede the consummation of the transactions contemplated by the Agreement in
any material respect (iii) together with the aggregate deal value of other
Rational acquisitions consummated after the date of the Agreement and prior to
the Effective Time, such acquisition would exceed $100 million in deal value
or (iv) result in a change of control of Rational.
NON-SOLICITATION
Each of Pure Atria and Rational has agreed, prior to the earlier of the
Effective Time or termination of the Agreement not to, directly or indirectly,
(i) solicit or knowingly encourage submission of, any proposals or offers by
any person, entity or group, or (ii) participate in any discussions or
negotiations with, or disclose any non-public information concerning itself
to, or afford any access to its properties, books or records, or otherwise
assist or facilitate, or enter into any agreement or understanding with, any
person, entity or group, in connection with any acquisition proposal with
respect to it. In addition, prior to the Effective Time or the termination of
the Agreement, each of Rational and Pure Atria has agreed not to make or
authorize any public statement, recommendation or solicitation in support of
any Acquisition Proposal (as defined below), except that the
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Rational Board and Pure Atria Board, as the case may be, may take and disclose
to its stockholders a position with respect to any tender offer, pursuant to
the sales under the Exchange Act. An "Acquisition Proposal" with respect to an
entity means any proposal or offer relating to (i) any merger, consolidation,
sale of substantial assets or similar transactions involving the entity or any
subsidiaries of the entity (other than in the ordinary course of business or
as permitted under the Agreement); (ii) the sale of 15% or more of the
outstanding shares of capital stock of the entity (including without
limitation by way of a tender offer or an exchange offer); (iii) the
acquisition by any person of beneficial ownership or a right to acquire
beneficial ownership of, or the formation of any "group" (as defined under
Section 13(d) of the Exchange Act) which beneficially owns, or has the right
to acquire beneficial ownership of, 15% or more of the then outstanding shares
of capital stock of the entity (except for acquisitions for passive investment
purposes only); or (iv) any public announcement of a proposal, plan or
intention to do any of the foregoing or any agreement to engage in any of the
foregoing. Each party has further agreed to notify the other party in the
event of any inquiry or proposal made or any information or access requested
in connection with an Acquisition Proposal, and to notify the other party of
the significant terms of any such Acquisition Proposal as promptly as
possible.
Notwithstanding the foregoing, to the extent the Board of Directors of
either party determines, in good faith, after consultation with outside legal
counsel, that the Board's fiduciary duties under applicable law require it to
do so, such party may participate in discussions or negotiations with, and
furnish information to any person, entity or group that has delivered to such
party, an unsolicited bona fide Acquisition Proposal which the Board of
Directors of such party in its good faith reasonable judgment determines,
after consultation with its independent financial advisors, would result in a
transaction more favorable than the Merger to the stockholders of such party
from a financial point of view and after reasonable inquiry by such party that
the party making such Acquisition Proposal is financially capable of
consummating such Acquisition Proposal (a "Superior Proposal"). In the event a
party receives a Superior Proposal, the Board of Directors of such party may
recommend such Superior Proposal to its stockholders, if the Board determines,
in good faith after consultation with outside legal counsel, that such action
is required by its fiduciary duties under applicable law and in such case, the
Board of Directors of such party may withdraw, modify or refrain from making
its recommendation in favor of the Merger.
CONDITIONS TO THE MERGER
The respective obligations of each party to the Agreement to effect the
Merger are subject to the satisfaction at or prior to the Effective Time of
the following conditions: (i) the Agreement shall have been approved and
adopted, and the Merger shall have been duly approved by the stockholders of
Pure Atria, and an increase in the authorized number of shares of Rational
Common Stock so as to permit the issuance of shares of Rational Common Stock
by virtue of the Merger, as well as such issuance, shall have been duly
approved by the stockholders of Rational; (ii) the SEC shall have declared
Rational's Registration Statement registering the shares of Rational Common
Stock to be issued in the Merger effective, and no stop order suspending such
effectiveness thereof shall have been issued nor shall any proceeding for that
purpose, nor any similar proceeding in respect of this Proxy Statement, have
been initiated or threatened in writing by the SEC; (iii) no governmental
entity shall have enacted, issued, promulgated, enforced or entered any
statute, rule, regulation, executive order, decree, injunction or other order
(whether temporary, preliminary or permanent) which is in effect and which has
the effect of making the Merger illegal or otherwise prohibiting consummation
of the Merger, and all waiting periods, if any, under the HSR Act relating to
the transactions contemplated by the Agreement will have expired or terminated
early; (iv) Rational and Pure Atria shall each have received substantially
identical written opinions from their respective legal counsel to the effect
that the Merger will constitute a reorganization within the meaning of Section
368(a) of the Code; (v) the shares of Rational Common Stock issuable to
stockholders of Pure Atria pursuant to the Agreement and such other shares
required to be reserved for issuance in connection with the Merger shall have
been authorized for listing on the Nasdaq National Market upon official notice
of issuance; and (vi) each of Rational and Pure Atria shall have received a
letter from Rational's independent auditors regarding concurrence with
Rational's conclusion regarding appropriateness of pooling-of-interest
accounting treatment for the Merger and from Pure Atria's independent auditors
to the effect that Pure Atria
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<PAGE>
qualifies as an entity that may be a party to a business combination for which
the pooling-of-interest method of accounting would be available.
In addition to the foregoing, the obligation of Pure Atria to consummate and
effect the Merger is subject to the satisfaction at or prior to the Effective
Time of each of the following conditions: (i) the representations and
warranties of Rational and Merger Sub contained in the Agreement shall have
been true and correct in all material respects as of the date of the Agreement
and as of the Effective Time; (ii) Rational and Merger Sub shall have
performed or complied with all agreements and covenants required by the
Agreement to be performed or complied with by them on or prior to the
Effective Time; (iii) no material adverse effect with respect to Rational
shall have occurred since the date of the Agreement; (iv) Pure Atria shall
have received an opinion from counsel to Rational as to certain legal matters;
and (v) no temporary restraining order, preliminary or permanent injunction or
other order issued by any court of competent jurisdiction or other legal,
contractual or regulatory restraint provision limiting or restricting
Rational's conduct or operation of its business or the business of Pure Atria
and its subsidiaries, following the Merger, shall be in effect, nor shall any
proceeding brought by an administrative agency or commission or other
governmental entity seeking the foregoing be pending.
In addition to the mutual conditions to the Merger set forth in the first
paragraph of this section, the obligations of Rational and Merger Sub to
consummate and effect the Merger are subject to the satisfaction at or prior
to the Effective Time of each of the following conditions: (i) the
representations and warranties of Pure Atria contained in the Agreement shall
have been true and correct in all material respects as of the date of the
Agreement and as of the Effective Time; (ii) Pure Atria shall have performed
or complied with all agreements and covenants required by the Agreement to be
performed or complied with by it on or prior to the Effective Time; (iii) no
material adverse effect with respect to Pure Atria shall have occurred since
the date of the Agreement; (iv) Reed Hastings (President and Chief Executive
Officer of Pure Atria) shall have entered into a noncompetition agreement in a
form reasonably acceptable to Rational; (v) Rational shall have received an
opinion from counsel to Pure Atria as to certain legal matters; and (vi) no
temporary restraining order, preliminary or permanent injunction or other
order issued by any court of competent jurisdiction or other legal,
contractual or regulatory restraint provision limiting or restricting
Rational's conduct or operation of its business or the business of Pure Atria
and its subsidiaries, following the Merger, shall be in effect, nor shall any
proceeding brought by an administrative agency or commission or other
governmental entity seeking the foregoing be pending.
TERMINATION, AMENDMENT AND WAIVER
The Agreement may be terminated at any time prior to the Effective Time of
the Merger, whether before or after approval of the Merger by the stockholders
of Pure Atria or the approval of the issuance of Rational Common Stock in
connection with the Merger by the stockholders of Rational: (i) by mutual
written consent duly authorized by the Rational Board and the Pure Atria
Board; (ii) by either Pure Atria or Rational if, without fault of the
terminating party, the Merger is not consummated by September 30, 1997, for
any reason; (iii) by either Pure Atria or Rational if a governmental entity
has issued an order, decree or ruling or taken any other action, in any case
having the effect of permanently restraining, enjoining or otherwise
prohibiting the Merger, which order, decree or ruling is final and
nonappealable; (iv) by either Pure Atria or Rational if the required approvals
of the stockholders of Pure Atria or the stockholders of Rational contemplated
by the Agreement are not obtained by reason of the failure to obtain the
required vote upon a vote taken at a meeting of stockholders duly convened
therefor or at any adjournment thereof (provided that the right to terminate
the Agreement under such provision is not available to any party where the
failure to obtain stockholder approval of such party has been caused by the
action or failure to act of such party in breach of the Agreement); (v) by
Rational, if the Pure Atria Board recommends a Superior Proposal (as defined
in "Non-Solicitation," above) with respect to Pure Atria to the stockholders
of Pure Atria, or if the Pure Atria Board shall have withheld, withdrawn or
modified in a manner adverse to Rational its recommendation in favor of
adoption and approval of the Agreement and approval of the Merger; (vi) by
Pure Atria, if the Rational Board recommends a Superior Proposal with respect
to Rational to the stockholders of Rational, or if the Rational Board shall
have withheld, withdrawn or modified
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in a manner adverse to Pure Atria its recommendation in favor of approving the
amendment of Rational's Certificate of Incorporation to increase its
authorized share capital to allow the issuance of shares of Rational Common
Stock by virtue of the Merger and the issuance of the shares of Rational
Common Stock by virtue of the Merger; (vii) by Pure Atria, upon a breach of
any representation, warranty, covenant or agreement on the part of Rational
set forth in the Agreement, or if any representation or warranty of Rational
shall have become untrue, provided that if such inaccuracy in Rational's
representations and warranties or breach by Rational is curable by Rational
through the exercise of its commercially reasonable efforts within ten (10)
days of the time such representation or warranty shall have become untrue or
such breach, then Pure Atria may not terminate the Agreement under this
provision during such ten-day period provided Rational continues to exercise
such commercially reasonable efforts to cure such breach; (viii) by Rational,
upon a breach of any representation, warranty, covenant or agreement on the
part of Pure Atria set forth in the Agreement, or if any representation or
warranty of Pure Atria shall have become untrue, provided, that if such
inaccuracy in Pure Atria's representations and warranties or breach by Pure
Atria is curable by Pure Atria through the exercise of its commercially
reasonable efforts within ten (10) days of the time such representation or
warranty shall have become untrue or such breach, then Rational may not
terminate the Agreement under this provision during such ten-day period
provided Pure Atria continues to exercise such commercially reasonable efforts
to cure such breach; (ix) by Pure Atria, if there shall have occurred any
material adverse effect with respect to Rational since the date of the
Agreement; or (x) by Rational, if there shall have occurred any material
adverse effect with respect to Pure Atria since the date of the Agreement.
BREAK-UP FEES; EXPENSES
Whether or not the Merger is consummated, all costs and expenses incurred in
connection with the Agreement and the transactions contemplated thereby shall
be paid by the party incurring such expense, except (i) expenses incurred in
connection with the proxy materials and the registration statement in
connection with the Merger shall be shared equally by Pure Atria and Rational
and (ii) as set forth below.
Under certain circumstances, if the Agreement is terminated without
consummation of the Merger, then either Pure Atria or Rational may be required
to pay certain break-up fees to the other party. Specifically, if, in the
absence of a material adverse effect on Rational, the Agreement is terminated
and the Pure Atria Board has either (i) withheld, withdrawn or modified in a
manner adverse to Rational its recommendation that the Pure Atria stockholders
approve the Merger, (ii) recommended that its stockholders approve a Superior
Proposal (as defined in "Non-Solicitation," above) with respect to Pure Atria,
or (iii) failed to hold a stockholder meeting before September 30, 1997, then
Pure Atria must pay Rational $18,000,000. Further, if, other than in a case
described by the immediately preceding sentence, (i) there is a competing
acquisition bid with respect to Pure Atria that is publicly disclosed and not
withdrawn, (ii) the stockholders of Pure Atria vote down the Merger (a "Pure
Atria Negative Vote"), and (iii) within 12 months of such Pure Atria Negative
Vote, Pure Atria consummates or agrees to an acquisition with the party that
made such competing acquisition bid, or within six months of such Pure Atria
Negative Vote, Pure Atria consummates, or agrees to an acquisition with any
other party, and there has been no material adverse effect on Rational prior
to such Pure Atria Negative Vote, then Pure Atria must pay to Rational
$18,000,000. Finally, Pure Atria must pay Rational $3 million (in addition to
any other break-up fee required) if the Agreement is terminated and either (i)
Pure Atria is required to pay Rational the $18 million fee in any case
described above, (ii) there is a Pure Atria Negative Vote but no requirement
to pay the $18 million fee arises, or (iii) Pure Atria has breached a
representation, warranty or covenant in the Merger Agreement or experiences a
material adverse effect such that Rational terminates the Merger Agreement.
See "Termination, Amendment and Waiver."
Similarly, if, in the absence of a material adverse effect on Pure Atria,
the Agreement is terminated and the Rational Board has either (i) withheld,
withdrawn or modified in a manner adverse to Pure Atria its recommendation
that the Rational stockholders approve the Merger, (ii) recommended that its
stockholders approve a Superior Proposal with respect to Rational, or (iii)
failed to hold a stockholder meeting before September 30, 1997, then Rational
must pay Pure Atria $18,000,000. Further, if, other than in a case described
by the immediately preceding sentence, (i) there is a competing acquisition
bid with respect to Rational that is
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<PAGE>
publicly disclosed and not withdrawn, (ii) the stockholders of Rational vote
down the Merger (a "Rational Negative Vote"), and (iii) within 12 months of
such Rational Negative Vote, Rational consummates or agrees to an acquisition
with the party that made such competing acquisition bid, or within six months
of such Rational Negative Vote, Rational consummates or agrees to an
acquisition with any other party, and there has been no material adverse
affect or Pure Atria prior to the Rational Negative Vote, then Rational must
pay to Pure Atria $18,000,000. Finally, Rational must pay Pure Atria $3
million (in addition to any other break-up fee required) if the Agreement is
terminated and either (i) Rational is required to pay Pure Atria the $18
million fee in any case described above, (ii) there is a Rational Negative
Vote but no requirement to pay the $18 million fee arises, or (iii) Rational
has breached a representation, warranty or covenant in the Merger Agreement or
experiences a material adverse effect such that Pure Atria terminates the
Merger Agreement. See "Termination, Amendment and Waiver."
STOCK OPTION AGREEMENTS
The following discussion summarizes the terms of the Stock Option Agreements
(as defined below). The following is not, however, a complete statement of all
provisions of those agreements and the discussion herein is qualified in its
entirety by reference to the more detailed information set forth in those
agreements, which are attached to this Prospectus/Joint Proxy Statement as
Annex C and Annex D.
As mutual inducements to enter into the Agreement, Rational and Pure Atria
entered into reciprocal Stock Option Agreements dated April 7, 1997 (the
"Stock Option Agreements") pursuant to which each party granted the right (the
"Options"), under certain conditions, to purchase up to that number of shares
of such party's Common Stock equal to 19.9% of outstanding Common Stock of
Rational or Pure Atria, as the case may be, as of the date the Option first
becomes exercisable. Rational's Option on Pure Atria's Common Stock is
exercisable for $21.038 per share, and Pure Atria's Option on Rational's
Common Stock is exercisable for $23.375 per share.
Subject to certain conditions, the Options will be exercisable by the party
holding such option (the "Optionee") (i) if the Board of Directors of the
other party (the "Issuer") shall have withheld, withdrawn or modified in a
manner adverse to the optionee its recommendation in favor of adoption and
approval of the Agreement and approval of the Merger in connection with an
alternative acquisition proposal with respect to the Issuer, (ii) immediately
prior to the consummation of a tender or exchange offer for 25% or more of any
class of the Issuer's capital stock, or (iii) if there is a Negative Vote (as
defined in "--Termination," above) by the holders of the Issuer's Common Stock
such that the Issuer is required to pay the Optionee $18,000,000 pursuant to
the Agreement. The Stock Option Agreement terminates upon the earliest of (i)
the Effective Time, (ii) the termination of the Agreement, if the Option has
not become exercisable at or prior to that time, or (iii) twelve months
following the termination of the Agreement if the Option has become
exercisable at or prior to such termination, provided, however, that if the
Option is exercisable but cannot be exercised by reason of any applicable
government order or because the waiting period related to the issuance of the
Option Shares under the HSR Act shall not have expired or been terminated,
then the Option shall not terminate until the tenth business day after such
impediment to exercise shall have been removed or shall have become final and
not subject to appeal. Notwithstanding the foregoing, the Option may not be
exercised if (i) the Optionee shall have breached in any material respect any
of its covenants or agreements contained in the Agreement or (ii) the
representations and warranties of the Optionee contained in the Agreement
shall not have been true and correct in all material respects on and as of the
date when made.
VOTING AGREEMENTS
As an inducement to Rational to enter into the Agreement, each of the
members of Pure Atria Board (namely Reed Hastings, Paul H. Levine, Louis J.
Volpe, David A. Litwack, Thomas A. Jermoluk and Aki Fujimura) and each of
certain of Pure Atria's non-director officers (namely Chuck Bay, W. Geoffrey
Stein, and David Barrett), in his capacity as a stockholder of Pure Atria, has
entered into a Voting Agreement with
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Rational. Together, as of the Record Date the members of the Pure Atria Board
and the aforementioned non-
director officers own an aggregate of 4,780,126 shares of Pure Atria Common
Stock and options exercisable within sixty (60) days of the Pure Atria Record
Date to purchase 439,706 shares of Pure Atria Common Stock, representing
approximately 11% of the votes entitled to be cast by holders of shares of
Pure Atria Common Stock issued and outstanding as of the Pure Atria Record
Date and 12% of such votes assuming the exercise of all options held by such
persons. Similarly, as an inducement to Pure Atria to enter into the
Agreement, each of the members of the Rational Board (namely Paul D. Levy,
Michael T. Devlin, James S. Campbell, Daniel H. Case III, Leslie G. Denend,
John H. Montague, and Allison R. Schleicher), in his capacity as a stockholder
of Rational, has entered into a Voting Agreement with Pure Atria. Together, as
of the Rational Record Date the members of the Rational Board own an aggregate
of 53,025 shares of Rational Common Stock and options exercisable within sixty
(60) days of the Rational Record Date to purchase 290,244 shares of Rational
Common Stock, representing less than 1% of the votes entitled to be cast by
holders of shares of Rational Common Stock issued and outstanding as of the
Rational Record Date and less than 1% of such votes assuming the exercise of
all options held by such persons. Collectively, all of the agreements are
referred to herein as the "Voting Agreements."
Pursuant to the Voting Agreements, the stockholders have agreed to vote and
to grant the Rational or Pure Atria Board, as the case may be, a proxy to vote
the shares of Common Stock owned by them in their respective companies in
favor of the proposals related to the Merger to be presented at their
respective stockholder meetings and any other matter that could reasonably be
expected to facilitate the Merger. The Voting Agreements terminate upon the
earlier to occur of the Effective Time or the termination of the Agreement.
Neither Rational nor Pure Atria paid any additional consideration to any
stockholder in connection with the execution and delivery of the Voting
Agreements.
AFFILIATE AGREEMENTS
Each of the members of the Pure Atria Board and certain officers of Pure
Atria have entered into agreements restricting sales, dispositions or other
transactions reducing their risk of investment in respect of the shares of
Pure Atria Common Stock held by them prior to or acquired by them after
entering into such agreements as well as the shares of Rational Common Stock
received by them in the Merger so as to comply with the requirements of
applicable federal securities law and to help ensure that the Merger will be
treated as a pooling of interests for accounting and financial reporting
purposes. Similarly, each of the members of the Rational Board and certain
officers of Rational have entered into agreements restricting sales,
dispositions or other transactions reducing their risk of investment in
respect of the shares of Rational Common Stock held by them prior to or
acquired by them after entering into such agreements so as to help ensure that
the Merger will be treated as a pooling of interests for accounting and
financial reporting purposes.
INTERESTS OF CERTAIN PERSONS
Pure Atria Options
Under the terms of the Pure Atria Stock Option Plan and the agreements
issued thereunder, (i) options granted to non-employee directors of Pure Atria
under the Automatic Option Grant Program of such Plan will automatically vest
in full at the Effective Time, and (ii) options granted to employees of Pure
Atria under the Discretionary Option Grant Program of the Pure Atria
Corporation Stock Option Plan, will automatically vest if the optionee is
actually or constructively terminated under certain circumstances following
the Effective Time.
Indemnification
After the Effective Time, Rational will, and will cause the Surviving
Corporation to, indemnify and hold harmless the present and former officers,
directors, employees and agents of Pure Atria (the "Indemnified Parties") in
respect of acts or omissions occurring on or prior to the Effective Time to
the extent permitted by law and to the extent provided under the Surviving
Corporation's Certificate of Incorporation and Bylaws (which must contain the
same provisions relating to indemnification and elimination of liability for
monetary damages
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previously included in Pure Atria's Certificate of Incorporation and Bylaws,
respectively) or any indemnification agreement with Pure Atria officers and
directors to which Pure Atria or any of its subsidiaries is a party; provided
that such indemnification shall be subject to any limitation imposed from time
to time under applicable law. For a period of six years after the Effective
Time, Rational will either (i) maintain at least $10,000,000 in cash,
marketable securities and unrestricted lines of credit which will be available
to provide the indemnification described above, or (ii) use its best efforts
to maintain in effect, if available, directors' and officers' liability
insurance for at least $10,000,000 covering those persons who are Indemnified
Parties; provided that in no case will the indemnification so provided be less
favorable than that afforded by Rational to its own officers and directors. In
the event of any claim, action, suit, proceeding or investigation to which the
indemnification described above applies, (i) any counsel retained by the
Indemnified Parties for any period after the Effective Time will be reasonably
satisfactory to Rational, (ii) after the Effective Time, Rational will pay the
reasonable fees and expenses of such counsel, promptly after statements
therefor are received and (iii) Rational will cooperate in the defense of any
such matter; provided, however, that Rational will not be liable for any
settlement effected without Rational's written consent; and provided, further,
that, in the event that any claim or claims for indemnification are asserted
or made within such six-year period, all rights to indemnification in respect
of any such claim or claims will continue until the disposition of any and all
such claims.
Employment Agreement
Chuck Bay, Pure Atria's chief financial officer, has entered into an
employment agreement with Rational, contingent upon the consummation of the
Merger, pursuant to which, among other things, (i) Rational agreed to pay Mr.
Bay the sum of $120,000 on the next business day after the consummation of the
Merger as a retention bonus for Mr. Bay continuing to perform services to Pure
Atria through the consummation of the Merger, and (ii) salary of $160,000 per
year and continuation of existing employment benefits through January 1, 1999,
in exchange for Mr. Bay's agreement to provide certain services during such
period and entry into a settlement, non-competition and non-solicitation
agreement.
Rational is also considering entering into employment and/or severance
agreements with certain other officers and employees of Pure Atria, but has no
contractual obligation to do so.
Financial Advisory Fees
Daniel H. Case III, a director and stockholder of Rational, is the President
and Chief Executive Officer of Hambrecht & Quist. Hambrecht & Quist is
providing financial advisory services to Rational in connection with the
Merger. Hambrecht & Quist was paid an initial payment of $2.0 million upon
delivery of its fairness opinion in connection with the Merger. Hambrecht &
Quist will be paid an additional $3.3 million upon consummation of the Merger.
Hambrecht & Quist will also be reimbursed for reasonable out-of-pocket
expenses incurred in connection with its services.
APPRAISAL RIGHTS
Pursuant to Section 262 of the DGCL, holders of Rational Common Stock and
Pure Atria Common Stock are not entitled to appraisal rights in connection
with the Merger because both companies are traded on the Nasdaq National
Market and holders of Pure Atria Common Stock will receive in the Merger only
shares of Rational Common Stock, or cash in lieu of fractional shares thereof.
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UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial statements
assume a business combination between Rational and Pure Atria accounted for on
a "pooling of interests" basis. The unaudited pro forma condensed combined
financial statements are based upon the respective historical financial
statements of Rational and Pure Atria and should be read in conjunction with
such historical financial statements and the notes thereto, which are included
elsewhere in this Prospectus/Joint Proxy Statement. The unaudited pro forma
condensed combined balance sheet combines Rational's March 31, 1997, audited
condensed consolidated balance sheet with Pure Atria's March 31, 1997,
unaudited condensed consolidated balance sheet. The unaudited pro forma
condensed combined statements of operations combine Rational's historical
condensed consolidated statements of operations for the fiscal years ended
March 31, 1995, 1996 and 1997 with the fiscal years ended December 31, 1994,
1995 and 1996 of Pure Atria, respectively.
The pro forma information is presented for illustrative purposes only and is
not necessarily indicative of the operating results or financial position that
would have occurred if the Merger had been consummated as presented in the
accompanying unaudited pro forma condensed combined financial information, nor
is it necessarily indicative of future operating results or financial
position.
The unaudited pro forma condensed combined financial statements should be
read in conjunction with the historical consolidated financial statements and
related notes thereto of Rational and of Pure Atria included elsewhere herein.
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UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
REFLECTING RATIONAL SOFTWARE CORPORATION
AFTER GIVING EFFECT TO THE MERGER
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, 1997
-------------------------------------------
COMBINED
RATIONAL PRO FORMA PRO FORMA
SOFTWARE PURE ATRIA ADJUSTMENTS BALANCE
--------- ---------- ----------- ---------
ASSETS
------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents....... $ 227,493 $ 16,900 $ 244,393
Short-term investments.......... 2,525 63,621 66,146
Accounts receivable, net........ 33,565 25,510 59,075
Prepaid expenses and other
assets......................... 3,395 3,330 6,725
Deferred tax assets............. -- 9,054 9,054
--------- -------- ---------
Total current assets.......... 266,978 118,415 385,393
Property and equipment, net....... 13,291 17,022 30,313
Other assets, net................. 22,521 1,495 24,016
--------- -------- ---------
Total assets...................... $ 302,790 $136,932 $ 439,722
========= ======== =========
<CAPTION>
LIABILITIES AND STOCKHOLDER'S
EQUITY
-----------------------------
<S> <C> <C> <C> <C>
Current liabilities:
Accounts payable................ $ 9,981 $ 3,861 $ 13,842
Accrued employee benefits....... 12,269 8,581 20,850
Other accrued expenses.......... 8,255 10,318 18,573
Current portion of accrued
merger and integration
expenses....................... 9,236 11,361 75,000 95,597
Deferred revenue................ 17,936 25,292 43,228
Current portion of long-term
debt and lease obligations..... 2,010 -- 2,010
--------- -------- ------- ---------
Total current liabilities..... 59,687 59,413 75,000 194,100
Accrued rent...................... 535 -- 535
Long-term accrued merger and
integration expenses............. 916 -- 916
Long-term debt.................... 1,741 -- 1,741
--------- -------- ------- ---------
Total liabilities............. 62,879 59,413 75,000 197,292
Stockholders' equity:
Common stock.................... 477 4 381 862
Additional paid-in capital...... 356,270 130,785 (381) 486,674
Treasury stock.................. (1,340) -- (1,340)
Accumulated deficit............. (115,006) (51,983) (75,000) (241,989)
Cumulative translation
adjustment..................... (490) (1,287) (1,777)
--------- -------- ------- ---------
Total stockholders' equity.... 239,911 77,519 (75,000) 242,430
--------- -------- ------- ---------
Total liabilities and
stockholders' equity............. $ 302,790 $136,932 $ -- $ 439,722
========= ======== ======= =========
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements.
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UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS FOR THE YEAR
ENDED MARCH 31, 1997
REFLECTING RATIONAL SOFTWARE CORPORATION
AFTER GIVING EFFECT TO THE MERGER
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
RATIONAL/
PERFORMANCE
RATIONAL/ PURE AWARENESS/
PERFORMANCE ATRIA/ PURE ATRIA/
PERFORMANCE AWARENESS INTEGRITY INTEGRITY
AWARENESS PRO FORMA COMBINED PRO FORMA COMBINED COMBINED
RATIONAL CORPORATION ADJUSTMENTS PRO FORMA PURE ATRIA INTEGRITY ADJUSTMENTS PRO FORMA PRO FORMA
-------- ----------- ----------- ----------- ---------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net product
revenue.......... $ 91,696 $ 4,064 $ 95,760 $93,437 $ -- $93,437 $189,197
Consulting and
support revenue.. 53,677 1,614 55,291 39,058 -- 39,058 94,349
-------- ------- -------- ------- ------- ------- --------
Total revenue..... 145,373 5,678 151,051 132,495 -- 132,495 283,546
Cost of product
revenue.......... 9,134 69 2,500 11,703 2,643 -- 2,643 14,346
Cost of consulting
and support
revenue.......... 26,566 1,091 27,657 11,739 -- 11,739 39,396
-------- ------- ------ -------- ------- ------- ------- --------
Total cost of
revenue.......... 35,700 1,160 2,500 39,360 14,382 -- 14,382 53,742
-------- ------- ------ -------- ------- ------- ------- --------
Gross margin...... 109,673 4,518 (2,500) 111,691 118,113 -- 118,113 229,804
-------- ------- ------ -------- ------- ------- ------- --------
Research and
development
expenses........ 24,445 2,078 26,523 22,794 887 23,681 50,204
Sales and
marketing
expenses........ 50,646 4,005 54,651 57,757 -- 57,757 112,408
General and
administrative
expenses........ 16,995 885 600 18,480 10,272 729 11,001 29,481
Charges for
acquired in-
process research
and
development..... 56,798 -- 56,798 -- -- -- 56,798
Merger and
restructuring
costs........... 7,201 -- 7,201 35,255 -- 35,255 42,456
-------- ------- ------ -------- ------- ------- ------- --------
Total operating
expenses......... 156,085 6,968 600 163,653 126,078 1,616 127,694 291,347
-------- ------- ------ -------- ------- ------- ------- --------
Operating loss.... (46,412) (2,450) (3,100) (51,962) (7,965) (1,616) (9,581) (61,543)
Other income,
net.............. 7,917 (45) 7,872 3,669 18 3,687 11,559
-------- ------- ------ -------- ------- ------- ------- --------
Loss before income
taxes............ (38,495) (2,495) (3,100) (44,090) (4,296) (1,598) (5,894) (49,984)
Provision for
(benefit from)
income taxes..... 4,459 (276) 4,183 2,361 -- 2,361 6,544
-------- ------- ------ -------- ------- ------- ------- --------
Net loss.......... $(42,954) $(2,219) (3,100) $(48,273) $(6,657) $(1,598) (8,255) $(56,528)
======== ======= ====== ======== ======= ======= ======= ========
Net loss per
share............ $ (0.98) $ (1.10) $ (0.17) $ (0.20) $ (0.70)
======== ======== ======= ======= ========
Shares used in per
share
computation...... 43,702 43,702 39,921 1,125 41,046 80,643
======== ======== ======= ===== ======= ========
</TABLE>
See accompanying note to unaudited pro forma condensed combined financial
statements.
78
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 1995 AND 1996
REFLECTING RATIONAL SOFTWARE CORPORATION
AFTER GIVING EFFECT TO THE MERGER
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------
1995 1996
---------- ----------
<S> <C> <C>
Net product revenue..................................... $ 74,688 $ 126,876
Consulting and support revenue.......................... 45,419 61,261
--------- ----------
Total revenue........................................... 120,107 188,137
Cost of product revenue................................. 7,989 9,735
Cost of consulting and support revenue.................. 22,016 26,779
--------- ----------
Total cost of revenue................................... 30,005 36,514
--------- ----------
Gross margin............................................ 90,102 151,623
--------- ----------
Research and development expenses..................... 23,379 33,773
Sales and marketing expenses.......................... 47,388 80,063
General and administrative expenses................... 12,342 19,481
Charges for acquired in-process research and
development.......................................... -- 20,300
Merger and restructuring costs........................ (1,100) 2,961
--------- ----------
Total operating expenses................................ 82,009 156,578
--------- ----------
Operating income (loss)................................. 8,093 (4,955)
Other income, net....................................... 1,331 4,234
--------- ----------
Income (loss) before income taxes....................... 9,424 (721)
Provision for income taxes.............................. 1,741 6,391
--------- ----------
Net income (loss)....................................... $ 7,683 $ (7,112)
========= ==========
Pro forma net income (loss) per share:
Income (loss) before income taxes, as reported........ $ 9,424 $ (721)
Pro forma income taxes................................ 2,036 7,115
--------- ----------
Pro forma net income (loss)........................... $ 7,388 $ (7,836)
--------- ----------
Pro forma net income (loss) per share................... $ 0.12 $ (0.11)
========= ==========
Shares used in pro forma per share computations......... 62,500 69,778
========= ==========
</TABLE>
See accompanying note to unaudited pro forma condensed combined financial
statements.
79
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
1. The adjustments to the pro forma condensed combined financial statements
reflect the issuance of up to 38,542,000 shares of Rational Common Stock
for all of the outstanding shares of Pure Atria Common Stock in connection
with the Merger based on an exchange rate of 0.9 shares of Rational Common
Stock for each outstanding share of Pure Atria Common Stock.
Additionally, the unaudited pro forma condensed combined statement of
operations for the fiscal year ended March 31, 1997 gives effect to the
acquisition of Performance Awareness Corporation which was completed by
Rational on March 31, 1997 and accounted for using the purchase method. The
aggregate purchase price (including direct acquisition costs) was
approximately $32.9 million in cash and options assumed by Rational. The
fiscal year 1997 pro forma statements of operations give effect to the
acquisition as if it had occurred on April 1, 1996, accordingly the Company
would have recorded approximately $3.1 million of amortization on purchased
intangibles.
The unaudited pro forma condensed combined statement of operations for the
fiscal year ended March 31, 1997 also gives effect to the acquisition of
Integrity QA Software, Inc. ("Integrity") which was completed by Pure Atria
on January 31, 1997 and accounted for using the purchase method. The
1,125,000 shares issued by Pure Atria pursuant to the acquisition of
Integrity are included in the weighted average share calculation of Pure
Atria on a pro forma basis.
2. There were no material transactions between Rational and Pure Atria during
any period presented. In addition, it is currently expected that the impact
of any conforming accounting policies will not be material.
3. The Combined Company expects to incur charges to operations currently
estimated to be between $55 and $75 million, primarily in the quarter in
which the Merger is consummated, to reflect direct transaction fees and
costs incident to the Merger of $15 million and additional anticipated
costs of $40 to $60 million associated with integrating the two companies.
Integration costs of merging the companies are expected to include
severance costs associated with any employee terminations, costs associated
with conforming employee benefits plans, charges associated with the
closure of duplicate facilities and asset writedowns related to duplicate
business systems. The final amounts associated with each of these items has
not yet been determined. An estimated charge of $75 million is reflected in
the pro forma condensed combined balance sheet as a reduction to retained
earnings and an increase to accrued liabilities. The estimated charge is
not reflected in the pro forma condensed combined statement of operations
data. The amount of this charge is a preliminary estimate and therefore is
subject to change.
4. For the three months ended March 31, 1997, Pure Atria reported a net loss
of $43.2 million ($1.02 per share) on total revenues of $30.0 million
compared to net income $3.9 million ($0.09 per share) on total revenues
$28.6 million for the comparable 1996 quarter. Pure Atria's three-month
period ended March 31, 1997 includes one-time pre-tax charges to operations
related to the Integrity acquisition of $43.6 million for in-process
research and development and $1.1 million for certain merger and
integration costs. Pure Atria also recorded a charge of $0.5 million during
the first quarter of 1997 for in-process research and development in
connection with the acquisition of other technology.
80
<PAGE>
5. The following is a summary of the historical results of operations of
Rational and Pure Atria and their pro forma combined amounts to reflect the
Merger as if it were effected for March 31, 1995 and 1996 below:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------
1995 1996
---------- -----------
<S> <C> <C>
NET PRODUCT REVENUE:
Rational......................................... $ 42,611 $ 64,743
Pure Atria....................................... 32,077 62,133
--------- -----------
$ 74,688 $ 126,876
========= ===========
CONSULTING AND SUPPORT REVENUE:
Rational......................................... $ 34,738 $ 39,209
Pure Atria....................................... 10,681 22,052
--------- -----------
$ 45,419 $ 61,261
========= ===========
COST OF PRODUCT REVENUE:
Rational......................................... $ 7,148 $ 7,826
Pure Atria....................................... 841 1,909
--------- -----------
$ 7,989 $ 9,735
========= ===========
COST OF CONSULTING AND SUPPORT REVENUE:
Rational......................................... $ 18,875 $ 20,823
Pure Atria....................................... 3,141 5,956
--------- -----------
$ 22,016 $ 26,779
========= ===========
RESEARCH AND DEVELOPMENT:
Rational......................................... $ 13,914 $ 18,305
Pure Atria....................................... 9,465 15,468
--------- -----------
$ 23,379 $ 33,773
========= ===========
SALES AND MARKETING:
Rational......................................... $ 28,454 $ 41,000
Pure Atria....................................... 18,934 39,063
--------- -----------
$ 47,388 $ 80,063
========= ===========
GENERAL AND ADMINISTRATIVE:
Rational......................................... $ 7,892 $ 11,690
Pure Atria....................................... 4,450 7,791
--------- -----------
$ 12,342 $ 19,481
========= ===========
CHARGES FOR ACQUIRED IN-PROCESS RESEARCH AND
DEVELOPMENT:
Rational......................................... $ -- $ 8,700
Pure Atria....................................... -- 11,600
--------- -----------
$ -- $ 20,300
========= ===========
MERGER AND RESTRUCTURING:
Rational......................................... $ (1,100) $ --
Pure Atria....................................... -- 2,961
--------- -----------
$ (1,100) $ 2,961
========= ===========
OTHER INCOME, NET:
Rational......................................... $ 496 $ 1,830
Pure Atria....................................... 835 2,404
--------- -----------
$ 1,331 $ 4,234
========= ===========
PROVISION FOR INCOME TAXES:
Rational......................................... $ 406 $ 1,028
Pure Atria....................................... 1,335 5,363
--------- -----------
$ 1,741 $ 6,391
========= ===========
NET INCOME (LOSS):
Rational......................................... $ 2,256 $ (3,590)
Pure Atria....................................... 5,427 (3,522)
--------- -----------
$ 7,683 $ (7,112)
========= ===========
</TABLE>
81
<PAGE>
COMPARISON OF CAPITAL STOCK
DESCRIPTION OF RATIONAL CAPITAL STOCK
The authorized capital stock of Rational currently consists of 75,000,000
shares of Common Stock, $0.01 par value per share. If the amendment of
Rational's Certificate of Incorporation is approved, then upon the filing of
the Certificate with the Delaware Secretary of State, the authorized capital
stock of Rational will consist of 150,000,000 shares of Common Stock, $.01 par
value per share.
Rational Common Stock
As of the Rational Record Date, there were 47,685,503 shares of Rational
Common Stock outstanding held of record by approximately 998 stockholders.
Rational Common Stock is listed on Nasdaq under the symbol "RATL." Holders of
Rational Common Stock are entitled to one vote per share on all matters to be
voted upon by the stockholders. The stockholders do not have the right to
cumulate votes in connection with the election of Directors. The holders of
Rational Common Stock are entitled to receive ratably such dividends, if any,
as may be declared from time to time by the Rational Board out of funds
legally available therefor. In the event of a liquidation, dissolution or
winding up of Rational, the holders of Rational Common Stock are entitled to
share ratably in all assets remaining after payment of liabilities. The
Rational Common Stock has no preemptive, conversion rights or other
subscription rights and there are no redemption or sinking fund provisions
applicable to the Rational Common Stock. All outstanding shares of Rational
Common Stock are fully paid and non-assessable, and the shares of Rational
Common Stock to be outstanding upon completion of the Merger will be fully
paid and non-assessable.
Transfer Agent and Registrar
The Transfer Agent and Registrar for the Rational Common Stock is
ChaseMellon Shareholder Services. Its telephone number is (415) 954-9512.
DESCRIPTION OF PURE ATRIA CAPITAL STOCK
The authorized capital stock of Pure Atria consists of 80,000,000 shares of
Pure Atria Common Stock, $.0001 par value per share, and 2,000,000 shares of
Preferred Stock, $0.0001 par value per share (the "Preferred Stock").
Pure Atria Common Stock
As of the Pure Atria Record Date, there were 43,316,558 shares of Pure Atria
Common Stock outstanding held of record by approximately 531 stockholders.
Pure Atria Common Stock is listed on Nasdaq under the trading symbol "PASW."
Holders of Pure Atria Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. The stockholders do not have the
right to cumulate votes in connection with the election of directors. Subject
to any rights of the Preferred Stock, the stockholders are entitled to receive
such lawful dividends as may be declared by Pure Atria Board. In the event of
the liquidation, dissolution or winding up of Pure Atria, the holders of
shares of Pure Atria Common Stock will be entitled to share ratably in Pure
Atria's assets available for distribution to the holders of Pure Atria Common
Stock. The Pure Atria Common Stock has no preemptive or conversion or other
subscription rights, and there are no redemption or other sinking fund
provisions applicable to the Pure Atria Common Stock. All outstanding shares
of Pure Atria Common Stock are fully paid and nonassessable.
Preferred Stock
The Pure Atria Board has the authority, without any further vote or action
by the stockholders, to provide for the issuance of up to 2,000,000 shares of
Preferred Stock in series, to establish from time to time the number of shares
to be included in each such series and to fix the rights, preferences,
privileges and restrictions of the
82
<PAGE>
shares of each series, including voting powers, if any, of such shares. The
issuance of Preferred Stock could adversely affect, among other things, the
rights of existing stockholders or could delay or prevent a change in control
of Pure Atria without further action by the stockholders. The issuance of
Preferred Stock could decrease the amount of earnings and assets available for
distribution to holders of Pure Atria Common Stock. In addition, any such
issuance could have the effect of delaying, deferring or preventing a change
in control of Pure Atria and could make the removal of the present management
of Pure Atria more difficult. The Pure Atria Board has no current plans to
issue any Preferred Stock.
The Transfer Agent and Registrar for Pure Atria Common Stock is U.S. Stock
Transfer Corporation, and its telephone number is (818) 502-1404.
COMPARISON OF CAPITAL STOCK
After consummation of the Merger, the holders of Pure Atria Common Stock who
receive Rational Common Stock under the terms of the Agreement will become
stockholders of Rational. Because Pure Atria and Rational are both Delaware
corporations, Pure Atria stockholders' rights will continue to be governed by
the DGCL. Additionally, as stockholders of Pure Atria, their rights are
presently governed by the Pure Atria Certificate of Incorporation, as amended
(the "Pure Atria Charter") and the Pure Atria Bylaws (the "Pure Atria
Bylaws"). As stockholders of Rational, their rights will be governed by
Rational's Certificate of Incorporation (the "Rational Charter") and Rational
Bylaws (the "Rational Bylaws"). The following discussion summarizes only the
material differences between the rights of holders of Rational Common Stock
and holders of Pure Atria Common Stock under the charters and bylaws of
Rational and Pure Atria. Because the rights of the Pure Atria Preferred Stock
are as yet undetermined, and because the Pure Atria Board has no present
intent to determine them, except as otherwise stated the following discussion
will compare Rational Common Stock with the Pure Atria Common Stock, and will
only identify those areas where there are material differences. This summary
does not purport to be complete and is qualified in its entirety by reference
to the Rational Charter and Bylaws, the Pure Atria Charter and Bylaws and the
relevant provisions of the DGCL.
Preferred Stock
The Rational Charter authorizes no such class of preferred stock. The
absence of a class of undesignated preferred means that, unlike the Pure Atria
Board, the Rational Board cannot, without shareholder approval, issue shares
of stock that could have conversion and/or voting rights that could adversely
affect the rights of the Common Stock. In addition, the Rational Board cannot
issue such a class of stock for the purpose of delaying, deferring or
preventing a change of control of the company.
Classification of Board of Directors
The Rational Board is divided into three classes, each of which is elected
for a three year term. The term of one class of Directors terminates at each
annual meeting of stockholders. Pure Atria Board is not divided into separate
classes. The terms of office for all directors expire at each annual meeting
of Pure Atria's stockholders.
A classified board of directors, such as Rational's, could have the effect
of delaying or discouraging a change of control of Rational by increasing the
length of time that would be required for a potential acquiror to gain control
of the Rational Board. See also, "Proposal No. 2 for Rational Stockholders:
Amendment and Restatement of Rational's Certificate of Incorporation--Certain
Anti-Takeover Effects."
Action By Written Consent in Lieu of a Stockholder Meeting
Rational stockholders have the ability to take action by written consent of
the holders of a majority of the outstanding shares of Rational Common Stock.
Pure Atria's stockholders do not have such a right.
83
<PAGE>
Stockholder Business at Meetings
The Rational Charter and Bylaws place no restrictions on the rights of
stockholders to raise business at a stockholder meeting other than
requirements for timely raising of business. In addition to timely notice
requirements similar to those in Rational's Bylaws, the Pure Atria Bylaws
require that for a stockholder to bring business before a stockholder meeting,
notice of such stockholder's intent to do so must include a description of the
business to be raised and the reasons for raising it, the identity of the
stockholder raising such business and the amount of stock such stockholder
owns, and any material intent of such stockholder and the beneficial owner, if
any, on whose behalf such business is raised.
Nomination of Directors by Stockholders
Rational's Bylaws do not provide specific restrictions on the ability of
stockholders to nominate Directors. Pure Atria's Bylaws require that for a
stockholder to nominate a Director, such nomination must be received not less
than 20 days nor more than 60 days prior to the meeting at which Directors are
to be elected, and must include specific information on the identity,
principle occupation, and stock ownership in Pure Atria of the nominee. In
addition, the stockholder nominating a Director must also disclose any
arrangement or understanding between the nominee and any other person with
respect to future employment or future transactions with Pure Atria.
84
<PAGE>
PROPOSAL NO. 2 FOR RATIONAL STOCKHOLDERS:
AMENDMENT OF RATIONAL'S CERTIFICATE OF INCORPORATION
Rational's stockholders are being asked to approve an amendment to
Rational's Certificate of Incorporation to increase the number of shares of
authorized Rational Common Stock from 75,000,000 to 150,000,000. The amendment
of Rational's Certificate of Incorporation called for by this Proposal 2 would
increase the ratio of Rational Common Stock authorized to Rational Common
Stock outstanding or issuable upon the exercise of outstanding options or
rights to acquire Rational Common Stock from approximately 1.35:1 to
approximately 1.39:1, assuming the Merger is consummated, based on the
capitalization of Rational and Pure Atria as of the Rational and Pure Atria
Record Dates. The amendment of Rational's Certificate of Incorporation was
adopted by the Rational Board on April 6, 1997, in substantially the form
attached as Annex G, subject to stockholder approval.
The primary reason that the Rational Board recommends approval of the
proposed increase in the authorized number of shares of Rational Common Stock
is to create a sufficient number of such shares to enable Rational to
consummate the Merger. Rational estimates that after the Merger, there will be
approximately 86,100,000 shares of Rational Common Stock issued and
outstanding, and options or rights to acquire 15,080,000 additional shares.
Currently, Rational has authorized only 75,000,000 shares of Common Stock. IF
RATIONAL STOCKHOLDERS DO NOT APPROVE PROPOSAL NO. 2, THE MERGER WILL NOT BE
CONSUMMATED. See "Proposal No. 1: The Merger--Terms of the Merger--Conditions
to the Merger."
In addition to the foregoing, the Rational Board believes that the proposed
increase in the number of shares of authorized Common Stock beyond that number
of shares required to consummate the Merger is desirable to preserve
Rational's flexibility in connection with possible future actions, such as
stock splits, stock dividends, financings, corporate mergers, acquisitions of
property, use in employee benefit plans and for other general corporate
purposes. In addition, elimination of the delay occasioned by the necessity of
obtaining stockholder approval will better enable Rational to engage in future
financing transactions and acquisitions that take full advantage of changing
market conditions. It should be further noted that while the Rational Board
and Rational management do not have specific acquisition plans at this time,
other than the Merger, Rational management frequently evaluates the strategic
opportunities available to it and may in the near-term or long-term future
pursue acquisitions of complementary products, technologies or businesses.
Certain Anti-takeover Effects
The proposed increase in the authorized number of shares of Rational Common
Stock could result in certain anti-takeover effects. Although the Rational
Board has taken no action to date to do so, it could use the increased number
of authorized shares of Rational Common Stock to make more difficult or
discourage an attempt to obtain control of Rational, such as by issuing
additional shares of Rational Common Stock to purchasers who might side with
the Rational Board in opposing a takeover attempt. The existence of the
additional authorized shares of Rational Common Stock could have the effect of
discouraging an attempt by any person or entity, through the acquisition of a
substantial number of shares of Rational Common Stock, to acquire control of
Rational with a view to imposing a merger, sale of all or any part of
Rational's assets or a similar transaction, since the issuance of the
additional shares of Rational Common Stock could be used to dilute the stock
ownership of a takeover bidder. In addition, Rational's Certificate of
Incorporation provides for a classified board of directors, which could have
the effect of delaying or discouraging a change in control of Rational by
increasing the length of time that would be required for a potential acquiror
to gain control of the Board of Directors.
To the extent that takeovers are discouraged, stockholders may not have the
opportunity to dispose of all or a part of their stock at a price that may be
higher than that prevailing in the market. However, it also is possible that
making shares of authorized, but unissued, Rational Common Stock available for
issuance or the presence of a classified board may have the effect of
increasing the price offered to stockholders of Rational in a tender or
exchange offer by encouraging potential bidders to negotiate with the Rational
Board rather than engaging in abusive takeover practices such as partial
takeovers and front-end loaded, two-step takeovers and freeze-outs.
85
<PAGE>
Finally, because Rational has not, by a provision in its Certificate of
Incorporation, elected otherwise, it is subject to Section 203 of the DGCL.
("Section 203") which imposes certain restrictions, described below, on
"business combinations" with an "interested stockholder" that could produce
anti-takeover effects in certain circumstances. Section 203 defines a business
combination to include: (i) any merger or consolidation involving the
corporation and the interested stockholder; (ii) any sale, transfer, pledge or
other disposition involving the interested stockholder of 10% or more of the
assets of the corporation; (iii) subject to certain exceptions, any
transaction which results in the issuance or transfer by the corporation of
any stock of the corporation to the interested stockholder; (iv) any
transaction involving the corporation which has the effect of increasing the
proportionate share of the stock of any class or series of the corporation
beneficially owned by the interested stockholder; or (v) the receipt by the
interested stockholder of the benefit of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation. In
general, Section 203 defines an "interested stockholder" as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
Subject to certain exceptions, Section 203 prohibits a Delaware corporation
from engaging in any business combination with any interested stockholder for
a period of three years following the time that such stockholder became an
interested stockholder, unless (i) prior to such time, the board of directors
of the corporation approved either the business combination or the transaction
which resulted in the stockholder becoming an interested stockholder, (ii)
upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder (as defined
below) owned at least 85% of the voting stock of the corporation outstanding
at the time the transaction commenced (not counting those shares owned by
directors who are also officers and by employee stock plans in which employee
participants do not have the right to determine confidentially whether shares
held subject to the plan will be tendered in a tender or exchange offer), or
(iii) at or subsequent to such time, the business combination is approved by
the board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at least
66 2/3% of the outstanding voting stock which is not owned by the interested
stockholder.
86
<PAGE>
EXPERTS
The consolidated financial statements of Rational Software Corporation at
March 31, 1995, 1996 and 1997, and for each of the three years in the period
ended March 31, 1997, included in this Prospectus/Joint Proxy Statement, have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report appearing elsewhere herein, and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
The consolidated financial statements and schedule of Pure Atria Corporation
and subsidiaries as of December 31, 1995 and 1996, and for each of the years
in the three-year period ended December 31, 1996 have been included in the
Registration Statement and this Prospectus/Joint Proxy Statement in reliance
upon the report of KPMG Peat Marwick LLP, independent auditors, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
The financial statements of Integrity QA Software, Inc. for the period from
inception (November 1, 1995) through September 30, 1996, incorporated in this
Prospectus by reference to the Current Report on Form 8-K of Pure Atria
Corporation dated January 31, 1997, have been so incorporated in reliance on
the report of Price Waterhouse LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
LEGAL MATTERS
The validity of the Rational Common Stock issuable pursuant to the Merger
will be passed on by Wilson Sonsini Goodrich & Rosati, Professional
Corporation, Palo Alto, California. Fenwick & West LLP, Palo Alto, California,
is acting as counsel for Pure Atria in connection with certain legal matters
relating to the Agreement and the transactions contemplated thereby.
FUTURE STOCKHOLDER PROPOSALS
To be brought before an annual meeting of Rational, Pure Atria or the
Combined Company, stockholder proposals must be timely received at the
executive offices of such company, and must meet the other requirements of the
rules of the SEC relating to stockholders' proposals and of such company's
bylaws. Stockholder proposals for the Rational 1997 Annual Meeting, which will
be a meeting of the stockholders of the Combined Company if the Merger is
consummated, received at Rational's executive offices prior to March 14, 1997,
would have been timely received to be considered for inclusion in the proxy
materials for such meeting, although no such proposals were received. If any
stockholder of Rational, or of the Combined Company, if the Merger is
consummated, intends to present a proposal at the Rational 1998 Annual Meeting
and wishes to have such proposal considered for inclusion in the proxy
materials for such meeting, such holder must submit the proposal to the
Secretary of Rational in writing so as to be received at Rational's executive
officers not less than 120 calendar days in advance of the date in 1998
corresponding to the date in 1997 on which Rational's proxy statement for the
Rational 1997 Annual Meeting is released to stockholders. In the event the
Merger is not consummated and Pure Atria holds a 1997 Annual Meeting, Pure
Atria will so notify its stockholders of such meeting, including the date by
which stockholder proposals must be received at Pure Atria's executive offices
in order to be considered for inclusion in the proxy materials related to such
meeting.
ACCOUNTANTS' REPRESENTATIVES
It is expected that representatives of Ernst & Young LLP, Rational's
independent accountants, will be present at the Rational Special Meeting and
representatives of KPMG Peat Marwick LLP, Pure Atria's independent auditors,
will be present at the Pure Atria Special Meeting where each will have an
opportunity to respond to appropriate questions of Rational's and Pure Atria's
stockholders, respectively, and to make a statement if they so desire.
87
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Rational Software Corporation and Subsidiaries:
Report of Ernst & Young LLP, Independent Auditors....................... F-2
Consolidated Statements of Operations................................... F-3
Consolidated Balance Sheets............................................. F-4
Consolidated Statement of Redeemable Convertible Preferred Stock and
Stockholders' Equity................................................... F-5
Consolidated Statements of Cash Flows................................... F-6
Notes to Consolidated Financial Statements.............................. F-7
Pure Atria Corporation and Subsidiaries:
Report of Independent Auditors.......................................... F-20
Consolidated Balance Sheets............................................. F-21
Consolidated Statements of Operations................................... F-22
Consolidated Statements of Redeemable Convertible Stock and
Stockholders' Equity................................................... F-23
Consolidated Statements of Cash Flows................................... F-24
Notes to Consolidated Financial Statements.............................. F-25
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Rational Software Corporation
We have audited the accompanying consolidated balance sheets of Rational
Software Corporation as of March 31, 1996 and 1997, and the related
consolidated statements of operations, redeemable convertible preferred stock
and stockholders' equity and cash flows for each of the three years in the
period ended March 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits. In February
1997, the Company merged with SQA, Inc. in a transaction which was accounted
for as a pooling of interests. We did not audit the financial statements of
SQA, Inc. for the years prior to fiscal 1997, which statements reflect total
assets constituting 32% of the related 1996 consolidated financial statement
totals, and which statements reflect net income (loss) of approximately
($2,422,000) and $431,000 of related 1995 and 1996 consolidated financial
statement totals, respectively. Those statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it
relates to data included for SQA, Inc. is based solely on the report of the
other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Rational Software
Corporation at March 31, 1996 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
March 31, 1997, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
San Jose, California
April 22, 1997
F-2
<PAGE>
RATIONAL SOFTWARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH
31,
--------------------------
1995 1996 1997
------- ------- --------
<S> <C> <C> <C>
Net product revenue............................... $42,611 $64,743 $ 91,696
Consulting and support revenue.................... 34,738 39,209 53,677
------- ------- --------
Total revenue................................... 77,349 103,952 145,373
Cost of product revenue........................... 7,148 7,826 9,134
Cost of consulting and support revenue............ 18,875 20,823 26,566
------- ------- --------
Total cost of revenue........................... 26,023 28,649 35,700
------- ------- --------
Gross margin.................................... 51,326 75,303 109,673
Product research and development expenses......... 13,914 18,305 24,445
Sales and marketing expenses...................... 28,454 41,000 50,646
General and administrative expenses............... 7,892 11,690 16,995
Charges for acquired in-process research and
development...................................... -- 8,700 56,798
Merger and restructuring costs (credit)........... (1,100) -- 7,201
------- ------- --------
Total operating expenses........................ 49,160 79,695 156,085
------- ------- --------
Operating income (loss)......................... 2,166 (4,392) (46,412)
Other income, net................................. 496 1,830 7,917
------- ------- --------
Income (loss) before income taxes............... 2,662 (2,562) (38,495)
Provision for income taxes........................ 406 1,028 4,459
------- ------- --------
Net income (loss)................................. $ 2,256 ($3,590) ($42,954)
======= ======= ========
Net income (loss) per common share................ $0.08 ($0.10) ($0.98)
Shares used in computing per share amounts........ 29,745 35,938 43,702
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
RATIONAL SOFTWARE CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31,
-------------------
1996 1997
-------- ---------
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents............................... $ 80,378 $ 227,493
Short-term investments.................................. 8,711 2,525
Accounts receivable, net of allowance for doubtful
accounts of $1,286 in 1996 and $1,960 in 1997.......... 26,043 33,565
Prepaid expenses and other assets....................... 2,550 3,395
-------- ---------
Total current assets.................................. 117,682 266,978
Property and equipment, net............................... 6,247 13,291
Other assets, net......................................... 2,210 22,521
-------- ---------
Total assets.......................................... $126,139 $ 302,790
======== =========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Accounts payable........................................ $ 3,802 $ 9,981
Accrued employee benefits............................... 9,225 12,269
Other accrued expenses.................................. 5,182 8,255
Current portion of accrued merger and restructuring
expenses............................................... 575 9,236
Deferred revenue........................................ 17,885 17,936
Current portion of long-term debt and lease
obligations............................................ 654 2,010
-------- ---------
Total current liabilities............................. 37,323 59,687
Accrued rent.............................................. 880 535
Long-term accrued merger and restructuring expenses....... 1,309 916
Long-term debt............................................ -- 1,741
-------- ---------
Total liabilities..................................... 39,512 62,879
-------- ---------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, 75,000 shares authorized,
issued and outstanding 40,211 shares in 1996 and 47,684
shares in 1997......................................... 402 477
Additional paid-in capital.............................. 155,336 356,270
Treasury stock.......................................... (1,340) (1,340)
Accumulated deficit..................................... (67,905) (115,006)
Cumulative translation adjustment....................... 134 (490)
-------- ---------
Total stockholders' equity............................ 86,627 239,911
-------- ---------
Total liabilities and stockholders' equity............ $126,139 $ 302,790
======== =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
RATIONAL SOFTWARE CORPORATION
CONSOLIDATED STATEMENT OF REDEEMABLE CONVERTIBLE PREFERRED
STOCK AND STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
REDEEMABLE
CONVERTIBLE
PREFERRED STOCK
----------------
<CAPTION> SHARES AMOUNT
------ -------- STOCKHOLDERS' EQUITY
------------------------------------------------------
COMMON STOCK
-------------
ADDITIONAL CUMULATIVE TOTAL
PAID-IN TREASURY ACCUMULATED TRANSLATION STOCKHOLDERS'
SHARES AMOUNT CAPITAL STOCK DEFICIT ADJUSTMENT EQUITY
------ ------ ---------- --------- ----------- ----------- -------------
<S> <C> <C>
BALANCE AT MARCH 31, 1994..... 4,060 $ 4,866
Issuance of Series C preferred
stock........................ 2,172 3,030
Exercise of stock options.....
Issuance of common stock...... -- --
Issuance of treasury stock.... -- --
Net income.................... -- --
------ --------
BALANCE AT MARCH 31, 1995..... 6,232 7,896
Issuance of Series D preferred
stock........................ 1,393 4,455
Conversion of redeemable
preferred stock to common
stock........................ (7,625) (12,351)
Issuance of common stock, net
of $808 in costs............. -- --
Issuance of common stock, net
of $852 in costs............. -- --
Issuance of common stock for
the acquisition of Objectory
AB........................... -- --
Exercise of common stock
options......................
Issuance of common stock under
Employee Stock Purchase
Plan......................... -- --
Cumulative translation
adjustment................... -- --
Net loss...................... -- --
------ --------
BALANCE AT MARCH 31, 1996..... -- --
Issuance of common stock, net
of expenses of $675..........
Exercise of common stock
options...................... -- --
Issuance of common stock......
Issuance of common stock under
Employee Stock Purchase
Plan......................... -- --
Stock options issued in
business combination......... -- --
Tax benefit from option
transactions................. -- --
Cumulative translation
adjustment................... -- --
Net loss...................... -- --
Net transactions of SQA from
January 1, 1997 to March 31,
1997......................... -- --
------ --------
BALANCE AT MARCH 31, 1997..... -- --
- --------------------------------------------------
====== ========
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT MARCH 31, 1994..... 24,874 $249 $ 70,601 $(1,394) $ (66,571) $ -- $ 2,885
Issuance of Series C preferred
stock........................ -- -- (22) -- -- -- (22)
Exercise of stock options..... 221 2 636 638
Issuance of common stock...... 66 1 226 -- -- -- 227
Issuance of treasury stock.... -- -- -- 54 -- -- 54
Net income.................... -- -- -- -- 2,256 -- 2,256
------ ------ ---------- --------- ----------- ----------- -------------
BALANCE AT MARCH 31, 1995..... 25,161 252 71,441 (1,340) (64,315) -- 6,038
Issuance of Series D preferred
stock........................ -- -- (20) -- -- -- (20)
Conversion of redeemable
preferred stock to common
stock........................ 4,575 46 12,305 -- -- -- 12,351
Issuance of common stock, net
of $808 in costs............. 1,720 17 28,935 -- -- -- 28,952
Issuance of common stock, net
of $852 in costs............. 5,759 57 29,888 -- -- -- 29,945
Issuance of common stock for
the acquisition of Objectory
AB........................... 1,497 15 8,754 -- -- -- 8,769
Exercise of common stock
options...................... 1,349 14 3,585 3,599
Issuance of common stock under
Employee Stock Purchase
Plan......................... 150 1 448 -- -- -- 449
Cumulative translation
adjustment................... -- -- -- -- -- 134 134
Net loss...................... -- -- -- -- (3,590) -- (3,590)
------ ------ ---------- --------- ----------- ----------- -------------
BALANCE AT MARCH 31, 1996..... 40,211 402 155,336 (1,340) (67,905) 134 86,627
Issuance of common stock, net
of expenses of $675.......... 5,188 52 186,304 -- -- -- 186,356
Exercise of common stock
options...................... 1,216 12 4,703 -- -- -- 4,715
Issuance of common stock...... 258 3 4,369 -- -- -- 4,372
Issuance of common stock under
Employee Stock Purchase
Plan......................... 787 8 2,927 -- -- -- 2,935
Stock options issued in
business combination......... -- -- 1,600 -- -- -- 1,600
Tax benefit from option
transactions................. -- 880 -- -- 880
Cumulative translation
adjustment................... -- -- -- -- -- (624) (624)
Net loss...................... -- -- -- -- (42,954) -- (42,954)
Net transactions of SQA from
January 1, 1997 to March 31,
1997......................... 24 -- 151 -- (4,147) -- (3,996)
------ ------ ---------- --------- ----------- ----------- -------------
BALANCE AT MARCH 31, 1997..... 47,684 $477 $356,270 $(1,340) $(115,006) $(490) $239,911
- --------------------------------------------------
====== ====== ========== ========= =========== =========== =============
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
RATIONAL SOFTWARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................ $ 2,256 $(3,590) $(42,954)
Adjustments to reconcile net income to net cash
provided by operating activities:
Charges for acquired in-process research and
development................................... -- 8,700 56,798
Depreciation................................... 4,361 3,873 4,063
Amortization................................... 678 842 1,675
Compensation expense for stock option grants... -- 229 145
Changes in operating assets and liabilities
Accounts receivable.......................... (4,145) (4,550) (9,083)
Prepaids and other, net...................... 402 (947) 829
Accounts payable............................. 1,161 (1,336) 5,122
Accrued employee benefits and accrued
expenses.................................... (1,564) 2,296 (2,392)
Deferred revenue............................. 1,181 9,367 (23)
Accrued merger and restructuring expenses.... (4,062) (329) 8,268
------- ------- --------
Net cash provided by operating activities...... 268 14,555 22,448
------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments.............. (2,369) (11,124) (10,611)
Maturities and sales of short-term investments... 7,581 3,449 16,824
Purchase of property and equipment............... (3,361) (3,608) (9,143)
Additions to capitalized software costs.......... (154) -- --
Business combinations, net of cash acquired...... -- 279 (69,992)
------- ------- --------
Net cash provided by (used in) investing
activities.................................... 1,697 (11,004) (72,922)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under long-term debt and
capital lease obligations....................... (2,463) (2,569) (644)
Net proceeds from issuance of common stock....... 865 62,715 198,233
Net proceeds from the sale of redeemable
convertible preferred stock, net of issuance
costs........................................... 3,008 4,435 --
Other............................................ 35 -- --
------- ------- --------
Net cash provided by financing activities...... 1,445 64,581 197,589
Net increase in cash and cash equivalents.......... 3,410 68,132 147,115
Cash and cash equivalents at beginning of year..... 8,836 12,246 80,378
------- ------- --------
Cash and cash equivalents at end of year........... $12,246 $80,378 $227,493
======= ======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid:
Income taxes................................... 199 355 929
Interest paid.................................. 101 107 12
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Conversion of redeemable preferred stock to
common stock.................................... -- 12,351 --
Options issued in business combination........... -- -- 1,600
Tax benefit from option transactions............. -- -- 880
Note payable issued for business combination..... -- -- 2,800
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
RATIONAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and basis of presentation. Rational Software Corporation (the
Company) was incorporated under the laws of Delaware on July 28, 1982. The
Company develops, markets and supports a comprehensive solution for the
component-based development of software systems.
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries including SQA, Inc. (SQA), which
was merged with the Company effective February 26, 1997. The historical
consolidated financial statements of the Company for all periods prior to such
merger date have been restated to reflect the merger, which has been accounted
for as a pooling-of-interests. The consolidated financial statements for all
periods include results of the Company's operations and balance sheet data on
a March 31 fiscal year basis and SQA's results on a December 31, fiscal year
basis. All intercompany transactions and balances have been eliminated upon
consolidation.
Use of estimates. The preparation of the financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 (FAS 121), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
which requires the Company to review for impairment of long-lived assets
certain identifiable intangibles and goodwill related to those assets whenever
events or changes in circumstances indicate that the carrying amount of an
asset might not be recoverable. In certain situations, an impairment loss
would be recognized. FAS 121 became effective for the Company on April 1,
1996. The adoption of FAS 121 did not have a material effect on the Company's
consolidated results of operations.
Revenue recognition. The Company recognizes revenue and related costs from
the sale of its software products and systems upon shipment to the customer if
collection is probable and remaining Company obligations are insignificant.
Revenue from software royalties, whether they are advance payments that are
nonrefundable or minimum royalty guarantees payable over a fixed period, is
recorded when the earnings process is complete and collection is considered
probable. Revenue from consulting services is recognized when earned. Customer
support revenue is deferred and recognized on a straight-line basis over the
period covered by the customer-support agreements. Contract revenue, which
generally represents special or custom engineering development under milestone
payments, is recognized in conformity with Accounting Research Bulletin No.
45, "Long-Term Construction Type Contracts", using the relevant guidance in
SOP 81-1, "Accounting for Performance of Construction-Type and Certain
Production-Type Contracts".
Software capitalization. Computer software development costs are capitalized
after the economic and technological feasibility of a new product is
established. Capitalized costs are amortized on a product basis over the
estimated economic life of a general-release product, which generally does not
exceed three years. The annual amortization is the greater of the amount
computed using the straight-line method or the amount computed using the ratio
of current revenue to the total of current and anticipated future revenues.
Capitalized software-development costs are also written down periodically to
net realizable value based on an analysis of anticipated future revenues.
Research and development costs prior to the establishment of the economic and
technological feasibility of a product are expensed as incurred.
There were no capitalized software development costs as of March 31, 1996
and 1997. For the years ended March 31, 1995, 1996 and 1997, software
amortization was $472,000, $329,000 and $0, respectively.
F-7
<PAGE>
RATIONAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1997
Translation of foreign currencies. Accounts denominated in foreign
currencies have been translated in accordance with Statement of Financial
Accounting Standards No. 52. The functional currency for the Company's
international sales operations is the U.S. dollar, with the exception of its
Swedish subsidiary for which the functional currency is the local currency.
Gains and losses resulting from the remeasurement of the foreign currency
financial statements of the sales operations into U.S dollars are included in
other income. Gains and losses resulting from foreign currency translation of
the Swedish subsidiary are accumulated as a separate component of
stockholders' equity.
Other income. During the year ended March 31, 1997, other income consisted
primarily of interest earned on the Company's excess cash, cash equivalents
and short-term investments and interest expense. It also included gains and
losses on foreign currency transactions.
Net income (loss) per share. Net loss per share is computed using the
weighted average number of common shares outstanding during the period. Net
income per share is computed using the weighted average number of common and
dilutive common equivalent shares outstanding during the period. Common stock
equivalents consist of stock options using the treasury stock method and
redeemable convertible preferred stock.
Cash, cash equivalents and short-term investments. Cash equivalents are
highly liquid investments with original maturity dates of three months or less
at the date of acquisition. Investments with maturity dates of greater than
three months are considered to be short-term investments.
All the Company's cash equivalents and short-term investments are classified
as available-for-sale under the provisions of Statement of Financial
Accounting Standards No. 115 (FAS 115), "Accounting for Certain Investments in
Debt and Equity Securities." Investments are carried at amortized cost which
approximates estimated fair value based on quoted market prices at March 31,
1996 and 1997.
Under FAS 115, management classifies investments as trading, available-for-
sale, or held-to-maturity at the time of purchase and periodically reevaluates
such designation. Debt securities are classified as held-to-maturity when the
Company has the positive intent and ability to hold the securities to
maturity. Held-to-maturity securities are stated at amortized cost with
corresponding premiums or discounts amortized over the life of the investment
to interest income. Debt securities not classified as held-to-maturity are
classified as available-for-sale and reported at fair market value.
Unrecognized gains and losses and declines in value judged to be other than
temporary on available-for-sale securities are included in interest income.
The cost of securities sold is based on the specific identification method.
Property and equipment. The Company's property and equipment are recorded at
cost, which is generally depreciated over three- to five-year periods using
the straight-line method. The cost of furniture and equipment under capital
leases is recorded at the lower of the present value of the minimum lease
payments or the fair value of the asset and is amortized over the shorter of
the term of the related lease or the estimated useful life of the asset.
Leasehold improvements are depreciated over the remaining life of the lease.
Stock-based compensation. The Company has elected to follow Accounting
Principles Board Opinion No. 25, "Accounting for Stock issued to Employees"
(APB 25) and related Interpretations in accounting for its employee stock
options because the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"),
requires use of option valuation models that were not developed for use in
valuing employee stock options. The Company generally grants stock options for
a fixed number of shares to employees with an exercise price equal to the fair
value of the shares at the date of grant, accordingly, no compensation expense
is recorded. The Company recognizes compensation expense for those options
granted with an exercise price less than fair value.
F-8
<PAGE>
RATIONAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1997
Fair value of financial instruments. The carrying values reported in the
balance sheet for cash and cash equivalents, short-term investments and long-
term debt approximate fair value. The fair value of short-term investments is
based on quoted market prices.
Advertising costs. The Company expenses advertising costs as incurred.
Advertising costs totaled $1,362,000, $2,109,000 and $2,618,000 for the years
ended March 31, 1995, 1996 and 1997, respectively.
Reclassifications. Certain prior year amounts have been reclassified to
conform with current year presentation.
Recent pronouncements. In February 1997, the Financial Accounting Standards
Board issued Statement No. 128, Earnings per Share, which is required to be
adopted on March 31, 1998. At that time, the Company will be required to
change the method currently used to compute earnings per share and to restate
all prior periods. Under the new requirements for calculating primary earnings
per share, the dilutive effect of stock options will be excluded.
2. RISKS DUE TO CONCENTRATIONS
Concentrations of credit risk. Financial instruments that potentially
subject the Company to concentrations of credit risk consist primarily of cash
equivalents and accounts receivable. The Company's investment policy limits
its exposure to concentrations of credit risk for cash equivalents. The
Company sells its products primarily to major corporations and systems
integrators that serve a wide variety of U.S. and foreign markets. Collateral
or deposits generally are not required from customers who demonstrate a
positive credit record and sound financial condition. The Company maintains
reserves for potential credit losses and such losses have been within
management's expectations.
International sales. International sales currently account for approximately
one-third of the Company's revenues, and the Company expects that
international sales will continue to account for a significant portion of the
Company's revenues in future periods. Any material adverse effect on the
Company's international business would have a material adverse effect on the
Company's financial statements. Also, the Company's international sales are
generally denominated in foreign currencies. Losses on the conversion of
foreign-denominated receivables into U.S. dollars may have a material adverse
effect on the Company's financial statements.
From time to time the Company enters into short-term forward exchange
contracts to hedge against the impact of foreign currency fluctuations on
accounts receivable denominated in foreign currencies. The total amount of
these contracts is offset by the underlying foreign currency denominated
accounts receivable. The gains or losses on the contracts are included in
income as the contracts expire and are offset by gains and losses on the
underlying receivables being hedged. At March 31, 1997, the Company had
outstanding forward exchange contracts, all having maturities of approximately
35 days, to exchange various European currencies for US dollars in the amounts
of $7,397,000. Neither the carrying amount nor the fair value of these foreign
currency forward exchange contracts was material at March 31, 1997. One major
U.S. multinational bank is counterparty to all these contracts. The associated
gains and losses are not material to the Company's results of operations.
There were no forward exchange contracts outstanding at March 31, 1996.
F-9
<PAGE>
RATIONAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1997
3. MERGER WITH SQA, INC.
On February 26, 1997, the Company acquired SQA, Inc. ("SQA"), a company
incorporated in Delaware, through the merger of a wholly-owned subsidiary of
the Company with and into SQA, pursuant to which the Company issued
approximately 6,997,000 shares of common stock. In addition, each outstanding
option or right to purchase SQA common stock under various stock option and
purchase plans were assumed by the Company and became an option or right to
purchase the Company's common stock after giving affect to the 0.86 exchange
ratio. SQA is primarily involved in developing and marketing integrated
software products for the automated testing and quality management of Windows-
based client/server applications. The acquisition was accounted for a pooling-
of-interests, and accordingly, the Company's historical consolidated financial
statements have been restated to include the results for SQA for all periods
presented. The following information shows revenue and net income (loss) of
the separate companies for the periods preceding the combination. Information
relating to SQA is for the year ended December 31, 1996, 1995 and 1994
respectively (in thousands):
<TABLE>
<CAPTION>
RATIONAL MERGER
SOFTWARE SQA, RELATED
CORPORATION INC. EXPENSES COMBINED
----------- ------- -------- --------
<S> <C> <C> <C> <C>
Year ended March 31, 1997
Revenue............................... $121,264 $24,109 $ -- $145,373
Net income (loss)..................... (40,518) 4,765 (7,201) (42,954)
Year ended March 31, 1996
Revenue .............................. $ 91,107 $12,845 $ -- $103,952
Net income (loss)..................... (4,021) 31 -- (3,590)
Year ended March 31, 1995
Revenue .............................. $ 72,899 $ 4,450 $ -- $ 77,349
Net income (loss)..................... 4,678 (2,422) -- (2,256)
</TABLE>
Revenue and net loss of SQA for the three-month period ended March 31, 1997,
the period which is excluded in the accompanying financial statements was
$2,351,000 and $4,147,000, respectively. Included in the accompanying
consolidated statement of operations for the year ended March 31, 1997 are
merger-related expenses totaling $7,201,000 consisting primarily of charges
for investment banking and professional fees of $3,100,000, severance costs of
$1,767,000 associated with employee terminations and charges of $2,334,000
incurred as a result of the closing of duplicate facilities, other merger-
related administrative costs and asset write-downs. As of March 31, 1997 the
Company has paid out or charged $3,842,000 against the related merger accrual.
4. PURCHASE OF VISUAL TEST PRODUCT AND BUSINESS COMBINATIONS
VISUAL TEST PRODUCT. During October 1996 the Company purchased the Visual
Test product from Microsoft Corporation. The aggregate purchase price
(including direct acquisition costs) was $23,146,000 in cash, which has been
allocated to the fair value of the assets acquired, including in-process
research and development. Acquired in-process research and development
represents the present value of the estimated cash flows expected to be
generated by Visual Test related technology, which at the acquisition date had
not yet reached the point of technological feasibility and does not have an
alternative future use. The value of the in-process research and development
was charged to operations on the acquisition date.
REQUISITE, INC. During February 1997 the Company acquired all of the
outstanding shares of common stock of Requisite, Inc. a Colorado-based
provider of software requirements-management tools and training pursuant to a
statutory share exchange under Colorado law. The aggregate purchase price
(including direct acquisition costs) was $8,631,000. The Company also assumed
the outstanding Requisite employee stock options in exchange for stock options
to purchase 6,450 shares of common stock of the Company.
F-10
<PAGE>
RATIONAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1997
SOFTLAB AB. During February 1997 the Company acquired all the outstanding
shares of common stock of Softlab AB, a developer of custom software-
engineering tools, integrated software-development environments, and software-
development processes based in Sweden. The aggregate purchase price (including
direct acquisition costs) was $6,732,000 in cash, plus notes payable totaling
approximately $2,800,000. The notes are due in two equal installments on the
first and second anniversary of the closing date.
PERFORMANCE AWARENESS CORPORATION. During March 1997 the Company acquired
all the outstanding shares of capital stock of Performance Awareness
Corporation for cash and assumed the outstanding Performance Awareness
employee stock options in exchange for options to purchase 250,000 shares of
the Company's Common Stock. Performance Awareness develops, markets and
supports automated software quality products and related services that provide
solutions for the software testing market. The aggregate purchase price
(including direct acquisition costs) was $32,929,000 in cash and fair value of
options which were assumed by the Company.
SOFTWARE 9000. Also during March 1997, the Company acquired all the
outstanding shares of common stock of Software 9000, a New Zealand software
distribution company. The aggregate purchase price was $425,000 (including
direct acquisition costs).
OBJECTORY AB. During October 1995, the Company signed a definitive agreement
to purchase all the outstanding stock of Objectory AB, a Swedish software
development company, in exchange for 1,496,718 shares of common stock.
The Company has accounted for the acquisitions of Requisite, Inc., Softlab
AB, Performance Awareness, Software 9000 and Objectory AB using the purchase
method, and accordingly, the operating results of the respective companies are
included in the consolidated results of the Company from the date of
acquisition. The consolidated balance sheets include the assets and
liabilities of these businesses at March 31, 1997. The total purchase price
paid for the Visual Test product and of each acquisition was allocated based
upon discounted cash flow valuation techniques and is summarized as of March
31, as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
------------------------------------------------ ---------
VISUAL PERFORMANCE
TEST REQUISITE, SOFTLAB AWARENESS SOFTWARE OBJECTORY
PRODUCT INC. AB CORPORATION 9000 AB
------- ---------- ------- ----------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Property and equipment.. $ -- $ 132 $ 508 $ 894 $ 16 $ 188
Intangible assets....... 5,488 2,447 3,632 10,094 366 1,216
Severance and facility
accruals............... -- -- (163) (3,573) -- (312)
Net assets (liabilities)
acquired............... -- 341 (512) (1,848) 43 (1,022)
In-process research and
development............ 17,658 5,711 6,067 27,362 -- 8,700
------- ------ ------ ------- ---- -------
$23,146 $8,631 $9,532 $32,929 $425 $ 8,770
======= ====== ====== ======= ==== =======
</TABLE>
Intangible assets include developed technology, assembled workforce,
customer base, trade name and covenant not-to-compete. The estimated average
useful life of these assets is four years. Accumulated amortization of
intangible assets totaled $2,184,000 and $509,000 at March 31, 1997 and 1996,
respectively. In-process research and development represents the present value
of the estimated cash flows expected to be generated by the related technology
from the Visual Test product and from each acquisition, which at the date of
purchase had not yet reached the point of technological feasibility and does
not have an alternative future use. Therefore, in accordance with generally
accepted accounting principles, the in-process research and development was
written off and charged to operations during the quarter in which the purchase
took place.
F-11
<PAGE>
RATIONAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1997
The following unaudited pro forma combined results of operations of the
Company for fiscal 1996 and 1997, had the business combinations occurred at
the beginning of each fiscal year presented, including non-recurring charges
for acquired in-process technology of $8,700,000 and $56,798,000 in 1996 and
1997, respectively, are as follows:
<TABLE>
<CAPTION>
1996 1997
-------- --------
(IN THOUSANDS,
EXCEPT PER SHARE
DATA)
<S> <C> <C>
Net revenue........................................... $118,880 $158,606
Net loss.............................................. $(10,419) $(50,059)
Net loss per share.................................... $ (0.28) $ (1.15)
</TABLE>
The unaudited pro forma information is presented for illustrative purposes
only and is not necessarily indicative of the operating results that would
have occurred had the transactions been completed at the beginning of the
periods indicated, nor is it necessarily indicative of future operating
results.
5. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company's cash equivalents and short-term investments as of March 31,
1996 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997
------- --------
<S> <C> <C>
Cash and cash equivalents:
Cash................................................... $ 7,998 $ 10,518
Money market funds..................................... 35,470 169,305
Commercial paper....................................... 3,470 11,875
U.S. Government........................................ 33,440 35,795
------- --------
Total................................................ $80,378 $227,493
======= ========
Short-term investments:
U.S. government........................................ $ 4,745 $ --
Commercial paper....................................... 3,908 2,465
Certificates of deposit................................ 58 60
------- --------
Total................................................ $ 8,711 $ 2,525
======= ========
</TABLE>
Realized gains and losses on sales of available-for-sale securities were
immaterial for the years ended March 31, 1996 and 1997. There were no
significant unrealized holding gains or losses on such securities at March 31,
1996 and 1997.
F-12
<PAGE>
RATIONAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1997
6. PROPERTY AND EQUIPMENT
Property and equipment at March 31, 1996 and 1997 is as follows (in
thousands):
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Computer, office and manufacturing equipment........... $ 23,816 $ 27,686
Office furniture....................................... 2,192 3,031
Leasehold improvements................................. 1,228 2,342
-------- --------
27,236 33,059
Accumulated depreciation and amortization.............. (20,989) (19,768)
-------- --------
Net property and equipment............................. $ 6,247 $ 13,291
======== ========
</TABLE>
7. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
In November 1989, the Company entered into a product development and loan
agreement with International Business Machines (IBM) whereby the Company
received interest-free loans of $8,700,000 to develop certain proprietary
software products in which the Company retains full ownership rights. In
exchange, the Company granted IBM distribution and marketing rights to the
products under development, the right to evaluate all of the Company's
technology for a period of five years, and an agreement to refrain from
undertaking any other development that would impair its ability to perform
under the agreement. The Company also provides consulting to IBM in certain
technology areas. The loans were fully repaid as of March 31, 1997.
The Company leases certain equipment and furniture under capitalized lease
obligations. The related obligations under capitalized leases represent the
present value of future minimum lease payments. Assets capitalized under
leases totaled $3,979,000 and $4,524,000 at March 31, 1996 and 1997,
respectively. Long-term debt and capitalized lease obligations consist of the
following at March 31 (in thousands):
<TABLE>
<CAPTION>
1996 1997
----- -------
<S> <C> <C>
Long-term debt payable to IBM............................ $ 488 $ --
Note payable to former Softlab AB shareholders........... -- 2,800
Present value of capital lease obligation................ 166 416
Other.................................................... -- 535
----- -------
654 3,751
Less current portion of capital lease obligations and
debt.................................................... (654) (2,010)
----- -------
Due after one year....................................... $ -- $ 1,741
===== =======
</TABLE>
F-13
<PAGE>
RATIONAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1997
8. COMMITMENTS
Commitments. The Company leases its primary office space under operating
leases. Rental expense for facilities was approximately $2,070,000, $2,750,000
and $3,520,000 for the years ended March 31, 1995, 1996 and 1997,
respectively. As a result of merger-related activity at March 31, 1997, the
Company has accrued $1,339,000 of estimated costs of future rent associated
with the excess office space. Estimated future rents from sublease agreements
are $501,000, $358,000, and $119,000 in fiscal 1998, 1999 and 2000,
respectively. Future minimum rental payments, net of sublease income, at March
31, 1997 are as follows for the fiscal years indicated (in thousands):
<TABLE>
<S> <C>
1998............................................................... $ 5,127
1999............................................................... 4,743
2000............................................................... 3,443
2001............................................................... 2,043
2002............................................................... 471
Thereafter......................................................... 495
-------
$16,322
=======
</TABLE>
Legal Matters. On December 1, 1995, a complaint was filed against the
Company relating to the Company's preliminary acquisition negotiations with
Interactive Development Environments, which were subsequently terminated. The
complaint was settled in March 1997, within amounts previously reserved for.
On December 16, 1996, the Company filed a lawsuit against Silicon Graphics,
Inc. ("SGI") arising from SGI's failure to pay certain royalties due to the
Company under a software license agreement entered into between the Company's
predecessor, Verdix Corporation, and SGI. SGI has filed an answer denying the
Company's allegations, and also filed a cross-complaint against the Company
for unspecified damages for alleged wrongdoing arising out of the license
agreement with SGI. The Company denies the allegations and intends to
vigorously defend SGI's claims.
From time to time the Company is subject to legal claims. Historically, the
cost of resolution of the claims has not been significant, and the Company is
not aware of any asserted or unasserted claims pending against it, including
the suits mentioned above, the resolution of which would have a material
adverse impact on the operations or financial position of the Company.
9. STOCKHOLDERS' EQUITY
Common stock. In July 1996, the Company's Board of Directors and
stockholders approved a two-for-one stock split payable in the form of a stock
dividend to stockholders. All share and per share information have been
adjusted to reflect this change.
During October 1996, the Company sold 5,188,000 shares of common stock in a
public offering. Net proceeds from the sale were $186,356,000 after deducting
underwriting discounts, commissions, and other related expenses.
Stock options. The Company provides equity incentives to employees and
directors by means of incentive stock options and nonstatutory options which
historically have been provided under various stock option plans. The Company
now issues options from the Stock Option Plan for Directors and the 1997 Stock
Option Plan. Stock options generally vest over a period of four years. Under
these plans, the Company may grant either nonstatutory or incentive stock
options and the option price per share cannot be less than 85% of fair market
F-14
<PAGE>
RATIONAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1997
value in the case of nonstatutory options, or 100% of fair market value in the
case of incentive stock options, determined on the date that the option is
granted. Under these plans, the Company has reserved 8,468,200 shares for
issuance at March 31, 1997. Options expire at various dates ranging from 5 to
10 years from the date of grant.
In July, 1995, an amendment was approved during the annual meeting of the
Company's stockholders that established a new formula for determining the size
of directors grants and that lengthened the vesting period of directors
grants. The compensation expense recognized during fiscal 1996 and 1997 as a
result of this change was $229,000 and $145,000, respectively.
Activity under all plans is summarized as follows:
<TABLE>
<CAPTION>
SHARES UNDER OUTSTANDING
OPTIONS
---------------------------
WEIGHTED-
SHARES AVAILABLE AVERAGE
FOR GRANT OPTIONS EXERCISE PRICE
---------------- ----------- --------------
<S> <C> <C> <C>
Balance at March 31, 1994......... 3,422,832 3,234,918 $ 2.64
Granted......................... (2,723,378) 2,723,378 2.61
Exercised....................... -- (221,003) 2.71
Canceled........................ 338,077 (338,077) 3.61
Expired......................... (448,620) -- --
----------- ----------- ------
Balance at March 31, 1995......... 588,911 5,399,216 2.56
Additional shares authorized...... 1,952,532 -- --
Granted......................... (1,679,429) 1,679,429 7.44
Exercised....................... -- (1,349,398) 2.50
Canceled........................ 244,975 (244,975) 2.50
Expired......................... (16,860) -- --
----------- ----------- ------
Balance at March 31, 1996......... 1,090,129 5,484,272 4.11
Additional shares authorized...... 3,250,000 -- --
Expiration of SQA option plans.... (123,036) -- --
Granted......................... (4,328,634) 4,328,634 24.48
Exercised....................... -- (1,215,624) 3.66
Canceled........................ 554,317 (554,317) 15.75
Expired......................... (13,226) -- --
Net transactions of SQA during the
period from January 1, 1997 to
March 31, 1997................... (94,385) 90,070 32.98
----------- ----------- ------
Balance at March 31, 1997......... 335,165 8,133,035 $14.54
=========== =========== ======
</TABLE>
F-15
<PAGE>
RATIONAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1997
At March 31, 1996 options to purchase 1,585,514 shares of common stock were
exercisable at a weighted-average exercise price of $2.92. At March 31, 1997
the range of options outstanding and exercisable is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------- --------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
--------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.29-$0.29......... 359,537 4.68 $ 0.29 205,865 $ 0.29
$0.87-$3.47......... 2,441,461 5.46 2.65 1,365,270 2.77
$3.75-$7.06......... 713,296 7.67 6.16 240,035 5.57
$7.69-$12.31........ 437,338 8.63 9.37 74,596 9.06
$13.57-$19.75....... 1,729,381 9.77 17.50 54,187 14.21
$20.63-$29.14....... 1,672,345 8.23 26.28 31,193 24.89
$31.06-$39.56....... 779,677 8.72 37.21 9,331 37.33
--------- ---- ------ --------- ------
8,133,035 7.59 $14.54 1,980,477 $ 3.92
========= ==== ====== ========= ======
</TABLE>
Employee stock purchase plan. The Company has an employee stock purchase
plan ("ESPP") under which substantially all employees may purchase common
stock through payroll deductions at a price equal to 85% of the lower of fair
market values as of the beginning or end of the offering period. Stock
purchases under the plan are limited to the lessor of 10% of an employee's
compensation or $25,000 per year. At March 31, 1997, 931,000 shares had been
issued under the Plan and 269,000 shares were reserved for issuance.
Stock-based compensation. Pro forma information regarding net income (loss)
and earnings (loss) per share is required by FAS 123 for awards granted or
modified after December 31, 1994 as if the Company had accounted for its
stock-based awards to employees under the fair value method of FAS 123. The
fair value of the Company's stock-based awards to employees was estimated
using a Black-Scholes option pricing model. The Black-Scholes model requires
the input of highly subjective assumptions including the expected stock price
volatility. Because the Company's stock-based awards to employees have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its stock-
based awards to employees. The fair value of the Company's stock-based awards
to employees was estimated assuming no expected dividends and the following
weighted-average assumptions:
<TABLE>
<CAPTION>
STOCK
OPTIONS ESPP
--------- ---------
1996 1997 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Expected life (years).................................. 3.47 3.52 0.5 0.5
Expected volatility.................................... 0.62 0.59 0.76 1.02
Risk-free interest rate................................ 5.79 6.52 5.64 5.38
</TABLE>
F-16
<PAGE>
RATIONAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1997
For pro forma purposes, the estimated fair value of the Company's stock-
based awards to employees is amortized over the options' vesting period (for
options) and the six-month purchase period (for stock purchases under the
ESPP). The Company's pro forma information for the years ended March 31, is as
follows (in thousands, except for loss per share information):
<TABLE>
<CAPTION>
1996 1997
------- --------
<S> <C> <C>
Net loss:
As reported........................................... $(3,590) $(42,954)
Pro forma............................................. (5,367) (54,663)
Net loss per share:
As reported........................................... $ (0.10) $ (0.98)
Pro forma............................................. (0.15) (1.25)
</TABLE>
Because FAS 123 is applicable only to awards granted subsequent to December
31, 1994, its pro forma effect will not be fully reflected until approximately
1999 and is not expected to be indicative of the effects on net income (loss)
and net income (loss) per share in future years.
The weighted-average fair value of options granted at market value during
fiscal 1996 and 1997 was $3.81 and $11.74 per share, respectively. The
weighted-average fair value of employee stock purchase rights during fiscal
1996 and 1997 was $1.35 and $4.65 per share, respectively.
10. INCOME TAXES
Pretax income (loss) from continuing operations is as follows at March 31
(in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
------ ------- --------
<S> <C> <C> <C>
Domestic......................................... $2,404 $(4,002) $(41,538)
Foreign.......................................... 258 1,440 3,043
------ ------- --------
Total........................................ $2,662 $(2,562) $(38,495)
====== ======= ========
</TABLE>
The provision for income taxes consists of the following at March 31 (in
thousands):
<TABLE>
<CAPTION>
1995 1996 1997
----- ------ ------
<S> <C> <C> <C>
Current
Federal.............................................. $ 100 $ 28 $2,029
State................................................ 70 52 730
Foreign.............................................. 236 948 1,700
----- ------ ------
Total.............................................. $ 406 $1,028 $4,459
===== ====== ======
</TABLE>
F-17
<PAGE>
RATIONAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1997
The provision for income taxes differs from the amount of income tax
determined by applying the applicable U.S. statutory federal income tax rate
as a result of the following differences for the years ended March 31 (in
thousands):
<TABLE>
<CAPTION>
1995 1996 1997
----- ------- --------
<S> <C> <C> <C>
Income tax (benefit) at the federal statutory
rate............................................ $ 932 $(897) $(13,473)
Net operating loss carryforwards utilized ....... (720) (1,616) (6,361)
Nondeductible charges for acquired in-process
research and development........................ -- 3,045 19,879
State income taxes............................... 46 52 474
Foreign taxes.................................... 148 444 1,700
Merger related costs............................. -- -- 1,103
Other............................................ -- -- 1,137
----- ------- --------
Total........................................ $ 406 $ 1,028 $ 4,459
===== ======= ========
</TABLE>
Significant components of the Company's deferred tax assets are as follows
at March 31 (in thousands):
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Net operating loss carryforwards........................ $ 18,324 $ 24,605
Tax credit carryforwards................................ 3,492 3,862
Acquired intangibles.................................... -- 4,357
Reserves and accruals not currently deductible.......... 3,301 2,815
Depreciation............................................ 1,323 660
Other................................................... 802 2,153
-------- --------
Total deferred tax assets............................... 27,242 38,452
Valuation allowance for deferred tax assets............. (27,242) (38,452)
-------- --------
$ -- $ --
======== ========
</TABLE>
The valuation allowance increased by $5,647,000 and $11,210,000 in 1996 and
1997, respectively. Approximately $14,119,000 of the valuation allowance is
attributable to stock options, the benefit of which will be credited to
additional paid-in capital when realized.
FASB Statement 109 provides for the recognition of deferred tax assets if
realization of such assets is more likely than not. Based upon the weight of
available evidence, which includes the Company's historical operating
performance and the reported cumulative net loss for the prior three years,
the Company has provided a full valuation allowance against its net deferred
tax assets. The Company will evaluate the realizability of the deferred tax
asset on a quarterly basis.
At March 31, 1997, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $69,000,000 and tax credit
carryforwards of $3,900,000 that expire in 1997 through 2012. As a result of
the sale of common stock in June 1995, the Company incurred a change in stock
ownership as defined under Section 382 of the Internal Revenue Code of 1986.
Accordingly, approximately $29,000,000 of the Company's net operating loss
carryforwards and $3,100,000 of the tax credit carryforwards will be subject
to an annual limitation regarding their utilization against taxable income in
future years. Such losses and credits will be available to offset the income
tax liability attributable to annual taxable income of approximately
$8,700,000.
11. MAJOR CUSTOMERS, RELATED PARTIES, AND INTERNATIONAL SALES.
IBM divested its shares of the Company's outstanding stock during the
secondary offering in the first quarter of fiscal 1996. IBM owned
approximately 13% of the Company's outstanding stock at the end of 1995 and
sales
F-18
<PAGE>
RATIONAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1997
to IBM amounted to 3% of the Company's revenue in 1995. Sales to Lockheed
Martin Corporation, which had a representative on the Board through September
1995, amounted to 2%, and 4% of the Company's revenue in 1995 and 1996,
respectively.
The Company also derives revenues from the sale of its products to customers
in international geographic areas. Total revenue from international sales and
related consulting and customer support in different geographic areas is as
follows at March 31, (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- --------
<S> <C> <C> <C>
Net Sales to Customers:
Western Europe................................... $12,776 $25,066 $ 31,934
Other............................................ 13,086 10,873 13,924
------- ------- --------
Total.......................................... $25,862 $35,939 $ 45,858
======= ======= ========
</TABLE>
Other primarily consists of sales to Canada and the Asia/Pacific region.
12. QUARTERLY INFORMATION (UNAUDITED)
The following table presents unaudited quarterly operating results for each
of the Company's eight quarters in the two-year period ended March 31, 1997.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------
JUNE 30 SEPT. 30 DEC. 31 MARCH 31
------- -------- -------- --------
<S> <C> <C> <C> <C>
1997
Total revenue........................... $32,002 $34,025 $ 39,057 $ 40,289
Gross margin............................ 24,054 25,754 29,697 30,168
Operating income(loss).................. 4,956 5,718 (13,743) (43,343)
Net income(loss)........................ 5,093 5,872 (11,836) (42,083)
Net income (loss) per share............. 0.11 0.13 (0.26) (0.89)
1996
Total revenue........................... $22,065 $24,579 $ 27,445 $ 29,863
Gross margin............................ 15,627 18,075 20,073 21,528
Operating income (loss)................. 662 1,840 (11,022) 4,128
Net income (loss)....................... 750 2,171 (10,874) 4,363
Net income (loss) per share............. 0.02 0.06 (0.29) 0.10
</TABLE>
13. SUBSEQUENT EVENTS
On April 7, 1997, the Company entered into an Agreement and Plan of
Reorganization (the "Merger Agreement") providing for the merger of Wings
Merger Corporation, a wholly-owned subsidiary of the Company, with and into
Pure Atria Corporation ("Pure Atria"). Pursuant to the Merger Agreement, all
of the outstanding shares of Pure Atria common stock will be converted into
the right to receive 0.9 shares of Rational common stock (the "Exchange
Ratio") and each outstanding option or right to purchase shares of Pure Atria
common stock will be assumed by the Company and become options and rights to
purchase shares of the Company's common stock with appropriate adjustments
made to the price and number of shares issuable upon exercise of such options
or rights based on the Exchange Ratio. The consummation of the merger requires
approval by the Company's stockholders of the reservation and issuance of the
shares of the Company's common stock to be issued in the merger. The Company
expects to account for the Merger as a pooling of interests and issue
approximately 45,493,000 shares in exchange for all outstanding common stock
and upon exercise of outstanding options of Pure Atria.
The Board of Directors has also authorized an increase in the authorized
number of shares of common stock from 75,000,000 to 150,000,000, subject to
stockholder approval, to provide Rational a sufficient number of shares of
common stock to consummate the merger.
F-19
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Pure Atria Corporation:
We have audited the accompanying consolidated balance sheets of Pure Atria
Corporation and subsidiaries as of December 31, 1995 and 1996, and the related
consolidated statements of operations, redeemable convertible preferred stock
and stockholders' equity, and cash flows for each of the years in the three-
year period ended December 31, 1996. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Pure Atria
Corporation and subsidiaries as of December 31, 1995 and 1996, and the results
of their operations and their cash flows for each of the years in the three-
year period ended December 31, 1996, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
San Jose, California
January 21, 1997, except as to Note 2
which is as of January 31, 1997
F-20
<PAGE>
PURE ATRIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ MARCH 31,
1995 1996 1997
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents.................... $ 24,294 $ 17,363 $ 16,900
Short-term investments....................... 54,240 80,014 63,621
Accounts receivable, net of allowances of
$838, $2,041 and $2,104 in 1995, 1996 and
1997........................................ 16,613 29,478 25,510
Prepaid expenses and other current assets.... 1,876 3,526 3,330
Deferred tax assets.......................... 2,220 9,054 9,054
-------- -------- --------
Total current assets....................... 99,243 139,435 118,415
Property and equipment, net.................... 8,314 12,974 17,022
Other assets, net.............................. 2,517 1,541 1,495
-------- -------- --------
Total assets................................. $110,074 $153,950 $136,932
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable............................. $ 1,846 $ 3,802 $ 3,861
Accrued payroll and related expenses......... 5,722 8,987 8,581
Accrued merger and integration expenses...... 1,887 15,371 11,361
Other accrued expenses and liabilities....... 7,460 10,003 8,074
Deferred revenue............................. 13,945 24,281 25,292
Income taxes................................. 3,359 1,308 2,244
-------- -------- --------
Total current liabilities.................... 34,219 63,752 59,413
-------- -------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock; $.0001 par value; 2,000,000
shares authorized; no shares issued and
outstanding................................. -- -- --
Common stock; $.0001 par value; 80,000,000
shares authorized; 39,086,379, 40,908,423
and 42,824,833 shares issued and outstanding
in 1995, 1996, and 1997, respectively....... 4 4 4
Additional paid-in capital................... 78,162 99,847 130,785
Cumulative translation adjustment............ (146) (831) (1,287)
Accumulated deficit.......................... (2,165) (8,822) (51,983)
-------- -------- --------
Total stockholders' equity................... 75,855 90,198 77,519
-------- -------- --------
Total liabilities and stockholders'
equity.................................... $110,074 $153,950 $136,932
======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-21
<PAGE>
PURE ATRIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------- ----------------
1994 1995 1996 1996 1997
------- -------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Product........................ $32,077 $ 62,133 $ 93,437 $20,164 $ 18,273
Maintenance and other.......... 10,681 22,052 39,058 8,466 11,762
------- -------- -------- ------- --------
Total revenues............... 42,758 84,185 132,495 28,630 30,035
------- -------- -------- ------- --------
Cost of revenues:
Product........................ 841 1,909 2,643 561 839
Maintenance and other.......... 3,141 5,956 11,739 2,253 3,974
------- -------- -------- ------- --------
Total cost of revenues....... 3,982 7,865 14,382 2,814 4,813
------- -------- -------- ------- --------
Gross margin................. 38,776 76,320 118,113 25,816 25,222
------- -------- -------- ------- --------
Operating expenses:
Sales and marketing............ 18,934 39,063 57,757 13,227 13,741
Research and development....... 9,465 15,468 22,794 5,185 6,448
General and administrative..... 4,450 7,791 10,272 2,335 2,772
In-process research and devel-
opment........................ -- 11,600 -- -- 44,117
Merger and integration......... -- 2,961 35,255 -- 1,070
------- -------- -------- ------- --------
Total operating expenses..... 32,849 76,883 126,078 20,747 68,148
------- -------- -------- ------- --------
Income (loss) from operations.. 5,927 (563) (7,965) 5,069 (42,926)
Other income.................... 835 2,404 3,669 761 907
------- -------- -------- ------- --------
Income (loss) before income
taxes......................... 6,762 1,841 (4,296) 5,830 (42,019)
Income taxes.................... 1,335 5,363 2,361 1,979 1,142
------- -------- -------- ------- --------
Net income (loss).............. $ 5,427 $ (3,522) $ (6,657) $ 3,851 $(43,161)
======= ======== ======== ======= ========
Net income (loss) per share..... $ (0.17) $ 0.09 $ (1.02)
======== ======= ========
Pro forma net income (loss) per
share:
Income before income taxes, as
reported...................... $ 6,762 $ 1,841
Pro forma income taxes......... 1,630 6,087
------- --------
Pro forma net income (loss)...... $ 5,132 $ (4,246)
======= ========
Pro forma net income (loss) per
share........................... $ 0.14 $ (0.11)
======= ========
Shares used in per share computa-
tions........................... 36,394 37,600 39,921 43,399 42,326
======= ======== ======== ======= ========
</TABLE>
See accompanying Notes To Consolidated Financial Statements.
F-22
<PAGE>
PURE ATRIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REDEEMABLE
CONVERTIBLE STOCK AND STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
REDEEMABLE
CONVERTIBLE
PREFERRED RETAINED
STOCK COMMON STOCK ADDITIONAL CUMULATIVE EARNINGS TOTAL
--------------- -------------- PAID-IN TRANSLATION (ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL ADJUSTMENT DEFICIT) EQUITY
------ ------- ------ ------ ---------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31,
1993................... 5,331 $ 8,564 14,054 $ 1 $ 257 $ -- $ (345) $ (87)
Conversion of Atria
preferred stock........ (809) (6,167) 8,959 1 6,166 -- -- 6,167
Issuance of Pure Series
C redeemable
convertible preferred
stock.................. 1,536 4,070 -- -- -- -- -- --
Atria initial public
offering............... -- -- 6,085 1 21,401 -- -- 21,402
Exercise of stock
options................ -- -- 683 -- 202 -- -- 202
Income tax benefit
related to option
plans.................. -- -- -- -- 170 -- -- 170
Distributions to
stockholders........... -- -- -- -- -- -- (300) (300)
Purchase of treasury
stock.................. -- -- (21) -- (1) -- -- (1)
Net income.............. -- -- -- -- -- -- 5,427 5,427
------ ------- ------ ---- -------- ------- -------- --------
Balances, December 31,
1994................... 6,058 6,467 29,760 3 28,195 -- 4,782 32,980
Issuance of Pure Series
D redeemable
convertible preferred
stock.................. 788 9,706 -- -- -- -- -- --
Pure initial public
offering............... -- -- 2,000 -- 30,396 -- -- 30,396
Conversion of Pure
preferred stock........ (6,846) (16,173) 6,846 1 16,172 -- -- 16,173
Exercise of stock
options................ -- -- 532 -- 530 -- -- 530
Income tax benefit
related to option
plans.................. -- -- -- -- 800 -- -- 800
Currency translation
adjustment............. -- -- -- -- -- (146) -- (146)
Distributions to
stockholders........... -- -- -- -- -- -- (1,800) (1,800)
Reclassification of
undistributed
S corporation
earnings.............. -- -- -- -- 1,625 -- (1,625) --
Stock issued under stock
purchase plan.......... -- -- 44 -- 453 -- -- 453
Purchase of treasury
stock.................. -- -- (96) -- (9) -- -- (9)
Net loss................ -- -- -- -- -- -- (3,522) (3,522)
------ ------- ------ ---- -------- ------- -------- --------
Balances, December 31,
1995................... -- -- 39,086 4 78,162 (146) (2,165) 75,855
Exercise of stock
options................ -- -- 1,647 -- 5,777 -- -- 5,777
Stock issued under stock
purchase plan.......... -- -- 175 -- 2,800 -- -- 2,800
Income tax benefit
related to option
plans.................. -- -- -- -- 8,950 -- -- 8,950
Stock compensation
expense................ -- -- -- -- 4,158 -- -- 4,158
Currency translation
adjustment............. -- -- -- -- -- (685) -- (685)
Net loss................ -- -- -- -- -- -- (6,657) (6,657)
------ ------- ------ ---- -------- ------- -------- --------
Balances, December 31,
1996................... -- -- 40,908 4 99,847 (831) (8,822) 90,198
Exercise of stock
options (unaudited).... -- -- 714 -- 2,272 -- -- 2,272
Stock issued under
employee stock purchase
plans (unaudited)...... -- -- 78 -- 1,076 -- -- 1,076
Stock issued in
connection with
Integrity acquisition
(unaudited)............ -- -- 1,125 -- 27,590 -- -- 27,590
Currency translation
adjustment
(unaudited)............ -- -- -- -- -- (456) -- (456)
Net loss (unaudited).... -- -- -- -- -- -- (43,161) (43,161)
------ ------- ------ ---- -------- ------- -------- --------
Balances, March 31, 1997
(unaudited)............ -- $ -- 42,825 $ 4 $130,785 $(1,287) $(51,983) $ 77,519
====== ======= ====== ==== ======== ======= ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-23
<PAGE>
PURE ATRIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------- ------------------
1994 1995 1996 1996 1997
-------- -------- --------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)......... $ 5,427 $ (3,522) $ (6,657) $ 3,851 $(43,161)
Adjustments to reconcile
net income (loss) to net
cash provided by
operating activities:
Depreciation and
amortization........... 1,814 3,192 5,628 1,549 1,307
Noncash merger and
integration costs...... -- 331 6,645 -- --
Tax benefit of stock
option exercises....... 170 800 8,950 300 --
In-process research and
development............ -- 11,600 -- -- 44,117
Changes in operating
assets and liabilities:
Accounts receivable... (2,625) (9,250) (13,699) (3,189) 3,534
Prepaid expenses and
other current
assets............... (307) (766) (1,733) (330) 196
Deferred tax assets... (682) (2,236) (6,765) -- --
Accounts payable...... 615 622 1,990 1,539 104
Accrued payroll and
related expenses..... 985 3,784 3,171 (965) (273)
Accrued merger and
integration
expenses............. -- 1,887 13,484 (1,461) (4,436)
Other accrued
expenses............. 1,841 4,001 3,351 1,010 (1,781)
Deferred revenue...... 4,101 6,025 10,347 4,047 1,343
Income taxes.......... 813 2,295 (2,052) 1,488 936
-------- -------- --------- -------- --------
Net cash provided by
operating
activities.......... 12,152 18,763 22,660 7,839 1,886
-------- -------- --------- -------- --------
Cash flows from investing
activities:
Purchases of property and
equipment, net........... (3,251) (8,212) (11,505) (2,959) (5,593)
Other assets.............. (118) (395) 74 (130) 46
Acquisitions, net of cash
acquired................. -- (3,137) -- -- (16,101)
Proceeds from the sale of
short-term investments... 10,966 59,711 148,490 16,865 97,196
Purchases of short-term
investments.............. (33,007) (92,078) (174,404) (17,600) (80,803)
-------- -------- --------- -------- --------
Net cash used in
investing
activities.......... (25,410) (44,111) (37,345) (3,824) (5,255)
-------- -------- --------- -------- --------
Cash flows from financing
activities:
Bank borrowings........... 250 -- -- -- --
Repayments of bank
borrowings and capital
leases................... (93) (298) (321) (64) --
S Corporation
distributions to
stockholders............. (300) (1,800) -- -- --
Proceeds from issuance of
common stock............. 21,603 31,370 8,577 1,654 3,348
Proceeds from issuance of
redeemable convertible
preferred stock.......... 4,070 -- -- -- --
-------- -------- --------- -------- --------
Net cash provided by
financing
activities.......... 25,530 29,272 8,256 1,590 3,348
-------- -------- --------- -------- --------
Effect of currency exchange
rate changes on cash...... -- (155) (502) (32) (442)
-------- -------- --------- -------- --------
Net change in cash and cash
equivalents............... 12,272 3,769 (6,931) 5,573 (463)
Cash and cash equivalents
at beginning of period.... 8,253 20,525 24,294 24,294 17,363
-------- -------- --------- -------- --------
Cash and cash equivalents
at end of period.......... $ 20,525 $ 24,294 $ 17,363 $ 29,867 $ 16,900
======== ======== ========= ======== ========
Supplemental disclosure of
cash flow information:
Cash paid:
Income taxes............ $ 843 $ 4,517 $ 3,306 $ 208 $ 7
Noncash investing and
financing activities:
Conversion of redeemable
preferred stock........ $ 6,167 $ 16,173 $ -- $ -- $ --
Redeemable convertible
preferred stock issued
in connection with
acquisition of QualTrak
Corporation............ $ -- $ 9,706 $ -- $ -- $ --
Common stock issued in
connection with
acquisition of
Integrity QA Software.. $ -- $ -- $ -- $ -- $ 27,590
</TABLE>
See accompanying Notes To Consolidated Financial Statements.
F-24
<PAGE>
PURE ATRIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND MARCH 31,
1996 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Pure Atria Corporation (the Company) develops, markets and supports a
comprehensive, integrated suite of software products that enables the
production of reliable, high-quality software and improves the software
development process.
Basis of Consolidation--The accompanying consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Cash Equivalents and Short-Term Investments--The Company considers all
highly liquid instruments with an original maturity of 90 days or less at time
of purchase to be cash equivalents. All of the Company's short-term
investments are classified as available-for-sale and are recorded at fair
value, which approximates cost.
Property and Equipment--Property and equipment are stated at cost, net of
accumulated depreciation and amortization and are depreciated over their
estimated useful lives of three to seven years. Leasehold improvements are
recorded at cost and amortized over the lesser of their useful lives or the
term of the related leases.
Revenue Recognition--The Company's revenues are derived from license fees
for its software products, from software maintenance fees, and from other
sources. Product revenues are derived from product licensing and sublicensing
fees. Maintenance and other revenues are derived from software maintenance,
training and consulting fees and from royalties for technology licenses. The
Company recognizes revenue in accordance with the provisions of the American
Institute of Certified Public Accountants' Statement of Position No. 91-1,
Software Revenue Recognition. Product revenues from the sale of software
licenses are recognized upon shipment to an end user if collection is probable
and remaining vendor obligations are insignificant. Sublicense fee revenue
from sales through distributors and other resellers is recognized in the
period in which the sublicense is reported to the Company. Product returns and
sales allowances are estimated and provided for at the time of sale.
Maintenance revenues from ongoing customer support and product upgrades are
recognized ratably over the term of the maintenance agreement. Payments for
maintenance fees are generally received in advance and are nonrefundable.
Revenues from training and consulting are recognized when the services are
performed. Revenues from royalties on technology licenses are recognized when
earned and when collection is probable.
Use of Estimates--Management of the Company has made a number of estimates
and assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these consolidated
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
Research and Development Costs--Research and development costs are charged
to operations as incurred. To date, the Company has not capitalized software
development costs after technological feasibility has been established as such
costs incurred subsequent to the establishment of technological feasibility
have not been material.
Income Taxes--The Company records income taxes using the asset and liability
method. Deferred assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. Valuation allowances are established when
necessary to reduce deferred tax assets to the amounts expected to be
realized.
Concentrations of Credit Risk--Financial instruments potentially exposing
the Company to a concentration of credit risk principally consist of cash and
cash equivalents, short-term investments, and accounts receivable.
F-25
<PAGE>
PURE ATRIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND MARCH 31,
1996 IS UNAUDITED)
Cash and cash equivalent balances consist of deposits with major commercial
banks, the maturity of which is under three months from date of purchase.
Short-term investments are placed with high quality financial, government, or
corporate institutions. These investments typically bear minimal risk. The
diversification of risk for the investment portfolio is consistent with the
Company's policy to ensure safety of principal and to maintain liquidity.
The Company sells its products to companies in the software development
industry (end users) and, to a lesser extent, distributors, who remarket the
product to end users. The Company maintains reserves for potential credit
losses, but historically has not experienced any significant losses related to
individual customers or groups of customers in any particular industry or
geographic area. No single customer accounted for 10% or more of total
revenues for all periods presented.
Foreign Currency Translation--The functional currency of the Company's
foreign subsidiaries is their local currency. Accordingly, all assets and
liabilities are translated at the current exchange rate at the end of the
period and income and expense accounts are translated at the average rates in
effect during the period. Adjustments arising from translation of these
subsidiaries' financial statements are reflected as a separate component of
stockholders' equity. Exchange gains or losses from foreign currency
transactions are reflected in operations and are not material.
Per Share Computations--Pro forma net income (loss) per share is computed
using pro forma net income (loss) and is based on the weighted average number
of shares outstanding of common stock and redeemable convertible preferred
stock, on an "as if converted" basis, and dilutive common equivalent shares
from stock options using the treasury stock method. In accordance with certain
Securities and Exchange Commission (SEC) Staff Accounting Bulletins, such
computations for periods preceding the initial public offerings (IPO) include
all common and common equivalent shares issued within the 12 months preceding
the IPO dates as if they were outstanding for all prior periods presented
using the treasury stock method and the IPO prices.
Pro forma net income (loss) includes a provision for income taxes as if
Performix, Inc. (Performix) had been a C corporation, fully subject to federal
and state income taxes. Prior to its acquisition by the Company, Performix had
elected S corporation status for income tax purposes and, consequently,
historical results as they relate to Performix do not include a provision for
income taxes.
Net income (loss) per share is computed using the weighted average number of
shares outstanding and dilutive common stock equivalents outstanding during
the period. Dilutive common stock equivalents consist of common stock issuable
using the treasury stock method.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share. SFAS No.
128 requires the presentation of both basic earnings per share and diluted
earnings per share for companies with potentially dilutive securities such as
outstanding options and convertible debt. SFAS No. 128 is effective for annual
and interim periods ending after December 15, 1997 and will require
restatement of all comparative per share amounts. The basic loss per share
will be no different from the primary loss per share as presented in the
accompanying consolidated statements of operations as neither consider
outstanding options nor convertible debt. Basic earnings per share, which does
not consider potentially dilutive securities, will be greater than primary
earnings per share. In addition, diluted earnings per share will not differ
materially from primary earnings per share under the Company's existing
capital structure.
Accounting for Stock-Based Compensation--The Company recognizes compensation
expense related to stock-based compensation plans using the intrinsic value
method.
F-26
<PAGE>
PURE ATRIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND MARCH 31,
1996 IS UNAUDITED)
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of--The
Company adopted the provisions of SFAS No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, on January
1, 1996. SFAS No. 121 requires long-lived assets to be evaluated for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of the
assets to be held and used is measured by a comparison of the carrying amount
of an asset to future net cash flows to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceed the
fair value of the assets. Assets to be disposed of are reported at the lower
of the carrying amount or the fair value less costs to sell. The adoption of
SFAS No. 121 did not have a material effect on the Company's consolidated
results of operations.
Interim Financial Information--The consolidated financial statements for the
three months ended March 31, 1996 and 1997 are unaudited but include all
adjustments (consisting solely of normal recurring adjustments), which are, in
the opinion of management, necessary for a fair presentation. The results of
operations for the three months ended March 31, 1997, are not necessarily
indicative of the results to be expected for the entire year.
2. BUSINESS COMBINATIONS
Poolings of Interests--On November 21, 1995, the Company acquired Performix,
a provider of client/server load and performance testing tools. Pursuant to
the acquisition, all of the shares of outstanding common stock of Performix
were exchanged for 1,591,475 shares of the Company's common stock. All options
to purchase Performix common stock then outstanding were assumed by the
Company. Each assumed option continues to have, and is subject to, the same
terms and conditions set forth in the respective option agreement applicable
to such option immediately prior to the date of acquisition, subject to
adjustment of the number of shares and exercise price thereof to reflect the
exchange ratio of Performix shares for the Company's shares. For income tax
purposes, Performix was acquired in a tax free reorganization. Performix was
an S corporation for federal income tax purposes prior to its acquisition.
Upon acquisition, the S corporation status terminated resulting in a one-time
deferred tax expense of approximately $650,000. Also, in connection with the
acquisition, the Company incurred approximately $2,200,000 of costs which are
not deductible for income tax purposes.
On August 26, 1996, the Company acquired Atria Software, Inc. (Atria), a
publicly held company that develops, markets, and supports software that
facilitates the management of complex software development, enhancement, and
maintenance. Pursuant to the acquisition, all of the shares of outstanding
common stock of Atria were exchanged for 22,238,806 shares of the Company's
common stock. In addition, each outstanding option or right to purchase Atria
common stock under Atria's various stock option and purchase plans were
assumed by the Company and became an option or right to purchase the Company's
common stock after giving effect to the 1.544615 exchange ratio. For income
tax purposes, Atria was acquired in a tax free reorganization.
These acquisitions were accounted for as poolings of interests, and
accordingly, the Company's consolidated financial statements and notes thereto
have been restated to include the financial position and results of Atria and
Performix for all periods presented.
F-27
<PAGE>
PURE ATRIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND MARCH 31,
1996 IS UNAUDITED)
Separate results of operations for the period prior to the acquisitions of
Atria and Performix are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED SIX MONTHS
--------------- SEPTEMBER 30, ENDED JUNE
1994 1995 1995 30, 1996
------- ------- ------------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Pure............................. $18,186 $44,042 $25,319 $31,625
Atria............................ 20,765 40,143 27,842 28,998
Performix........................ 3,807 -- 5,528 --
------- ------- ------- -------
Combined....................... $42,758 $84,185 $58,689 $60,623
======= ======= ======= =======
Net income (loss):
Pure............................. $ 1,270 $(8,695) $(8,132) $ 1,945
Atria............................ 3,380 5,173 3,212 2,432
Performix........................ 777 -- 1,904 --
------- ------- ------- -------
Combined....................... $ 5,427 $(3,522) $(3,016) $ 4,377
======= ======= ======= =======
</TABLE>
Purchases--On March 17, 1995, the Company acquired QualTrak Corporation
(QualTrak), a provider of quality assurance software tools. Pursuant to the
acquisition, all of the shares of outstanding common stock of QualTrak and
options therefor were exchanged for 822,363 shares of the Company's Series D
redeemable convertible preferred stock or options therefor and $2,000,000 in
cash or the right to receive cash.
The acquisition was accounted for as a purchase with the results of QualTrak
included from the acquisition date. The total purchase price of $11,904,000
was assigned to the fair value of the net assets acquired, including $543,000
to the net tangible assets acquired, $10,100,000 to in-process research and
development, $591,000 to goodwill, $420,000 to purchased software, and
$250,000 to a royalty arrangement. The value of the in-process research and
development was charged to operations on the acquisition date. Goodwill,
purchased software and prepaid royalties are amortized on a straight-line
basis over 5 years, 18 months, and 3 years, respectively. For income tax
purposes, QualTrak was acquired in a tax free reorganization.
During the quarter ended September 30, 1995, the Company recorded a pre-tax
charge of $1,500,000 for in-process research and development in connection
with the acquisition of technology. This technology is incorporated in a
client/server change request management product that tracks defects and
enhancement requests throughout the software lifecycle. The Company began
shipping this product in the first quarter of 1996.
On January 31, 1997, the Company completed the acquisition of Integrity QA
Software, Inc. (Integrity), a provider of quality assurance software tools. An
aggregate of 1,237,228 shares of common stock were issued (including common
stock to be reserved for issuance upon exercise of Integrity options to be
assumed by the Company) in exchange for (i) all of the issued and outstanding
capital stock of Integrity and (ii) all unexpired and unexercised stock
options or warrants to acquire capital stock of Integrity. Each outstanding
share of Integrity Series A preferred stock was converted into a right to
receive (i) $6.50 in cash and (ii) that fraction of a share of the Company's
common stock obtained by dividing $6.50 by the average of the closing prices
of the Company's common stock as quoted on the Nasdaq National Market for the
five trading days immediately preceding the closing date of the acquisition.
Each outstanding share of Integrity common stock was converted into a right to
receive that fraction of a share of the Company's common stock obtained by
dividing $6.3254 by the average of the closing prices of the Company's common
stock as quoted on the Nasdaq National Market for
F-28
<PAGE>
PURE ATRIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND MARCH 31,
1996 IS UNAUDITED)
the five trading days immediately preceding the closing date of the
acquisition. Each outstanding warrant to purchase shares of Integrity
preferred stock and each outstanding option to purchase Integrity common stock
was assumed by the Company after giving effect to the applicable exchange
ratio. As a result of the acquisition, the Company recorded one-time pre-tax
charges to operations of $43.6 million for in-process research and development
and $1.1 million for certain merger and integration expenses.
The following summary prepared on an unaudited pro forma basis combines the
consolidated results of operations as if QualTrak and Integrity had been
acquired as of the beginning of the periods presented (in thousands, except
per share data):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------
1994 1995
------- -------
<S> <C> <C>
PRO FORMA FOR QUALTRAK:
Revenues...................................................... $46,000 $84,844
Pro forma net income.......................................... 5,007 5,770
Pro forma net income per share................................ 0.13 0.14
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
YEAR ENDED -------------------
DECEMBER 31,
1996 1996 1997
------------ --------- ---------
<S> <C> <C> <C>
PRO FORMA FOR INTEGRITY:
Revenues.................................... $132,495 $28,630 $ 30,035
Net income (loss)........................... (8,185) 3,588 1,354
Net income (loss) per share................. (0.21) 0.08 0.03
</TABLE>
The pro forma results exclude the $10.1 million and $44.7 million
nonrecurring charges for in-process research and development and merger
related costs resulting from the acquisitions of QualTrak and Integrity,
respectively. The pro forma results are not necessarily indicative of what
would have occurred if the acquisitions had been in effect for the periods
presented. In addition, they are not intended to be a projection of future
results and do not reflect any synergies that might be achieved from combined
operations.
F-29
<PAGE>
PURE ATRIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND MARCH 31,
1996 IS UNAUDITED)
4. SHORT-TERM INVESTMENTS
The Company's portfolio of short-term investments consisted of the following
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1995 1996
------- -------
<S> <C> <C>
US treasury and agency obligations........................... $ -- $35,760
Auction rate securities--municipal obligations............... 8,000 17,300
Auction rate securities--preferred stock..................... 25,400 11,975
Debt securities--municipal obligations....................... 20,840 9,483
Corporate debt securities.................................... 5,496 --
------- -------
$54,240 $80,014
======= =======
</TABLE>
All short-term investments as of December 31, 1995 and 1996, are classified
as available-for-sale and have maturities of less than one year. Such
investments are recorded at fair value which as of December 31, 1995 and 1996
approximated cost. Unrealized gains or losses on available-for-sale securities
were immaterial for the years ended December 31, 1995 and 1996.
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1995 1996
------- -------
<S> <C> <C>
Computer equipment.......................................... $10,281 $17,761
Furniture and office equipment.............................. 2,872 4,225
Leasehold improvements...................................... 957 1,447
Construction in progress.................................... -- 1,216
------- -------
14,110 24,649
Less accumulated depreciation and amortization.............. 5,796 11,675
------- -------
$ 8,314 $12,974
======= =======
</TABLE>
6. ACCRUED MERGER AND INTEGRATION EXPENSES
On August 26, 1996, the Company acquired Atria (see Note 2) and initiated a
plan to combine the operations of the two companies. During the third quarter
of 1996, the Company recorded a $35,255,000 charge to operating expenses
related to merger and integration costs.
F-30
<PAGE>
PURE ATRIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND MARCH 31,
1996 IS UNAUDITED)
Atria merger costs consist principally of transaction fees for investment
bankers, attorneys, accountants, financial printing, and other related
charges. Atria integration costs include severance and other employee related
charges, elimination of redundant facilities, write-off of excess property and
equipment and certain intangible assets, and other professional fees.
<TABLE>
<CAPTION>
SEVERANCE
AND OTHER ASSET WRITE-OFFS
TRANSACTION EMPLOYEE AND LEASE
COSTS RELATED CHARGES CANCELLATIONS OTHER TOTAL
----------- --------------- ---------------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Provision recorded at
acquisition of Atria... $ 8,319 $16,538 $ 5,998 $ 4,400 $ 35,255
Change in estimate...... -- 960 (560) (400) --
Noncash write-offs...... -- (4,018) (1,987) (640) (6,645)
Cash payments........... (7,709) (2,856) (550) (2,124) (13,239)
------- ------- ------- ------- --------
Accrued as of December
31, 1996............... $ 610 $10,624 $ 2,901 $ 1,236 $ 15,371
======= ======= ======= ======= ========
</TABLE>
Severance and Other Employee Related Charges--As a result of the merger,
certain technical support, customer service, distribution, sales, marketing,
and administrative functions were combined and reduced. Approximately 20
employees were terminated as a result of this activity. Affected employees had
received notification of their termination by September 30, 1996 and final
assignments were completed by March 31, 1997. The Company also committed to
pay noncontingent retention bonuses and commissions to other employees and
these costs have been included in the accrual. In addition, certain employees
received accelerated vesting on their options in conjunction with their
termination subsequent to the Merger for which a compensation charge of
$4,018,000 was recorded.
Asset Write-offs and Lease Cancellations--The Company has consolidated
duplicate offices in Europe and will relocate the North American headquarters
to a larger facility. The accrual includes lease payments resulting from the
planned closure of these facilities that are expected to continue through the
lease term or penalties associated with early termination of the leases.
Certain intangibles that will have no benefit to the combined operations were
written off. Redundant property and equipment were either disposed of during
the third quarter or written down to its estimated net realizable value.
Other--Other consists of incurred costs associated with communication of the
merger to employees and costs associated with exiting offices in Europe,
discontinuance of the Pure Vision product line and termination of a European
distributor. Payments associated with these activities were primarily expended
through the first quarter of 1997.
In connection with the Integrity acquisition on January 31, 1997 (see Note
2), the Company recorded a $1,070,000 charge to operating expenses related to
nonrecurring transition costs. These costs relate principally to noncontingent
hiring bonuses to be paid by March 31, 1998.
F-31
<PAGE>
PURE ATRIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND MARCH 31,
1996 IS UNAUDITED)
7. COMMITMENTS AND CONTINGENCIES
Leases
The Company has operating leases for its corporate headquarters, field sales
offices and certain office equipment that expire at various dates through
2007. In October 1996, the Company entered into an operating lease for
approximately 101,000 square feet of office space in Cupertino, California.
The term of the lease is ten years and contains two five-year options to
renew. Future minimum lease payments under these noncancelable leases as of
December 31, 1996 are as follows (in thousands):
<TABLE>
<S> <C>
1997............................................................... $ 5,246
1998............................................................... 4,991
1999............................................................... 4,455
2000............................................................... 3,196
2001............................................................... 2,842
Thereafter......................................................... 10,692
</TABLE>
As of December 31, 1996, the Company had letters of credit outstanding in
the amount of $250,000 and $3,000,000 guaranteeing certain rental payments at
its office locations in Lexington, Massachusetts and Cupertino, California,
respectively.
Rent expense was $1,148,000, $2,010,000, and $3,655,000, for the years ended
December 31, 1994, 1995, and 1996, respectively.
Legal Proceeding
In March, 1995, the Company brought suit against AIB Software Corporation
("AIB") and Platinum Technology, Inc. ("Platinum") in the U.S. District Court
for the Northern District of California, asserting that AIB's Sentinel II
product, later marketed by Platinum as Memory Advisor, infringed the Company's
patents. (Platinum had purchased AIB after the initial claim was filed.) In
the suit the Company sought injunctive relief and damages. This litigation was
resolved in February 1997 with a settlement including submittal of a consent
judgment in the Company's favor. The settlement provides for Platinum to stop
selling licenses for the products that were the subject of the lawsuit, and
for current licensees of those products to be entitled to a free swap/upgrade
to Purify for Unix. The submitted consent judgement includes a dismissal of
the anti-trust claims against the Company, affirms the validity and
enforceability of the patents in question, and enjoins Platinum from granting
any further licenses to Sentinel II/Memory Advisor 4.2, and from releasing any
new versions other than error corrections and support for new versions of the
currently supported operating systems. Product revenues include a $1.0 million
payment from Platinum for the swap/upgrade right to Purify for Unix and in-
process research and development includes $500,000 for software code acquired
from Platinum in conjunction with the settlement.
8. STOCKHOLDERS' EQUITY
Redeemable Convertible Preferred Stock--Prior to July 1995, Pure was
authorized to issue 6,600,000 shares of redeemable convertible preferred stock
of which 6,057,456 shares were issued and outstanding. Pure had 2,000,000
shares of Series A issued and outstanding, 2,521,875 shares of Series B issued
and outstanding, and 1,535,581 shares of Series C issued and outstanding. Each
outstanding share of preferred stock automatically converted into one share of
common stock upon the closing of Pure's IPO in August 1995.
F-32
<PAGE>
PURE ATRIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND MARCH 31,
1996 IS UNAUDITED)
Atria had 55,834 shares of Series A issued and outstanding and 753,408
shares of Series B issued and outstanding as of December 31, 1993. Each
outstanding share of preferred stock automatically converted at a rate of
77.070 and 6.178 shares of common stock for each share of Series A and B
preferred stock, respectively, upon the closing of Atria's IPO in 1994.
1992 Stock Option/Stock Issuance Plan--On October 15, 1992, the Company's
Board of Directors approved the 1992 Stock Option/ Stock Issuance Plan (the
Plan). Options granted under the Plan may be either incentive stock options or
nonstatutory stock options, as designated by the Board of Directors. The Plan
expires 10 years after adoption. Stock issued under the plan was subject to
repurchase upon termination of employment. The Company's repurchase right
generally lapses for 25% of the shares granted one year from the date of the
grantee's date of hire ratably over the next 36 months for the remaining
shares.
The Plan provides that (i) the exercise price of an incentive stock option
will be no less than the fair market value of the Company's common stock at
the date of grant; (ii) the option exercise price per share for a nonstatutory
stock option shall not be less than 85% of the fair market value; and (iii)
the exercise price of an incentive stock option for an optionee who possesses
more than 10% of the total combined voting power of all classes of stock shall
not be less than 110% of the fair market value; all as determined by the
Company's Board of Directors. One year from the date of grant, 25% of the
options granted vest. The remaining balance vests ratably over the next 36
months of continuous service.
1995 Stock Option Plan--In May 1995, the Company adopted the 1995 Stock
Option Plan (1995 Plan) to succeed the Plan. Under the 1995 Plan, 3,449,329
shares of common stock have been reserved for issuance. Beginning in 1996, an
additional number of shares will be reserved on the first trading day of
calendar years 1996, 1997, and 1998 equal to 5% of the number of shares of
common stock outstanding on the last day of the preceding calendar year. Under
the 1995 Plan, employees (including officers) and independent consultants may
be granted nonstatutory options to purchase common stock at an exercise price
of not less than 85% of the fair market value at the date of the grant and/or
incentive stock options at an exercise price of no less than the fair market
value at the date of grant.
The 1995 Plan is administered by the Compensation Committee of the Board of
Directors. The Compensation Committee determines which eligible individuals
are to receive option grants, the number of shares subject to each such grant,
the status of any granted option as either an incentive option or a
nonstatutory option under the federal tax laws, the vesting schedule to be in
effect for each option grant and the maximum term for which each granted
option is to remain outstanding.
The Company's Board of Directors may amend or modify the 1995 Plan at any
time. The 1995 Plan will terminate on May 15, 2005, unless terminated sooner
by the Board of Directors.
Under the 1995 Plan, each individual serving as a nonemployee director
received on the date of the IPO and each individual who first joins the Board
of Directors as a nonemployee director on or after the effective date of the
1995 Plan, received at that time, an automatic option grant for 15,000 shares
of the Company's common stock. In addition, at each annual stockholders'
meeting, beginning in 1996, each nonemployee director will automatically be
granted at that meeting, a stock option to purchase 5,000 shares of common
stock, provided such individual has served on the Board of Directors for at
least 6 months prior to such meeting. Each option has an exercise price equal
to the fair market value of the common stock on the automatic grant date and a
maximum term of 10 years, subject to earlier termination following the
optionee's cessation of Board of Directors service. The option is immediately
exercisable for all of the shares but the shares are subject to
F-33
<PAGE>
PURE ATRIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND MARCH 31,
1996 IS UNAUDITED)
repurchase at original cost. With respect to the 15,000 share option grant,
the right lapses and the optionee vests in a series of 4 equal annual
installments over the optionee's period of Board of Directors service,
beginning one year from the grant date. With respect to each 5,000 share
option grant, the right lapses and the option vests in full on the first
anniversary of such option's date of grant. However, vesting of the shares
will automatically accelerate upon (i) an acquisition of the Company by
merger, consolidation or asset sale; (ii) a hostile take-over of the Company
effected by tender offer for more than 50% of the outstanding voting stock or
proxy contest for Board of Directors membership; or (iii) the death or
disability of the optionee while serving as a Board of Directors member.
In the event that more than 50% of the Company's outstanding voting stock
were to be acquired pursuant to a hostile tender offer, each grant to
nonemployee directors, which has been outstanding for at least six months, may
be surrendered to the Company in return for a cash distribution from the
Company based upon the tender offer price per share of common stock at the
time subject to the surrendered option.
The following summarizes stock option transactions under all plans for the
years ended December 31 and three months ended March 31, 1997:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
--------------------
WEIGHTED
SHARES AVERAGE
AVAILABLE NUMBER OF EXERCISE
FOR GRANT SHARES PRICE
---------- ---------- --------
<S> <C> <C> <C>
Balances, December 31, 1993................ 3,040,184 2,939,933 $ 0.25
Additional shares reserved................. 2,471,384 -- --
Retired.................................... (1,547,164) -- --
Granted.................................... (1,983,552) 1,983,552 1.84
Exercised.................................. -- (683,383) 0.32
Canceled................................... 150,420 (150,420) 0.28
---------- ----------
Balances, December 31, 1994................ 2,131,272 4,089,682 1.01
Additional shares reserved................. 1,285,354 -- --
Retired.................................... (54,602) -- --
Granted.................................... (2,170,214) 2,170,214 11.78
Exercised.................................. -- (531,739) 1.00
Canceled................................... 406,562 (406,562) 2.18
---------- ----------
Balances, December 31, 1995................ 1,598,372 5,321,595 5.37
Additional shares reserved................. 3,340,734 -- --
Retired.................................... (246,426) -- --
Granted.................................... (5,236,376) 5,236,376 26.08
Exercised.................................. -- (1,646,893) 3.51
Canceled................................... 805,262 (805,262) 20.51
---------- ----------
Balances, December 31, 1996................ 261,566 8,105,816 $17.56
Additional shares reserved (unaudited)..... 2,045,421 -- --
Granted (unaudited)........................ (571,384) 571,384 21.89
Exercised (unaudited)...................... -- 714,933 3.18
Canceled (unaudited)....................... 316,353 316,353 25.79
---------- ----------
Balances, March 31, 1997 (unaudited)....... 2,051,956 7,645,914 $18.56
========== ==========
</TABLE>
F-34
<PAGE>
PURE ATRIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND MARCH 31,
1996 IS UNAUDITED)
At March 31, 1997, the number of options exercisable was 2,977,847 and the
weighted average price of those options was $12.11.
The following table summarizes information about fixed-price stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------- --------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
------------------------ ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.06-$ 0.60........... 1,355,922 6.6 $ 0.19 1,353,922 $ 0.19
$ 0.65-$ 9.43........... 1,395,859 7.5 $ 4.53 1,314,707 $ 4.25
$10.00-$21.69........... 1,418,284 9.1 $20.20 765,377 $19.62
$21.73-$23.63........... 346,959 9.3 $23.04 48,862 $21.93
$24.00.................. 1,458,242 10.0 $24.00 447 $24.00
$24.75-$40.25........... 2,130,550 9.4 $30.07 422,455 $29.99
--------- ---- ------ --------- ------
$ 0.06-$40.25........... 8,105,816 8.6 $17.55 3,903,770 $ 8.85
========= ==== ====== ========= ======
</TABLE>
Employee Stock Purchase Plan--The Company's Employee Stock Purchase Plan
(the 1995 Purchase Plan) was adopted by the Company's Board of Directors on
May 16, 1995, and approved by the stockholders on July 17, 1995. The Company
has reserved 300,000 shares of common stock for issuance under the
1995 Purchase Plan. The 1995 Purchase Plan provides for 24-month offerings
with purchases occurring at six-month intervals, commencing on the effective
date of the Company's IPO. The 1995 Purchase Plan is administered by the
Compensation Committee of the Board of Directors. The price of stock purchased
under the 1995 Purchase Plan is the lower of the fair market value of the
common stock on the first day of the 6-month purchase period in which the
participant first joined the plan or on the applicable semi-annual purchase
date. The 1995 Purchase Plan will terminate in June 2005.
Pro Forma Fair Value Information--The Company applies APB Opinion No. 25 in
accounting for its stock option plans and accordingly, no compensation cost
has been recognized for its stock options in the financial statements, except
where vesting has been accelerated for options held by terminated employees
thereby triggering a new measurement date. Had the Company determined
compensation cost based on the fair value at the grant date for its stock
options under SFAS No. 123, Accounting for Stock-Based Compensation, the
Company's net loss would have been increased to the pro forma amounts
indicated below (in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------
1995 1996
------- --------
<S> <C> <C>
Pro forma net loss...................................... $(4,290) $(12,973)
Pro forma net loss per share............................ (.11) (.32)
</TABLE>
The per share weighted-average fair value of stock options granted during
1996 and 1995 was $13.36 and $5.83 on the date of grant using the Black
Scholes option-pricing model with the following weighted-average assumptions:
1996--expected volatility 0.5--expected dividend yield 0.0%, risk-free
interest rate of 6.2%, and an expected life of 5 years; 1995--expected
volatility 0.5--expected dividend yield 0.0%, risk-free interest rate of 6.4%,
and an expected life of 5 years.
F-35
<PAGE>
PURE ATRIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND MARCH 31,
1996 IS UNAUDITED)
Pro forma net loss reflects only options granted in 1996 and 1995.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net loss amounts
presented above because compensation costs is reflected over the options'
vesting period of 4 years and compensation costs for options granted prior to
January 1, 1995 is not considered.
9. INCOME TAXES
Income taxes consisted of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
------------------------
1994 1995 1996
------ ------- -------
<S> <C> <C> <C>
Current:
Federal........................................ $1,410 $ 5,684 $(1,422)
State.......................................... 370 1,108 166
Foreign........................................ 67 7 177
------ ------- -------
1,847 6,799 (1,079)
------ ------- -------
Deferred:
Federal........................................ (587) (1,923) (5,478)
State.......................................... (95) (313) (32)
------ ------- -------
(682) (2,236) (5,510)
------ ------- -------
Charge in lieu of taxes attributable to employee
stock plans..................................... 170 800 8,950
------ ------- -------
$1,335 $ 5,363 $ 2,361
====== ======= =======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets (liabilities) were as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1995 1996
------ ------
<S> <C> <C>
Allowances and accrued expenses............................. $2,266 $5,692
Research credits............................................ -- 733
State taxes................................................. 118 125
Net operating loss carryforward............................. -- 981
Deferred revenue............................................ 543 1,523
Accounts receivable......................................... (649) --
Prepaid expenses............................................ (58) --
------ ------
Net deferred tax assets--current.......................... 2,220 9,054
Long-term deferred tax asset--property, equipment and
intangibles................................................ 915 846
------ ------
Net deferred tax assets................................... $3,135 $9,900
====== ======
</TABLE>
Management believes that it is more likely than not that the results of
future operations will generate sufficient taxable income to realize the net
deferred tax asset.
F-36
<PAGE>
PURE ATRIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND MARCH 31,
1996 IS UNAUDITED)
Income tax expense differs from the amounts computed by applying the
statutory income tax rate of 34% to pre-tax income (loss) as a result of the
following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
-----------------------
1994 1995 1996
------ ------ -------
<S> <C> <C> <C>
Income tax expense (benefit) at statutory rate..... $2,299 $ 626 $(1,461)
State income taxes, net of federal benefit......... 203 621 276
Performix earnings during S corporation status..... (264) (605) --
Nondeductible acquisition-related charges.......... -- 4,790 4,678
Performix acquired deferred tax liability.......... -- 650 --
Research and development credits................... (615) (470) (295)
Tax exempt interest income......................... (145) (393) (881)
Other permanent differences........................ 256 181 44
Reduction in valuation allowance................... (399) (37) --
------ ------ -------
$1,335 $5,363 $ 2,361
====== ====== =======
</TABLE>
As of December 31, 1996, the Company had net operating loss carryforwards
for federal and state income tax purposes of approximately $2.4 million and
$3.7 million respectively, which expire between 2001 and 2011. As of December
31, 1996, the Company had research credit carryforwards for federal tax
purposes of approximately $0.7 million which expire between 2008 and 2011.
10. FOREIGN OPERATIONS
Foreign operations consisted of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1994 1995 1996
------- -------- --------
<S> <C> <C> <C>
Revenues:
United States................................. $41,689 $ 70,183 $104,621
Europe........................................ 1,069 10,512 24,464
Asia Pacific.................................. -- 3,490 3,410
------- -------- --------
Consolidated.................................. $42,758 $ 84,185 $132,495
======= ======== ========
Income (loss) from operations:
United States................................. $ 5,865 $ 971 $(16,886)
Europe........................................ 62 (1,205) 8,399
Asia Pacific.................................. -- (329) 522
------- -------- --------
Consolidated.................................. $ 5,927 $ (563) $ (7,965)
======= ======== ========
Identifiable assets:
United States................................. $54,235 $100,516 $137,603
Europe........................................ 481 7,817 13,634
Asia Pacific.................................. -- 1,741 2,713
------- -------- --------
Consolidated.................................. $54,716 $110,074 $153,950
======= ======== ========
</TABLE>
F-37
<PAGE>
PURE ATRIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND MARCH 31,
1996 IS UNAUDITED)
United States revenue includes export sales of approximately $7,426,000,
$10,172,000, and $12,595,000 in the years ended December 31, 1994, 1995 and
1996, respectively. Export sales have been made primarily to customers in
Europe, Australia, Canada and Latin America.
11. SUBSEQUENT EVENT (UNAUDITED)
On April 7, 1997, the Company announced that it had entered into a
definitive agreement ("the Merger Agreement") to be acquired by Rational
Software Corporation ("Rational"). Under the terms of the Merger Agreement all
of the outstanding shares of Pure Atria common stock will be exchanged for
shares of Rational on the basis of 0.90 shares of Rational stock for each
share of Pure Atria stock. Outstanding stock options to purchase Pure Atria
stock will be converted at the exchange ratio into Rational stock options. The
transaction is expected to be accounted for as a pooling of interests and to
qualify as a tax-free reorganization. It is anticipated that Rational will
recognize a one-time charge related to certain merger costs and related
expenses in the quarter ended September 30, 1997.
F-38
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ANNEX A
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
RATIONAL SOFTWARE CORPORATION
WINGS MERGER CORPORATION
AND
PURE ATRIA CORPORATION
APRIL 7, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
ARTICLE I--THE MERGER................................................... A-1
1.1 The Merger........................................................ A-1
1.2 Effective Time; Closing........................................... A-2
1.3 Effect of the Merger.............................................. A-2
1.4 Certificate of Incorporation; Bylaws.............................. A-2
1.5 Directors and Officers............................................ A-2
1.6 Effect on Capital Stock........................................... A-2
1.7 Dissenting Shares................................................. A-3
1.8 Surrender of Certificates......................................... A-4
1.9 No Further Ownership Rights in Target Common Stock................ A-5
1.10 Lost, Stolen or Destroyed Certificates............................ A-5
1.11 Tax and Accounting Consequences................................... A-5
1.12 Taking of Necessary Action; Further Action........................ A-5
ARTICLE II--REPRESENTATIONS AND WARRANTIES OF TARGET.................... A-6
2.1 Organization of Target............................................ A-6
2.2 Target Capital Structure.......................................... A-6
2.3 Obligations With Respect to Capital Stock......................... A-7
2.4 Authority......................................................... A-7
2.5 SEC Filings; Target Financial Statements.......................... A-8
2.6 Absence of Certain Changes or Events.............................. A-8
2.7 Tax............................................................... A-9
2.8 Restrictions on Business Activities............................... A-9
2.9 Title to Properties; Absence of Liens and Encumbrances............ A-9
2.10 Intellectual Property............................................. A-9
2.11 Compliance; Permits; Restrictions................................. A-10
2.12 Litigation........................................................ A-10
2.13 Brokers' and Finders' Fees........................................ A-10
2.14 Employee Benefit Plans............................................ A-11
2.15 Employees; Labor Matters.......................................... A-11
2.16 Environmental Matters............................................. A-11
2.17 Agreements, Contracts and Commitments............................. A-12
2.18 Change of Control Payments........................................ A-12
2.19 Statements; Proxy Statement/Prospectus............................ A-13
2.20 Board Approval.................................................... A-13
2.21 Fairness Opinion.................................................. A-13
ARTICLE III--REPRESENTATIONS AND WARRANTIES OF ACQUIROR AND MERGER SUB.. A-13
3.1 Organization of Acquiror.......................................... A-13
3.2 Acquiror and Merger Sub Capital Structure......................... A-14
3.3 Obligations With Respect to Capital Stock......................... A-14
3.4 Authority......................................................... A-15
3.5 Section 203 of the Delaware General Corporation Law Not A-16
Applicable.......................................................
3.6 SEC Filings; Acquiror Financial Statements........................ A-16
3.7 Absence of Certain Changes or Events.............................. A-17
3.8 Taxes and Returns................................................. A-17
3.9 Title to Properties; Absence of Liens and Encumbrances............ A-17
3.10 Intellectual Property............................................. A-18
</TABLE>
A-i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
3.11 Compliance; Permits; Restrictions................................. A-18
3.12 Litigation........................................................ A-18
3.13 Brokers' and Finders' Fees........................................ A-19
3.14 Employee Benefit Plans............................................ A-19
3.15 Employees; Labor Matters.......................................... A-19
3.16 Environmental Matters............................................. A-19
3.17 Agreements, Contracts and Commitments............................. A-20
3.18 Change of Control Payments........................................ A-21
3.19 Statements; Proxy Statement/Prospectus............................ A-21
3.20 Board Approval.................................................... A-21
3.21 Fairness Opinion.................................................. A-21
3.22 Restrictions on Business Activities............................... A-21
ARTICLE IV--CONDUCT PRIOR TO THE EFFECTIVE TIME......................... A-21
4.1 Conduct of Business............................................... A-21
4.2 Acquiror Acquisitions............................................. A-24
4.3 No HSR Act Violation.............................................. A-24
ARTICLE V--ADDITIONAL AGREEMENTS........................................ A-24
5.1 Proxy Statement/Prospectus; Registration Statement; Other Filings; A-24
Board Recommendations............................................
5.2 Meetings of Stockholders.......................................... A-25
5.3 Confidentiality; Access to Information............................ A-25
5.4 No Solicitation................................................... A-25
5.5 Public Disclosure................................................. A-28
5.6 Legal Requirements................................................ A-28
5.7 Third Party Consents.............................................. A-28
5.8 Notification of Certain Matters................................... A-28
5.9 Best Efforts and Further Assurances............................... A-28
5.10 Stock Options and Warrants........................................ A-29
5.11 Form S-8.......................................................... A-29
5.12 Indemnification and Insurance..................................... A-29
5.13 Nasdaq National Market Listing.................................... A-30
5.14 Acquiror Affiliate Agreement...................................... A-30
5.15 Target Affiliate Agreement........................................ A-30
5.16 Acquiror Voting Agreements........................................ A-30
5.17 Target Voting Agreements.......................................... A-30
5.18 Regulatory Filings; Reasonable Efforts............................ A-31
5.19 Increase in Authorized Shares..................................... A-31
5.20 Tax-Free Reorganization........................................... A-31
5.21 Nasdaq Quotation.................................................. A-31
5.22 Employee Benefit Arrangements..................................... A-31
5.23 [Intentionally left blank]........................................ A-31
5.24 Amendment to Registration Rights.................................. A-31
5.25 Pooling Accounting................................................ A-31
5.26 Option Agreement.................................................. A-32
5.27 ESPP.............................................................. A-32
ARTICLE VI--CONDITIONS TO THE MERGER.................................... A-32
6.1 Conditions to Obligations of Each Party to Effect the Merger...... A-32
6.2 Additional Conditions to Obligations of Target.................... A-33
6.3 Additional Conditions to the Obligations of Acquiror and Merger A-33
Sub..............................................................
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
ARTICLE VII--TERMINATION, AMENDMENT AND WAIVER............................ A-34
7.1 Termination......................................................... A-34
7.2 Notice of Termination; Effect of Termination........................ A-35
7.3 Fees and Expenses................................................... A-35
7.4 Amendment........................................................... A-37
7.5 Extension; Waiver................................................... A-37
7.6 Extension of Date................................................... A-37
ARTICLE VIII--GENERAL PROVISIONS.......................................... A-37
8.1 Non-Survival of Representations and Warranties...................... A-37
8.2 Notices............................................................. A-37
8.3 Interpretation; Knowledge........................................... A-38
8.4 Counterparts........................................................ A-38
8.5 Entire Agreement; Third Party Beneficiaries......................... A-39
8.6 Severability........................................................ A-39
8.7 Other Remedies; Specific Performance................................ A-39
8.8 Governing Law....................................................... A-39
8.9 Rules of Construction............................................... A-39
8.10 Assignment.......................................................... A-39
8.11 Waiver of Jury Trial................................................ A-39
</TABLE>
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<PAGE>
INDEX OF EXHIBITS
Exhibit A-1 Form of Target Voting Agreement
Exhibit A-2 Form of Acquiror Voting Agreement
Exhibit B-1 Form of Target Option Agreement
Exhibit B-2 Form of Acquiror Option Agreement
Exhibit C-1 Form of Acquiror Affiliate Agreement
Exhibit C-2 Form of Target Affiliate Agreement
Exhibit D-1 Form of Opinion of Wilson Sonsini Goodrich & Rosati, P.C.
Exhibit D-2 Form of Opinion of Fenwick & West LLP
Exhibit E Form of Noncompetition Agreement
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<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION is made and entered into as of
April 7, 1997, by and among Rational Software Corporation, a Delaware
corporation ("ACQUIROR"), Wings Merger Corporation, a Delaware corporation and
a wholly owned subsidiary of Acquiror ("MERGER SUB"), and Pure Atria
Corporation, a Delaware corporation ("TARGET").
RECITALS
A. The Boards of Directors of Acquiror, Merger Sub and Target believe it is
in the best interests of their respective companies and the stockholders of
their respective companies that Target and Merger Sub combine into a single
company through the statutory merger of Merger Sub with and into Target (the
"MERGER") upon the terms and subject to the conditions of this Agreement (as
defined in Section 1.2 below) and in accordance with the Delaware General
Corporation Law ("DELAWARE LAW").
B. Pursuant to the Merger, among other things, the outstanding shares of
Target Common Stock, $.0001 par value ("TARGET COMMON STOCK"), shall be
converted into shares of Acquiror Common Stock, no par value ("ACQUIROR COMMON
STOCK"), at the rate set forth herein.
C. Target, Acquiror and Merger Sub desire to make certain representations
and warranties and other agreements in connection with the Merger.
D. The parties intend, by executing this Agreement (as defined in Section
1.2 below), to adopt a plan of reorganization within the meaning of Section
368 of the Internal Revenue Code of 1986, as amended (the "CODE"), and to
cause the Merger to qualify as a reorganization under the provisions of
Sections 368(a)(1)(A) and 368(a)(2)(E) of the Code.
E. The parties intend to cause the Merger to be accounted for as a pooling
of interests pursuant to APB Opinion No. 16.
F. Concurrently with the execution of this Agreement, and as a condition and
inducement to Acquiror's willingness to enter into this Agreement, certain
affiliates of Target shall enter into Voting Agreements in substantially the
form attached hereto as Exhibit A-1 (the "TARGET VOTING AGREEMENTS").
Concurrently with the execution of this Agreement, and as a condition and
inducement to Target's willingness to enter into this Agreement, certain
affiliates of Acquiror shall enter into Voting Agreements in substantially the
form attached hereto as Exhibit A-2 (the "ACQUIROR VOTING AGREEMENTS").
G. Concurrently with the execution of this Agreement, and as a condition and
inducement to Acquiror to enter into this Agreement, Target shall execute and
deliver a Stock Option Agreement in favor of Acquiror in substantially the
form attached hereto as Exhibit B-1 (the "TARGET OPTION AGREEMENT").
H. Concurrently with the execution of this Agreement, and as a condition and
inducement to Target to enter into this Agreement, Acquiror shall execute and
deliver a Stock Option Agreement in favor of Target in substantially the form
attached hereto as Exhibit B-2 (the "ACQUIROR OPTION AGREEMENT").
NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the parties agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger. At the Effective Time (as defined in Section 1.2) and
subject to and upon the terms and conditions of this Agreement and the
applicable provisions of Delaware Law, Merger Sub shall be merged with
A-1
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and into Target, the separate corporate existence of Merger Sub shall cease
and Target shall continue as the surviving corporation. Target as the
surviving corporation after the Merger is hereinafter sometimes referred to as
the "SURVIVING CORPORATION."
1.2 Effective Time; Closing. Subject to the provisions of this Agreement,
the parties hereto shall cause the Merger to be consummated by filing a
Certificate of Merger with the Secretary of State of the State of Delaware in
accordance with the relevant provisions of Delaware Law (the "CERTIFICATE OF
MERGER") (the time of such filing (or such later time as may be agreed in
writing by the parties and specified in the Certificate of Merger) being the
"EFFECTIVE TIME") as soon as practicable on or after the Closing Date (as
herein defined). Unless the context otherwise requires, the term "AGREEMENT"
as used herein refers collectively to this Agreement and Plan of
Reorganization and the Certificate of Merger. The closing of the Merger (the
"CLOSING") shall take place at the offices of Wilson Sonsini Goodrich &
Rosati, P.C., at a time and date to be specified by the parties, which shall
be no later than the second business day after the satisfaction or waiver of
the conditions set forth in Article VI, or at such other time, date and
location as the parties hereto agree in writing (the "CLOSING DATE").
1.3 Effect of the Merger. At the Effective Time, the effect of the Merger
shall be as provided in this Agreement and the applicable provisions of
Delaware Law. Without limiting the generality of the foregoing, and subject
thereto, at the Effective Time all the property, rights, privileges, powers
and franchises of Target and Merger Sub shall vest in the Surviving
Corporation, and all debts, liabilities and duties of Target and Merger Sub
shall become the debts, liabilities and duties of the Surviving Corporation.
1.4 Certificate of Incorporation; Bylaws.
(a) At the Effective Time, the Certificate of Incorporation of Merger Sub,
as in effect immediately prior to the Effective Time, shall be the Certificate
of Incorporation of the Surviving Corporation until thereafter amended as
provided by law and such Certificate of Incorporation of the Surviving
Corporation; provided, however, that at the Effective Time the Certificate of
Incorporation of the Surviving Corporation shall be amended so that the name
of the Surviving Corporation shall be the name of Target immediately prior to
the Merger.
(b) Subject to Section 5.12, the Bylaws of Merger Sub, as in effect
immediately prior to the Effective Time, shall be, at the Effective Time, the
Bylaws of the Surviving Corporation until thereafter amended.
1.5 Directors and Officers. The initial directors of the Surviving
Corporation shall be the directors of Merger Sub immediately prior to the
Effective Time, until their respective successors are duly elected or
appointed and qualified. The initial officers of the Surviving Corporation
shall be the officers of Merger Sub immediately prior to the Effective Time,
until their respective successors are duly appointed.
1.6 Effect on Capital Stock. At the Effective Time, by virtue of the Merger
and without any action on the part of Merger Sub, Target or the holders of any
of the following securities:
(a) Conversion of Target Common Stock. Each share of Target Common Stock
issued and outstanding immediately prior to the Effective Time (other than any
shares of Target Common Stock to be canceled pursuant to Section 1.6(b) and
any Dissenting Shares (as defined in and to the extent provided in Section
1.7(a)) will be canceled and extinguished and automatically converted (subject
to Sections 1.6(e) and (f)) into the right to receive 0.9 (the "EXCHANGE
RATIO") shares of Acquiror Common Stock upon surrender of the certificate
representing such share of Target Common Stock in the manner provided in
Section 1.8 (or in the case of a lost, stolen or destroyed certificate, upon
delivery of an affidavit (and bond, if required) in the manner provided in
Section 1.10).
(b) Cancellation of Acquiror-Owned Stock. Each share of Target Common Stock
held by Target or owned by Merger Sub, Acquiror or any direct or indirect
wholly owned subsidiary of Target or of Acquiror immediately prior to the
Effective Time shall be canceled and extinguished without any conversion
thereof.
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<PAGE>
(c) Stock Option Plans. Employee Stock Purchase Plan. At the Effective
Time, all options to purchase Target Common Stock then outstanding under all
of Target's stock option plans, which plans are listed on Schedule 1.6(c) of
the Target Schedules (the "TARGET STOCK OPTION PLANS") shall be assumed by
Acquiror in accordance with Section 5.10 hereof. With respect to any stock
purchase agreements entered into by the Target pursuant to any of the Target
Stock Option Plans, following the consummation of the Merger any Target
repurchase rights with respect to such stock purchase agreements shall be
assigned to the Acquiror and continue in the Acquiror's favor, subject to the
terms of such agreements and such plans. The Target shall take such actions as
are necessary to establish a "new exercise date" as such term is used in the
Target's Employee Stock Purchase Plan (the "TARGET ESPP")) in accordance with
the terms of the Target ESPP (the "NEW EXERCISE DATE") for the then current
offering period (as such term is used in the Target ESPP). The New Exercise
Date shall be the last trading day on which the Acquiror's Common Shares are
traded on the Nasdaq National Market immediately prior to the Effective Time
provided, that the New Exercise Date shall be conditioned upon the
consummation of the Merger. On the New Exercise Date, the Target shall apply
the funds credited as of such date under the Target ESPP within each
participant's payroll withholdings account to the purchase of whole shares of
Target Common Stock in accordance with the terms of the Target ESPP.
(d) Capital Stock of Merger Sub. Each share of Common Stock, $.001, of
Merger Sub (the "MERGER SUB COMMON STOCK") issued and outstanding immediately
prior to the Effective Time shall be converted into one validly issued, fully
paid and nonassessable share of Common Stock, $.001, of the Surviving
Corporation. Each certificate evidencing ownership of shares of Merger Sub
Common Stock shall continue to evidence ownership of such shares of capital
stock of the Surviving Corporation.
(e) Adjustments to Exchange Ratio. The Exchange Ratio shall be adjusted to
reflect appropriately the effect of any stock split, reverse stock split,
stock dividend (including any dividend or distribution of securities
convertible into Acquiror Common Stock or Target Common Stock),
reorganization, recapitalization or other like change with respect to Acquiror
Common Stock or Target Common Stock occurring on or after the date hereof and
prior to the Effective Time.
(f) Fractional Shares. No fraction of a share of Acquiror Common Stock will
be issued by virtue of the Merger, but in lieu thereof each holder of shares
of Target Common Stock who would otherwise be entitled to a fraction of a
share of Acquiror Common Stock (after aggregating all fractional shares of
Acquiror Common Stock to be received by such holder) shall receive from
Acquiror an amount of cash (rounded to the nearest whole cent) equal to the
product of (i) such fraction, multiplied by (ii) the average closing price of
one share of Acquiror Common Stock for the ten most recent days that Acquiror
Common Stock has traded ending on the trading day immediately prior to the
Effective Time, as reported on the Nasdaq National Market.
1.7 Dissenting Shares.
(a) Notwithstanding any provision of this Agreement to the contrary, the
shares of any holder of Target Common Stock who has demanded and perfected
appraisal rights for such shares in accordance with Delaware Law and who, as
of the Effective Time, has not effectively withdrawn or lost such appraisal
rights ("DISSENTING SHARES"), shall not be converted into or represent a right
to receive Acquiror Common Stock pursuant to Section 1.6, but the holder
thereof shall only be entitled to such rights as are granted by Delaware Law.
(b) Notwithstanding the foregoing, if any holder of shares of Target Common
Stock who demands appraisal of such shares under Delaware Law shall
effectively withdraw or lose (through failure to perfect or otherwise) the
right to appraisal, then, as of the later of the Effective Time or the
occurrence of such event, such holder's shares shall automatically be
converted into and represent only the right to receive Acquiror Common Stock
and cash in lieu of fractional shares of Acquiror Common Stock in accordance
with Section 1.6 hereof, without interest thereon, upon surrender of the
certificate representing such shares of Target Common Stock in the manner
provided in Section 1.8 (or in the case of a lost, stolen or destroyed
certificate, upon delivery of an affidavit (and bond, if required) in the
manner provided in Section 1.10).
A-3
<PAGE>
(c) Target shall give Acquiror (i) prompt notice of any written demands for
appraisal of any shares of Target Common Stock, withdrawals of such demands,
and any other instruments served pursuant to Delaware Law and received by
Target which relate to any such demand for appraisal and (ii) the opportunity
to participate in all negotiations and proceedings which take place prior to
the Effective Time with respect to demands for appraisal under Delaware Law.
Target shall not, except with the prior written consent of Acquiror or as may
be required by applicable law, voluntarily make any payment with respect to
any demands for appraisal of Target Common Stock or offer to settle or settle
any such demands. Any payments made in respect of Dissenting Shares shall be
made by Target or the Surviving Corporation as the case may be.
(d) The above provisions of this Section 1.7 shall apply only to the extent
that appraisal rights are required pursuant to Delaware Law, and shall not be
construed to limit the parties' obligations under Section 5.21 (Nasdaq
Quotation).
1.8 Surrender of Certificates.
(a) Exchange Agent. Acquiror shall select a bank or trust company with
assets of not less than $500 million to act as the exchange agent (the
"EXCHANGE AGENT") in the Merger.
(b) Acquiror to Provide Common Stock and Cash. Promptly after the Effective
Time, Acquiror shall make available to the Exchange Agent for exchange in
accordance with this Article I, the shares of Acquiror Common Stock issuable
pursuant to Section 1.6 in exchange for outstanding shares of Target Common
Stock, and cash in an amount sufficient for payment in lieu of fractional
shares pursuant to Section 1.6(f) and any dividends or distributions which
holders of shares of Target Common Stock may be entitled pursuant to Section
1.8(d).
(c) Exchange Procedures. Promptly after the Effective Time, Acquiror shall
cause the Exchange Agent to mail to each holder of record (as of the Effective
Time) of a certificate or certificates (the "CERTIFICATES"), which immediately
prior to the Effective Time represented outstanding shares of Target Common
Stock whose shares were converted into the right to receive shares of Acquiror
Common Stock pursuant to Section 1.6, cash in lieu of any fractional shares
pursuant to Section 1.6(f) and any dividends or other distributions pursuant
to Section 1.8(d), (i) a letter of transmittal (which shall specify that
delivery shall be effected, and risk of loss and title to the Certificates
shall pass, only upon delivery of the Certificates to the Exchange Agent and
shall be in such form and have such other provisions as Acquiror may
reasonably specify) and (ii) instructions for use in effecting the surrender
of the Certificates in exchange for certificates representing shares of
Acquiror Common Stock, cash in lieu of any fractional shares pursuant to
Section 1.6(f) and any dividends or other distributions pursuant to Section
1.8(d). Upon surrender of Certificates for cancellation to the Exchange Agent
or to such other agent or agents as may be appointed by Acquiror, together
with such letter of transmittal, duly completed and validly executed in
accordance with the instructions thereto, the holders of such Certificates
shall be entitled to receive in exchange therefor certificates representing
the number of whole shares of Acquiror Common Stock, payment in lieu of
fractional shares which such holders have the right to receive pursuant to
Section 1.6(f) and any dividends or distributions payable pursuant to Section
1.8(d), and the Certificates so surrendered shall forthwith be canceled. Until
so surrendered, outstanding Certificates will be deemed from and after the
Effective Time, for all corporate purposes, to evidence the ownership of the
number of full shares of Acquiror Common Stock into which such shares of
Target Common Stock shall have been so converted and the right to receive an
amount in cash in lieu of the issuance of any fractional shares in accordance
with Section 1.6(f) and any dividends or distributions payable pursuant to
Section 1.8(d).
(d) Distributions With Respect to Unexchanged Shares. No dividends or other
distributions declared or made after the date of this Agreement with respect
to Acquiror Common Stock with a record date after the Effective Time will be
paid to the holders of any unsurrendered Certificates with respect to the
shares of Acquiror Common Stock represented thereby until the holders of
record of such Certificates shall surrender such Certificates. Subject to
applicable law, following surrender of any such Certificates, the Exchange
Agent shall deliver to the record holders thereof, without interest,
certificates representing whole shares of Acquiror Common
A-4
<PAGE>
Stock issued in exchange therefor along with payment in lieu of fractional
shares pursuant to Section 1.6(f) hereof and the amount of any such dividends
or other distributions with a record date after the Effective Time payable
with respect to such whole shares of Acquiror Common Stock.
(e) Transfers of Ownership. If certificates for shares of Acquiror Common
Stock are to be issued in a name other than that in which the Certificates
surrendered in exchange therefor are registered, it will be a condition of the
issuance thereof that the Certificates so surrendered will be properly
endorsed and otherwise in proper form for transfer and that the persons
requesting such exchange will have paid to Acquiror or any agent designated by
it any transfer or other taxes required by reason of the issuance of
certificates for shares of Acquiror Common Stock in any name other than that
of the registered holder of the Certificates surrendered, or established to
the satisfaction of Acquiror or any agent designated by it that such tax has
been paid or is not payable.
(f) No Liability. Notwithstanding anything to the contrary in this Section
1.8, neither the Exchange Agent, Acquiror, the Surviving Corporation nor any
party hereto shall be liable to a holder of shares of Acquiror Common Stock or
Target Common Stock for any amount properly paid to a public official pursuant
to any applicable abandoned property, escheat or similar law.
1.9 No Further Ownership Rights in Target Common Stock. All shares of
Acquiror Common Stock issued upon the surrender for exchange of shares of
Target Common Stock in accordance with the terms hereof (including any cash or
other distributions paid in respect thereof pursuant to Section 1.6(f) and
1.8(d)) shall be deemed to have been issued in full satisfaction of all rights
pertaining to such shares of Target Common Stock, and there shall be no
further registration of transfers on the records of the Surviving Corporation
of shares of Target Common Stock which were outstanding immediately prior to
the Effective Time. If after the Effective Time Certificates are presented to
the Surviving Corporation for any reason, they shall be canceled and exchanged
as provided in this Article I.
1.10 Lost, Stolen or Destroyed Certificates. In the event any Certificates
shall have been lost, stolen or destroyed, the Exchange Agent shall issue in
exchange for such lost, stolen or destroyed Certificates, upon the making of
an affidavit of that fact by the holder thereof, such shares of Acquiror
Common Stock, cash for fractional shares, if any, as may be required pursuant
to Section 1.6(f) and any dividends or distributions payable pursuant to
Section 1.8(d); provided, however, that Acquiror may, in its discretion and as
a condition precedent to the issuance thereof, require the owner of such lost,
stolen or destroyed Certificates to deliver a bond in such sum as it may
reasonably direct as indemnity against any claim that may be made against
Acquiror, Target or the Exchange Agent with respect to the Certificates
alleged to have been lost, stolen or destroyed.
1.11 Tax and Accounting Consequences.
(a) It is intended by the parties hereto that the Merger shall constitute a
reorganization within the meaning of Section 368 of the Code. The parties
hereto adopt this Agreement as a "plan of reorganization" within the meaning
of Sections 1.368-2(g) and 1.368-3(a) of the United States Income Tax
Regulations.
(b) It is intended by the parties hereto that the Merger shall qualify for
accounting treatment as a pooling of interests.
1.12 Taking of Necessary Action; Further Action. If, at any time after the
Effective Time, any further action is necessary or desirable to carry out the
purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges,
powers and franchises of Target and Merger Sub, the officers and directors of
Target and Merger Sub will take all such lawful and necessary action, so long
as such action is consistent with this Agreement.
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<PAGE>
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF TARGET
Target represents and warrants to Acquiror and Merger Sub, subject to the
exceptions specifically disclosed in writing in the disclosure letter supplied
by Target to Acquiror dated as of the date hereof (the "TARGET SCHEDULES"), as
follows:
2.1 Organization of Target.
(a) Target and each of its subsidiaries is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction of
its incorporation; has the corporate power and authority to own, lease and
operate its assets and property and to carry on its business as now being
conducted and as proposed to be conducted; and is duly qualified or licensed
to do business and is in good standing in each jurisdiction where the
character of the properties owned, leased or operated by it or the nature of
its activities makes such qualification or licensing necessary, except where
the failure to be so qualified would not have a Material Adverse Effect (as
defined below) on Target.
(b) Target has delivered to Acquiror a true and complete list of all of
Target's subsidiaries, indicating the jurisdiction of incorporation of each
subsidiary and Target's equity interest therein.
(c) Target has delivered or made available to Acquiror a true and correct
copy of the Certificate of Incorporation and Bylaws of Target and similar
governing instruments of each of its subsidiaries, each as amended to date,
and each such instrument is in full force and effect. Neither Target nor any
of its subsidiaries is in violation of any of the provisions of its
Certificate of Incorporation or Bylaws or equivalent governing instruments.
(d) When used in connection with Target, the term "MATERIAL ADVERSE EFFECT"
means, for purposes of this Agreement, any change, event or effect that is
materially adverse to the business, assets (including intangible assets),
financial condition or results of operations of Target and its subsidiaries
taken as a whole, except (i) that a change in the market price of the Target
Common Stock shall not, in and of itself, be deemed a "Material Adverse
Effect" with respect to Target and (ii) that a "Material Adverse Effect" with
respect to Target shall not include any adverse effect (i) on the bookings,
revenues, gross margins or earnings of Target (or the direct consequences
thereof) following the date of this Agreement which is attributable to a delay
of, reduction in or cancellation or change in the terms of product orders by
customers of Target or (ii) due to employee attrition of Target, where Target
sustains the burden of reasonably demonstrating that any such delay,
reduction, cancellation, change or attrition is primarily attributable to the
transactions contemplated by this Agreement or the pendency or announcement of
the Merger. Acquiror may conclude that Material Adverse Effect on Target has
occurred only if Acquiror makes such determination in good faith after
consulting with its and Target's Chief Financial Officer or Chief Executive
Officer, auditors and other financial advisors.
2.2 Target Capital Structure. The authorized capital stock of Target
consists of 80,000,000 shares of Common Stock, $.0001 par value, of which
there were 42,803,204 shares issued and outstanding as of the close of
business on March 14, 1997 and 2,000,000 shares of Preferred Stock, $.0001 par
value, of which no shares are issued or outstanding. Since the close of
business on March 14, 1997, no shares of Target Capital Stock have been issued
except pursuant to the exercise of options outstanding as of March 14, 1997
under the Target Stock Option Plans or pursuant to the Target ESPP. All
outstanding shares of Target Common Stock are duly authorized, validly issued,
fully paid and nonassessable and are not subject to preemptive rights created
by statute, the Certificate of Incorporation or Bylaws of Target or any
agreement or document to which Target is a party or by which it is bound. As
of the close of business on March 14, 1997, Target had reserved (i) an
aggregate of 9,760,000 shares of Target Common Stock, net of exercises, for
issuance to employees, consultants and non-employee directors pursuant to the
Target Stock Option Plans, under which, as of the close of business on March
14, 1997, options and stock purchase rights, if any, were outstanding for an
aggregate of 7,630,000 shares, and (ii) 90,000 shares of Common Stock, net of
prior issuances, for issuance to employees pursuant to the Target
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ESPP. All shares of Target Common Stock subject to issuance as aforesaid, upon
issuance on the terms and conditions specified in the instruments pursuant to
which they are issuable, would be duly authorized, validly issued, fully paid
and nonassessable and not subject to preemptive rights created by statute, the
Certificate of Incorporation or Bylaws of Target or any agreement or document
to which Target is a party or by which it is bound.
2.3 Obligations With Respect to Capital Stock. Except as set forth in
Section 2.2 and except for the Target Option Agreement, there are no equity
securities or similar ownership interests of any class of Target, or any
securities exchangeable or convertible into or exercisable for such equity
securities or similar ownership interests, issued, reserved for issuance or
outstanding. Except for securities Target owns, directly or indirectly through
one or more subsidiaries, there are no equity securities, or similar ownership
interests of any class of any subsidiary of Target, or any security
exchangeable or convertible into or exercisable for such equity securities or
similar ownership interests, issued, reserved for issuance or outstanding.
Except as set forth in Section 2.2, there are no options, warrants, equity
securities or similar ownership interests, calls, rights (including preemptive
rights), commitments or agreements of any character to which Target or any of
its subsidiaries is a party or by which it is bound obligating Target or any
of its subsidiaries to issue, deliver or sell, or cause to be issued,
delivered or sold, or repurchase, redeem or otherwise acquire, or cause the
repurchase, redemption or acquisition, of any shares of capital stock or
similar ownership interests of Target or any of its subsidiaries or obligating
Target or any of its subsidiaries to grant, extend, accelerate the vesting of
or enter into any such option, warrant, equity security, call, right,
commitment or agreement. There are no registration rights and, to the
knowledge of Target, as of the date of this Agreement, there are no voting
trusts, proxies or other agreements or understandings with respect to any
equity security of any class of Target or with respect to any equity security
or similar ownership interest of any class of any of its subsidiaries, other
than the Target Voting Agreements.
2.4 Authority.
(a) Target has all requisite corporate power and authority to enter into
this Agreement and to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of Target, subject only to the approval and
adoption of this Agreement and the approval of the Merger by Target's
stockholders and the filing and recordation of the Certificate of Merger
pursuant to Delaware Law. A vote of the holders of at least a majority of the
outstanding shares of the Target Common Stock is required for Target's
stockholders to approve and adopt this Agreement and approve the Merger. This
Agreement has been duly executed and delivered by Target and, assuming the due
authorization, execution and delivery by Acquiror and, if applicable, Merger
Sub, constitute valid and binding obligations of Target, enforceable in
accordance with their respective terms, except as enforceability may be
limited by bankruptcy and other similar laws and general principles of equity.
The execution and delivery of this Agreement by Target does not, and the
performance of this Agreement will not, (i) conflict with or violate the
Certificate of Incorporation or Bylaws of Target or the equivalent
organizational documents of any of its subsidiaries, (ii) subject to obtaining
the approval and adoption of this Agreement and the approval of the Merger by
Target's stockholders as contemplated in Section 5.2 and compliance with the
requirements set forth in Section 2.4(b) below, conflict with or violate any
law, rule, regulation, order, judgment or decree applicable to Target or any
of its subsidiaries or by which its or any of their respective properties is
bound or affected, or (iii) result in any breach of or constitute a default
(or an event that with notice or lapse of time or both would become a default)
under, or impair Target's rights or alter the rights or obligations of any
third party under, or give to others any rights of termination, amendment,
acceleration or cancellation of, or result in the creation of a lien or
encumbrance on any of the properties or assets of Target or any of its
subsidiaries pursuant to, any material note, bond, mortgage, indenture,
contract, agreement, lease, license, permit, franchise or other instrument or
obligation to which Target or any of its subsidiaries is a party or by which
Target or any of its subsidiaries or its or any of their respective properties
are bound or affected, except, with respect to clause (iii), for any such
conflicts, violations, defaults or other occurrences that would not have a
Material Adverse Effect on Target. The Target Schedules list all material
consents, waivers and approvals under any of Target's or any of its
subsidiaries' agreements, contracts, licenses or leases required to be
obtained in connection with the consummation of the transactions contemplated
hereby.
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(b) No consent, approval, order or authorization of, or registration,
declaration or filing with any court, administrative agency or commission or
other governmental authority or instrumentality, foreign or domestic
("GOVERNMENTAL ENTITY"), is required by or with respect to Target in
connection with the execution and delivery of this Agreement or the
consummation of the Merger, except for (i) the filing of the Certificate of
Merger with the Secretary of State of the State of Delaware, (ii) the filing
of the Proxy Statement (as defined in Section 2.19) with the Securities and
Exchange Commission ("SEC") in accordance with the Securities Exchange Act of
1934, as amended (the "EXCHANGE ACT"), (iii) such consents, approvals, orders,
authorizations, registrations, declarations and filings as may be required
under applicable federal and state securities laws and the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR ACT"), and the
securities or antitrust laws of any foreign country, and (iv) such other
consents, authorizations, filings, approvals and registrations which if not
obtained or made would not have a Material Adverse Effect on Target or
Acquiror or have a material adverse effect on the ability of the parties to
consummate the Merger.
2.5 SEC Filings; Target Financial Statements.
(a) Target has filed all forms, reports and documents required to be filed
with the SEC since August 1, 1995 and has made available to Acquiror such
forms, reports and documents in the form filed with the SEC. All such required
forms, reports and documents (including those that Target may file subsequent
to the date hereof) are referred to herein as the "TARGET SEC REPORTS." As of
their respective dates, the Target SEC Reports (i) were prepared in accordance
with the requirements of the Securities Act of 1933, as amended (the
"SECURITIES ACT"), or the Exchange Act, as the case may be, and the rules and
regulations of the SEC thereunder applicable to such Target SEC Reports, and
(ii) did not at the time they were filed (or if amended or superseded by a
filing prior to the date of this Agreement, then on the date of such filing)
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading. None of Target's subsidiaries is required to file any
forms, reports or other documents with the SEC.
(b) Each of the consolidated financial statements (including, in each case,
any related notes thereto) contained in Target SEC Reports (the "TARGET
FINANCIALS"), including any Target SEC Reports filed after the date hereof
until the Closing, (x) complied as to form in all material respects with the
published rules and regulations of the SEC with respect thereto, (y) was
prepared in accordance with generally accepted accounting principles ("GAAP")
applied on a consistent basis throughout the periods involved (except as may
be indicated in the notes thereto or, in the case of unaudited interim
financial statements, as may be permitted by the SEC on Form 10-Q under the
Exchange Act) and (z) fairly presented the consolidated financial position of
Target and its subsidiaries as at the respective dates thereof and the
consolidated results of Target's operations and cash flows for the periods
indicated, except that the unaudited interim financial statements were or are
subject to normal and recurring year-end adjustments. The balance sheet of
Target contained in Target SEC Reports as of December 31, 1996 is hereinafter
referred to as the "TARGET BALANCE SHEET." Except as disclosed in the Target
Financials, since the date of the Target Balance Sheet neither Target nor any
of its subsidiaries has any liabilities (absolute, accrued, contingent or
otherwise) of a nature required to be disclosed on a balance sheet or in the
related notes to the consolidated financial statements prepared in accordance
with GAAP which are, individually or in the aggregate, material to the
business, results of operations or financial condition of Target and its
subsidiaries taken as a whole, except liabilities (i) provided for in the
Target Balance Sheet, or (ii) incurred since the date of the Target Balance
Sheet in the ordinary course of business consistent with past practices.
(c) Target has heretofore furnished to Acquiror a complete and correct copy
of any amendments or modifications, which have not yet been filed with the SEC
but which are required to be filed, to agreements, documents or other
instruments which previously had been filed by Target with the SEC pursuant to
the Securities Act or the Exchange Act.
2.6 Absence of Certain Changes or Events. Since the date of the Target
Balance Sheet through the date of this Agreement, there has not been: (i) any
Material Adverse Effect on Target, (ii) any material change by Target in its
accounting methods, principles or practices, except as required by concurrent
changes in GAAP, or
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(iii) any material revaluation by Target of any of its assets, including,
without limitation, writing down the value of capitalized inventory or writing
off notes or accounts receivable other than in the ordinary course of
business.
2.7 Taxes and Returns. Target and each of its subsidiaries, and any
consolidated, combined, unitary or aggregate group for Tax (as such term is
defined in Section 3.8) purposes of which Target or any of its subsidiaries is
or has been a member has timely filed all Returns (as such term is defined in
Section 3.8) required to be filed by it (other than those that are not,
individually or in the aggregate, material), has paid all Taxes shown thereon
to be due and has provided adequate accruals in all material respects in
accordance with GAAP in its financial statements for any Taxes that have not
been paid, whether or not shown as being due on any returns. In addition, (i)
no material claim for unpaid Taxes has become a lien against the property of
Target or any of its subsidiaries or is being asserted against Target or any
of its subsidiaries, (ii) no audit of any Tax Return of Target or any of its
subsidiaries is being conducted by a Tax authority (A) as of the date of this
Agreement and (B) which, as of the Closing Date, has had and could reasonably
be expected to have a Material Adverse Effect on Target and its subsidiaries,
(iii) no extension of the statute of limitations on the assessment of any
Taxes has been granted by Target or any of its subsidiaries and is currently
in effect (A) as of the date of this Agreement and (B) which, as of the
Closing Date, has had and could reasonably be expected to have a Material
Adverse Effect on Target and its subsidiaries and (iv) there is no agreement,
contract or arrangement to which Target or any of its subsidiaries is a party
that may result in the payment of any amount that would not be deductible
pursuant to Sections 280G, 162 or 404 of the Code.
2.8 Restrictions on Business Activities. There is no agreement (noncompete
or otherwise), commitment, judgment, injunction, order or decree to which
Target is a party or, to the knowledge of Target, otherwise binding upon
Target, which has or reasonably could be expected to have the effect of
prohibiting or impairing any business practice of Target, any acquisition of
property (tangible or intangible) by Target or the conduct of business by
Target. Without limiting the foregoing, Target has not entered into any
agreement under which Target is restricted from selling, licensing or
otherwise distributing any of its products to any class of customers, in any
geographic area, during any period of time or in any segment of the market.
2.9 Title to Properties; Absence of Liens and Encumbrances.
(a) The Target Schedules list each item of real property consisting of over
15,000 square feet owned by Target. The Target Schedules list all real
property leases to which Target is a party and each amendment thereto. All
such current leases are in full force and effect, are valid and effective in
accordance with their respective terms, and there is not, under any of such
leases, any existing default or event of default (or event which with notice
or lapse of time, or both, would constitute a default) that would give rise to
a claim in an amount greater than $100,000.
(b) Target has good and valid title to, or, in the case of leased
properties and assets, valid leasehold interests in, all of its tangible
properties and assets, real, personal and mixed, used or held for use in its
business, free and clear of any liens, pledges, charges, claims, security
interests or other encumbrances of any sort ("LIENS"), except as reflected in
Target Financials or in the Target Schedules and except for liens for taxes
not yet due and payable and such imperfections of title and encumbrances, if
any, which are not material in character, amount or extent, and which do not
materially detract from the value, or materially interfere with the present
use, of the property subject thereto or affected thereby.
2.10 Intellectual Property.
(a) Target and its subsidiaries either own, or have a valid license with
respect to, all patents, copyrights, trademarks, trade secrets and other
intellectual property used in, by, or necessary to, the operation or conduct
of their respective businesses as presently conducted (such intellectual
property and the rights thereto are collectively referred to herein as the
"TARGET IP RIGHTS").
(b) The execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby will not constitute a
material breach of any instrument or agreement governing any patent,
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copyright, trademark, trade secret or other intellectual property rights
licensed by, or to, Target, will not cause the forfeiture or termination or
give rise to a right of forfeiture or termination of any Target IP Rights or
materially impair the right of Target, the Surviving Corporation or Acquiror
in or to use, sell, enforce license or otherwise exploit any Target IP Rights
or portion thereof.
(c) Neither the operation of Target's nor any of its subsidiaries'
respective businesses nor the manufacture, marketing, license, sale or
intended use of any product, service or technology currently licensed,
manufactured, created, distributed, authored, used, sold or under development
by Target or any of its subsidiaries (i) violates in any material respect any
license or agreement between Target or any of its subsidiaries and any third
party or (ii) infringes any patents, copyright, trademark, trade secret or
other intellectual property right of any other party; and there is no pending
or, to the knowledge of Target, threatened claim or litigation contesting the
validity, ownership or right to use, sell, enforce, license or dispose of any
Target IP Rights, nor has Target received any written notice asserting that
any Target IP Rights or the proposed use, sale, license or disposition thereof
conflicts or will conflict with the rights of any other party, except, with
respect to clauses (i) and (ii), for violations, infringements, claims or
litigation that would not have a Material Adverse Effect on Target.
(d) Target has taken reasonable and practicable steps designed to safeguard
and maintain the secrecy and confidentiality of, and its proprietary rights
in, all Target IP Rights.
2.11 Compliance; Permits; Restrictions.
(a) Neither Target nor any of its subsidiaries is, in any material respect,
in conflict with, or in default or violation of (i) any law, rule, regulation,
order, judgment or decree applicable to Target or any of its subsidiaries or
by which Target or any of its subsidiaries or any of their respective
properties is bound or affected, or (ii) any material note, bond, mortgage,
indenture, contract, agreement, lease, license, permit, franchise or other
instrument or obligation to which Target or any of its subsidiaries is a party
or by which Target or any of its subsidiaries or its or any of their
respective properties is bound or affected. To the knowledge of Target, no
investigation or review by any Governmental Entity is pending or threatened
against Target or any of its subsidiaries, nor has any Governmental Entity
indicated an intention to conduct the same. There is no material agreement,
judgment, injunction, order or decree binding upon Target or any of its
subsidiaries which has or could reasonably be expected to have the effect of
prohibiting or materially impairing any business practice of Target or any of
its subsidiaries, any acquisition of material property by Target or any of its
subsidiaries or the conduct of business by Target as currently conducted.
(b) Target and its subsidiaries hold all permits, licenses, variances,
exemptions, orders and approvals from governmental authorities that are
material to the operation of the business of Target (collectively, the "TARGET
PERMITS"). Target and its subsidiaries are in compliance in all material
respects with the terms of the Target Permits.
2.12 Litigation. There is no action, suit, proceeding, claim, arbitration or
investigation pending, or as to which Target or any of its subsidiaries has
received any notice of assertion nor, to Target's knowledge, is there a
threatened action, suit, proceeding, claim, arbitration or investigation
against Target or any of its subsidiaries which reasonably would be likely to
be material to Target, or which in any manner challenges or seeks to prevent,
enjoin, alter or delay any of the transactions contemplated by this Agreement.
To the knowledge of Target, no Governmental Entity has at any time challenged
or questioned in writing the legal right of Target to manufacture, offer or
sell any of its products in the present manner or style thereof.
2.13 Brokers' and Finders' Fees. Except for fees payable to Deutsche Morgan
Grenfell, Inc. pursuant to an engagement letter with Target, a copy of which
has been provided to Acquiror, Target has not incurred, nor will it incur,
directly or indirectly, any liability for brokerage or finders' fees or
agents' commissions or any similar charges in connection with this Agreement
or any transaction contemplated hereby.
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2.14 Employee Benefit Plans.
(a) With respect to each material employee benefit plan, program,
arrangement and contract (including, without limitation, any "employee benefit
plan" as defined in Section 3(3) of ERISA) maintained or contributed to by
Target or any trade or business which is under common control with Target
within the meaning of Section 414 of the Code (the "TARGET EMPLOYEE PLANS"),
Target has made available to Acquiror a true and complete copy of, to the
extent applicable, (i) such Target Employee Plan, (ii) the most recent annual
report (Form 5500), (iii) each trust agreement related to such Target Employee
Plan, (iv) the most recent summary plan description for each Target Employee
Plan for which such a description is required, (v) the most recent actuarial
report relating to any Target Employee Plan subject to Title IV of ERISA and
(vi) the most recent IRS determination letter issued with respect to any
Target Employee Plan.
(b) Each Target Employee Plan which is intended to be qualified under
Section 401(a) of the Code has received a favorable determination from the IRS
covering the provisions of the Tax Reform Act of 1986 stating that such Target
Employee Plan is so qualified and nothing has occurred since the date of such
letter that could reasonably be expected to affect the qualified status of
such plan. Each Target Employee Plan has been operated in all material
respects in accordance with its terms and the requirements of applicable law.
Neither Target nor any ERISA Affiliate of Target has incurred or is reasonably
expected to incur any material liability under Title IV of ERISA in connection
with any Target Employee Plan.
2.15 Employees; Labor Matters. To Target's knowledge, no employee of Target
is in violation of any term of any employment contract, patent disclosure
agreement, non-competition agreement, or any restrictive covenant to a former
employer relating to the right of any such employee to be employed by Target
because of the nature of the business conducted or presently proposed to be
conducted by Target or to the use of trade secrets or proprietary information
of others. To Target's knowledge, there are no activities or proceedings of
any labor union to organize any employees of Target or any of its subsidiaries
and there are no strikes, or material slowdowns, work stoppages or lockouts,
or threats thereof by or with respect to any employees of Target or any of its
subsidiaries. Target and its subsidiaries are and have been in compliance in
all material respects with all applicable laws regarding employment practices,
terms and conditions of employment, and wages and hours (including, without
limitation, ERISA, WARN or any similar state or local law).
2.16 Environmental Matters.
(a) Hazardous Material. Except as reasonably would not be likely to result
in a material liability to Target, no underground storage tanks and no amount
of any substance that has been designated by any Governmental Entity or by
applicable federal, state or local law to be radioactive, toxic, hazardous or
otherwise a danger to health or the environment, including, without
limitation, PCBs, asbestos, petroleum, urea-formaldehyde and all substances
listed as hazardous substances pursuant to the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, as amended, or defined as a
hazardous waste pursuant to the United States Resource Conservation and
Recovery Act of 1976, as amended, and the regulations promulgated pursuant to
said laws, (a "HAZARDOUS MATERIAL"), but excluding office and janitorial
supplies, are present, as a result of the actions of Target or any of its
subsidiaries or any affiliate of Target, or, to Target's knowledge, as a
result of any actions of any third party or otherwise, in, on or under any
property, including the land and the improvements, ground water and surface
water thereof, that Target or any of its subsidiaries has at any time owned,
operated, occupied or leased.
(b) Hazardous Materials Activities. Except as reasonably would not be
likely to result in a material liability to Target, neither Target nor any of
its subsidiaries has transported, stored, used, manufactured, disposed of,
released or exposed its employees or others to Hazardous Materials in
violation of any law in effect on or before the Closing Date, nor has Target
or any of its subsidiaries disposed of, transported, sold, used, released,
exposed its employees or others to or manufactured any product containing a
Hazardous Material (collectively "HAZARDOUS MATERIALS ACTIVITIES") in
violation of any rule, regulation, treaty or statute promulgated by any
Governmental Entity in effect prior to or as of the date hereof to prohibit,
regulate or control Hazardous Materials or any Hazardous Material Activity.
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(c) Permits. Target and its subsidiaries currently hold all environmental
approvals, permits, licenses, clearances and consents (the "TARGET
ENVIRONMENTAL PERMITS") necessary for the conduct of Target's and its
subsidiaries' Hazardous Material Activities and other businesses of Target and
its subsidiaries as such activities and businesses are currently being
conducted.
(d) Environmental Liabilities. No material action, proceeding, revocation
proceeding, amendment procedure, writ, injunction or claim is pending, or to
Target's knowledge, threatened concerning any Target Environmental Permit,
Hazardous Material or any Hazardous Materials Activity of Target or any of its
subsidiaries. Target is not aware of any fact or circumstance which could
involve Target or any of its subsidiaries in any material environmental
litigation or impose upon Target any material environmental liability.
2.17 Agreements, Contracts and Commitments. Except as set forth in the
Target Schedules, neither Target nor any of its subsidiaries is a party to or
is bound by:
(a) any employment or consulting agreement, contract or commitment with any
officer or director level employee or member of Target's Board of Directors,
other than those that are terminable by Target or any of its subsidiaries on
no more than thirty days notice without liability or financial obligation,
except to the extent general principles of wrongful termination law may limit
Target's or any of its subsidiaries' ability to terminate employees at will;
(b) any agreement or plan, including, without limitation, any stock option
plan, stock appreciation right plan or stock purchase plan, any of the
benefits of which will be increased, or the vesting of benefits of which will
be accelerated, by the occurrence of any of the transactions contemplated by
this Agreement or the value of any of the benefits of which will be calculated
on the basis of any of the transactions contemplated by this Agreement;
(c) any agreement of indemnification or guaranty not entered into in the
ordinary course of business other than indemnification agreements between
Target or any of its subsidiaries and any of its officers or directors;
(d) any agreement, contract or commitment containing any covenant limiting
the freedom of Target or any of its subsidiaries to engage in any line of
business or compete with any person or granting any exclusive distribution
rights;
(e) any agreement, contract or commitment currently in force relating to
the disposition or acquisition of assets not in the ordinary course of
business or any ownership interest in any corporation, partnership, joint
venture or other business enterprise;
(f) any material joint marketing or development agreement; or
(g) any agreement, contract or commitment described in Item 10 of
Regulation S-K (whether or not a filing with the SEC requiring such document
to be included as an exhibit is yet due).
Neither Target nor any of its subsidiaries, nor to Target's knowledge any
other party to a Target Contract (as defined below), has breached, violated or
defaulted under, or received notice that it has breached violated or defaulted
under, any of the material terms or conditions of any of the agreements,
contracts or commitments to which Target or any of its subsidiaries is a party
or by which it is bound of the type described in clauses (a) through (g) above
(any such agreement, contract or commitment, a "TARGET CONTRACT") in such a
manner as would permit any other party to cancel or terminate any such Target
Contract, or would permit any other party to seek damages, which would be
reasonably likely to be material to Target.
2.18 Change of Control Payments. The Target Schedules set forth each plan or
agreement pursuant to which any material amounts may become payable (whether
currently or in the future) to current or former officers and directors of
Target as a result of or in connection with the Merger.
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2.19 Statements; Proxy Statement/Prospectus. The information supplied by
Target for inclusion in the Registration Statement (as defined in Section
3.4(b)) shall not at the time the Registration Statement is filed with the SEC
and at the time it becomes effective under the Securities Act, contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein not misleading. The information supplied by Target for inclusion in
the proxy statement/prospectus to be sent to the stockholders of Target and
stockholders of Acquiror in connection with the meeting of Target's
stockholders to consider the approval and adoption of this Agreement and the
approval of the Merger (the "TARGET STOCKHOLDERS' MEETINGS") and in connection
with the meeting of Acquiror's stockholders to consider the approval of (i)
the amendment of Acquiror's Certificate of Incorporation to increase its
authorized share capital to allow for the issuance of shares of Acquiror
Common Stock by virtue of the Merger and (ii) the issuance of shares of
Acquiror Common Stock by virtue of the Merger, (the "ACQUIROR STOCKHOLDERS'
MEETING") (such proxy statement/prospectus as amended or supplemented is
referred to herein as the "PROXY STATEMENT") shall not, on the date the Proxy
Statement is first mailed to Target's stockholders and Acquiror's
stockholders, at the time of the Target Stockholders' Meeting or the Acquiror
Stockholders' Meeting and at the Effective Time, contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not false or misleading; or omit to
state any material fact necessary to correct any statement in any earlier
communication with respect to the solicitation of proxies for the Target
Stockholders' Meeting or the Acquiror Stockholders' Meeting which has become
false or misleading. The Proxy Statement will comply as to form in all
material respects with the provisions of the Exchange Act and the rules and
regulations thereunder. If at any time prior to the Effective Time, any event
relating to Target or any of its affiliates, officers or directors should be
discovered by Target which should be set forth in an amendment to the
Registration Statement or a supplement to the Proxy Statement, Target shall
promptly inform Acquiror. Notwithstanding the foregoing, Target makes no
representation or warranty with respect to any information supplied by
Acquiror or Merger Sub which is contained in any of the foregoing documents.
2.20 Board Approval. The Board of Directors of Target has, as of the date of
this Agreement, determined (i) in its reasonable business judgment that the
Merger is fair from a financial point of view to, and in the best interests
of, Target and its stockholders, and (ii) to recommend that the stockholders
of Target approve and adopt this Agreement and approve the Merger.
2.21 Fairness Opinion. Target's Board of Directors has received an oral
opinion from Deutsche Morgan Grenfell (to be subsequently confirmed in
writing), to the effect that as of the date hereof, the Exchange Ratio is fair
to Target's stockholders from a financial point of view.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF ACQUIROR AND MERGER SUB
Acquiror and Merger Sub represent and warrant to Target, subject to the
exceptions specifically disclosed in writing in the disclosure letter supplied
by Acquiror to Target dated as of the date hereof (the "ACQUIROR SCHEDULES"),
as follows:
3.1 Organization of Acquiror.
(a) Acquiror and each of its subsidiaries is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction of
its incorporation; has the corporate power and authority to own, lease and
operate its assets and property and to carry on its business as now being
conducted and as proposed to be conducted; and is duly qualified or licensed
to do business and is in good standing in each jurisdiction where the
character of the properties owned, leased or operated by it or the nature of
its activities makes such qualification or licensing necessary, except where
the failure to be so qualified would not have a Material Adverse Effect (as
defined below) on Acquiror.
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(b) Acquiror has delivered to Target a true and complete list of all of
Acquiror's subsidiaries, indicating the jurisdiction of incorporation of each
subsidiary and Acquiror's equity interest therein.
(c) Acquiror has delivered or made available to Target a true and correct
copy of the Certificate of Incorporation and Bylaws of Acquiror and similar
governing instruments of each of its subsidiaries, each as amended to date,
and each such instrument is in full force and effect. Neither Acquiror nor any
of its subsidiaries is in violation of any of the provisions of its
Certificate of Incorporation or Bylaws or equivalent governing instruments.
(d) When used in connection with Acquiror, the term "MATERIAL ADVERSE
EFFECT" means, for purposes of this Agreement, any change, event or effect
that is materially adverse to the business, assets (including intangible
assets), financial condition or results of operations of Acquiror and its
subsidiaries taken as a whole, except (i) that a change in the market price of
the Acquiror Common Stock shall not, in and of itself, be deemed a Material
Adverse Effect with respect to Acquiror, and (ii) that a "Material Adverse
Effect" with respect to Acquiror shall not include any adverse effect (i) on
the bookings, revenues, gross margins or earnings of Acquiror (or the direct
consequences thereof) following the date of this Agreement which is
attributable to a delay of, reduction or cancellation or change in the terms
of product orders by customers of Acquiror or (ii) due to employee attrition
of Acquiror, where Acquiror sustains the burden of reasonably demonstrating
that any such delay, reduction, cancellation, change or attrition is primarily
attributable to the transactions contemplated by this Agreement or the
pendency or announcement of the Merger. Target may conclude that a Material
Adverse Effect on Acquiror has occurred only if Target makes such
determination in good faith after consultation with its and Acquiror's Chief
Financial Officer or Chief Executive Officer, auditors and other financial
advisors.
3.2 Acquiror and Merger Sub Capital Structure. The authorized capital stock
of Acquiror consists of 75,000,000 shares of Common Stock, $.01 par value and
no shares of Preferred Stock of which there were issued and outstanding as of
the close of business on March 31, 1997, 47,781,260 shares of Common Stock and
no shares of Preferred Stock. Since the close of business on March 31, 1997,
no shares of Acquiror capital stock have been issued except pursuant to the
exercise of options outstanding as of March 31, 1997 under the Acquiror Stock
Option Plans (as defined below). As of the close of business on March 31,
1997, there were no other outstanding commitments to issue any shares of
capital stock or voting securities of Acquiror other than pursuant to the
exercise of options outstanding as of that date under the 1983 Incentive Stock
Option Plans, the 1986 Stock Option Plan, the Stock Option Plan for Directors,
the 1993 Incentive Stock Option Plan, and the 1994 Stock Option Plan, and
pursuant to the 1994 Employee Stock Purchase Plan and other plans set forth in
Section 3.2 of the Acquiror Schedules, (collectively, the "ACQUIROR STOCK
OPTION PLANS"). The authorized capital stock of Merger Sub consists of 1,000
shares of Common Stock, $.001 par value, all of which are issued and
outstanding and are held by Acquiror. All outstanding shares of Acquiror and
Merger Sub have been duly authorized, validly issued, fully paid and are
nonassessable and free of any liens or encumbrances other than any liens or
encumbrances created by or imposed upon the holders thereof. As of the close
of business on March 31, 1997, Acquiror has reserved 8,829,450 shares of
Common Stock for issuance to employees, directors and independent contractors
pursuant to the Acquiror Stock Option Plans, net of exercises, cancellations,
repurchases and expiration of options of which, as of the close of business on
March 31, 1997, 8,417,436 shares were subject to outstanding, unexercised
options and 412,014 shares remained available for future grant. Other than
pursuant to this Agreement, the Acquiror 1994 Employee Stock Purchase Plan,
and the SQA, Inc. 1995 Employee Stock Purchase Plan, there are no other
options, warrants, calls, rights, commitments or agreements of any character
to which Acquiror or Merger Sub is a party or by which either of them is bound
obligating Acquiror or Merger Sub to issue, deliver, sell, repurchase or
redeem, or cause to be issued, delivered, sold, repurchased or redeemed, any
shares of the capital stock of Acquiror or Merger Sub or obligating Acquiror
or Merger Sub to grant, extend or enter into any such option, warrant, call,
right, commitment or agreement. The shares of Acquiror Common Stock to be
issued pursuant to the Merger will be duly authorized, validly issued, fully
paid, and non-assessable.
3.3 Obligations With Respect to Capital Stock. Except as set forth in
Section 3.2 and except for the Acquiror Option Agreement, there are no equity
securities, partnership interests or similar ownership interests of any class
of Acquiror, or any securities exchangeable or convertible into or exercisable
for such equity securities,
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partnership interests or similar ownership interests, issued, reserved for
issuance or outstanding. Except for securities Acquiror owns, directly or
indirectly through one or more subsidiaries, there are no equity securities,
partnership interests or similar ownership interests of any class of any
subsidiary of Acquiror, or any security exchangeable or convertible into or
exercisable for such equity securities, partnership interests or similar
ownership interests, issued, reserved for issuance or outstanding. Except as
set forth in Section 3.2, there are no options, warrants, equity securities,
partnership interests or similar ownership interests, calls, rights (including
preemptive rights), commitments or agreements of any character to which
Acquiror or any of its subsidiaries is a party or by which it is bound
obligating Acquiror or any of its subsidiaries to issue, deliver or sell, or
cause to be issued, delivered or sold, or repurchase, redeem or otherwise
acquire, or cause the repurchase, redemption or acquisition, of any shares of
capital stock, partnership interests or similar ownership interests of
Acquiror or any of its subsidiaries or obligating Acquiror or any of its
subsidiaries to grant, extend, accelerate the vesting of or enter into any
such option, warrant, equity security, call, right, commitment or agreement.
There are no registration rights and, to the knowledge of Acquiror, as of the
date of this Agreement, there are no voting trusts, proxies or other
agreements or understandings with respect to any equity security of any class
of Acquiror or with respect to any equity security, partnership interest or
similar ownership interest of any class of any of its subsidiaries, other than
the Acquiror Voting Agreements.
3.4 Authority.
(a) Each of Acquiror and Merger Sub has all requisite corporate power and
authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by all necessary corporate action on the part of Acquiror and, in the case of
this Agreement, Merger Sub, subject only to the filing and recordation of the
Certificate of Merger pursuant to Delaware Law and the approval by Acquiror's
stockholders of (i) the amendment of Acquiror's Certificate of Incorporation
to increase its authorized share capital to allow for the issuance of shares
of Acquiror Common Stock by virtue of the Merger and (ii) the issuance of
shares of Acquiror Common Stock by virtue of the Merger. A vote of the holders
of at least a majority of the outstanding shares of the Acquiror Common Stock
is required for Acquiror's stockholders to approve each of (i) the amendment
of Acquiror's Certificate of Incorporation to increase its authorized share
capital to allow for the issuance of shares of Acquiror Common Stock by virtue
of the Merger and (ii) the issuance of shares of Acquiror Common Stock by
virtue of the Merger. This Agreement has been duly executed and delivered by
each of Acquiror and Merger Sub and, assuming the due authorization, execution
and delivery by Target, constitutes the valid and binding obligation of
Acquiror, enforceable in accordance with its terms, except as enforceability
may be limited by bankruptcy and other similar laws and general principles of
equity. The execution and delivery of this Agreement by each of Acquiror and
Merger Sub does not, and the performance of this Agreement by each of Acquiror
and Merger Sub will not, (i) conflict with or violate the Certificate of
Incorporation or Bylaws of Acquiror or the Certificate of Incorporation or
Bylaws of Merger Sub or the equivalent organizational documents of any of
Acquiror's other subsidiaries, (ii) subject to obtaining the approval of
Acquiror's stockholders of (y) the amendment of Acquiror's Certificate of
Incorporation to increase its authorized share capital to allow for the
issuance of shares of Acquiror Common Stock by virtue of the Merger and (z)
the issuance of shares of Acquiror Common Stock by virtue of the Merger as
contemplated in Section 5.2 and compliance with the requirements set forth in
Section 3.4(b) below, conflict with or violate any law, rule, regulation,
order, judgment or decree applicable to Acquiror or any of its subsidiaries
(including Merger Sub) or by which its or any of their respective properties
is bound or affected or (iii) result in any breach of or constitute a default
(or an event that with notice or lapse of time or both would become a default)
under, or impair Acquiror's rights or alter the rights or obligations of any
third party under, or give to others any rights of termination, amendment,
acceleration or cancellation of, or result in the creation of a lien or
encumbrance on any of the properties or assets of Acquiror or any of its
subsidiaries (including Merger Sub) pursuant to, any material note, bond,
mortgage, indenture, contract, agreement, lease, license, permit, franchise or
other instrument or obligation to which Acquiror or any of its subsidiaries
(including Merger Sub) is a party or by which Acquiror or any of its
subsidiaries or its or any of their respective properties are bound or
affected except, with respect to clause (iii), for any such conflicts,
violations, defaults or other occurrences that would not have a
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Material Adverse Effect on Acquiror. The Acquiror Schedules list all material
consents, waivers and approvals under any of Acquiror's or any of its
subsidiaries' agreements, contracts, licenses or leases required to be
obtained in connection with the consummation of the transactions contemplated
hereby.
(b) No consent, approval, order or authorization of, or registration,
declaration or filing with any Governmental Entity is required by or with
respect to Acquiror or Merger Sub in connection with the execution and
delivery of this Agreement or the consummation of the Merger, except for (i)
the filing of a Form S-4 Registration Statement (the "REGISTRATION STATEMENT")
with the SEC in accordance with the Securities Act, (ii) the filing of the
Certificate of Merger with the Secretary of State of the State of Delaware,
(iii) the filing of the Proxy Statement with the SEC in accordance with the
Exchange Act, (iv) such consents, approvals, orders, authorizations,
registrations, declarations and filings as may be required under applicable
federal and state securities laws and the HSR Act and the securities or
antitrust laws of any foreign country, and (v) such other consents,
authorizations, filings, approvals and registrations which if not obtained or
made would not have a Material Adverse Effect on Target or Acquiror or have a
material adverse effect on the ability of the parties to consummate the
Merger.
3.5 Section 203 of the Delaware General Corporation Law Not Applicable. The
Board of Directors of Acquiror has taken all actions so that the restrictions
contained in Section 203 of the Delaware General Corporation Law applicable to
a "business combination" (as defined in such Section 203) will not apply to
the execution, delivery or performance of this Agreement or to the
consummation of the Merger or the other transactions contemplated by this
Agreement.
3.6 SEC Filings; Acquiror Financial Statements.
(a) Acquiror has filed all forms, reports and documents required to be
filed with the SEC since June 30, 1994, and has made available to Target such
forms, reports and documents in the form filed with the SEC. All such required
forms, reports and documents (including those that Acquiror may file
subsequent to the date hereof) are referred to herein as the "ACQUIROR SEC
REPORTS." As of their respective dates, the Acquiror SEC Reports (i) were
prepared in accordance with the requirements of the Securities Act or the
Exchange Act, as the case may be, and the rules and regulations of the SEC
thereunder applicable to such Acquiror SEC Reports, and (ii) did not at the
time they were filed (or if amended or superseded by a filing prior to the
date of this Agreement, then on the date of such filing) contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading. None of
Acquiror's subsidiaries is required to file any forms, reports or other
documents with the SEC.
(b) Each of the consolidated financial statements (including, in each case,
any related notes thereto) contained in Acquiror SEC Reports (the "ACQUIROR
FINANCIALS"), including any Acquiror SEC Reports filed after the date hereof
until the Closing, (x) complied as to form in all material respects with the
published rules and regulations of the SEC with respect thereto, (y) was
prepared in accordance with GAAP applied on a consistent basis throughout the
periods involved (except as may be indicated in the notes thereto or, in the
case of unaudited interim financial statements, as may be permitted by the SEC
on Form 10-Q under the Exchange Act) and (z) fairly presented the consolidated
financial position of Acquiror and its subsidiaries as at the respective dates
thereof and the consolidated results of Acquiror's operations and cash flows
for the periods indicated, except that the unaudited interim financial
statements were or are subject to normal and recurring year-end adjustments.
The balance sheet of Acquiror contained in Acquiror SEC Reports as of December
31, 1997 is hereinafter referred to as the "ACQUIROR BALANCE SHEET." Except as
disclosed in the Acquiror Financials, since the date of the Acquiror Balance
Sheet neither Acquiror nor any of its subsidiaries has any liabilities
(absolute, accrued, contingent or otherwise) of a nature required to be
disclosed on a balance sheet or in the related notes to the consolidated
financial statements prepared in accordance with GAAP which are, individually
or in the aggregate, material to the business, results of operations or
financial condition of Acquiror and its subsidiaries taken as a whole, except
liabilities (i) provided for in the Acquiror Balance Sheet, or (ii) incurred
since the date of the Acquiror Balance Sheet in the ordinary course of
business consistent with past practices.
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(c) Acquiror has heretofore furnished to Target a complete and correct copy
of any amendments or modifications, which have not yet been filed with the SEC
but which are required to be filed, to agreements, documents or other
instruments which previously had been filed by Acquiror with the SEC pursuant
to the Securities Act or the Exchange Act.
3.7 Absence of Certain Changes or Events. Since the date of the Acquiror
Balance Sheet through the date of this Agreement, there has not been: (i) any
Material Adverse Effect on Acquiror, (ii) any material change by Acquiror in
its accounting methods, principles or practices, except as required by
concurrent changes in GAAP, or (iii) any material revaluation by Acquiror of
any of its assets, including, without limitation, writing down the value of
capitalized inventory or writing off notes or accounts receivable other than
in the ordinary course of business.
3.8 Taxes and Returns. Acquiror and each of its subsidiaries, and any
consolidated, combined, unitary or aggregate group for Tax purposes of which
Acquiror or any of its subsidiaries is or has been a member has timely filed
all Returns required to be filed by it (other than those that are not,
individually or in the aggregate, material), has paid all Taxes shown thereon
to be due and has provided adequate accruals in all material respects in
accordance with GAAP in its financial statements for any Taxes that have not
been paid, whether or not shown as being due on any returns. In addition, (i)
no material claim for unpaid Taxes has become a lien against the property of
Acquiror or any of its subsidiaries or is being asserted against Acquiror or
any of its subsidiaries, (ii) no audit of any Tax Return of Acquiror or any of
its subsidiaries is being conducted by a Tax authority (A) as of the date of
this Agreement and (B) which, as of the Closing Date, has had and could
reasonably be expected to have a Material Adverse Effect on Acquiror and its
subsidiaries, (iii) no extension of the statute of limitations on the
assessment of any Taxes has been granted by Acquiror or any of its
subsidiaries and is currently in effect (A) as of the date of this Agreement
and (B) which, as of the Closing Date, has had and could reasonably be
expected to have a Material Adverse Effect on Acquiror and its subsidiaries
and (iv) there is no agreement, contract or arrangement to which Acquiror or
any of its subsidiaries is a party that may result in the payment of any
amount that would not be deductible pursuant to Sections 280G, 162 or 404 of
the Code. As used herein, "TAXES" shall mean all taxes of any kind, including,
without limitation, those on or measured by or referred to as income, gross
receipts, sales, use, ad valorem, franchise, profits, license, withholding,
payroll, employment, excise, severance, stamp, occupation, premium, value
added, property or windfall profits taxes, customs, duties or similar fees,
assessments or charges of any kind whatsoever, together with any interest and
any penalties, additions to tax or additional amounts imposed by any govern
mental authority, domestic or foreign. As used herein, "RETURN" shall mean any
return, report or statement required to be filed with any governmental
authority with respect to Taxes.
3.9 Title to Properties; Absence of Liens and Encumbrances.
(a) The Acquiror Schedules list each item of real property consisting of
over 15,000 square feet owned by Acquiror. The Acquiror Schedules list all
real property leases relating to properties consisting of over 40,000 square
feet to which Acquiror is a party and each amendment thereto. All such current
leases are in full force and effect, are valid and effective in accordance
with their respective terms, and there is not, under any of such leases, any
existing default or event of default (or event which with notice or lapse of
time, or both, would constitute a default) that would give rise to a claim in
an amount greater than $100,000.
(b) Acquiror has good and valid title to, or, in the case of leased
properties and assets, valid leasehold interests in, all of its tangible
properties and assets, real, personal and mixed, used or held for use in its
business, free and clear of any Liens, except as reflected in Acquiror
Financials or in the Acquiror Schedules and except for liens for taxes not yet
due and payable and such imperfections of title and encumbrances, if any,
which are not material in character, amount or extent, and which do not
materially detract from the value, or materially interfere with the present
use, of the property subject thereto or affected thereby.
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3.10 Intellectual Property.
(a) Acquiror and its subsidiaries either own, or have a valid license with
respect to, all patents, copyrights, trademarks, trade secrets and other
intellectual property used in, by or necessary to the operation or conduct of
their respective businesses as presently conducted (such intellectual property
and the rights thereto are collectively referred to herein as the "ACQUIROR IP
RIGHTS").
(b) The execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby will not constitute a
material breach of any instrument or agreement governing any patent,
copyright, trademark, trade secret or other intellectual property rights
licensed by or to, Acquiror, will not cause the forfeiture or termination or
give rise to a right of forfeiture or termination of any Acquiror IP Rights or
materially impair the right of Acquiror, the Surviving Corporation or Target
in or to use, sell, enforce, license or otherwise exploit any Acquiror IP
Rights or portion thereof.
(c) Neither the operation of Acquiror's nor any of its subsidiaries'
respective business nor the manufacture, marketing, license, sale or intended
use of any product, service or technology currently licensed, manufactured,
created, distributed, authored, used, sold or under development by Acquiror or
any of its subsidiaries (i) violates in any material respect any license or
agreement between Acquiror or any of its subsidiaries and any third party or
(ii) infringes any patent, copyright, trademark, trade secret or other
intellectual property right of any other party; and there is no pending or, to
the knowledge of Acquiror, threatened claim or litigation contesting the
validity, ownership or right to use, sell, enforce, license or dispose of any
Acquiror IP Rights, nor has Acquiror received any written notice asserting
that any Acquiror IP Rights or the proposed use, sale, license or disposition
thereof conflicts or will conflict with the rights of any other party, except,
with respect to clauses (i) and (ii), for violation, infringements, claims or
litigation that would not have a Material Adverse Effect on Acquiror.
(d) Acquiror has taken reasonable and practicable steps designed to
safeguard and maintain the secrecy and confidentiality of, and its proprietary
rights in, all Acquiror IP Rights.
3.11 Compliance; Permits; Restrictions.
(a) Neither Acquiror nor any of its subsidiaries is, in any material
respect, in conflict with, or in default or violation of (i) any law, rule,
regulation, order, judgment or decree applicable to Acquiror or any of its
subsidiaries or by which Acquiror or any of its subsidiaries or any of their
respective properties is bound or affected, or (ii) any material note, bond,
mortgage, indenture, contract, agreement, lease, license, permit, franchise or
other instrument or obligation to which Acquiror or any of its subsidiaries is
a party or by which Acquiror or any of its subsidiaries or its or any of their
respective properties is bound or affected. To the knowledge of Acquiror, no
investigation or review by any Governmental Entity is pending or threatened
against Acquiror or any of its subsidiaries, nor has any Governmental Entity
indicated an intention to conduct the same. There is no material agreement,
judgment, injunction, order or decree binding upon Acquiror or any of its
subsidiaries which has or could reasonably be expected to have the effect of
prohibiting or materially impairing any business practice of Acquiror or any
of its subsidiaries, any acquisition of material property by Acquiror or any
of its subsidiaries or the conduct of business by Acquiror as currently
conducted.
(b) Acquiror and its subsidiaries hold all permits, licenses, variances,
exemptions, orders and approvals from governmental authorities which are
material to the operation of the business of Acquiror (collectively, the
"ACQUIROR PERMITS"). Acquiror and its subsidiaries are in compliance in all
material respects with the terms of the Acquiror Permits.
3.12 Litigation. There is no action, suit, proceeding, claim, arbitration or
investigation pending, or as to which Acquiror or any of its subsidiaries has
received any notice of assertion nor, to Acquiror's knowledge, is there a
threatened action, suit, proceeding, claim, arbitration or investigation
against Acquiror or any of its subsidiaries which reasonably would be likely
to be material to Acquiror, or which in any manner challenges or seeks to
prevent, enjoin, alter or delay any of the transactions contemplated by this
Agreement. To the knowledge
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of Acquiror, no Governmental Entity has at any time challenged or questioned
in writing the legal right of Acquiror to manufacture, offer or sell any of
its products in the present manner or style thereof.
3.13 Brokers' and Finders' Fees. Except for fees payable to Hambrecht &
Quist LLC pursuant to an engagement letter dated April 4, 1997, a copy of
which has been provided to Target, Acquiror has not incurred, nor will it
incur, directly or indirectly, any liability for brokerage or finders' fees or
agents' commissions or any similar charges in connection with this Agreement
or any transaction contemplated hereby.
3.14 Employee Benefit Plans.
(a) With respect to each material employee benefit plan, program,
arrangement and contract (including, without limitation, any "employee benefit
plan" as defined in Section 3(3) of ERISA) maintained or contributed to by
Acquiror or any trade or business which is under common control with Acquiror
within the meaning of Section 414 of the Code (the "ACQUIROR EMPLOYEE PLANS"),
Acquiror has made available to Target a true and complete copy of, to the
extent applicable, (i) such Acquiror Employee Plan, (ii) the most recent
annual report (Form 5500), (iii) each trust agreement related to such Acquiror
Employee Plan, (iv) the most recent summary plan description for each Acquiror
Employee Plan for which such a description is required, (v) the most recent
actuarial report relating to any Acquiror Employee Plan subject to Title IV of
ERISA and (vi) the most recent IRS determination letter issued with respect to
any Acquiror Employee Plan.
(b) Each Acquiror Employee Plan which is intended to be qualified under
Section 401(a) of the Code has received a favorable determination from the IRS
covering the provisions of the Tax Reform Act of 1986 stating that such
Acquiror Employee Plan is so qualified and nothing has occurred since the date
of such letter that could reasonably be expected to affect the qualified
status of such plan. Each Acquiror Employee Plan has been operated in all
material respects in accordance with its terms and the requirements of
applicable law. Neither Acquiror nor any ERISA Affiliate of Acquiror has
incurred or is reasonably expected to incur any material liability under Title
IV of ERISA in connection with any Acquiror Employee Plan.
3.15 Employees; Labor Matters. To Acquiror's knowledge, no employee of
Acquiror is in violation of any term of any employment contract, patent
disclosure agreement, non-competition agreement, or any restrictive covenant
to a former employer relating to the right of any such employee to be employed
by Acquiror because of the nature of the business conducted or presently
proposed to be conducted by Acquiror or to the use of trade secrets or
proprietary information of others. To Acquiror's knowledge, there are no
activities or proceedings of any labor union to organize any employees of
Acquiror or any of its subsidiaries and there are no strikes, or material
slowdowns, work stoppages or lockouts, or threats thereof by or with respect
to any employees of Acquiror or any of its subsidiaries. Acquiror and its
subsidiaries are and have been in compliance in all material respects with all
applicable laws regarding employment practices, terms and conditions of
employment, and wages and hours (including, without limitation, ERISA, WARN or
any similar state or local law).
3.16 Environmental Matters.
(a) Hazardous Material. Except as reasonably would not be likely to result
in a material liability to Acquiror, no underground storage tanks and no
amount of any Hazardous Material, but excluding office and janitorial
supplies, are present, as a result of the actions of Acquiror or any of its
subsidiaries or any affiliate of Acquiror, or, to Acquiror's knowledge, as a
result of any actions of any third party or otherwise, in, on or under any
property, including the land and the improvements, ground water and surface
water thereof, that Acquiror or any of its subsidiaries has at any time owned,
operated, occupied or leased.
(b) Hazardous Materials Activities. Except as reasonably would not be
likely to result in a material liability to Acquiror, neither Acquiror nor any
of its subsidiaries has transported, stored, used, manufactured, disposed of,
released or exposed its employees or others to Hazardous Materials in
violation of any law in effect on or before the Closing Date, nor has Acquiror
or any of its subsidiaries engaged in any Hazardous Materials Activities in
violation of any rule, regulation, treaty or statute promulgated by any
Governmental Entity in effect
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prior to or as of the date hereof to prohibit, regulate or control Hazardous
Materials or any Hazardous Material Activity.
(c) Permits. Acquiror and its subsidiaries currently hold all environmental
approvals, permits, licenses, clearances and consents (the "ACQUIROR
ENVIRONMENTAL PERMITS") necessary for the conduct of Acquiror's and its
subsidiaries' Hazardous Material Activities and other businesses of Acquiror
and its subsidiaries as such activities and businesses are currently being
conducted.
(d) Environmental Liabilities. No material action, proceeding, revocation
proceeding, amendment procedure, writ, injunction or claim is pending, or to
Acquiror's knowledge, threatened concerning any Acquiror Environmental Permit,
Hazardous Material or any Hazardous Materials Activity of Acquiror or any of
its subsidiaries. Acquiror is not aware of any fact or circumstance which
could involve Acquiror or any of its subsidiaries in any material
environmental litigation or impose upon Acquiror any material environmental
liability.
3.17 Agreements, Contracts and Commitments. Except as set forth in the
Acquiror Schedules, neither Acquiror nor any of its subsidiaries is a party to
or is bound by:
(a) any employment or consulting agreement, contract or commitment with any
officer or director level employee or member of Acquiror's Board of Directors,
other than those that are terminable by Acquiror or any of its subsidiaries on
no more than thirty days notice without liability or financial obligation,
except to the extent general principles of wrongful termination law may limit
Acquiror's or any of its subsidiaries' ability to terminate employees at will;
(b) any agreement or plan, including, without limitation, any stock option
plan, stock appreciation right plan or stock purchase plan, any of the
benefits of which will be increased, or the vesting of benefits of which will
be accelerated, by the occurrence of any of the transactions contemplated by
this Agreement or the value of any of the benefits of which will be calculated
on the basis of any of the transactions contemplated by this Agreement;
(c) any agreement of indemnification or guaranty not entered into in the
ordinary course of business other than indemnification agreements between
Acquiror or any of its subsidiaries and any of its officers or directors;
(d) any agreement, contract or commitment containing any covenant limiting
the freedom of Acquiror or any of its subsidiaries to engage in any line of
business or compete with any person or granting any exclusive distribution
rights;
(e) any agreement, contract or commitment currently in force relating to
the disposition or acquisition of assets not in the ordinary course of
business or any ownership interest in any corporation, partnership, joint
venture or other business enterprise;
(f) any material joint marketing or development agreement; or
(g) any agreement, contract or commitment described in Item 10 of
Regulation S-K (whether or not a filing with the SEC requiring such document
to be included as an exhibit is yet due).
Neither Acquiror nor any of its subsidiaries, nor to Acquiror's knowledge
any other party to a Acquiror Contract (as defined below), has breached,
violated or defaulted under, or received notice that it has breached violated
or defaulted under, any of the material terms or conditions of any of the
agreements, contracts or commitments to which Acquiror or any of its
subsidiaries is a party or by which it is bound of the type described in
clauses (a) through (g) above (any such agreement, contract or commitment, an
"ACQUIROR CONTRACT") in such a manner as would permit any other party to
cancel or terminate any such Acquiror Contract, or would permit any other
party to seek damages, which would be reasonably likely to be material to
Acquiror.
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3.18 Change of Control Payments. The Acquiror Schedules set forth each plan
or agreement pursuant to which any material amounts may become payable
(whether currently or in the future) to current or former officers and
directors of Acquiror as a result of or in connection with the Merger.
3.19 Statements; Proxy Statement/Prospectus. The information supplied by
Acquiror for inclusion in the Registration Statement shall not at the time the
Registration Statement is filed with the SEC and at the time it becomes
effective under the Securities Act, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein not misleading. The
information supplied by Acquiror for inclusion in the Proxy Statement shall
not, on the date the Proxy Statement is first mailed to Acquiror's
stockholders and Target's stockholders, at the time of the Acquiror
Stockholders' Meeting or the Target Stockholders' Meeting and at the Effective
Time, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are made,
not false or misleading; or omit to state any material fact necessary to
correct any statement in any earlier communication with respect to the
solicitation of proxies for the Acquiror Stockholders' Meeting or the Target
Stockholders' Meeting which has become false or misleading. The Proxy
Statement will comply as to form in all material respects with the provisions
of the Exchange Act and the rules and regulations thereunder. If at any time
prior to the Effective Time, any event relating to Acquiror or any of its
affiliates, officers or directors should be discovered by Acquiror which
should be set forth in an amendment to the Registration Statement or a
supplement to the Proxy Statement, Acquiror shall promptly inform Target.
Notwithstanding the foregoing, Acquiror makes no representation or warranty
with respect to any information supplied by Target which is contained in any
of the foregoing documents.
3.20 Board Approval. The Board of Directors of Acquiror has, as of the date
of this Agreement, determined (i) in its reasonable business judgment, that
the Merger is fair from a financial point of view to, and in the best
interests of Acquiror, and (ii) to recommend that the stockholders of Acquiror
approve (x) the amendment of Acquiror's Certificate of Incorporation to
increase its authorized share capital to allow for the issuance of shares of
Acquiror Common Stock by virtue of the Merger and (y) the issuance of shares
of Acquiror Common Stock by virtue of the Merger.
3.21 Fairness Opinion. Acquiror's Board of Directors has received written
opinions from Hambrecht & Quist LLC, dated as of the date hereof, to the
effect that as of the date hereof, the Exchange Ratio is fair to Acquiror from
a financial point of view and has delivered to Target a copy of such opinions.
3.22 Restrictions on Business Activities. There is no agreement (noncompete
or otherwise), commitment, judgment, injunction, order or decree to which
Acquiror is a party or, to the knowledge of Acquiror, otherwise binding upon
Acquiror, which has or reasonably could be expected to have the effect of
prohibiting or impairing any business practice of Acquiror, any acquisition of
property (tangible or intangible) by Acquiror or the conduct of business by
Acquiror. Without limiting the foregoing, Acquiror has not entered into any
agreement under which Acquiror is restricted from selling, licensing or
otherwise distributing any of its products to any class of customers, in any
geographic area, during any period of time or in any segment of the market.
ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME
4.1 Conduct of Business. During the period from the date of this Agreement
and continuing until the earlier of the termination of this Agreement pursuant
to its terms or the Effective Time, Target (which for the purposes of this
Article IV shall include Target and each of its subsidiaries) and Acquiror
(which for the purposes of this Article IV shall include Acquiror and each of
its subsidiaries) agree, except (i) in the case of Target as provided in
Article IV of the Target Schedules and in the case of Acquiror as provided in
Article IV of the Acquiror Schedules, or (ii) to the extent that the other of
them shall otherwise consent in writing, to carry on its
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business diligently and in accordance with good commercial practice and to
carry on its business in the usual, regular and ordinary course, in
substantially the same manner as heretofore conducted and in compliance with
all applicable laws and regulations, to pay its debts and taxes when due
subject to good faith disputes over such debts or taxes, to pay or perform
other material obligations when due, and to use its commercially reasonable
efforts consistent with past practices and policies to preserve intact its
present business organization, keep available the services of its present
officers and employees and preserve its relationships with customers,
suppliers, distributors, licensors, licensees, and others with which it has
business dealings. In addition, each of Target and Acquiror will promptly
notify the other of any material event involving its business or operations,
except where prohibited by applicable law or contracts existing as of the date
of this Agreement; provided that Target or Acquiror, as the case may be, shall
use its best efforts to have such prohibition removed promptly following such
material event.
In addition, except as permitted by the terms of this Agreement and except
in the case of Target as provided in Article IV of the Target Schedules, and
except in the case of Acquiror as provided in Article IV of the Acquiror
Schedules, without the prior written consent of the other (which consent will
not be unreasonably withheld), neither Target nor Acquiror shall do any of the
following, and neither Target nor Acquiror shall permit its subsidiaries to do
any of the following:
(a) Waive any stock repurchase rights, accelerate, amend or change the
period of exercisability of options or restricted stock, or reprice options
granted under any employee, consultant or director stock plans or authorize
cash payments in exchange for any options granted under any of such plans;
(b) Grant any severance or termination pay to any officer, employee or
consultant, except payments in amounts consistent with policies and past
practices or pursuant to written agreements outstanding, or policies existing,
on the date hereof and as previously disclosed in writing to the other, or
adopt any new severance plan;
(c) Transfer or license to any person or entity or otherwise extend, amend
or modify in any material respect any rights to the Target IP Rights or the
Acquiror IP Rights, as the case may be, or enter into grants to future patent
rights, other than in the ordinary course of business;
(d) Declare or pay any dividends on or make any other distributions
(whether in cash, stock or property) in respect of any capital stock or split,
combine or reclassify any capital stock or issue or authorize the issuance of
any other securities in respect of, in lieu of or in substitution for any
capital stock;
(e) Repurchase or otherwise acquire, directly or indirectly, any shares of
capital stock, except pursuant to rights of repurchase of any such shares
under any employee, consultant or director stock plan existing on the date
hereof;
(f) Issue, deliver, sell, authorize or propose the issuance, delivery or
sale of, any shares of capital stock or any securities convertible into shares
of capital stock, or subscriptions, rights, warrants or options to acquire any
shares of capital stock or any securities convertible into shares of capital
stock, or enter into other agreements or commitments of any character
obligating it to issue any such shares or convertible securities, other than
(i) the issuance of shares of Target Common Stock or Acquiror Common Stock, as
the case may be, pursuant to the exercise of stock options therefor
outstanding as of the date of this Agreement, (ii) options to purchase shares
of Target Common Stock or Acquiror Common Stock, as the case may be, to be
granted at fair market value in the ordinary course of business, consistent
with past practice and in accordance with stock option plans existing on the
date hereof; provided, however, that Target shall not, without the prior
written consent of Acquiror, issue options to purchase more than an aggregate
of 100,000 shares of Target Common Stock, (iii) shares of Target Common Stock
or Acquiror Common Stock, as the case may be, issuable upon the exercise of
the options referred to in clause (ii), (iv) shares of Target Common Stock or
Acquiror Common Stock, as the case may be, issuable to participants in the
Target Employee Stock Purchase Plan or the Acquiror Employee Stock Purchase
Plan, as the case may be, consistent with past practice and the terms thereof
and (v) shares of the Target Common Stock, issuable pursuant to the Option
Agreement;
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(g) Cause, permit or propose any amendments to any charter document or
Bylaw (or similar governing instruments of any subsidiaries);
(h) Acquire or agree to acquire by merging or consolidating with, or by
purchasing any equity interest in or a material portion of the assets of, or
by any other manner, any business or any corporation, partnership interest,
association or other business organization or division thereof, or otherwise
acquire or agree to acquire any assets which are material, individually or in
the aggregate, to the business of Target or Acquiror, as the case may be;
(i) Sell, lease, license, encumber or otherwise dispose of any properties
or assets which are material, individually or in the aggregate, to the
business of Target or Acquiror, as the case may be, except in the ordinary
course of business consistent with past practice;
(j) Incur any indebtedness for borrowed money (other than ordinary course
trade payables or pursuant to existing credit facilities in the ordinary
course of business) or guarantee any such indebtedness or issue or sell any
debt securities or warrants or rights to acquire debt securities of Target or
Acquiror, as the case may be, or guarantee any debt securities of others;
(k) Adopt or amend any employee benefit or employee stock purchase or
employee option plan, or enter into any employment contract, pay any special
bonus or special remuneration to any director or employee, or increase the
salaries or wage rates of its officers or employees, in each case other than
in the ordinary course of business, consistent with past practice.
(l) Pay, discharge or satisfy any claim, liability or obligation (absolute,
accrued, asserted or unasserted, contingent or otherwise), other than the
payment, discharge or satisfaction in the ordinary course of business;
(m) Make any grant of exclusive rights to any third party, other than in
the ordinary course of business;
(n) Enter into any agreement, contract or commitment containing any
covenant limiting its freedom to engage in any line of business or compete
with any person;
(o) Commence a lawsuit other than (i) for the routine collection of bills,
(ii) in such cases where it in good faith determines that failure to commence
suit would result in the material impairment of a valuable aspect of its
business or material impairment or loss of a Target IP Right or a material
asset, provided that it consults with the other prior to the filing of such a
suit, or (iii) for a breach or threatened breach of this Agreement;
(p) Other than in the ordinary course of business, make or change any
material election in respect of Taxes, adopt or change any accounting method
in respect of Taxes to the extent material to it or its subsidiaries, enter
into any material closing agreement, settle any material claim or assessment
in respect of Taxes, or consent to any extension or waiver of the limitation
period applicable to any material claim or assessment in respect of Taxes;
(q) Revalue any of its assets, including without limitation writing down
the value of inventory or writing off notes or accounts receivable other than
in the ordinary course of business;
(r) Enter into any partnership arrangements, joint ventures, joint
development agreements, strategic partnership or alliances, or other material
contracts other than in the ordinary course of business consistent with past
practice, or violate, amend or otherwise modify or waive any material
contract, except, in the case of Acquiror or any of its subsidiaries, where
such action described in this clause (r) would not have a Material Adverse
Effect;
(s) Take any action that would be reasonably likely to interfere with
Acquiror's ability to account for the Merger as a pooling of interests; or
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(t) Intentionally take or agree in writing or otherwise to take any of the
actions described in Article IV (a) through (s) above, or any action which
would make any of its representations or warranties contained in this
Agreement untrue or incorrect or prevent it from performing or cause it not to
perform its covenants hereunder, except to the extent that such action would
not be reasonably expected to result in a Material Adverse Effect with respect
to such party or otherwise interfere with, delay or impede the consummation of
the transactions contemplated hereby in any material respect.
4.2 Acquiror Acquisitions. Notwithstanding anything in this Agreement to the
contrary, Acquiror may acquire or agree to acquire by merging or consolidating
with, or by purchasing any equity interest in or a material portion of the
assets of, or by any other manner, any business or any corporation,
partnership interest, association or other business organization or division
thereof, or otherwise acquire or agree to acquire any assets, as the case may
be (an "ACQUIROR ACQUISITION"). An Acquiror Acquisition may involve cash,
stock or other consideration, and may include such other actions as are
customary in connection with such type of transaction, including without
limitation entering into employment agreements and severance arrangements in
connection with any such transaction. Notwithstanding the foregoing, the
Acquiror may not make or enter into any agreements pertaining to an Acquiror
Acquisition where (i) such action would reasonably be expected to have a
Material Adverse Effect with respect to Acquiror, Surviving Corporation or
Target (ii) such action would prevent or materially delay the satisfaction of
the condition set forth in Sections 6.1(a) (Stockholder Approval), 6.1(b)
(Registration Statement Effective; Proxy Statement), 6.1(c) (No Order; HSR
Act) or 6.1(f) (Opinion of Accountants) or otherwise interfere with, delay or
impede the consummation of the transactions contemplated hereby in any
material respect (iii) together with the aggregate deal value of any prior
Acquiror Acquisitions, such Acquiror Acquisition would exceed $100 million in
deal value or (iv) result in a change of control of Acquiror. The taking of
any action allowed by this Section 4.2 shall not be deemed a violation of any
representation, warranty or covenant set forth in this Agreement, nor shall it
constitute a failure of a condition to close.
4.3 No HSR Act Violation. Notwithstanding anything to the contrary in this
Article IV, neither Target nor Acquiror shall be required under this Article
IV to take any action or obtain any consent that would cause a violation of
the HSR Act.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Proxy Statement/Prospectus; Registration Statement; Other Filings; Board
Recommendations.
(a) As promptly as practicable after the execution of this Agreement,
Target and Acquiror will prepare, and file with the SEC, the Proxy Statement
and Acquiror will prepare and file with the SEC the Registration Statement in
which the Proxy Statement will be included as a prospectus. Each of Target and
Acquiror will respond to any comments of the SEC, will use its respective best
efforts to have the Registration Statement declared effective under the
Securities Act as promptly as practicable after such filing and will cause the
Proxy Statement to be mailed to its respective stockholders at the earliest
practicable time. As promptly as practicable after the date of this Agreement,
Target and Acquiror will prepare and file any other filings required under the
Exchange Act, the Securities Act or any other Federal, foreign or Blue Sky
laws relating to the Merger and the transactions contemplated by this
Agreement (the "OTHER FILINGS"). Each of Target and Acquiror will notify the
other promptly upon the receipt of any comments from the SEC or its staff and
of any request by the SEC or its staff or any other government officials for
amendments or supplements to the Registration Statement, the Proxy Statement
or any Other Filing or for additional information and will supply the other
with copies of all correspondence between such party or any of its
representatives, on the one hand, and the SEC, or its staff or any other
government officials, on the other hand, with respect to the Registration
Statement, the Proxy Statement, the Merger or any Other Filing. The Proxy
Statement, the Registration Statement and the Other Filings will comply in all
material respects with all applicable requirements of law and the rules and
regulations promulgated thereunder. Whenever any event occurs which is
required to be set forth in an amendment or supplement to the Proxy Statement,
the Registration Statement or any Other Filing, Target or Acquiror, as the
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case may be, will promptly inform the other of such occurrence and cooperate
in filing with the SEC or its staff or any other government officials, and/or
mailing to stockholders of Target, such amendment or supplement.
(b) Subject to the provisions of Section 5.4, the Proxy Statement will
include the recommendation of the Board of Directors of Target in favor of
adoption and approval of this Agreement and approval of the Merger. In
addition, the Proxy Statement will include the recommendations of the Board of
Directors of Acquiror in favor of (x) the amendment of Acquiror's Certificate
of Incorporation to increase its authorized share capital to allow for the
issuance of shares of Acquiror Common Stock by virtue of the Merger and (y)
the issuance of shares of Acquiror Common Stock by virtue of the Merger.
5.2 Meetings of Stockholders. Promptly after the date hereof, Target will
take all action necessary in accordance with Delaware Law and its Certificate
of Incorporation and Bylaws to convene the Target Stockholders' Meeting to be
held as promptly as practicable, and in any event (to the extent permissible
under applicable law) within 45 days after the declaration of effectiveness of
the Registration Statement, for the purpose of voting upon this Agreement.
Target will consult with Acquiror and use its reasonable best efforts to hold
the Target Stockholders' Meeting on the same day as the Acquiror Stockholders'
Meeting. Promptly after the date hereof, Acquiror will take all action
necessary in accordance with Delaware Law and its Certificate of Incorporation
and Bylaws to convene the Acquiror Stockholders' Meeting to be held as
promptly as practicable, and in any event (to the extent permissible under
applicable law) within 45 days after the declaration of effectiveness of the
Registration Statement, for the purpose of (i) amending its Certificate of
Incorporation to increase its authorized share capital to allow for the
issuance of shares of Acquiror Common Stock by virtue of the Merger and (ii)
voting upon the issuance of shares of Acquiror Common Stock by virtue of the
Merger. Acquiror will consult with Target and will use its reasonable best
efforts to hold the Acquiror Stockholders' Meeting on the same day as the
Target Stockholders' Meeting. For so long as the Board of Directors of Target
is required to make the recommendation set forth in Section 5.1, Target will
use its reasonable best efforts to solicit from its stockholders proxies in
favor of the adoption and approval of this Agreement and the approval of the
Merger and will take all other action necessary or advisable to secure the
vote or consent of its stockholders required by Delaware Law to approve the
Merger. For so long as the Board of Directors of Acquiror is required to make
the recommendations set forth in Section 5.1, Acquiror will use its best
efforts to solicit from its stockholders proxies in favor of (i) the amendment
of Acquiror's Certificate of Incorporation to increase its authorized share
capital to allow for the issuance of shares of Acquiror Common Stock by virtue
of the Merger and (ii) the issuance of shares of Acquiror Common Stock by
virtue of the Merger.
5.3 Confidentiality; Access to Information.
(a) The parties acknowledge that Target and Acquiror have previously
executed a mutual confidentiality letter, dated April 1, 1997, (the
"CONFIDENTIALITY AGREEMENT"), which Confidentiality Agreement will continue in
full force and effect in accordance with its terms.
(b) Access to Information. Each party will afford the other party and its
accountants, counsel and other representatives reasonable access during normal
business hours to the properties, books, records and personnel of the other
party during the period prior to the Effective Time to obtain all information
concerning the business, including the status of product development efforts,
properties, results of operations and personnel of such party, as the other
party may reasonably request. No information or knowledge obtained in any
investigation pursuant to this Section 5.3 will affect or be deemed to modify
any representation or warranty contained herein or the conditions to the
obligations of the parties to consummate the Merger.
5.4 No Solicitation.
(a) Restriction on Acquiror.
(i) From and after the date of this Agreement until the earlier of the
Effective Time or termination of this Agreement pursuant to its terms,
Acquiror and its subsidiaries will not, and will instruct their respective
directors, officers, employees, representatives, investment bankers, agents
and affiliates not to, directly or indirectly, (ii) solicit or knowingly
encourage submission of, any proposals or offers by any person, entity or
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group, or (iii) participate in any discussions or negotiations with, or
disclose any non-public information concerning Acquiror or any of its
subsidiaries to, or afford any access to the properties, books or records of
Acquiror or any of its subsidiaries to, or otherwise assist or facilitate, or
enter into any agreement or understanding with, any person, entity or group,
in connection with any Acquisition Proposal with respect to Acquiror. For the
purposes of this Agreement, an "ACQUISITION PROPOSAL" with respect to an
entity means any proposal or offer relating to (i) any merger, consolidation,
sale of substantial assets or similar transactions involving the entity or any
subsidiaries of the entity (other than sales of assets or inventory in the
ordinary course of business or as permitted under the terms of this
Agreement); (ii) sale of 15% or more of the outstanding shares of capital
stock of the entity (including without limitation by way of a tender offer or
an exchange offer); (iii) the acquisition by any person of beneficial
ownership or a right to acquire beneficial ownership of, or the formation of
any "group" (as defined under Section 13(d) of the Exchange Act and the rules
and regulations thereunder) which beneficially owns, or has the right to
acquire beneficial ownership of, 15% or more of the then outstanding shares of
capital stock of the entity (except for acquisitions for passive investment
purposes only in circumstances where the person or group qualifies for and
files a Schedule 13G with respect thereto and does not subsequently become
required to file a Schedule 13D); or (iv) any public announcement of a
proposal, plan or intention to do any of the foregoing or any agreement to
engage in any of the foregoing. Acquiror will immediately disclose to Target
and cease any and all existing activities, discussions or negotiations with
any parties conducted heretofore with respect to any of the foregoing.
Acquiror will (i) notify Target as promptly as practicable if any inquiry or
proposal is made or any information or access is requested in connection with
an Acquisition Proposal or potential Acquisition Proposal and (ii) as promptly
as practicable notify Target of the significant terms and conditions of any
such Acquisition Proposal. In addition, subject to the other provisions of
this Section 5.4(a), from and after the date of this Agreement until the
earlier of the Effective Time and termination of this Agreement pursuant to
its terms, Acquiror and its subsidiaries will not, and will instruct their
respective directors, officers, employees, representatives, investment
bankers, agents and affiliates not to, directly or indirectly, make or
authorize any public statement, recommendation or solicitation in support of
any Acquisition Proposal made by any person, entity or group; provided,
however, that nothing herein shall prohibit Acquiror's Board of Directors from
taking and disclosing to Acquiror's stockholders a position with respect to a
tender offer pursuant to Rules 14d-9 and 14e-2 promulgated under the Exchange
Act.
(ii) Notwithstanding any other provision of this Agreement, prior to the
Effective Time, Acquiror may, to the extent the Board of Directors of Acquiror
determines, in good faith, after consultation with outside legal counsel, that
the Board's fiduciary duties under applicable law require it to do so,
participate in discussions or negotiations with, and, subject to the
requirements of paragraph (c), below, furnish information to any person,
entity or group after such person, entity or group has delivered to Acquiror,
an unsolicited bona fide Acquisition Proposal which the Board of Directors of
Acquiror in its good faith reasonable judgment determines, (i) after
consultation with its independent financial advisors, would result in a
transaction more favorable than the Merger to the stockholders of Acquiror
from a financial point of view and (ii) after reasonable inquiry by Acquiror,
that the party making such Acquisition Proposal is financially capable of
consummating such Acquisition Proposal (an "ACQUIROR SUPERIOR PROPOSAL"). In
addition, notwithstanding any other provision of this Agreement in connection
with a possible Acquisition Proposal, Acquiror may refer any third party to
this Section 5.4 or make a copy of this Section 5.4 available to a third
party. In the event Acquiror receives an Acquiror Superior Proposal, nothing
contained in this Agreement (but subject to the terms of this Section 5.4(a))
will prevent the Board of Directors of Acquiror from recommending such
Acquiror Superior Proposal to its stockholders, if the Board determines, in
good faith, after consultation with outside legal counsel, that such action is
required by its fiduciary duties under applicable law; in such case, the Board
of Directors of Acquiror may withdraw, modify or refrain from making its
recommendation set forth in Section 5.1(b), and, to the extent it does so,
Acquiror may refrain from soliciting proxies and taking such other action
necessary to secure the vote of its stockholders as may be required by Section
5.2; provided, however, that Acquiror shall not recommend to its stockholders
an Acquiror Superior Proposal for a period of not less than 48 hours after
Target's receipt of a copy of such Acquiror Superior Proposal (or a
description of the significant terms and conditions thereof, if such Acquiror
Superior Proposal is not in writing); and provided further, that nothing
contained in this Section shall limit
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Acquiror's obligation to hold and convene the Acquiror Stockholders Meeting
(regardless of whether the recommendation of the Board of Directors of
Acquiror shall have been withdrawn, modified or not yet made).
(iii) Notwithstanding anything to the contrary in this Section 5.4(a)
Acquiror will not provide any non-public information to a third party unless:
(x) Acquiror provides such non-public information pursuant to a nondisclosure
agreement with terms regarding the protection of confidential information at
least as restrictive as such terms in the Confidentiality Agreement; and (y)
such non-public information has been previously delivered to Target.
(b) Restrictions on Target.
(i) From and after the date of this Agreement until the earlier of the
Effective Time or termination of this Agreement pursuant to its terms, Target
and its subsidiaries will not, and will instruct their respective directors,
officers, employees, representatives, investment bankers, agents and
affiliates not to, directly or indirectly, (i) solicit or knowingly encourage
submission of, any proposals or offers by any person, entity or group (other
than Acquiror and its affiliates, agents and representatives), or (ii)
participate in any discussions or negotiations with, or disclose any non-
public information concerning Target or any of its subsidiaries to, or afford
any access to the properties, books or records of Target or any of its
subsidiaries to, or otherwise assist or facilitate, or enter into any
agreement or understanding with, any person, entity or group (other than
Acquiror and its affiliates, agents and representatives), in connection with
any Acquisition Proposal with respect to Target. Target will immediately
disclose to Acquiror and cease any and all existing activities, discussions or
negotiations with any parties conducted heretofore with respect to any of the
foregoing. Target will (i) notify Acquiror as promptly as practicable if any
inquiry or proposal is made or any information or access is requested in
connection with an Acquisition Proposal or potential Acquisition Proposal and
(ii) as promptly as practicable notify Acquiror of the significant terms and
conditions of any such Acquisition Proposal. In addition, subject to the other
provisions of this Section 5.4(b), from and after the date of this Agreement
until the earlier of the Effective Time and termination of this Agreement
pursuant to its terms, Target and its subsidiaries will not, and will instruct
their respective directors, officers, employees, representatives, investment
bankers, agents and affiliates not to, directly or indirectly, make or
authorize any public statement, recommendation or solicitation in support of
any Acquisition Proposal made by any person, entity or group (other than
Acquiror); provided, however, that nothing herein shall prohibit Target's
Board of Directors from taking and disclosing to Target's stockholders a
position with respect to a tender offer pursuant to Rules 14d-9 and 14e-2
promulgated under the Exchange Act.
(ii) Notwithstanding any other provision of this Agreement, prior to the
Effective Time, Target may, to the extent the Board of Directors of Target
determines, in good faith, after consultation with outside legal counsel, that
the Board's fiduciary duties under applicable law require it to do so,
participate in discussions or negotiations with, and, subject to the
requirements of paragraph (c), below, furnish information to any person,
entity or group after such person, entity or group has delivered to Target, an
unsolicited bona fide Acquisition Proposal which the Board of Directors of
Target in its good faith reasonable judgment determines, (i) after
consultation with its independent financial advisors, would result in a
transaction more favorable to the stockholders of Target from a financial
point of view than the Merger and (ii) after reasonable inquiry by Target,
that the party making such Acquisition Proposal is financially capable of
consummating such Acquisition Proposal (a "TARGET SUPERIOR PROPOSAL"). In
addition, notwithstanding any other provision of this Agreement, in connection
with a possible Acquisition Proposal, Target may refer any third party to this
Section 5.4 or make a copy of this Section 5.4 available to a third party. In
the event Target receives a Target Superior Proposal, nothing contained in
this Agreement (but subject to the terms of this Section 5.4(b)) will prevent
the Board of Directors of Target from recommending such Target Superior
Proposal to its stockholders, if the Board determines, in good faith, after
consultation with outside legal counsel, that such action is required by its
fiduciary duties under applicable law; in such case, the Board of Directors of
Target may withdraw, modify or refrain from making its recommendation set
forth in Section 5.1(b), and, to the extent it does so, Target may refrain
from soliciting proxies and taking such other action necessary to secure the
vote of its stockholders as may be required by Section 5.2; provided, however,
that Target shall not recommend to its stockholders a Target Superior Proposal
for a period of not less than 48 hours after Acquiror's receipt of a copy of
such Target Superior Proposal (or a description of the significant terms and
conditions thereof, if such Target Superior Proposal is not
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in writing); and provided further, that nothing contained in this Section
shall limit Target's obligation to hold and convene the Target Stockholders
Meeting (regardless of whether the recommendation of the Board of Directors of
Target shall have been withdrawn, modified or not yet made).
(iii) Notwithstanding anything to the contrary in this paragraph (b),
Target will not provide any non-public information to a third party unless:
(x) Target provides such non-public information pursuant to a nondisclosure
agreement with terms regarding the protection of confidential information at
least as restrictive as such terms in the Confidentiality Agreement; and (y)
such non-public information has been previously delivered to Acquiror.
5.5 Public Disclosure. Acquiror and Target will consult with each other
before issuing any press release or otherwise making any public statement with
respect to the Merger, or this Agreement or an Acquisition Proposal and will
not issue any such press release or make any such public statement prior to
such consultation, except as may be required by law or any listing agreement
with a national securities exchange or the Nasdaq Stock Market.
5.6 Legal Requirements. Each of Acquiror, Merger Sub and Target will take
all reasonable actions necessary or desirable to comply promptly with all
legal requirements which may be imposed on them with respect to the
consummation of the transactions contemplated by this Agreement (including
furnishing all information required in connection with approvals by or filings
with any Governmental Entity, and prompt resolution of any litigation prompted
hereby) and will promptly cooperate with and furnish information to any party
hereto necessary in connection with any such filings with or investigations by
any Governmental Entity, and any other such requirements imposed upon any of
them or their respective subsidiaries in connection with the consummation of
the transactions contemplated by this Agreement. Acquiror will use its
commercially reasonable efforts to take such steps as may be necessary to
comply with the securities and blue sky laws of all jurisdictions which are
applicable to the issuance of Acquiror Common Stock pursuant hereto. Target
will use its commercially reasonable efforts to assist Acquiror as may be
necessary to comply with the securities and blue sky laws of all jurisdictions
which are applicable in connection with the issuance of Acquiror Common Stock
pursuant hereto.
5.7 Third Party Consents. As soon as practicable following the date hereof,
Acquiror and Target will each use its commercially reasonable efforts to
obtain all material consents, waivers and approvals under any of its or its
subsidiaries' agreements, contracts, licenses or leases required to be
obtained in connection with the consummation of the transactions contemplated
hereby.
5.8 Notification of Certain Matters. Acquiror and Merger Sub will give
prompt notice to Target, and Target will give prompt notice to Acquiror, of
the occurrence, or failure to occur, of any event, which occurrence or failure
to occur would be reasonably likely to cause (a) any representation or
warranty contained in this Agreement and made by it to be untrue or inaccurate
in any material respect at any time from the date of this Agreement to the
Effective Time such that the conditions set forth in Section 6.2(a) or 6.3(a),
as the case may be, would not be satisfied as a result thereof, or (b) any
material failure of Acquiror and Merger Sub or Target, as the case may be, or
of any officer, director, employee or agent thereof, to comply with or satisfy
any covenant, condition or agreement to be complied with or satisfied by it
under this Agreement. Notwithstanding the above, the delivery of any notice
pursuant to this Section 5.8 will not limit or otherwise affect the remedies
available hereunder to the party receiving such notice.
5.9 Best Efforts and Further Assurances. Subject to the respective rights
and obligations of Acquiror and Target under this Agreement, each of the
parties to this Agreement will use its reasonable best efforts to effectuate
the Merger and the other transactions contemplated hereby and to fulfill and
cause to be fulfilled the conditions to closing under this Agreement. Each
party hereto, at the reasonable request of another party hereto, will execute
and deliver such other instruments and do and perform such other acts and
things as may be necessary or desirable for effecting completely the
consummation of the transactions contemplated hereby.
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5.10 Stock Options and Warrants.
(a) At the Effective Time, each outstanding option to purchase shares of
Target Common Stock (each a "TARGET STOCK OPTION") under the Target Stock
Option Plans, whether or not exercisable, will be assumed by Acquiror. Each
Target Stock Option so assumed by Acquiror under this Agreement will continue
to have, and be subject to, the same terms and conditions set forth in the
applicable Target Stock Option Plan immediately prior to the Effective Time
(including, without limitation, any repurchase rights), except that (i) each
Target Stock Option will be exercisable (or will become exercisable in
accordance with its terms) for that number of whole shares of Acquiror Common
Stock equal to the product of the number of shares of Target Common Stock that
were issuable upon exercise of such Target Stock Option immediately prior to
the Effective Time multiplied by the Exchange Ratio, rounded down to the
nearest whole number of shares of Acquiror Common Stock, and (ii) the per
share exercise price for the shares of Acquiror Common Stock issuable upon
exercise of such assumed Target Stock Option will be equal to the quotient
determined by dividing the exercise price per share of Target Common Stock at
which such Target Stock Option was exercisable immediately prior to the
Effective Time by the Exchange Ratio, rounded up to the nearest whole cent.
After the Effective Time, Acquiror will issue to each holder of an outstanding
Target Stock Option a notice describing the foregoing assumption of such
Target Stock Option by Acquiror.
(b) It is intended that Target Stock Options assumed by Acquiror shall
qualify following the Effective Time as incentive stock options as defined in
Section 422 of the Code to the extent Target Stock Options qualified as
incentive stock options immediately prior to the Effective Time and the
provisions of this Section 5.10 shall be applied consistent with such intent.
(c) Acquiror will reserve sufficient shares of Acquiror Common Stock for
issuance under Section 5.10(a) and under Section 1.6(c) hereof.
5.11 Form S-8. Acquiror agrees to file a registration statement on Form S-8
for the shares of Acquiror Common Stock issuable with respect to assumed
Target Stock Options and the rights assumed under the Target ESPP no later
than five (5) business days after the Closing Date.
5.12 Indemnification and Insurance.
(a) From and after the Effective Time, Acquiror will fulfill and honor and
will cause the Surviving Corporation to fulfill and honor in all respects the
obligations of Target pursuant to any indemnification agreements between
Target and any of its subsidiaries and their respective directors and officers
(the "INDEMNIFIED PARTIES") existing prior to the date hereof. From and after
the Effective Time, such obligations shall be the joint and several
obligations of Acquiror and the Surviving Corporation and, by executing this
Agreement, Acquiror hereby assumes such obligations. The Certificate of
Incorporation and Bylaws of the Surviving Corporation will contain the
provisions with respect to indemnification and elimination of liability for
monetary damages set forth in the Certificate of Incorporation and Bylaws of
Target, which provisions will not be amended, repealed or otherwise modified
from the Effective Time in any manner that would adversely affect the rights
thereunder of individuals who, immediately prior to the Effective Time, were
directors, officers, employees or agents of Target or its subsidiaries, unless
such modification is required by law.
(b) For a period of six years after the Effective Time, Acquiror will
either (i) maintain at least $10,000,000 in cash, marketable securities and
unrestricted lines of credit which the Chief Financial Officer of Acquiror, on
behalf of Acquiror, certifies in writing are and will continue to be available
to provide the indemnification in accordance with Section 5.12(a) above, or
(ii) cause the Surviving Corporation to use its best efforts to maintain in
effect, if available, directors' and officers' liability insurance for at
least $10,000,000 covering those persons who are Indemnified Parties;
provided, however, that at no time when Acquiror is required to provide
indemnification under Section 5.12 will the indemnification provided to the
Indemnified Parties under this Section 5.12(b) be less favorable in amount or
material terms than the indemnification provided by Acquiror to its own
directors and officers.
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In the event of any claim, action, suit, proceeding or investigation to
which paragraph (a) applies, (i) any counsel retained by the Indemnified
Parties for any period after the Effective Time will be reasonably
satisfactory to the Surviving Corporation and Acquiror, (ii) after the
Effective Time, the Surviving Corporation or Acquiror will pay the reasonable
fees and expenses of such counsel, promptly after statements therefor are
received and (iii) the Surviving Corporation and Acquiror will cooperate in
the defense of any such matter; provided, however, that neither Acquiror nor
the Surviving Corporation will be liable for any settlement effected without
the Surviving Corporation's or Acquiror's written consent (which consent will
not be unreasonably withheld); and provided, further, that, in the event that
any claim or claims for indemnification are asserted or made within such six-
year period, all rights to indemnification in respect of any such claim or
claims will continue until the disposition of any and all such claims. The
Indemnified Parties as a group may retain only one law firm (in addition to
local counsel) to represent them with respect to any single action unless
there is, under applicable standards of professional conduct, a conflict on
any significant issue between the positions of any two or more Indemnified
Parties.
(c) This Section 5.13 will survive any termination of this Agreement and
the consummation of the Merger at the Effective Time, is intended to benefit
Target, the Surviving Corporation and the persons who are or were directors or
officers of Target or its subsidiaries on or prior to the Effective Time, and
will be binding on all successors and assigns of the Surviving Corporation.
5.13 Nasdaq National Market Listing. Acquiror agrees to file with the Nasdaq
National Market prior to the Effective Time a Notification Form for Listing of
Additional Shares with respect to the shares of Acquiror Common Stock
issuable, and those required to be reserved for issuance, in connection with
the Merger, upon official notice of issuance.
5.14 Acquiror Affiliate Agreement. Set forth on the Acquiror Schedules is a
list of those persons who, in Acquiror's reasonable judgment, may be deemed to
be affiliates of Acquiror within the meaning of Rule 145 promulgated under the
Securities Act (each an "ACQUIROR AFFILIATE"). Acquiror will provide Target
with such information and documents as Target reasonably requests for purposes
of reviewing such list. Acquiror will use its reasonable best efforts to
deliver or cause to be delivered to Target, as promptly as practicable on or
following the date hereof, from each Acquiror Affiliate an executed affiliate
agreement in substantially the form attached hereto as Exhibit C-1.
5.15 Target Affiliate Agreement. Set forth on the Target Schedules is a list
of those persons who may be deemed to be, in Target's reasonable judgment,
affiliates of Target within the meaning of Rule 145 promulgated under the
Securities Act (each a "TARGET AFFILIATE"). Target will provide Acquiror with
such information and documents as Acquiror reasonably requests for purposes of
reviewing such list. Target will use its reasonable best efforts to deliver or
cause to be delivered to Acquiror, as promptly as practicable on or following
the date hereof, from each Target Affiliate an executed affiliate agreement in
substantially the form attached hereto as Exhibit C-2 (the "TARGET AFFILIATE
AGREEMENT"). Acquiror will be entitled to place appropriate legends on the
certificates evidencing any Acquiror Common Stock to be received by a Target
Affiliate pursuant to the terms of this Agreement, and to issue appropriate
stop transfer instructions to the transfer agent for the Acquiror Common
Stock, consistent with the terms of the Target Affiliate Agreement.
5.16 Acquiror Voting Agreements. To the extent not delivered to Target
concurrently with the execution of this Agreement, Acquiror shall use its best
efforts, on behalf of Target and pursuant to the request of Target, to cause
each Acquiror stockholder named in Schedule 5.16 of the Acquiror Schedule
(which accurately states the number of shares of Target Common Stock
beneficially owned by each person named thereon) to execute and deliver to
Target an Acquiror Voting Agreement in substantially the form of Exhibit A-2
attached hereto promptly following the execution of this Agreement (and in
each case no later than the date prior to the time that the preliminary proxy
materials are filed with the SEC pursuant to Section 5.1).
5.17 Target Voting Agreements. To the extent not delivered to Acquiror
concurrently with the execution of this Agreement, Target shall use its best
efforts, on behalf of Acquiror and pursuant to the request of Acquiror,
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to cause each Target stockholder named in Schedule 5.17 of the Target Schedule
(which accurately states as of March 14, 1997 the number of shares of Target
Common Stock beneficially owned by each person named thereon) to execute and
deliver to Acquiror a Target Voting Agreement in substantially the form of
Exhibit A-1 attached hereto promptly following the execution of this Agreement
(and in each case no later than the date prior to the time that the
preliminary proxy materials are filed with the SEC pursuant to Section 5.1).
5.18 Regulatory Filings; Reasonable Efforts. If required under applicable
law, as soon as may be reasonably practicable, Target and Acquiror each shall
file with the United States Federal Trade Commission (the "FTC") and the
Antitrust Division of the United States Department of Justice ("DOJ")
Notification and Report Forms relating to the transactions contemplated herein
as required by the HSR Act, as well as comparable pre-merger notification
forms required by the merger notification or control laws and regulations of
any applicable jurisdiction, as agreed to by the parties. Target and Acquiror
each shall promptly (a) supply the other with any information which may be
required in order to effectuate such filings and (b) supply any additional
information which reasonably may be required by the FTC, the DOJ or the
competition or merger control authorities of any other jurisdiction and which
the parties may reasonably deem appropriate.
5.19 Increase in Authorized Shares. Subject to the terms hereof, at the
Acquiror Stockholders' Meeting, Acquiror shall propose and recommend that its
Certificate of Incorporation be amended to increase the authorized number of
shares of Common Stock thereunder to at least 110,000,000 shares, provided
that Acquiror may propose and recommend an increase of such lesser number as
in good faith it determines (provided that, subject to the terms hereof, such
lesser number is not less than the number required to issue shares by virtue
of the Merger and the other transactions contemplated hereby).
5.20 Tax-Free Reorganization. Each party shall take such reasonable action
as may be required to cause the Merger to qualify as a "reorganization" under
Section 368(a) of the Code, and no party shall take any action either prior to
or after the Effective Time that could reasonably be expected to cause the
Merger to fail to qualify as a "reorganization" under Section 368(a) of the
Code.
5.21 Nasdaq Quotation. Acquiror and Target agree to continue the quotation
of Acquiror Common Stock and Target Common Stock, respectively, on the Nasdaq
National Market during the term of the Agreement so that appraisal rights will
not be available to stockholders of Target under Section 262 of the Delaware
Law.
5.22 Employee Benefit Arrangements. As soon as practicable following the
Effective Time, Acquiror shall enroll employees of Target who will become
employees of Acquiror in all "employee welfare benefit plans," as such term is
defined in Section 3.(1) of ERISA, maintained by Acquiror and shall take such
steps as are necessary to ensure that there are no pre-existing condition
limitations that apply to any medical, life or disability insurance coverage.
5.23 [Intentionally left blank]
5.24 Amendment to Registration Rights. Target shall use its reasonable best
efforts to obtain such amendments to registration rights agreements to which
it is a party which may be reasonably requested by Acquiror.
5.25 Pooling Accounting.
(a) Acquiror and Target shall each use its best efforts to take all actions
required to cause the business combination to be effected by the Merger to be
accounted for as a pooling of interests. Each of Acquiror and Target shall use
its best efforts to cause its "Affiliates" (as such term is used in Sections
5.14 and 5.15) not to take any action that would prevent Acquiror from
accounting for the business combination to be effected by the Merger as a
pooling of interests. Acquiror and Target shall each advise each other and
their own respective accounting firms of any action known to such party to
have been taken by any of its directors, officers, affiliate, or stockholder
which, to the knowledge of such party, could preclude accounting for the
Merger as a pooling of interests.
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(b) Target shall use all reasonable efforts to cause to be delivered to
Acquiror a letter of Target's independent auditors in writing two business
days prior to the Effective Time to the effect that Target qualifies as an
entity that may be a party to a business combination for which the pooling-of-
interest method of accounting would be available and in a form reasonably
satisfactory to Acquiror and customary in scope and substance for letters
delivered by independent public accountants in connection with transactions of
this type.
(c) Acquiror shall use all reasonable efforts to cause to be delivered to
Target a letter of Acquiror's independent auditors in writing two business
days before the Effective Time regarding concurrence with Acquiror's
management's conclusion regarding appropriateness of pooling-of-interest
accounting treatment for the Merger under APB Opinion No. 16 if consummated in
accordance with this Agreement and in a form reasonably satisfactory to Target
and customary in scope and substance for letters delivered by independent
public accountants in connection with transactions of this type.
5.26 Option Agreement. Concurrently with the execution of this Agreement,
Target shall deliver to Acquiror an executed Target Option Agreement in the
form of Exhibit B-1 attached hereto. Target agrees to fully perform its
obligations under the Target Option Agreement. Concurrently with the execution
of this Agreement, Acquiror shall deliver to Target an executed Acquiror
Option Agreement in the form of Exhibit B-2 attached hereto. Acquiror agrees
to fully perform its obligations under the Acquiror Option Agreement.
5.27 ESPP. Employees of Target as of the Effective Time shall be permitted
to participate in the Acquiror's Employee Stock Purchase Plan commencing on
the first enrollment date following the Effective Time, subject to compliance
with the eligibility provisions of such plan.
ARTICLE VI
CONDITIONS TO THE MERGER
6.1 Conditions to Obligations of Each Party to Effect the Merger. The
respective obligations of each party to this Agreement to effect the Merger
shall be subject to the satisfaction at or prior to the Effective Time of the
following conditions:
(a) Stockholder Approval. This Agreement shall have been approved and
adopted, and the Merger shall have been duly approved, by the requisite vote
under applicable law, by the stockholders of Target; and an increase in the
authorized number of shares of Acquiror Common Stock so as to permit the
issuance of shares of Acquiror Common Stock by virtue of the Merger, as well
as such issuance, shall have been duly approved by the requisite vote under
applicable law and the rules of the National Association of Securities
Dealers, Inc. by the stockholders of Acquiror.
(b) Registration Statement Effective; Proxy Statement. The SEC shall have
declared the Registration Statement effective. No stop order suspending the
effectiveness of the Registration Statement or any part thereof shall have
been issued and no proceeding for that purpose, and no similar proceeding in
respect of the Proxy Statement, shall have been initiated or threatened in
writing by the SEC.
(c) No Order; HSR Act. No Governmental Entity shall have enacted, issued,
promulgated, enforced or entered any statute, rule, regulation, executive
order, decree, injunction or other order (whether temporary, preliminary or
permanent) which is in effect and which has the effect of making the Merger
illegal or otherwise prohibiting consummation of the Merger. All waiting
periods, if any, under the HSR Act relating to the transactions contemplated
hereby will have expired or terminated early.
(d) Tax Opinions. Acquiror and Target shall each have received
substantially identical written opinions from their counsel, Wilson Sonsini
Goodrich & Rosati, and Fenwick & West LLP, respectively, in form and substance
reasonably satisfactory to them, to the effect that the Merger will constitute
a reorganization within the meaning of Section 368(a) of the Code. The parties
to this Agreement agree to make reasonable representations as requested by
such counsel for the purpose of rendering such opinions.
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(e) Nasdaq Listing. The shares of Acquiror Common Stock issuable to
stockholders of Target pursuant to this Agreement and such other shares
required to be reserved for issuance in connection with the Merger shall have
been authorized for listing on the Nasdaq National Market upon official notice
of issuance.
(f) Opinion of Accountants. Each of Acquiror and Target shall have received
a letter from Ernst & Young LLP and KPMG Peat Marwick LLP, respectively, dated
within two (2) business days prior to the Effective Time, as described in
Section 5.25.
6.2 Additional Conditions to Obligations of Target. The obligation of Target
to consummate and effect the Merger shall be subject to the satisfaction at or
prior to the Effective Time of each of the following conditions, any of which
may be waived, in writing, exclusively by Target:
(a) Representations and Warranties. The representations and warranties of
Acquiror and Merger Sub contained in this Agreement shall have been true and
correct in all material respects (i) as of the date of this Agreement and (ii)
as of the Effective Time except, in each case, for changes contemplated by
this Agreement and except for those representations and warranties which
address matters only as of a particular date (which shall remain true and
correct as of such particular date), with the same force and effect as if made
on and as of the Effective Time, except in such cases (other than the
representations in Sections 3.2 and 3.3) where the failure to be so true and
correct would not have a Material Adverse Effect on Acquiror. Target shall
have received a certificate with respect to the foregoing signed on behalf of
Acquiror by the Chief Executive Officer and the Chief Financial Officer of
Acquiror.
(b) Agreements and Covenants. Acquiror and Merger Sub shall have performed
or complied with all agreements and covenants required by this Agreement to be
performed or complied with by them on or prior to the Effective Time, except
where the failure to so perform or comply would not have a Material Adverse
Effect with respect to Acquiror and Target shall have received a certificate
to such effect signed on behalf of Acquiror by the Chief Executive Officer and
the Chief Financial Officer of Acquiror.
(c) Material Adverse Effect. No Material Adverse Effect with respect to
Acquiror shall have occurred since the date of this Agreement.
(d) Legal Opinion. Target shall have received a legal opinion from Wilson
Sonsini Goodrich & Rosati, P.C., counsel to Acquiror, in substantially the
form set forth in Exhibit D-1.
(e) Injunctions or Restraints on Conduct of Business. No temporary
restraining order, preliminary or permanent injunction or other order issued
by any court of competent jurisdiction or other legal, contractual or
regulatory restraint provision limiting or restricting Acquiror's conduct or
operation of its business or the business of Target and its subsidiaries,
following the Merger, shall be in effect, nor shall any proceeding brought by
an administrative agency or commission or other Governmental Entity, domestic
or foreign, seeking the foregoing be pending, except where the existence of
any of the foregoing items would not have a Material Adverse Effect on
Acquiror.
6.3 Additional Conditions to the Obligations of Acquiror and Merger Sub. The
obligations of Acquiror and Merger Sub to consummate and effect the Merger
shall be subject to the satisfaction at or prior to the Effective Time of each
of the following conditions, any of which may be waived, in writing,
exclusively by Acquiror:
(a) Representations and Warranties. The representations and warranties of
Target contained in this Agreement shall have been true and correct in all
material respects (i) as of the date of this Agreement and (ii) as of the
Effective Time except, in each case, for changes contemplated by this
Agreement or the Target Schedules and except for those representations and
warranties which address matters only as of a particular date (which shall
remain true and correct as of such particular date), with the same force and
effect as if made on and as of the Effective Time, except in such cases (other
than the representations in Sections 2.2 and 2.3) where the
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failure to be so true and correct would not have a Material Adverse Effect on
Target. Acquiror shall have received a certificate with respect to the
foregoing signed on behalf of Target by the Chief Executive Officer and the
Chief Financial Officer of Target.
(b) Agreements and Covenants. Target shall have performed or complied with
all agreements and covenants required by this Agreement to be performed or
complied with by it on or prior to the Effective Time, except where the
failure to so perform or comply would not have a Material Adverse Effect with
respect to Target and the Acquiror shall have received a certificate to such
effect signed on behalf of Target by the President and the Chief Financial
Officer of Target.
(c) Material Adverse Effect. No Material Adverse Effect with respect to
Target shall have occurred since the date of this Agreement.
(d) No Dissenters. Holders of more than 4.9% of the outstanding shares of
Target Common Stock shall not have exercised, nor shall they have any
continued right to exercise, appraisal, dissenters' or similar rights under
applicable law with respect to their shares by virtue of the Merger.
(e) Employment and Noncompetition Agreement. Reed Hastings shall have
entered into the Noncompetition Agreement in the form of Exhibit E hereto.
(f) Legal Opinion. Acquiror shall have received a legal opinion from
Fenwick & West LLP, counsel to Target, in substantially the form set forth in
Exhibit D-2.
(g) Injunctions or Restraints on Conduct of Business. No temporary
restraining order, preliminary or permanent injunction or other order issued
by any court of competent jurisdiction or other legal, contractual or
regulatory restraint provision limiting or restricting Acquiror's conduct or
operation of its business or the business of Target and its subsidiaries,
following the Merger, shall be in effect, nor shall any proceeding brought by
an administrative agency or commission or other Governmental Entity, domestic
or foreign, seeking the foregoing be pending, except where the existence of
any of the foregoing items would not have a Material Adverse Effect on Target.
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
7.1 Termination. This Agreement may be terminated at any time prior to the
Effective Time of the Merger, whether before or after approval of the Merger
by the stockholders of Target or the approval of the issuance of Acquiror
Common Stock in connection with the Merger by the stockholders of Acquiror:
(a) by mutual written consent duly authorized by the Boards of Directors of
Acquiror and Target;
(b) by either Target or Acquiror if the Merger shall not have been
consummated by September 30, 1997 for any reason; provided, however, that the
right to terminate this Agreement under this Section 7.1(b) shall not be
available to any party whose action or failure to act has been a principal
cause of or resulted in the failure of the Merger to occur on or before such
date and such action or failure to act constitutes a breach of this Agreement;
(c) by either Target or Acquiror if a Governmental Entity shall have issued
an order, decree or ruling or taken any other action (an "ORDER"), in any case
having the effect of permanently restraining, enjoining or otherwise
prohibiting the Merger, which order, decree or ruling is final and
nonappealable;
(d) by either Target or Acquiror if the required approvals of the
stockholders of Target or the stockholders of Acquiror contemplated by this
Agreement shall not have been obtained by reason of the failure to obtain the
required vote upon a vote taken at a meeting of stockholders duly convened
therefor or at any
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adjournment thereof (provided that the right to terminate this Agreement under
this Section 7.1(d) shall not be available to any party where the failure to
obtain stockholder approval of such party shall have been caused by the action
or failure to act of such party in breach of this Agreement);
(e) by Acquiror, if the Board of Directors of Target recommends a Target
Superior Proposal to the stockholders of Target, or if the Board of Directors
of Target shall have withheld, withdrawn or modified in a manner adverse to
Acquiror its recommendation in favor of adoption and approval of this
Agreement and approval of the Merger;
(f) by Target, if the Board of Directors of Acquiror recommends an Acquiror
Superior Proposal to the stockholders of Acquiror, or if the Board of
Directors of Acquiror shall have withheld, withdrawn or modified in a manner
adverse to Target its recommendation in favor of approving the amendment of
Acquiror's Certificate of Incorporation to increase its authorized share
capital to allow the issuance of shares of Acquiror Common Stock by virtue of
the Merger and the issuance of the shares of Acquiror Common Stock by virtue
of the Merger;
(g) by Target, upon a breach of any representation, warranty, covenant or
agreement on the part of Acquiror set forth in this Agreement, or if any
representation or warranty of Acquiror shall have become untrue, in either
case such that the conditions set forth in Section 6.2(a) or Section 6.2(b)
would not be satisfied as of the time of such breach or as of the time such
representation or warranty shall have become untrue, provided that if such
inaccuracy in Acquiror's representations and warranties or breach by Acquiror
is curable by Acquiror through the exercise of its commercially reasonable
efforts within ten (10) days of the time such representation or warranty shall
have become untrue or such breach, then Target may not terminate this
Agreement under this Section 7.1(g) during such ten-day period provided
Acquiror continues to exercise such commercially reasonable efforts to cure
such breach;
(h) by Acquiror, upon a breach of any representation, warranty, covenant or
agreement on the part of Target set forth in this Agreement, or if any
representation or warranty of Target shall have become untrue, in either case
such that the conditions set forth in Section 6.3(a) or Section 6.3(b) would
not be satisfied as of the time of such breach or as of the time such
representation or warranty shall have become untrue, provided, that if such
inaccuracy in Target's representations and warranties or breach by Target is
curable by Target through the exercise of its commercially reasonable efforts
within ten (10) days of the time such representation or warranty shall have
become untrue or such breach, then Acquiror may not terminate this Agreement
under this Section 7.1(h) during such ten-day period provided Target continues
to exercise such commercially reasonable efforts to cure such breach.
(i) by Target, if there shall have occurred any Material Adverse Effect
with respect to Acquiror since the date of this Agreement; or
(j) by Acquiror, if there shall have occurred any Material Adverse Effect
with respect to Target since the date of this Agreement.
7.2 Notice of Termination; Effect of Termination. Any termination of this
Agreement under Section 7.1 above will be effective immediately upon the
delivery of written notice of the terminating party to the other parties
hereto. In the event of the termination of this Agreement as provided in
Section 7.1, this Agreement shall be of no further force or effect, except (i)
as set forth in this Section 7.2, Section 7.3 and Article 8 (General
Provisions), each of which shall survive the termination of this Agreement,
and (ii) nothing herein shall relieve any party from liability for any breach
of this Agreement. No termination of this Agreement shall affect the
obligations of the parties contained in the Confidentiality Agreement or the
Option Agreement, all of which obligations shall survive termination of this
Agreement in accordance with their terms.
7.3 Fees and Expenses.
(a) General. Except as set forth in this Section 7.3, all fees and expenses
incurred in connection with this Agreement and the transactions contemplated
hereby shall be paid by the party incurring such expenses
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whether or not the Merger is consummated; provided, however, that Acquiror and
Target shall share equally all fees and expenses, other than attorneys' and
accountants fees and expenses, incurred in relation to the printing and filing
of the Proxy Statement (including any preliminary materials related thereto)
and the Registration Statement (including financial statements and exhibits)
and any amendments or supplements thereto.
(b) Target Payments.
(i) If (x) the Board of Directors of Target shall have withheld, withdrawn
or modified in a manner adverse to Acquiror its recommendation in favor of
adoption and approval of this Agreement and approval of the Merger, and at
that time there shall not have occurred a Material Adverse Effect on Acquiror,
(y) the Board of Directors of Target recommends a Target Superior Proposal to
the stockholders of Target, or (z) Target fails to hold the Target
Stockholders Meeting as required by this Agreement by September 30, 1997,
Target shall pay to Acquiror an amount equal to $18,000,000 within one
business day following the earlier to occur of (A) termination of this
Agreement pursuant to Section 7.1(b) or 7.1(e) hereof and (B) a Target
Negative Vote (as defined below);
(ii) If no payment shall be required pursuant to clause 7.3(b)(i) above,
and if (x) the vote of the stockholders of Target approving and adopting this
Agreement and approving the Merger shall not have been obtained by reason of
the failure to obtain the required vote upon a vote taken at a meeting of
stockholders duly convened therefor or at any adjournment thereof (a "TARGET
NEGATIVE VOTE") and (y) prior to such Target Negative Vote there shall have
occurred an Acquisition Proposal with respect to Target which shall have been
publicly disclosed and not withdrawn (a "TARGET COMPETING PROPOSAL") and (z)
(i) within 12 months of such Target Negative Vote, Target shall enter into a
definitive agreement with respect to an Acquisition Proposal with the party
(or any affiliate of the party) that made the Target Competing Proposal or an
Acquisition Proposal with such party (or any such affiliate) with respect to
Target shall have been consummated or (ii) within 6 months following such
Target Negative Vote, Target shall enter into a definitive agreement with
respect to an Acquisition Proposal with any other party or an Acquisition
Proposal with any other party with respect to Target shall have been
consummated, then, provided that there shall have not occurred a Material
Adverse Effect on Acquiror prior to the Target Negative Vote, Target shall pay
to Acquiror an amount equal to $18,000,000 within one business day following
demand therefor after the occurrence of the events set forth in (x) and (y)
and either (z)(i) or (z)(ii) above; and
(iii) If (A) payment is required pursuant to clauses 7.3(b)(i) or (ii)
above, (B) if there shall otherwise be a Target Negative Vote or (C) if this
Agreement is terminated by Acquiror pursuant to Section 7.1(h) or 7.1(j) then
Target shall pay to Acquiror an amount equal to $3,000,000 within one business
day following demand therefor.
(c) Acquiror Payments.
(i) If (x) the Board of Directors of Acquiror shall have withheld,
withdrawn or modified in a manner adverse to Target its recommendation in
favor of the approval of the issuance of shares of its capital stock in
connection with the Merger, and at that time there shall not have occurred a
Material Adverse Effect on Target, (y) the Board of Directors of Acquiror
recommends an Acquiror Superior Proposal to the stockholders of Acquiror or
(z) Acquiror fails to hold the Acquiror Stockholders Meeting as required by
this Agreement by September 30, 1997, Acquiror shall pay to Target an amount
equal to $18,000,000 within one business day following the earlier to occur of
(A) termination of the Agreement pursuant to Section 7.1(b) or 7.1(f) hereof
and (B) an Acquiror Negative Vote (as defined below);
(ii) If no payment shall be required pursuant to clause 7.3(c)(i) above,
and if (x) the vote of the stockholders of Acquiror approving the amendment of
its Certificate of Incorporation to increase its authorized share capital to
allow the issuance of shares of Acquiror Common Stock by virtue of the Merger
and the issuance of such shares by virtue of the Merger shall not have been
obtained by reason of the failure to obtain the required vote upon a vote
taken at a meeting of stockholders duly convened therefor or at any
adjournment thereof (an "ACQUIROR NEGATIVE VOTE") and (y) prior to such
Acquiror Negative Vote there shall have occurred an Acquisition Proposal with
respect to Acquiror which shall have been publicly disclosed and not withdrawn
("ACQUIROR COMPETING PROPOSAL") and (z) (i) within 12 months of such Acquiror
Negative Vote, Acquiror
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<PAGE>
shall enter into a definitive agreement with respect to an Acquisition
Proposal with the party (or any affiliate of the party) that made the Acquiror
Competing Proposal or an Acquisition Proposal with such party (or any such
affiliate) with respect to Acquiror shall have been consummated or (ii) within
6 months following such Acquiror Negative Vote, Acquiror shall enter into a
definitive agreement with respect to an Acquisition Proposal with any other
party or an Acquisition Proposal with any other party with respect to Acquiror
shall have been consummated, then, provided that there shall have not occurred
a Material Adverse Effect on Target prior to the Acquiror Negative Vote,
Acquiror shall pay to Target an amount equal to $18,000,000 within one
business day following demand therefor after the occurrence of the events set
forth in (x) and (y) and either (z)(i) or (z)(ii) above; and
(iii) If (A) payment is required pursuant to clause 7.3(c)(i) or (ii)
above, (B) if there shall be an Acquiror Negative Note or (C) if this
Agreement is terminated by Target pursuant to Section 7.1(g) or 7.1(i) then
Acquiror shall pay to Target an amount equal to $3,000,000 within one business
day following demand therefor.
(d) Payment of the amounts described in Section 7.3(b) or (c) above shall
not be in lieu of damages incurred in the event of breach of this Agreement.
7.4 Amendment. Subject to applicable law, this Agreement may be amended by
the parties hereto at any time by execution of an instrument in writing signed
on behalf of each of the parties hereto.
7.5 Extension; Waiver. At any time prior to the Effective Time any party
hereto may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties
hereto, (ii) waive any inaccuracies in the representations and warranties made
to such party contained herein or in any document delivered pursuant hereto
and (iii) waive compliance with any of the agreements or conditions for the
benefit of such party contained herein. Any agreement on the part of a party
hereto to any such extension or waiver shall be valid only if set forth in an
instrument in writing signed on behalf of such party. Delay in exercising any
right under this Agreement shall not constitute a waiver of such right.
7.6 Extension of Date. The references in this Article VII to September 30,
1997 shall be deemed to be references to September 30, 1997, or such later
date as may be necessary to allow time to comply with the HSR Act (provided
that the parties are using their best efforts with respect to such matter),
but in no event later than December 31, 1997.
ARTICLE VIII
GENERAL PROVISIONS
8.1 Non-Survival of Representations and Warranties. The representations and
warranties of Target, Acquiror and Merger Sub contained in this Agreement
shall terminate at the Effective Time, and only the covenants that by their
terms survive the Effective Time shall survive the Effective Time.
8.2 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally or by commercial
delivery service, or sent via telecopy (receipt confirmed) to the
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<PAGE>
parties at the following addresses or facsimile numbers (or at such other
address or facsimile numbers for a party as shall be specified by like
notice):
(a) if to Acquiror or Merger Sub, to:
Rational Software Corporation
2800 San Tomas Expressway
Santa Clara, California 95051
Attention: Chief Executive Officer
Telephone No.: (408) 496-3600
Facsimile No.: (408) 496-3636
with a copy to:
Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, California 94304-1050
Attention: Francis S. Currie, Esq.
Telephone No.: (415) 493-9300
Facsimile No.: (415) 493-6811
(b) if to Target, to:
Pure Atria Corporation
1309 South Mary Avenue
Sunnyvale, California 94087
Attention: President and Chief Executive Officer
Telephone No.: (408) 720-1600
Facsimile No.: (408) 720-0324
with a copy to:
Fenwick & West LLP
Two Palo Alto Square, Suite 700
Palo Alto, California 94306
Attention: Dennis R. DeBroeck, Esq.
Telephone No.: (415) 494-0600
Facsimile No.: (415) 494-1417
8.3 Interpretation; Knowledge.
(a) When a reference is made in this Agreement to Exhibits, such reference
shall be to an Exhibit to this Agreement unless otherwise indicated. The words
"INCLUDE," "INCLUDES" and "INCLUDING" when used herein shall be deemed in each
case to be followed by the words "without limitation." The table of contents
and headings contained in this Agreement are for reference purposes only and
shall not affect in any way the meaning or interpretation of this Agreement.
When reference is made herein to "THE BUSINESS OF" an entity, such reference
shall be deemed to include the business of all direct and indirect
subsidiaries of such entity. Reference to the subsidiaries of an entity shall
be deemed to include all direct and indirect subsidiaries of such entity.
(b) For purposes of this Agreement, the term "KNOWLEDGE" means, with
respect to any matter in question, that any of the executive officers of
Target or Acquiror, as the case may be, has actual knowledge of such matter.
8.4 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each
of the parties and delivered to the other party, it being understood that all
parties need not sign the same counterpart.
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<PAGE>
8.5 Entire Agreement; Third Party Beneficiaries. This Agreement and the
documents and instruments and other agreements among the parties hereto as
contemplated by or referred to herein, including Target Schedules and the
Acquiror Schedules (a) constitute the entire agreement among the parties with
respect to the subject matter hereof and supersede all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter hereof, it being understood that the Confidentiality Agreement
shall continue in full force and effect until the Closing and shall survive
any termination of this Agreement; and (b) are not intended to confer upon any
other person any rights or remedies hereunder, except with respect to the
matters set forth in Sections 1.6(c), 5.10, 5.11, 5.12 and 5.13.
8.6 Severability. In the event that any provision of this Agreement or the
application thereof, becomes or is declared by a court of competent
jurisdiction to be illegal, void or unenforceable, the remainder of this
Agreement will continue in full force and effect and the application of such
provision to other persons or circumstances will be interpreted so as
reasonably to effect the intent of the parties hereto. The parties further
agree to replace such void or unenforceable provision of this Agreement with a
valid and enforceable provision that will achieve, to the extent possible, the
economic, business and other purposes of such void or unenforceable provision.
8.7 Other Remedies; Specific Performance. Except as otherwise provided
herein, any and all remedies herein expressly conferred upon a party will be
deemed cumulative with and not exclusive of any other remedy conferred hereby,
or by law or equity upon such party, and the exercise by a party of any one
remedy will not preclude the exercise of any other remedy. The parties hereto
agree that irreparable damage would occur in the event that any of the
provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached. It is accordingly agreed that the
parties shall be entitled to an injunction or injunctions to prevent breaches
of this Agreement and to enforce specifically the terms and provisions hereof
in any court of the United States or any state having jurisdiction, this being
in addition to any other remedy to which they are entitled at law or in
equity.
8.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, regardless of the laws that
might otherwise govern under applicable principles of conflicts of law
thereof. Each of the parties hereto irrevocably consents to the exclusive
jurisdiction of any state or federal court within the State of Delaware, in
connection with any matter based upon or arising out of this Agreement or the
matters contemplated herein, other than issues involving the corporate
governance of any of the parties hereto, agrees that process may be served
upon them in any manner authorized by the laws of the State of California for
such persons and waives and covenants not to assert or plead any objection
which they might otherwise have to such jurisdiction and such process.
8.9 Rules of Construction. The parties hereto agree that they have been
represented by counsel during the negotiation and execution of this Agreement
and, therefore, waive the application of any law, regulation, holding or rule
of construction providing that ambiguities in an agreement or other document
will be construed against the party drafting such agreement or document.
8.10 Assignment. No party may assign either this Agreement or any of its
rights, interests, or obligations hereunder without the prior written approval
of the parties. Subject to the preceding sentence, this Agreement shall be
binding upon and shall inure to the benefit of the parties hereto and their
respective successors and permitted assigns.
8.11 Waiver of Jury Trial. EACH OF ACQUIROR, TARGET AND MERGER SUB HEREBY
IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR
COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR THE ACTIONS OF ACQUIROR, TARGET OR MERGER SUB IN
THE NEGOTIATION, ADMINISTRATION, PERFORMANCE AND ENFORCEMENT HEREOF.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized respective officers as of the date first
written above.
RATIONAL SOFTWARE CORPORATION
By:__________________________________
Name:
Title:
WINGS MERGER CORPORATION
By:__________________________________
Name:
Title:
PURE ATRIA CORPORATION
By:__________________________________
Name:
Title:
**** AGREEMENT AND PLAN OF REORGANIZATION ****
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<PAGE>
ANNEX B
CERTIFICATE OF MERGER
MERGING
WINGS MERGER CORPORATION
WITH AND INTO
PURE ATRIA CORPORATION
----------------
Pursuant to Section 251 of the General Corporation Law of
the State of Delaware
----------------
Wings Merger Corporation, a Delaware corporation ("Merger Sub"), and Pure
Atria Corporation, a Delaware corporation ("Target"), DO HEREBY CERTIFY AS
FOLLOWS:
FIRST: That Merger Sub and Target are duly incorporated under the Delaware
General Corporation Law (the "Delaware Law").
SECOND: That an Agreement and Plan of Reorganization (the "Agreement"),
dated as of April 7, 1997, among Rational Software Corporation, a Delaware
corporation, Merger Sub and Target, setting forth the terms and conditions of
the merger of Merger Sub with and into Target (the "Merger"), has been
approved, adopted, certified, executed and acknowledged by each of the
constituent corporations in accordance with Section 251(c) of the Delaware
Law.
THIRD: That the name of the surviving corporation (the "Surviving
Corporation") shall be Pure Atria Corporation, a Delaware corporation.
FOURTH: That pursuant to the Agreement, the Certificate of Incorporation of
Merger Sub immediately prior to the Merger will be the Certificate of
Incorporation of the Surviving Corporation, amended solely for the purpose of
changing the name of Merger Sub to "Pure Atria Corporation."
FIFTH: That an executed copy of the Agreement is on file at the principal
place of business of the Surviving Corporation at the following address:
Rational Software Corporation
2800 San Tomas Expressway
Santa Clara, CA 95051
SIXTH: That a copy of the Agreement will be furnished by the Surviving
Corporation, on request and without cost, to any stockholder of any
constituent corporation.
SEVENTH: That the Merger shall become effective upon the filing of this
Certificate of Merger with the Secretary of State of the State of Delaware.
<PAGE>
IN WITNESS WHEREOF, each of Merger Sub and Target has caused this
Certificate of Merger to be executed in its corporate name this day of
, 1997.
WINGS MERGER CORPORATION
By:
----------------------------------
Paul D. Levy, President
ATTEST:
- -------------------------------------
Robert T. Bond, Secretary
By:
----------------------------------
Reed Hastings, President and Chief
Executive Officer
ATTEST:
- -------------------------------------
Chuck Bay, Secretary
<PAGE>
ANNEX C
[Option from Target to Acquiror]
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT dated as of April 7, 1997 (the "AGREEMENT") is
entered into by and between Pure Atria Corporation, a Delaware corporation
("TARGET"), and Rational Software Corporation, a Delaware corporation
("ACQUIROR"). Capitalized terms used in this Agreement but not defined herein
shall have the meanings ascribed thereto in the Merger Agreement (as defined
below).
RECITALS
WHEREAS, concurrently with the execution and delivery of this Agreement,
Target, Acquiror and Wings Merger Corporation, a Delaware corporation and a
wholly owned subsidiary of Acquiror ("MERGER"), are entering into an Agreement
and Plan of Reorganization (the "MERGER AGREEMENT"), which provides that,
among other things, upon the terms and subject to the conditions thereof,
Target and Acquiror will enter into a business combination transaction (the
"MERGER"); and
WHEREAS, as a condition to Acquiror's willingness to enter into the Merger
Agreement, Acquiror has requested that Target agree, and Target has so agreed,
to grant to Acquiror an option to acquire shares of Target's Common Stock,
$0.0001 par value, upon the terms and subject to the conditions set forth
herein;
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements set forth herein and in the Merger Agreement and for
other good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, the parties hereto agree as follows:
1. GRANT OF OPTION
Target hereby grants to Acquiror an irrevocable option (the "OPTION") to
acquire up to a number of shares of the Common Stock, $0.0001 par value, of
Target ("TARGET SHARES") equal to 19.9% of the issued and outstanding shares
as of the first date, if any, upon which an Exercise Event (as defined in
Section 2(a) below) shall occur (the "OPTION SHARES"), in the manner set forth
below (i) by paying cash at a price of $21.038 per share (the "EXERCISE
PRICE") and/or, at Acquiror's election, (ii) by exchanging therefor shares of
the Common Stock, no par value per share, of Acquiror ("ACQUIROR SHARES") at a
rate (the "EXERCISE RATIO"), for each Option Share, of a number of Acquiror
Shares equal to the Exercise Price divided by the closing sale price of
Acquiror Shares on the Nasdaq National Market for the trading day immediately
preceding the date of the Closing (as defined below) of the particular Option
exercise.
2. EXERCISE OF OPTION; MAXIMUM PROCEEDS
(a) For all purposes of this Agreement, an "EXERCISE EVENT" shall have
occurred (i) immediately prior to the earlier of (x) the consummation of, or
(y) the record date, if any, for a meeting of Target's stockholders with
regard to, an Acquisition Proposal with respect to Target with any party other
than Acquiror (or an affiliate of Acquiror) if the Board of Directors of
Target shall have withheld, withdrawn or modified in a manner adverse to
Acquiror its recommendation in favor of adoption and approval of the Merger
Agreement and approval of the Merger (and at that time there shall not have
occurred a Material Adverse Effect on Acquiror) after receipt of and in
connection with an Acquisition Proposal with respect to Target, (ii)
immediately prior to the consummation of a tender or exchange offer for 25% or
more of any class of Target's capital stock, or (iii) immediately prior to the
time at which all of the events specified in Section 7.3(b)(ii)(x), Section
7.3(b)(ii)(y) and either Section 7.3(b)(ii)(z)(i) or Section 7.3(b)(ii)(z)(ii)
of the Merger Agreement shall have occurred.
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<PAGE>
(b) Acquiror may deliver to Target a written notice (an "EXERCISE NOTICE")
specifying that it wishes to exercise and close a purchase of Option Shares
upon the occurrence of an Exercise Event and specifying the total number of
Option Shares it wishes to acquire and the form of consideration to be paid
(i) at any time following such time as the Board of Directors of Target shall
have withheld, withdrawn or modified in a manner adverse to Acquiror its
recommendation in favor of adoption and approval of the Merger Agreement and
approval of the Merger (and at that time there shall not have occurred a
Material Adverse Effect on Acquiror) after receipt of and in connection with
an Acquisition Proposal with respect to Target, (ii) upon the commencement of
a tender or exchange offer for 25% or more of any class of Target's capital
stock (and/or during any time which such a tender or exchange offer remains
open or has been consummated) or (iii) at any time following the occurrence of
each of the events specified in Section 7.3(b)(ii)(x) and 7.3(b)(ii)(y) of the
Merger Agreement (the events specified in clauses (i), (ii) or (iii) of this
sentence being referred to herein as a "CONDITIONAL EXERCISE EVENTS"). At any
time after delivery of an Exercise Notice, unless such Exercise Notice is
withdrawn by Acquiror, the closing of a purchase of Option Shares (a
"CLOSING") specified in such Exercise Notice shall take place at the principal
offices of Target upon the occurrence of an Exercise Event or at such later
date prior to the termination of the Option as may be designated by Acquiror
in writing. In the event that no Exercise Event shall occur prior to
termination of the Option, such Exercise Notice shall be void and of no
further force and effect.
(c) The Option shall terminate upon the earliest of (i) the Effective Time,
(ii) 12 months following the termination of the Merger Agreement pursuant to
Article VII thereof if a Conditional Exercise Event shall have occurred on or
prior to the date of such termination, and (iii) the date on which the Merger
Agreement is terminated if no Conditional Exercise Event shall have occurred
on or prior to such date of termination; provided, however, that if the Option
is exercisable but cannot be exercised by reason of any applicable government
order or because the waiting period related to the issuance of the Option
Shares under the HSR Act shall not have expired or been terminated, then the
Option shall not terminate until the tenth business day after such impediment
to exercise shall have been removed or shall have become final and not subject
to appeal. Notwithstanding the foregoing, the Option may not be exercised if
(i) Acquiror shall have breached in any material respect any of its covenants
or agreements contained in the Merger Agreement or (ii) the representations
and warranties of Acquiror contained in the Merger Agreement shall not have
been true and correct in all material respects on and as of the date when
made.
(d) If Acquiror receives in the aggregate pursuant to Section 7.3(b) of the
Merger Agreement together with proceeds in connection with any sales or other
dispositions of Option Shares and any dividends received by Acquiror declared
on Option Shares, more than the sum of (x) $21,000,000 plus (y) the Exercise
Price multiplied by the number of Target Shares purchased by Acquiror pursuant
to the Option, then all proceeds to Acquiror in excess of such sum shall be
remitted by Acquiror to Target.
3. CONDITIONS TO CLOSING
The obligation of Target to issue Option Shares to Acquiror hereunder is
subject to the conditions that (a) any waiting period under the HSR Act
applicable to the issuance of the Option Shares hereunder shall have expired
or been terminated; (b) all material consents, approvals, orders or
authorizations of, or registrations, declarations or filings with, any
Federal, state or local administrative agency or commission or other Federal
state or local governmental authority or instrumentality, if any, required in
connection with the issuance of the Option Shares hereunder shall have been
obtained or made, as the case may be; and (c) no preliminary or permanent
injunction or other order by any court of competent jurisdiction prohibiting
or otherwise restraining such issuance shall be in effect. It is understood
and agreed that at any time during which Acquiror shall be entitled to deliver
to Target an Exercise Notice, the parties will use their respective best
efforts to satisfy all conditions to Closing, so that a Closing may take place
as promptly as practicable, and in any event, upon the occurrence of an
Exercise Event.
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<PAGE>
4. CLOSING
At any Closing, (a) Target shall deliver to Acquiror a single certificate in
definitive form representing the number of Target Shares designated by
Acquiror in its Exercise Notice, such certificate to be registered in the name
of Acquiror and to bear the legend set forth in Section 10 hereof, against
delivery of (b) payment by Acquiror to Target of the aggregate purchase price
for the Target Shares so designated and being purchased by delivery of (i) a
certified check or bank check and/or, at Acquiror' election, (ii) a single
certificate in definitive form representing the number of Acquiror Shares
being issued by Acquiror in consideration therefor (based on the Exercise
Ratio), such certificate to be registered in the name of Target and to bear
the legend set forth in Section 10 hereof.
5. REPRESENTATIONS AND WARRANTIES OF TARGET
Target represents and warrants to Acquiror that (a) Target is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware and has the corporate power and authority to enter into this
Agreement and to carry out its obligations hereunder; (b) the execution and
delivery of this Agreement by Target and consummation by Target of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of Target and no other corporate proceedings on
the part of Target are necessary to authorize this Agreement or any of the
transactions contemplated hereby; (c) this Agreement has been duly executed
and delivered by Target and constitutes a legal, valid and binding obligation
of Target and, assuming this Agreement constitutes a legal, valid and binding
obligation of Acquiror, is enforceable against Target in accordance with its
terms, except as enforceability may be limited by bankruptcy and other laws
affecting the rights and remedies of creditors generally and general
principles of equity; (d) except for any filings required under the HSR Act,
Target has taken all necessary corporate and other action to authorize and
reserve for issuance and to permit it to issue upon exercise of the Option,
and at all times from the date hereof until the termination of the Option will
have reserved for issuance, a sufficient number of unissued Target Shares for
Acquiror to exercise the Option in full and will take all necessary corporate
or other action to authorize and reserve for issuance all additional Target
Shares or other securities which may be issuable pursuant to Section 9(a) upon
exercise of the Option, all of which, upon their issuance and delivery in
accordance with the terms of this Agreement, will be validly issued, fully
paid and nonassessable; (e) upon delivery of the Target Shares and any other
securities to Acquiror upon exercise of the Option, Acquiror will acquire such
Target Shares or other securities free and clear of all material claims,
liens, charges, encumbrances and security interests of any kind or nature
whatsoever, excluding those imposed by Acquiror; (f) the execution and
delivery of this Agreement by Target do not, and the performance of this
Agreement by Target will not, (i) violate the Certificate of Incorporation or
Bylaws of Target, (ii) conflict with or violate any order applicable to Target
or any of its subsidiaries or by which they or any of their property is bound
or affected or (iii) result in any breach of or constitute a default (or an
event which with notice or lapse of time or both would become a default)
under, or give rise to any right of termination, amendment, acceleration or
cancellation of, or result in the creation of a lien or encumbrance on any
property or assets of Target or any of its subsidiaries pursuant to, any
contract or agreement to which Target or any of its subsidiaries is a party or
by which Target or any of its subsidiaries or any of their property is bound
or affected, except, in the case of clauses (ii) and (iii) above, for
violations, conflicts, breaches, defaults, rights of termination, amendment,
acceleration or cancellation, liens or encumbrances which would not,
individually or in the aggregate, have a Material Adverse Effect on Target;
(g) the execution and delivery of this Agreement by Target does not, and the
performance of this Agreement by Target will not, require any consent,
approval, authorization or permit of, or filing with, or notification to, any
Governmental Entity except pursuant to the HSR Act; and (h) any Acquiror
Shares acquired pursuant to this Agreement will not be acquired by Target with
a view to the public distribution thereof and Target will not sell or
otherwise dispose of such shares in violation of applicable law or this
Agreement.
6. REPRESENTATIONS AND WARRANTIES OF ACQUIROR
Acquiror represents and warrants to Target that (a) Acquiror is a
corporation duly incorporated, validly existing and in good standing under the
laws of the State of Delaware and has the corporate power and authority
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<PAGE>
to enter into this Agreement and to carry out its obligations hereunder; (b)
the execution and delivery of this Agreement by Acquiror and the consummation
by Acquiror of the transactions contemplated hereby have been duly authorized
by all necessary corporate action on the part of Acquiror and no other
corporate proceedings on the part of Acquiror are necessary to authorize this
Agreement or any of the transactions contemplated hereby; (c) this Agreement
has been duly executed and delivered by Acquiror and constitutes a legal,
valid and binding obligation of Acquiror and, assuming this Agreement
constitutes a legal, valid and binding obligation of Target, is enforceable
against Acquiror in accordance with its terms, except as enforceability may be
limited by bankruptcy and other laws affecting the rights and remedies of
creditors generally and general principles of equity; (d) except for any
filings required under the HSR Act, Acquiror has taken (or will in a timely
manner take) all necessary corporate and other action in connection with any
exercise of the Option; (e) upon delivery of Acquiror Shares to Target in
consideration of any acquisition of Target Shares pursuant hereto, Target will
acquire such Acquiror Shares free and clear of all material claims, liens,
charges, encumbrances and security interests of any kind or nature whatsoever,
excluding those imposed by Target; (f) the execution and delivery of this
Agreement by Acquiror do not, and the performance of this Agreement by
Acquiror will not, (i) violate the Certificate of Incorporation or Bylaws of
Acquiror, (ii) conflict with or violate any order applicable to Acquiror or
any of its subsidiaries or by which they or any of their property is bound or
affected or (iii) result in any breach of or constitute a default (or an event
which with notice or lapse of time or both would become a default) under, or
give rise to any right of termination, amendment, acceleration or cancellation
of, or result in the creation of a lien or encumbrance on any of the property
or assets of Acquiror or any of its subsidiaries pursuant to, any contract or
agreement to which Acquiror or any of its subsidiaries is a party or by which
Acquiror or any of its subsidiaries or any of their property is bound or
affected, except, in the case of clauses (ii) and (iii) above, for violations,
conflicts, breaches, defaults, rights of termination, amendment, acceleration
or cancellation, liens or encumbrances which would not, individually or in the
aggregate, have a Material Adverse Effect on Acquiror; (g) the execution and
delivery of this Agreement by Acquiror does not, and the performance of this
Agreement by Acquiror will not, require any consent, approval, authorization
or permit of, or filing with or notification to, any Governmental Entity
except pursuant to the HSR Act; and (h) any Target Shares acquired upon
exercise of the Option will not be acquired by Acquiror with a view to the
public distribution thereof and Acquiror will not sell or otherwise dispose of
such shares in violation of applicable law or this Agreement.
7. CERTAIN RIGHTS
(a) ACQUIROR PUT. Acquiror may deliver to Target a written notice (a "PUT
NOTICE") at any time during which Acquiror may deliver an Exercise Notice
specifying that it wishes to sell the Option, to the extent not previously
exercised, at the price set forth in subparagraph (i) below (as limited by
subparagraph (iii) below), and the Option Shares, if any, acquired by Acquiror
pursuant thereto, at the price set forth in subparagraph (ii) below (as
limited by subparagraph (iii) below) (the "PUT"). At any time after delivery
of a Put Notice, unless such Put Notice is withdrawn by Acquiror, the closing
of the Put (the "PUT CLOSING") shall take place at the principal offices of
Target upon the occurrence of an Exercise Event or at such later date prior to
the termination of the Option as may be designated by Acquiror in writing. In
the event that no Exercise Event shall occur prior to termination of the
Option, such Put Notice shall be void and of no further force and effect.:
(i) The difference between the "MARKET/TENDER OFFER PRICE" for Target
Shares as of the date Acquiror gives notice of its intent to exercise its
rights under this Section 7(a) (defined as the higher of (A) the highest price
per share offered as of such date pursuant to any Acquisition Proposal which
was made prior to such date and not terminated or withdrawn as of such date
and (B) the highest closing sale price of Target Shares on the Nasdaq National
Market during the twenty (20) trading days ending on the trading day
immediately preceding such date) and the Exercise Price, multiplied by the
number of Target Shares purchasable pursuant to the Option, but only if the
Market/Tender Offer Price is greater than the Exercise Price. For purposes of
determining the highest price offered pursuant to any Acquisition Proposal
which involves consideration other than cash, the value of such consideration
shall be equal to the higher of (x) if securities of the same class of the
proponent as such consideration are traded on any national securities exchange
or by any registered securities association, a value based on the closing sale
price or asked price for such securities on their principal trading market on
such date and (y) the value ascribed to such consideration by the proponent of
such Acquisition Proposal, or if no such value is ascribed, a value determined
in good faith by the Board of Directors of Target.
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(ii) The Exercise Price paid by Acquiror for Target Shares acquired
pursuant to the Option plus the difference between the Market/Tender Offer
Price and such Exercise Price (but only if the Market/Tender Offer Price is
greater than the Exercise Price) multiplied by the number of Target Shares so
purchased. If Acquiror issued Acquiror Shares in connection with any exercise
of the Option, the Exercise Price in connection with such exercise shall be
calculated as set forth in the last sentence of Section 1 as if Acquiror had
exercised its right to pay cash instead of issuing Acquiror Shares.
(iii) Notwithstanding subparagraphs (i) and (ii) above, pursuant to this
Section 7 Target shall not be required to pay Acquiror in excess of an
aggregate of (x) $21,000,000 plus (y) the Exercise Price paid by Acquiror for
Target Shares acquired pursuant to the Option minus (z) any amounts paid to
Acquiror by Target pursuant to Section 7.3(b) of the Merger Agreement.
(b) REDELIVERY OF ACQUIROR SHARES. If Acquiror has acquired Target Shares
pursuant to exercise of the Option by the issuance and delivery of Acquiror
Shares, then Target shall, if so requested by Acquiror, in fulfillment of its
obligation pursuant to the first clause of Section 7(a)(ii) with respect to
the Exercise Price paid in the form of Acquiror Shares only, redeliver the
certificate(s) for such Acquiror Shares to Acquiror, free and clear of all
claims, liens, charges, encumbrances and security interests of any kind or
nature whatsoever, other than those imposed by Acquiror.
(c) PAYMENT AND REDELIVERY OF OPTION OR SHARES. At the Put Closing, Target
shall pay the required amount to Acquiror in immediately available funds (and
Acquiror Shares, if applicable) and Acquiror shall surrender to Target the
Option and the certificates evidencing the Target Shares purchased by Acquiror
pursuant thereto, and Acquiror shall represent and warrant that such shares
are then free and clear of all claims, liens, charges, encumbrances and
security interests of any kind or nature whatsoever, other than those imposed
by Target.
(d) TARGET CALL. If Acquiror has acquired Option Shares pursuant to
exercise of the Option (the date of any Closing relating to any such exercise
herein referred to as an "EXERCISE DATE") and no Acquisition Proposal with
respect to Target has been consummated at any time after the date of this
Agreement and prior to the date one year following such Exercise Date (nor has
Target entered into a definitive agreement or letter of intent with respect to
such an Acquisition Proposal which agreement or letter of intent remains in
effect at the end of such year), then, at any time after the date one year
following such Exercise Date and prior to the date eighteen months following
such Exercise Date, Target may require Acquiror, upon delivery to Acquiror of
written notice, to sell to Target any Target Shares held by Acquiror as of the
day that is ten business days after the date of such notice, up to a number of
shares equal to the number of Option Shares acquired by Acquiror pursuant to
exercise of the Option in connection with such Exercise Date. The per share
purchase price for such sale (the "TARGET CALL PRICE") shall be equal to the
Exercise Price, plus an amount equal to seven percent (7.0%) of the Exercise
Price per annum, compounded annually, since the applicable Exercise Date, less
any dividends paid on the Target Shares to be purchased by Target pursuant to
this Section 7(d). The closing of any sale of Target Shares pursuant to this
Section 7(d) shall take place at the principal offices of Target at a time and
on a date designated by Target in the aforementioned notice to Acquiror, which
date shall be no more than 20 and no less than 12 business days from the date
of such notice. The Target Call Price shall be paid in immediately available
funds, provided that, in the event Acquiror has acquired Option Shares
pursuant to exercise of the Option by issuance and delivery of Acquiror
Shares, at the option of Target, the Target Call Price for part or all of any
purchase of Target Shares pursuant to this Section 7(d), up to a number of
such shares equal to the number of Option Shares acquired by Acquiror by
issuance and delivery of Acquiror Shares, shall be paid by delivery of a
number of Acquiror Shares equal to the Target Call Price divided by the
closing sale price of Acquiror Shares on the Nasdaq National Market for the
trading day immediately preceding the date of the Exercise Date on which the
Option Shares to be purchased by Target pursuant to this Section 7(d) were
originally issued to Acquiror.
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(e) RESTRICTIONS ON TRANSFER. Until the termination of the Option, Target
shall not sell, transfer or otherwise dispose of any Acquiror Shares acquired
by it pursuant to this Agreement.
8. REGISTRATION RIGHTS
(a) Following the termination of the Merger Agreement, each party hereto (a
"HOLDER") may by written notice (a "REGISTRATION NOTICE") to the other party
(the "REGISTRANT") request the Registrant to register under the Securities Act
all or any part of the shares acquired by such Holder pursuant to this
Agreement (the "REGISTRABLE SECURITIES") in order to permit the sale or other
disposition of such shares pursuant to a bona fide firm commitment
underwritten public offering in which the Holder and the underwriters shall
effect as wide a distribution of such Registrable Securities as is reasonably
practicable and shall use reasonable efforts to prevent any person or group
from purchasing through such offering shares representing more than 1% of the
outstanding shares of Common Stock of the Registrant on a fully diluted basis
(a "PERMITTED OFFERING"); provided, however, that any such Registration Notice
must relate to a number of shares equal to at least 2% of the outstanding
shares of Common Stock of the Registrant on a fully diluted basis and that any
rights to require registration hereunder shall terminate with respect to any
shares that may be sold pursuant to Rule 144(k) under the Securities Act. The
Registration Notice shall include a certificate executed by the Holder and its
proposed managing underwriter, which underwriter shall be an investment
banking firm of nationally recognized standing (the "MANAGER"), stating that
(i) the Holder and the Manager have a good faith intention to commence a
Permitted Offering and (ii) the Manager in good faith believes that, based on
the then prevailing market conditions, it will be able to sell the Registrable
Securities at a per share price equal to at least 80% of the per share average
of the closing sale prices of the Registrant's Common Stock on the Nasdaq
National Market for the twenty trading days immediately preceding the date of
the Registration Notice. The Registrant shall thereupon have the option
exercisable by written notice delivered to the Holder within ten business days
after the receipt of the Registration Notice, irrevocably to agree to purchase
all or any part of the Registrable Securities for cash at a price (the "OPTION
PRICE" equal to the product of (i) the number of Registrable Securities so
purchased and (ii) the per share average of the closing sale prices of the
Registrant's Common Stock on the Nasdaq National Market for the twenty trading
days immediately preceding the date of the Registration Notice. Any such
purchase of Registrable Securities by the Registrant hereunder shall take
place at a closing to be held at the principal executive offices of the
Registrant or its counsel at any reasonable date and time designated by the
Registrant in such notice within 10 business days after delivery of such
notice. The payment for the shares to be purchased shall be made by delivery
at the time of such closing of the Option Price in immediately available
funds.
(b) If the Registrant does not elect to exercise its option to purchase
pursuant to Section 8(a) with respect to all Registrable Securities, the
Registrant shall use all reasonable efforts to effect, as promptly as
practicable, the registration under the Securities Act of the unpurchased
Registrable Securities requested to be registered in the Registration Notice;
provided, however, that (i) neither party shall be entitled to more than an
aggregate of two effective registration statements hereunder and (ii) the
Registrant will not be required to file any such registration statement during
any period of time (not to exceed 40 days after a Registration Notice in the
case of clause (A) below or 90 days after a Registration Notice in the case of
clauses (B) and (C) below) when (A) the Registrant is in possession of
material non-public information which it reasonably believes would be
detrimental to be disclosed at such time and, in the written opinion of
counsel to such Registrant, such information would have to be disclosed if a
registration statement were filed at that time; (B) such Registrant is
required under the Securities Act to include audited financial statements for
any period in such registration statement and such financial statements are
not yet available for inclusion in such registration statement; or (C) such
Registrant determines, in its reasonable judgment, that such registration
would interfere with any financing, acquisition or other material transaction
involving the Registrant. If consummation of the sale of any Registrable
Securities pursuant to a registration hereunder does not occur within 180 days
after the filing with the SEC of the initial registration statement therefor,
the provisions of this Section 8 shall again be applicable to any proposed
registration, it being understood that neither party shall be entitled to more
than an aggregate of two effective registration statements hereunder. The
Registrant shall use all reasonable efforts to cause any Registrable
Securities registered pursuant to this Section 8 to be qualified for sale
under the securities or blue sky laws of
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such jurisdictions as the Holder may reasonably request and shall continue
such registration or qualification in effect in such jurisdictions; provided,
however, that the Registrant shall not be required to qualify to do business
in, or consent to general service of process in, any jurisdiction by reason of
this provision.
(c) The registration rights set forth in this Section 8 are subject to the
condition that the Holder shall provide the Registrant with such information
with respect to such Holder's Registrable Securities, the plan for
distribution thereof, and such other information with respect to such Holder
as, in the reasonable judgment of counsel for the Registrant, is necessary to
enable the Registrant to include in a registration statement all material
facts required to be disclosed with respect to a registration thereunder.
(d) A registration effected under this Section 8 shall be effected at the
Registrant's expense, except for underwriting discounts and commissions and
the fees and expenses of counsel to the Holder, and the Registrant shall
provide to the underwriters such documentation (including certificates,
opinions of counsel and "comfort" letters from auditors) as are customary in
connection with underwritten public offerings and as such underwriters may
reasonably require. In connection with any registration, the Holder and the
Registrant agree to enter into an underwriting agreement reasonably acceptable
to each such party, in form and substance customary for transactions of this
type with the underwriters participating in such offering.
(e) Indemnification
(i) The Registrant will indemnify the Holder, each of its directors and
officers and each person who controls the Holder within the meaning of Section
15 of the Securities Act, and each underwriter of the Registrant's securities,
with respect to any registration, qualification or compliance which has been
effected pursuant to this Agreement, against all expenses, claims, losses,
damages or liabilities (or actions in respect thereof), including any of the
foregoing incurred in settlement of any litigation, commenced or threatened,
arising out of or based on any untrue statement (or alleged untrue statement)
of a material fact contained in any registration statement, prospectus,
offering circular or other document, or any amendment or supplement thereto,
incident to any such registration, qualification or compliance, or based on
any omission (or alleged omission) to state therein a material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances in which they were made, not misleading, or any violation by
the Registrant of any rule or regulation promulgated under the Securities Act
applicable to the Registrant in connection with any such registration,
qualification or compliance, and the Registrant will reimburse the Holder and,
each of its directors and officers and each person who controls the Holder
within the meaning of Section 15 of the Securities Act, and each underwriter
for any legal and any other expenses reasonably incurred in connection with
investigating, preparing or defending any such claim, loss, damage, liability
or action, provided that the Registrant will not be liable in any such case to
the extent that any such claim, loss, damage, liability or expense arises out
of or is based on any untrue statement or omission or alleged untrue statement
or omission, made in reliance upon and in conformity with written information
furnished to the Registrant by such Holder or director or officer or
controlling person or underwriter seeking indemnification.
(ii) The Holder will indemnify the Registrant, each of its directors and
officers and each underwriter of the Registrant's securities covered by such
registration statement and each person who controls the Registrant within the
meaning of Section 15 of the Securities Act, against all claims, losses,
damages and liabilities (or actions in respect thereof), including any of the
foregoing incurred in settlement of any litigation, commenced or threatened,
arising out of or based on any untrue statement (or alleged untrue statement)
of a material fact contained in any such registration statement, prospectus,
offering circular or other document, or any omission (or alleged omission) to
state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, or any violation by the Holder of
any rule or regulation promulgated under the Securities Act applicable to the
Holder in connection with any such registration, qualification or compliance,
and will reimburse the Registrant, such directors, officers or control persons
or underwriters for any legal or any other expenses reasonably incurred in
connection with investigating, preparing or defending any such claim, loss,
damage, liability or action, in each case to the extent, but only to the
extent, that such untrue statement (or alleged untrue statement) or omission
(or alleged omission) is made in such registration statement, prospectus,
offering
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circular or other document in reliance upon and in conformity with written
information furnished to the Registrant by the Holder for use therein,
provided that in no event shall any indemnity under this Section 8(e) exceed
the gross proceeds of the offering received by the Holder.
(iii) Each party entitled to indemnification under this Section 8(e) (the
"INDEMNIFIED PARTY") shall give notice to the party required to provide
indemnification (the "INDEMNIFYING PARTY") promptly after such Indemnified
Party has actual knowledge of any claim as to which indemnity may be sought,
and shall permit the Indemnifying Party to assume the defense of any such
claim or any litigation resulting therefrom, provided that counsel for the
Indemnifying Party, who shall conduct the defense of such claim or litigation,
shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld), and the Indemnified Party may participate in such
defense at such party's expense; provided, however, that the Indemnifying
Party shall pay such expense if representation of the Indemnified Party by
counsel retained by the Indemnifying Party would be inappropriate due to
actual or potential differing interests between the Indemnified Party and any
other party represented by such counsel in such proceeding, and provided
further that the failure of any Indemnified Party to give notice as provided
herein shall not relieve the Indemnifying Party of its obligations under this
Section 8(e) unless the failure to give such notice is materially prejudicial
to an Indemnifying Party's ability to defend such action. No Indemnifying
Party, in the defense of any such claim or litigation shall, except with the
consent of each Indemnified Party, consent to entry of any judgment or enter
into any settlement which does not include as an unconditional term thereof
the giving by the claimant or plaintiff to such Indemnified Party of a release
from all liability in respect to such claim or litigation. No Indemnifying
Party shall be required to indemnify any Indemnified Party with respect to any
settlement entered into without such Indemnifying Party's prior consent (which
shall not be unreasonably withheld).
9. ADJUSTMENT UPON CHANGES IN CAPITALIZATION; RIGHTS PLANS
(a) In the event of any change in the Target Shares by reason of stock
dividends, stock splits, reverse stock splits, mergers (other than the
Merger), recapitalizations, combinations, exchanges of shares and the like,
the type and number of shares or securities subject to the Option, the
Exercise Ratio and the Exercise Price shall be adjusted appropriately, and
proper provision shall be made in the agreements governing such transaction so
that Acquiror shall receive, upon exercise of the Option, the number and class
of shares or other securities or property that Acquiror would have received in
respect of the Target Shares if the Option had been exercised immediately
prior to such event or the record date therefor, as applicable.
(b) At any time during which the Option is exercisable, and at any time
after the Option is exercised (in whole or in part, if at all), neither Target
nor Acquiror shall adopt a stockholders rights plan (a so-called "poison
pill") that contains provisions for the distribution of rights thereunder as a
result of the other party being the beneficial owner of shares of the first
party by virtue of the Option being exercisable or having been exercised (or
as a result of such other party beneficially owning shares issuable in respect
of any Option Shares). It is understood, however, that following termination
(if any) of the Merger Agreement, a party may adopt a stockholders rights
plan, that contains provisions for the distribution of rights thereunder as a
result of the other party being the beneficial owner of shares of the first
party in addition to those that may be beneficially owned by virtue of the
Option being exercisable or having been exercised (or as a result of such
other party beneficially owning shares issuable in respect of any Option
Shares).
10. RESTRICTIVE LEGENDS
Each certificate representing Option Shares issued to Acquiror hereunder,
and each certificate representing Acquiror Shares delivered to Target at a
Closing, shall include a legend in substantially the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY BE REOFFERED OR SOLD
ONLY IF SO REGISTERED OR IF AN EXEMPTION FROM SUCH REGISTRATION IS
AVAILABLE. SUCH SECURITIES ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON
TRANSFER AS SET FORTH IN THE STOCK OPTION AGREEMENT DATED AS OF APRIL 7,
1997, A COPY OF WHICH MAY BE OBTAINED FROM THE ISSUER.
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11. LISTING AND HSR FILING
Target, upon the request of Acquiror, shall promptly file an application to
list the Target Shares to be acquired upon exercise of the Option for
quotation on the Nasdaq National Market and shall use its best efforts to
obtain approval of such listing as soon as practicable. Acquiror, upon the
request of Target, shall promptly file an application to list the Acquiror
Shares issued and delivered to Target pursuant to Section 1 for quotation on
the Nasdaq National Market and shall use its best efforts to obtain approval
of such listing as soon as practicable. Promptly after the date hereof, each
of the parties hereto shall promptly file with the Federal Trade Commission
and the Antitrust Division of the United States Department of Justice all
required premerger notification and report forms and other documents and
exhibits required to be filed under the HSR Act to permit the acquisition of
the Target Shares subject to the Option at the earliest possible date.
12. BINDING EFFECT
This Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and permitted assigns. Nothing
contained in this Agreement, express or implied, is intended to confer upon
any person other than the parties hereto and their respective successors and
permitted assigns any rights or remedies of any nature whatsoever by reason of
this Agreement. Any shares sold by a party in compliance with the provisions
of Section 8 shall, upon consummation of such sale, be free of the
restrictions imposed with respect to such shares by this Agreement and any
transferee of such shares shall not be entitled to the rights of such party.
Certificates representing shares sold in a registered public offering pursuant
to Section 8 shall not be required to bear the legend set forth in Section 10.
13. SPECIFIC PERFORMANCE
The parties recognize and agree that if for any reason any of the provisions
of this Agreement are not performed in accordance with their specific terms or
are otherwise breached, immediate and irreparable harm or injury would be
caused for which money damages would not be an adequate remedy. Accordingly,
each party agrees that in addition to other remedies the other party shall be
entitled to an injunction restraining any violation or threatened violation of
the provisions of this Agreement. In the event that any action shall be
brought in equity to enforce the provisions of the Agreement, neither party
will allege, and each party hereby waives the defense, that there is an
adequate remedy at law.
14. ENTIRE AGREEMENT
This Agreement and the Merger Agreement (including the appendices thereto)
constitute the entire agreement between the parties with respect to the
subject matter hereof and supersede all other prior agreements and
understandings, both written and oral, between the parties with respect to the
subject matter hereof.
15. FURTHER ASSURANCES
Each party will execute and deliver all such further documents and
instruments and take all such further action as may be necessary in order to
consummate the transactions contemplated hereby.
16. VALIDITY
The invalidity or unenforceability of any provision of this Agreement shall
not affect the validity or enforceability of the other provisions of this
Agreement, which shall remain in full force and effect. In the event any
Governmental Entity of competent jurisdiction holds any provision of this
Agreement to be null, void or unenforceable, the parties hereto shall
negotiate in good faith and shall execute and deliver an amendment to this
Agreement in order, as nearly as possible, to effectuate, to the extent
permitted by law, the intent of the parties hereto with respect to such
provision.
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17. NOTICES
All notices and other communications hereunder shall be in writing and shall
be deemed given if delivered personally or by commercial delivery service, or
sent via telecopy (receipt confirmed) to the parties at the following
addresses or telecopy numbers (or at such other address or telecopy numbers
for a party as shall be specified by like notice):
(a) if to Target, to:
Pure Atria Corporation
1309 South Mary Avenue
Sunnyvale, California 94087
Attn: President and Chief Executive Officer
with a copy to:
Fenwick & West
Two Palo Alto Square, Suite 700
Palo Alto, California 94306
Attn: Dennis R. DeBroeck, Esq.
(b) if to Acquiror, to:
Rational Software Corporation
2800 San Tomas Expressway
Santa Clara, California 95051
Attn: President and Chief Executive Officer
with a copy to:
Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, California 94304-1050
Attn: Francis S. Currie, Esq.
18. GOVERNING LAW
This Agreement shall be governed by and construed in accordance with the
laws of the State of Delaware applicable to agreements made and to be
performed entirely within such State.
19. COUNTERPARTS
This Agreement may be executed in two counterparts, each of which shall be
deemed to be an original, but both of which, taken together, shall constitute
one and the same instrument.
20. EXPENSES
Except as otherwise expressly provided herein or in the Merger Agreement,
all costs and expenses incurred in connection with the transactions
contemplated by this Agreement shall be paid by the party incurring such
expenses.
21. AMENDMENTS; WAIVER
This Agreement may be amended by the parties hereto and the terms and
conditions hereof may be waived only by an instrument in writing signed on
behalf of each of the parties hereto, or, in the case of a waiver, by an
instrument signed on behalf of the party waiving compliance.
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22. ASSIGNMENT
Neither of the parties hereto may sell, transfer, assign or otherwise
dispose of any of its rights or obligations under this Agreement or the Option
created hereunder to any other person, without the express written consent of
the other party, except that the rights and obligations hereunder shall inure
to the benefit of and be binding upon any successor of a party hereto.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective duly authorized officers as of the date first
above written.
PURE ATRIA CORPORATION
By: /s/
----------------------------------
Name: Reed Hastings
Title: President and Chief
Executive Officer
RATIONAL SOFTWARE CORPORATION
By: /s/
----------------------------------
Name: Paul D. Levy
Title: President, Chief Executive
Officer and Chairman of
the Board of Directors
***STOCK OPTION AGREEMENT***
(Target option to Acquiror)
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ANNEX D
[OPTION FROM ACQUIROR TO TARGET]
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT dated as of April 7, 1997 (the "AGREEMENT") is
entered into by and between Pure Atria Corporation, a Delaware corporation
("TARGET"), and Rational Software Corporation, a Delaware corporation
("ACQUIROR"). Capitalized terms used in this Agreement but not defined herein
shall have the meanings ascribed thereto in the Merger Agreement (as defined
below).
RECITALS
WHEREAS, concurrently with the execution and delivery of this Agreement,
Acquiror, Target and Wings Merger Corporation, a Delaware corporation and a
wholly owned subsidiary of Acquiror ("MERGER SUB"), are entering into an
Agreement and Plan of Reorganization (the "MERGER AGREEMENT"), which provides
that, among other things, upon the terms and subject to the conditions
thereof, Acquiror and Target will enter into a business combination
transaction (the "MERGER"); and
WHEREAS, as a condition to Target's willingness to enter into the Merger
Agreement, Target has requested that Acquiror agree, and Acquiror has so
agreed, to grant to Target an option to acquire shares of Acquiror's Common
Stock, $0.01 par value, upon the terms and subject to the conditions set forth
herein;
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements set forth herein and in the Merger Agreement and for
other good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, the parties hereto agree as follows:
1. GRANT OF OPTION
Acquiror hereby grants to Target an irrevocable option (the "OPTION") to
acquire up to a number of shares of the Common Stock, $0.01 par value, of
Acquiror ("ACQUIROR SHARES") equal to 19.9% of the issued and outstanding
shares as of the first date, if any, upon which an Exercise Event (as defined
in Section 2(a) below) shall occur (the "OPTION SHARES"), in the manner set
forth below (i) by paying cash at a price of $23.375 per share (the "EXERCISE
PRICE") and/or, at Target's election, (ii) by exchanging therefor shares of
the Common Stock, par value $0.0001 per share, of Target ("TARGET SHARES") at
a rate (the "EXERCISE RATIO"), for each Option Share, of a number of Target
Shares equal to the Exercise Price divided by the closing sale price of Target
Shares on the Nasdaq National Market for the trading day immediately preceding
the date of the Closing (as defined below) of the particular Option exercise.
2. EXERCISE OF OPTION; MAXIMUM PROCEEDS
(a) For all purposes of this Agreement, an "EXERCISE EVENT" shall have
occurred (i) immediately prior to the earlier of (x) the consummation of, or
(y) the record date, if any, for a meeting of Acquiror's stockholders with
regard to, an Acquisition Proposal with respect to Acquiror with any party
other than Target (or an affiliate of Target) if the Board of Directors of
Acquiror shall have withheld, withdrawn or modified in a manner adverse to
Target its recommendation in favor of adoption and approval of the Merger
Agreement and approval of the Merger (and at that time there shall not have
occurred a Material Adverse Effect on Target) after receipt of and in
connection with an Acquisition Proposal with respect to Acquiror, (ii)
immediately prior to the consummation of a tender or exchange offer for 25% or
more of any class of Acquiror's capital stock, or (iii) immediately prior to
the time at which all of the events specified in Section 7.3(c)(ii)(x),
Section 7.3(c)(ii)(y) and either Section 7.3(c)(ii)(z)(i) or Section
7.3(c)(ii)(z)(ii) of the Merger Agreement shall have occurred.
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(b) Target may deliver to Acquiror a written notice (an "EXERCISE NOTICE")
specifying that it wishes to exercise and close a purchase of Option Shares
upon the occurrence of an Exercise Event and specifying the total number of
Option Shares it wishes to acquire and the form of consideration to be paid
(i) at any time following such time as the Board of Directors of Acquiror
shall have withheld, withdrawn or modified in a manner adverse to Target its
recommendation in favor of adoption and approval of the Merger Agreement and
approval of the Merger (and at that time there shall not have occurred a
Material Adverse Effect on Target) after receipt of and in connection with an
Acquisition Proposal with respect to Acquiror, (ii) upon the commencement of a
tender or exchange offer for 25% or more of any class of Acquiror's capital
stock (and/or during any time which such a tender or exchange offer remains
open or has been consummated) or (iii) at any time following the occurrence of
each of the events specified in Section 7.3(c)(ii)(x) and 7.3(c)(ii)(y) of the
Merger Agreement (the events specified in clauses (i), (ii) or (iii) of this
sentence being referred to herein as a "CONDITIONAL EXERCISE EVENTS"). At any
time after delivery of an Exercise Notice, unless such Exercise Notice is
withdrawn by Target, the closing of a purchase of Option Shares (a "CLOSING")
specified in such Exercise Notice shall take place at the principal offices of
Acquiror upon the occurrence of an Exercise Event or at such later date prior
to the termination of the Option as may be designated by Target in writing. In
the event that no Exercise Event shall occur prior to termination of the
Option, such Exercise Notice shall be void and of no further force and effect.
(c) The Option shall terminate upon the earliest of (i) the Effective Time,
(ii) 12 months following the termination of the Merger Agreement pursuant to
Article VII thereof if a Conditional Exercise Event shall have occurred on or
prior to the date of such termination, and (iii) the date on which the Merger
Agreement is terminated if no Conditional Exercise Event shall have occurred
on or prior to such date of termination; provided, however, that if the Option
is exercisable but cannot be exercised by reason of any applicable government
order or because the waiting period related to the issuance of the Option
Shares under the HSR Act shall not have expired or been terminated, then the
Option shall not terminate until the tenth business day after such impediment
to exercise shall have been removed or shall have become final and not subject
to appeal. Notwithstanding the foregoing, the Option may not be exercised if
(i) Target shall have breached in any material respect any of its covenants or
agreements contained in the Merger Agreement or (ii) the representations and
warranties of Target contained in the Merger Agreement shall not have been
true and correct in all material respects on and as of the date when made.
(d) If Target receives in the aggregate pursuant to Section 7.3(c) of the
Merger Agreement together with proceeds in connection with any sales or other
dispositions of Option Shares and any dividends received by Target declared on
Option Shares, more than the sum of (x) $21,000,000 plus (y) the Exercise
Price multiplied by the number of Acquiror Shares purchased by Target pursuant
to the Option, then all proceeds to Target in excess of such sum shall be
remitted by Target to Acquiror.
3. CONDITIONS TO CLOSING
The obligation of Acquiror to issue Option Shares to Target hereunder is
subject to the conditions that (a) any waiting period under the HSR Act
applicable to the issuance of the Option Shares hereunder shall have expired
or been terminated; (b) all material consents, approvals, orders or
authorizations of, or registrations, declarations or filings with, any
Federal, state or local administrative agency or commission or other Federal
state or local governmental authority or instrumentality, if any, required in
connection with the issuance of the Option Shares hereunder shall have been
obtained or made, as the case may be; and (c) no preliminary or permanent
injunction or other order by any court of competent jurisdiction prohibiting
or otherwise restraining such issuance shall be in effect. It is understood
and agreed that at any time during which Target shall be entitled to deliver
to Acquiror an Exercise Notice, the parties will use their respective best
efforts to satisfy all conditions to Closing, so that a Closing may take place
as promptly as practicable, and in any event, upon the occurrence of an
Exercise Event.
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4. CLOSING
At any Closing, (a) Acquiror shall deliver to Target a single certificate in
definitive form representing the number of Acquiror Shares designated by
Target in its Exercise Notice, such certificate to be registered in the name
of Target and to bear the legend set forth in Section 10 hereof, against
delivery of (b) payment by Target to Acquiror of the aggregate purchase price
for the Acquiror Shares so designated and being purchased by delivery of (i) a
certified check or bank check and/or, at Target's election, (ii) a single
certificate in definitive form representing the number of Target Shares being
issued by Target in consideration therefor (based on the Exercise Ratio), such
certificate to be registered in the name of Acquiror and to bear the legend
set forth in Section 10 hereof.
5. REPRESENTATIVES AND WARRANTIES OF ACQUIROR
Acquiror represents and warrants to Target that (a) Acquiror is a
corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware and has the corporate power and authority to
enter into this Agreement and to carry out its obligations hereunder; (b) the
execution and delivery of this Agreement by Acquiror and consummation by
Acquiror of the transactions contemplated hereby have been duly authorized by
all necessary corporate action on the part of Acquiror and no other corporate
proceedings on the part of Acquiror are necessary to authorize this Agreement
or any of the transactions contemplated hereby; (c) this Agreement has been
duly executed and delivered by Acquiror and constitutes a legal, valid and
binding obligation of Acquiror and, assuming this Agreement constitutes a
legal, valid and binding obligation of Target, is enforceable against Acquiror
in accordance with its terms, except as enforceability may be limited by
bankruptcy and other laws affecting the rights and remedies of creditors
generally and general principles of equity; (d) except for any filings
required under the HSR Act, Acquiror has taken all necessary corporate and
other action to authorize and reserve for issuance and to permit it to issue
upon exercise of the Option, and at all times from the date hereof until the
termination of the Option will have reserved for issuance, a sufficient number
of unissued Acquiror Shares for Target to exercise the Option in full and will
take all necessary corporate or other action to authorize and reserve for
issuance all additional Acquiror Shares or other securities which may be
issuable pursuant to Section 9(a) upon exercise of the Option, all of which,
upon their issuance and delivery in accordance with the terms of this
Agreement, will be validly issued, fully paid and nonassessable; (e) upon
delivery of the Acquiror Shares and any other securities to Target upon
exercise of the Option, Target will acquire such Acquiror Shares or other
securities free and clear of all material claims, liens, charges, encumbrances
and security interests of any kind or nature whatsoever, excluding those
imposed by Target; (f) the execution and delivery of this Agreement by
Acquiror do not, and the performance of this Agreement by Acquiror will not,
(i) violate the Certificate of Incorporation or Bylaws of Acquiror, (ii)
conflict with or violate any order applicable to Acquiror or any of its
subsidiaries or by which they or any of their property is bound or affected or
(iii) result in any breach of or constitute a default (or an event which with
notice or lapse of time or both would become a default) under, or give rise to
any right of termination, amendment, acceleration or cancellation of, or
result in the creation of a lien or encumbrance on any property or assets of
Acquiror or any of its subsidiaries pursuant to, any contract or agreement to
which Acquiror or any of its subsidiaries is a party or by which Acquiror or
any of its subsidiaries or any of their property is bound or affected, except,
in the case of clauses (ii) and (iii) above, for violations, conflicts,
breaches, defaults, rights of termination, amendment, acceleration or
cancellation, liens or encumbrances which would not, individually or in the
aggregate, have a Material Adverse Effect on Acquiror; (g) the execution and
delivery of this Agreement by Acquiror does not, and the performance of this
Agreement by Acquiror will not, require any consent, approval, authorization
or permit of, or filing with, or notification to, any Governmental Entity
except pursuant to the HSR Act; and (h) any Target Shares acquired pursuant to
this Agreement will not be acquired by Acquiror with a view to the public
distribution thereof and Acquiror will not sell or otherwise dispose of such
shares in violation of applicable law or this Agreement.
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6. REPRESENTATIVES AND WARRANTIES OF TARGET
Target represents and warrants to Acquiror that (a) Target is a corporation
duly incorporated, validly existing and in good standing under the laws of the
State of Delaware and has the corporate power and authority to enter into this
Agreement and to carry out its obligations hereunder; (b) the execution and
delivery of this Agreement by Target and the consummation by Target of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of Target and no other corporate proceedings on
the part of Target are necessary to authorize this Agreement or any of the
transactions contemplated hereby; (c) this Agreement has been duly executed
and delivered by Target and constitutes a legal, valid and binding obligation
of Target and, assuming this Agreement constitutes a legal, valid and binding
obligation of Acquiror, is enforceable against Target in accordance with its
terms, except as enforceability may be limited by bankruptcy and other laws
affecting the rights and remedies of creditors generally and general
principles of equity; (d) except for any filings required under the HSR Act,
Target has taken (or will in a timely manner take) all necessary corporate and
other action in connection with any exercise of the Option; (e) upon delivery
of Target Shares to Acquiror in consideration of any acquisition of Acquiror
Shares pursuant hereto, Acquiror will acquire such Target Shares free and
clear of all material claims, liens, charges, encumbrances and security
interests of any kind or nature whatsoever, excluding those imposed by
Acquiror; (f) the execution and delivery of this Agreement by Target do not,
and the performance of this Agreement by Target will not, (i) violate the
Certificate of Incorporation or Bylaws of Target, (ii) conflict with or
violate any order applicable to Target or any of its subsidiaries or by which
they or any of their property is bound or affected or (iii) result in any
breach of or constitute a default (or an event which with notice or lapse of
time or both would become a default) under, or give rise to any right of
termination, amendment, acceleration or cancellation of, or result in the
creation of a lien or encumbrance on any of the property or assets of Target
or any of its subsidiaries pursuant to, any contract or agreement to which
Target or any of its subsidiaries is a party or by which Target or any of its
subsidiaries or any of their property is bound or affected, except, in the
case of clauses (ii) and (iii) above, for violations, conflicts, breaches,
defaults, rights of termination, amendment, acceleration or cancellation,
liens or encumbrances which would not, individually or in the aggregate, have
a Material Adverse Effect on Target; (g) the execution and delivery of this
Agreement by Target does not, and the performance of this Agreement by Target
will not, require any consent, approval, authorization or permit of, or filing
with or notification to, any Governmental Entity except pursuant to the HSR
Act; and (h) any Acquiror Shares acquired upon exercise of the Option will not
be acquired by Target with a view to the public distribution thereof and
Target will not sell or otherwise dispose of such shares in violation of
applicable law or this Agreement.
7. CERTAIN RIGHTS
(a) TARGET PUT. Target may deliver to Acquiror a written notice (a "PUT
NOTICE") at any time during which Target may deliver an Exercise Notice
specifying that it wishes to sell the Option, to the extent not previously
exercised, at the price set forth in subparagraph (i) below (as limited by
subparagraph (iii) below), and the Option Shares, if any, acquired by Target
pursuant thereto, at the price set forth in subparagraph (ii) below (as
limited by subparagraph (iii) below) (the "PUT"). At any time after delivery
of a Put Notice, unless such Put Notice is withdrawn by Target, the closing of
the Put (the "PUT CLOSING") shall take place at the principal offices of
Acquiror upon the occurrence of an Exercise Event or at such later date prior
to the termination of the Option as may be designated by Target in writing. In
the event that no Exercise Event shall occur prior to termination of the
Option, such Put Notice shall be void and of no further force and effect.:
(i) The difference between the "MARKET/TENDER OFFER PRICE" for Acquiror
Shares as of the date Target gives notice of its intent to exercise its rights
under this Section 7(a) (defined as the higher of (A) the highest price per
share offered as of such date pursuant to any Acquisition Proposal which was
made prior to such date and not terminated or withdrawn as of such date and
(B) the highest closing sale price of Acquiror Shares on the Nasdaq National
Market during the twenty (20) trading days ending on the trading day
immediately preceding such date) and the Exercise Price, multiplied by the
number of Acquiror Shares purchasable pursuant to the Option, but only if the
Market/Tender Offer Price is greater than the Exercise Price. For purposes of
determining the highest price offered pursuant to any Acquisition Proposal
which involves consideration other than cash, the value of such consideration
shall be equal to the higher of (x) if securities of the same class of the
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proponent as such consideration are traded on any national securities exchange
or by any registered securities association, a value based on the closing sale
price or asked price for such securities on their principal trading market on
such date and (y) the value ascribed to such consideration by the proponent of
such Acquisition Proposal, or if no such value is ascribed, a value determined
in good faith by the Board of Directors of Acquiror.
(ii) The Exercise Price paid by Target for Acquiror Shares acquired
pursuant to the Option plus the difference between the Market/Tender Offer
Price and such Exercise Price (but only if the Market/Tender Offer Price is
greater than the Exercise Price) multiplied by the number of Acquiror Shares
so purchased. If Target issued Target Shares in connection with any exercise
of the Option, the Exercise Price in connection with such exercise shall be
calculated as set forth in the last sentence of Section 1 as if Target had
exercised its right to pay cash instead of issuing Target Shares.
(iii) Notwithstanding subparagraphs (i) and (ii) above, pursuant to this
Section 7 Acquiror shall not be required to pay Target in excess of an
aggregate of (x) $21,000,000 plus (y) the Exercise Price paid by Target for
Acquiror Shares acquired pursuant to the Option minus (z) any amounts paid to
Target by Acquiror pursuant to Section 7.3(c) of the Merger Agreement.
(b) REDELIVERY OF TARGET SHARES. If Target has acquired Acquiror Shares
pursuant to exercise of the Option by the issuance and delivery of Target
Shares, then Acquiror shall, if so requested by Target, in fulfillment of its
obligation pursuant to the first clause of Section 7(a)(ii) with respect to
the Exercise Price paid in the form of Target Shares only, redeliver the
certificate(s) for such Target Shares to Target, free and clear of all claims,
liens, charges, encumbrances and security interests of any kind or nature
whatsoever, other than those imposed by Target.
(c) PAYMENT AND REDELIVERY OF OPTION OR SHARES. At the Put Closing,
Acquiror shall pay the required amount to Target in immediately available
funds (and Target Shares, if applicable) and Target shall surrender to
Acquiror the Option and the certificates evidencing the Acquiror Shares
purchased by Target pursuant thereto, and Target shall represent and warrant
that such shares are then free and clear of all claims, liens, charges,
encumbrances and security interests of any kind or nature whatsoever, other
than those imposed by Acquiror.
(d) ACQUIROR CALL. If Target has acquired Option Shares pursuant to
exercise of the Option (the date of any Closing relating to any such exercise
herein referred to as an "EXERCISES DATE") and no Acquisition Proposal with
respect to Acquiror has been consummated at any time after the date of this
Agreement and prior to the date one year following such Exercise Date (nor has
Acquiror entered into a definitive agreement or letter of intent with respect
to such an Acquisition Proposal which agreement or letter of intent remains in
effect at the end of such year), then, at any time after the date one year
following such Exercise Date and prior to the date eighteen months following
such Exercise Date, Acquiror may require Target, upon delivery to Target of
written notice, to sell to Acquiror any Acquiror Shares held by Target as of
the day that is ten business days after the date of such notice, up to a
number of shares equal to the number of Option Shares acquired by Target
pursuant to exercise of the Option in connection with such Exercise Date. The
per share purchase price for such sale (the "ACQUIROR CALL PRICE") shall be
equal to the Exercise Price, plus an amount equal to seven percent (7.0%) of
the Exercise Price per annum, compounded annually, since the applicable
Exercise Date, less any dividends paid on the Acquiror Shares to be purchased
by Acquiror pursuant to this Section 7(d). The closing of any sale of Acquiror
Shares pursuant to this Section 7(d) shall take place at the principal offices
of Acquiror at a time and on a date designated by Acquiror in the
aforementioned notice to Target, which date shall be no more than 20 and no
less than 12 business days from the date of such notice. The Acquiror Call
Price shall be paid in immediately available funds, provided that, in the
event Target has acquired Option Shares pursuant to exercise of the Option by
issuance and delivery of Target Shares, at the option of Acquiror, the
Acquiror Call Price for part or all of any purchase of Acquiror Shares
pursuant to this Section 7(d), up to a number of such shares equal to the
number of Option Shares acquired by Target by issuance and delivery of Target
Shares, shall be paid by delivery of a number of Target Shares equal to the
Acquiror Call Price divided by the closing sale price of Target Shares on the
Nasdaq National Market for the trading day immediately preceding the date of
the Exercise Date on which the Option Shares to be purchased by Acquiror
pursuant to this Section 7(d) were originally issued to Target.
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(e) RESTRICTIONS ON TRANSFER. Until the termination of the Option, Acquiror
shall not sell, transfer or otherwise dispose of any Target Shares acquired by
it pursuant to this Agreement.
8. REGISTRATION RIGHTS
(a) Following the termination of the Merger Agreement, each party hereto (a
"HOLDER") may by written notice (a "REGISTRATION NOTICE") to the other party
(the "REGISTRANT") request the Registrant to register under the Securities Act
all or any part of the shares acquired by such Holder pursuant to this
Agreement (the "REGISTRABLE SECURITIES") in order to permit the sale or other
disposition of such shares pursuant to a bona fide firm commitment
underwritten public offering in which the Holder and the underwriters shall
effect as wide a distribution of such Registrable Securities as is reasonably
practicable and shall use reasonable efforts to prevent any person or group
from purchasing through such offering shares representing more than 1% of the
outstanding shares of Common Stock of the Registrant on a fully diluted basis
(a "PERMITTED OFFERING"); provided, however, that any such Registration Notice
must relate to a number of shares equal to at least 2% of the outstanding
shares of Common Stock of the Registrant on a fully diluted basis and that any
rights to require registration hereunder shall terminate with respect to any
shares that may be sold pursuant to Rule 144(k) under the Securities Act. The
Registration Notice shall include a certificate executed by the Holder and its
proposed managing underwriter, which underwriter shall be an investment
banking firm of nationally recognized standing (the "MANAGER"), stating that
(i) the Holder and the Manager have a good faith intention to commence a
Permitted Offering and (ii) the Manager in good faith believes that, based on
the then prevailing market conditions, it will be able to sell the Registrable
Securities at a per share price equal to at least 80% of the per share average
of the closing sale prices of the Registrant's Common Stock on the Nasdaq
National Market for the twenty trading days immediately preceding the date of
the Registration Notice. The Registrant shall thereupon have the option
exercisable by written notice delivered to the Holder within ten business days
after the receipt of the Registration Notice, irrevocably to agree to purchase
all or any part of the Registrable Securities for cash at a price (the "OPTION
PRICE" equal to the product of (i) the number of Registrable Securities so
purchased and (ii) the per share average of the closing sale prices of the
Registrant's Common Stock on the Nasdaq National Market for the twenty trading
days immediately preceding the date of the Registration Notice. Any such
purchase of Registrable Securities by the Registrant hereunder shall take
place at a closing to be held at the principal executive offices of the
Registrant or its counsel at any reasonable date and time designated by the
Registrant in such notice within 10 business days after delivery of such
notice. The payment for the shares to be purchased shall be made by delivery
at the time of such closing of the Option Price in immediately available
funds.
(b) If the Registrant does not elect to exercise its option to purchase
pursuant to Section 8(a) with respect to all Registrable Securities, the
Registrant shall use all reasonable efforts to effect, as promptly as
practicable, the registration under the Securities Act of the unpurchased
Registrable Securities requested to be registered in the Registration Notice;
provided, however, that (i) neither party shall be entitled to more than an
aggregate of two effective registration statements hereunder and (ii) the
Registrant will not be required to file any such registration statement during
any period of time (not to exceed 40 days after a Registration Notice in the
case of clause (A) below or 90 days after a Registration Notice in the case of
clauses (B) and (C) below) when (A) the Registrant is in possession of
material non-public information which it reasonably believes would be
detrimental to be disclosed at such time and, in the written opinion of
counsel to such Registrant, such information would have to be disclosed if a
registration statement were filed at that time; (B) such Registrant is
required under the Securities Act to include audited financial statements for
any period in such registration statement and such financial statements are
not yet available for inclusion in such registration statement; or (C) such
Registrant determines, in its reasonable judgment, that such registration
would interfere with any financing, acquisition or other material transaction
involving the Registrant. If consummation of the sale of any Registrable
Securities pursuant to a registration hereunder does not occur within 180 days
after the filing with the SEC of the initial registration statement therefor,
the provisions of this Section 8 shall again be applicable to any proposed
registration, it being understood that neither party shall be entitled to more
than an aggregate of two effective registration statements hereunder. The
Registrant shall use all reasonable efforts to cause any Registrable
Securities registered pursuant to this Section 8 to be qualified for sale
under the securities or blue sky laws of
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such jurisdictions as the Holder may reasonably request and shall continue
such registration or qualification in effect in such jurisdictions; provided,
however, that the Registrant shall not be required to qualify to do business
in, or consent to general service of process in, any jurisdiction by reason of
this provision.
(c) The registration rights set forth in this Section 8 are subject to the
condition that the Holder shall provide the Registrant with such information
with respect to such Holder's Registrable Securities, the plan for
distribution thereof, and such other information with respect to such Holder
as, in the reasonable judgment of counsel for the Registrant, is necessary to
enable the Registrant to include in a registration statement all material
facts required to be disclosed with respect to a registration thereunder.
(d) A registration effected under this Section 8 shall be effected at the
Registrant's expense, except for underwriting discounts and commissions and
the fees and expenses of counsel to the Holder, and the Registrant shall
provide to the underwriters such documentation (including certificates,
opinions of counsel and "comfort" letters from auditors) as are customary in
connection with underwritten public offerings and as such underwriters may
reasonably require. In connection with any registration, the Holder and the
Registrant agree to enter into an underwriting agreement reasonably acceptable
to each such party, in form and substance customary for transactions of this
type with the underwriters participating in such offering.
(e) Indemnification
(i) The Registrant will indemnify the Holder, each of its directors and
officers and each person who controls the Holder within the meaning of Section
15 of the Securities Act, and each underwriter of the Registrant's securities,
with respect to any registration, qualification or compliance which has been
effected pursuant to this Agreement, against all expenses, claims, losses,
damages or liabilities (or actions in respect thereof), including any of the
foregoing incurred in settlement of any litigation, commenced or threatened,
arising out of or based on any untrue statement (or alleged untrue statement)
of a material fact contained in any registration statement, prospectus,
offering circular or other document, or any amendment or supplement thereto,
incident to any such registration, qualification or compliance, or based on
any omission (or alleged omission) to state therein a material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances in which they were made, not misleading, or any violation by
the Registrant of any rule or regulation promulgated under the Securities Act
applicable to the Registrant in connection with any such registration,
qualification or compliance, and the Registrant will reimburse the Holder and,
each of its directors and officers and each person who controls the Holder
within the meaning of Section 15 of the Securities Act, and each underwriter
for any legal and any other expenses reasonably incurred in connection with
investigating, preparing or defending any such claim, loss, damage, liability
or action, provided that the Registrant will not be liable in any such case to
the extent that any such claim, loss, damage, liability or expense arises out
of or is based on any untrue statement or omission or alleged untrue statement
or omission, made in reliance upon and in conformity with written information
furnished to the Registrant by such Holder or director or officer or
controlling person or underwriter seeking indemnification.
(ii) The Holder will indemnify the Registrant, each of its directors and
officers and each underwriter of the Registrant's securities covered by such
registration statement and each person who controls the Registrant within the
meaning of Section 15 of the Securities Act, against all claims, losses,
damages and liabilities (or actions in respect thereof), including any of the
foregoing incurred in settlement of any litigation, commenced or threatened,
arising out of or based on any untrue statement (or alleged untrue statement)
of a material fact contained in any such registration statement, prospectus,
offering circular or other document, or any omission (or alleged omission) to
state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, or any violation by the Holder of
any rule or regulation promulgated under the Securities Act applicable to the
Holder in connection with any such registration, qualification or compliance,
and will reimburse the Registrant, such directors, officers or control persons
or underwriters for any legal or any other expenses reasonably incurred in
connection with investigating, preparing or defending any such claim, loss,
damage, liability or action, in each case to the extent, but only to the
extent, that such untrue statement (or alleged untrue statement) or omission
(or alleged omission) is made in such registration statement, prospectus,
offering
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circular or other document in reliance upon and in conformity with written
information furnished to the Registrant by the Holder for use therein,
provided that in no event shall any indemnity under this Section 8(e) exceed
the gross proceeds of the offering received by the Holder.
(iii) Each party entitled to indemnification under this Section 8(e) (the
"INDEMNIFIED PARTY") shall give notice to the party required to provide
indemnification (the "INDEMNIFYING PARTY") promptly after such Indemnified
Party has actual knowledge of any claim as to which indemnity may be sought,
and shall permit the Indemnifying Party to assume the defense of any such
claim or any litigation resulting therefrom, provided that counsel for the
Indemnifying Party, who shall conduct the defense of such claim or litigation,
shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld), and the Indemnified Party may participate in such
defense at such party's expense; provided, however, that the Indemnifying
Party shall pay such expense if representation of the Indemnified Party by
counsel retained by the Indemnifying Party would be inappropriate due to
actual or potential differing interests between the Indemnified Party and any
other party represented by such counsel in such proceeding, and provided
further that the failure of any Indemnified Party to give notice as provided
herein shall not relieve the Indemnifying Party of its obligations under this
Section 8(e) unless the failure to give such notice is materially prejudicial
to an Indemnifying Party's ability to defend such action. No Indemnifying
Party, in the defense of any such claim or litigation shall, except with the
consent of each Indemnified Party, consent to entry of any judgment or enter
into any settlement which does not include as an unconditional term thereof
the giving by the claimant or plaintiff to such Indemnified Party of a release
from all liability in respect to such claim or litigation. No Indemnifying
Party shall be required to indemnify any Indemnified Party with respect to any
settlement entered into without such Indemnifying Party's prior consent (which
shall not be unreasonably withheld).
9. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION; RIGHTS PLANS
(a) In the event of any change in the Acquiror Shares by reason of stock
dividends, stock splits, reverse stock splits, mergers (other than the
Merger), recapitalizations, combinations, exchanges of shares and the like,
the type and number of shares or securities subject to the Option, the
Exercise Ratio and the Exercise Price shall be adjusted appropriately, and
proper provision shall be made in the agreements governing such transaction so
that Target shall receive, upon exercise of the Option, the number and class
of shares or other securities or property that Target would have received in
respect of the Acquiror Shares if the Option had been exercised immediately
prior to such event or the record date therefor, as applicable.
(b) At any time during which the Option is exercisable, and at any time
after the Option is exercised (in whole or in part, if at all), neither
Acquiror nor Target shall adopt a stockholders rights plan (a so-called
"poison pill") that contains provisions for the distribution of rights
thereunder as a result of the other party being the beneficial owner of shares
of the first party by virtue of the Option being exercisable or having been
exercised (or as a result of such other party beneficially owning shares
issuable in respect of any Option Shares). It is understood, however, that
following termination (if any) of the Merger Agreement, a party may adopt a
stockholders rights plan, that contains provisions for the distribution of
rights thereunder as a result of the other party being the beneficial owner of
shares of the first party in addition to those that may be beneficially owned
by virtue of the Option being exercisable or having been exercised (or as a
result of such other party beneficially owning shares issuable in respect of
any Option Shares).
10. RESTRICTIVE LEGENDS
Each certificate representing Option Shares issued to Target hereunder, and
each certificate representing Target Shares delivered to Acquiror at a
Closing, shall include a legend in substantially the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY BE REOFFERED OR SOLD
ONLY IF SO REGISTERED OR IF AN EXEMPTION FROM SUCH REGISTRATION IS
AVAILABLE. SUCH SECURITIES ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON
TRANSFER AS SET FORTH IN THE STOCK OPTION AGREEMENT DATED AS OF APRIL 7,
1997, A COPY OF WHICH MAY BE OBTAINED FROM THE ISSUER.
D-8
<PAGE>
11. LISTING AND HSR FILING
Acquiror, upon the request of Target, shall promptly file an application to
list the Acquiror Shares to be acquired upon exercise of the Option for
quotation on the Nasdaq National Market and shall use its best efforts to
obtain approval of such listing as soon as practicable. Target, upon the
request of Acquiror, shall promptly file an application to list the Target
Shares issued and delivered to Acquiror pursuant to Section 1 for quotation on
the Nasdaq National Market and shall use its best efforts to obtain approval
of such listing as soon as practicable. Promptly after the date hereof, each
of the parties hereto shall promptly file with the Federal Trade Commission
and the Antitrust Division of the United States Department of Justice all
required premerger notification and report forms and other documents and
exhibits required to be filed under the HSR Act to permit the acquisition of
the Acquiror Shares subject to the Option at the earliest possible date.
12. BINDING EFFECT
This Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and permitted assigns. Nothing
contained in this Agreement, express or implied, is intended to confer upon
any person other than the parties hereto and their respective successors and
permitted assigns any rights or remedies of any nature whatsoever by reason of
this Agreement. Any shares sold by a party in compliance with the provisions
of Section 8 shall, upon consummation of such sale, be free of the
restrictions imposed with respect to such shares by this Agreement and any
transferee of such shares shall not be entitled to the rights of such party.
Certificates representing shares sold in a registered public offering pursuant
to Section 8 shall not be required to bear the legend set forth in Section 10.
13. SPECIFIC PERFORMANCE
The parties recognize and agree that if for any reason any of the provisions
of this Agreement are not performed in accordance with their specific terms or
are otherwise breached, immediate and irreparable harm or injury would be
caused for which money damages would not be an adequate remedy. Accordingly,
each party agrees that in addition to other remedies the other party shall be
entitled to an injunction restraining any violation or threatened violation of
the provisions of this Agreement. In the event that any action shall be
brought in equity to enforce the provisions of the Agreement, neither party
will allege, and each party hereby waives the defense, that there is an
adequate remedy at law.
14. ENTIRE AGREEMENT
This Agreement and the Merger Agreement (including the appendices thereto)
constitute the entire agreement between the parties with respect to the
subject matter hereof and supersede all other prior agreements and
understandings, both written and oral, between the parties with respect to the
subject matter hereof.
15. FURTHER ASSURANCES
Each party will execute and deliver all such further documents and
instruments and take all such further action as may be necessary in order to
consummate the transactions contemplated hereby.
16. VALIDITY
The invalidity or unenforceability of any provision of this Agreement shall
not affect the validity or enforceability of the other provisions of this
Agreement, which shall remain in full force and effect. In the event any
Governmental Entity of competent jurisdiction holds any provision of this
Agreement to be null, void or unenforceable, the parties hereto shall
negotiate in good faith and shall execute and deliver an amendment to this
Agreement in order, as nearly as possible, to effectuate, to the extent
permitted by law, the intent of the parties hereto with respect to such
provision.
D-9
<PAGE>
17. NOTICES
All notices and other communications hereunder shall be in writing and shall
be deemed given if delivered personally or by commercial delivery service, or
sent via telecopy (receipt confirmed) to the parties at the following
addresses or telecopy numbers (or at such other address or telecopy numbers
for a party as shall be specified by like notice):
(a) if to Target, to:
Pure Atria Corporation
1309 South Mary Avenue
Sunnyvale, California 94087
Attn: President and Chief Executive Officer
with a copy to:
Fenwick & West
Two Palo Alto Square, Suite 700
Palo Alto, California 94306
Attn: Dennis R. DeBroeck, Esq.
(b) if to Acquiror to:
Rational Software Corporation
2800 San Tomas Expressway
Santa Clara, California 95051
Attn: President and Chief Executive Officer
with a copy to:
Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, California 94304-1050
Attn: Francis S. Currie, Esq.
18. GOVERNING LAW
This Agreement shall be governed by and construed in accordance with the
laws of the State of Delaware applicable to agreements made and to be
performed entirely within such State.
19. COUNTERPARTS
This Agreement may be executed in two counterparts, each of which shall be
deemed to be an original, but both of which, taken together, shall constitute
one and the same instrument.
20. EXPENSES
Except as otherwise expressly provided herein or in the Merger Agreement,
all costs and expenses incurred in connection with the transactions
contemplated by this Agreement shall be paid by the party incurring such
expenses.
21. AMENDMENTS; WAIVER
This Agreement may be amended by the parties hereto and the terms and
conditions hereof may be waived only by an instrument in writing signed on
behalf of each of the parties hereto, or, in the case of a waiver, by an
instrument signed on behalf of the party waiving compliance.
D-10
<PAGE>
22. ASSIGNMENT
Neither of the parties hereto may sell, transfer, assign or otherwise
dispose of any of its rights or obligations under this Agreement or the Option
created hereunder to any other person, without the express written consent of
the other party, except that the rights and obligations hereunder shall inure
to the benefit of and be binding upon any successor of a party hereto.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective duly authorized officers as of the date first
above written.
PURE ATRIA CORPORATION
By: /s/
---------------------------------
Name:Reed Hastings
Title: President, Chief Executive
Officer Chairman of the
Board of Directors
ACQUIROR
By: /s/
---------------------------------
Name:Paul D. Levy
Title:Chief Executive Officer
***STOCK OPTION AGREEMENT***
(Acquiror option to Target)
D-11
<PAGE>
ANNEX E
Confidential
April 6, 1997
The Board of Directors
Rational Software Corporation
2800 San Tomas Expressway
Santa Clara, CA 95051-0951
Gentlemen:
You have requested our opinion as to the fairness from a financial point of
view to Rational Software Corporation ("Rational" or the "Company") of the
consideration to be paid by the Company in connection with the proposed merger
of a wholly-owned subsidiary of Rational with and into Pure Atria Corporation
("Pure Atria") (the "Proposed Transaction") under the terms of the Agreement
and Plan of Reorganization, dated as of April 6, 1997, among Pure Atria, a
wholly-owned subsidiary of Rational and Rational and the related Exhibits and
Schedules thereto (the "Agreement"). The Agreement provides, among other
things, that Rational will issue to the stockholders of Pure Atria, upon
consummation of the Proposed Transaction, 0.9 shares of Rational common stock
for each share of Pure Atria common stock.
Hambrecht & Quist LLC ("Hambrecht & Quist"), as part of its investment
banking services, is regularly engaged in the valuation of businesses and
their securities in connection with mergers and acquisitions, strategic
transactions, corporate restructurings, negotiated underwritings, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. We have acted as a financial
advisor to the Board of Directors of Rational in connection with the Proposed
Transaction, and we will receive a fee for our services, which includes the
rendering of this opinion.
In the past, we have provided investment banking and other financial
advisory services to Rational and have received fees for rendering these
services. In the ordinary course of business, Hambrecht & Quist acts as a
market maker and broker in the publicly traded securities of Rational and
receives customary compensation in connection therewith, and also provides
research coverage for Rational. In the ordinary course of business, Hambrecht
& Quist actively trades in the equity and derivative securities of Rational
for its own account and for the accounts of its customers and, accordingly,
may at any time hold a long or short position in such securities. Hambrecht &
Quist may in the future provide additional investment banking or other
financial advisory services to Rational. In November, 1996, Hambrecht & Quist
acted as financial advisor to Rational in connection with Rational's
acquisition of SQA, Inc., and received a fee for this service. In addition,
the President and Chief Executive Officer of Hambrecht & Quist, Daniel H. Case
III, is a Director of Rational.
In connection with our review of the Proposed Transaction, and in arriving
at our opinion, we have, among other things:
(i) reviewed the publicly available consolidated financial statements of
Rational for recent years and interim periods to date and certain other
relevant financial and operating data of Rational made available to us from
published sources;
(ii) discussed the business, financial condition and prospects of
Rational with certain of its officers;
(iii) reviewed the publicly available consolidated financial statements
of Pure Atria for recent years and interim periods to date and certain
other relevant financial and operating data of Pure Atria made available to
us from published sources;
<PAGE>
The Board of Directors
Rational Software Corporation
Page 2
(iv) discussed the business, financial condition and prospects of Pure
Atria with certain of its officers;
(v) analyzed the pro forma impact of the Proposed Transaction on earnings
per share, consolidated capital and other financial ratios of Rational and
Pure Atria;
(vi) reviewed and discussed with management of Rational and Pure Atria;
the strategic rationale for the Proposed Transaction;
(vii) reviewed the recent reported prices and trading activity for the
common stocks of Rational and Pure Atria and compared such information and
certain financial information for Rational and Pure Atria with similar
information for certain other companies engaged in businesses we consider
comparable;
(viii) reviewed the financial terms, to the extent publicly available, of
certain comparable merger and acquisition transactions;
(ix) reviewed the Agreement;
(x) discussed the tax and accounting treatment of the Proposed
Transaction with Rational and Rational lawyers and accountants; and
(xi) performed such other analyses and examinations and considered such
other information, financial studies, analyses and investigations and
financial, economic and market data as we deemed relevant.
In rendering our opinion, we have assumed and relied upon the accuracy and
completeness of all of the information concerning Rational or Pure Atria
considered in connection with our review of the Proposed Transaction, and we
have not assumed any responsibility for independent verification of such
information or any independent valuation or appraisal of any of the assets or
liabilities of Rational or Pure Atria nor have we conducted a physical
inspection of the properties and facilities of either company. For purposes of
this opinion, we have assumed that neither Rational nor Pure Atria is a party
to any pending transactions, including external financings, recapitalizations
or material merger discussions, other than the Proposed Transaction and those
activities undertaken in the ordinary course of conducting their respective
businesses. Our opinion is necessarily based upon market, economic, financial
and other conditions as they exist and can be evaluated as of the date of this
letter and any change in such conditions would require a reevaluation of this
opinion.
We express no opinion as to the price at which the shares of Rational or
Pure Atria will trade after the announcement or consummation of the Proposed
Transaction.
It is understood that this letter is for the information of the Board of
Directors and may not be summarized or publicly referred to without our prior
written consent; provided, however, that this letter may be reproduced,
discussed or summarized in any filing made by Rational with respect to the
transaction contemplated by the Agreement. This letter does not constitute a
recommendation to any stockholder as to how such stockholder should vote on
the Proposed Transaction.
<PAGE>
The Board of Directors
Rational Software Corporation
Page 3
Based upon and subject to the foregoing and after considering such other
matters as we deem relevant, we are of the opinion that as of the date hereof
the consideration to be paid by Rational in the Proposed Transaction is fair
to the Company from a financial point of view.
Very truly yours,
HAMBRECHT & QUIST LLC
By __________________________________
Paul B. Cleveland
Managing Director
<PAGE>
ANNEX F
April 6, 1997
Board of Directors
Pure Atria Corporation
1309 South Mary Avenue
Sunnyvale, CA 94087
Members of the Board:
We understand that Rational Software Corporation ("Rational"), Pure Atria
Corporation ("Pure Atria") and Wings Merger Corporation ("Merger Sub"), a
wholly-owned subsidiary of Rational, have entered into an Agreement and Plan
of Reorganization, dated as of the date hereof (the "Merger Agreement"), which
provides, among other things, for the merger (the "Merger") of Merger Sub with
and into Pure Atria. Pursuant to the Merger, Pure Atria will become a wholly-
owned subsidiary of Rational and each issued and outstanding share of common
stock, par value $0.0001 per share, of Pure Atria (the "Pure Atria Common
Stock"), other than shares held in treasury or held by Rational or any
subsidiary of Rational or Pure Atria or as to which dissenters' rights have
been perfected, shall be converted into the right to receive 0.90 (the
"Exchange Ratio") of a share of common stock, par value $0.01 per share, of
Rational (the "Rational Common Stock"). The terms and conditions of the Merger
are more fully set forth in the Merger Agreement.
You have asked for our opinion as to whether the Exchange Ratio pursuant to
the Merger Agreement is fair from a financial point of view to the holders of
Pure Atria Common Stock.
For purposes of the opinion set forth herein, we have:
(i) analyzed certain publicly available financial statements and other
information of Rational and Pure Atria, respectively;
(ii) analyzed certain historical internal financial statements and other
financial and operating data concerning Pure Atria prepared by the
management of Pure Atria;
(iii) discussed the past and current operations and financial condition
and the prospects of Pure Atria with senior executives of Pure Atria;
(iv) analyzed certain historical internal financial statements and other
financial and operating data concerning Rational prepared by the management
of Rational;
(v) discussed the past and current operations and financial condition and
the prospects of Rational with senior executives of Rational and Pure
Atria;
(vi) analyzed the pro forma impact of the Merger on the earnings per
share and consolidated capitalization of Rational;
(vii) reviewed the reported prices and trading activity for the Rational
Common Stock and the Pure Atria Common Stock;
(viii) compared the financial performance of Rational and Pure Atria and
the prices and trading activity of the Rational Common Stock and the Pure
Atria Common Stock, respectively, with that of certain other comparable
publicly-traded companies which we deemed to be relevant and their
securities;
(ix) reviewed the financial terms, to the extent publicly available, of
certain comparable merger and acquisition transactions which we deemed to
be relevant;
(x) reviewed and discussed with the senior managements of Rational and
Pure Atria (a) the strategic rationale for the Merger and their assessment
as to the benefits expected to be derived from the Merger; and (b) certain
alternatives to the Merger, including independence, particularly in light
of the impact on Pure Atria, its business and its employees of the intended
first quarter earnings announcement;
<PAGE>
(xi) participated in discussions and negotiations among representatives
of Rational and Pure Atria and their respective financial and legal
advisors;
(xii) reviewed the Merger Agreement and certain related agreements; and
(xiii) performed such other analyses and considered such other factors as
we have deemed appropriate.
We have assumed and relied upon, without independent verification, the
accuracy and completeness of the information reviewed by us for the purposes
of this opinion. With respect to the information furnished by Rational and
Pure Atria, and with respect to the information discussed with the managements
of Rational and Pure Atria regarding their views of future operations, we have
assumed that such information has been reasonably prepared and reflects the
best currently available estimates and judgments of Rational's and Pure
Atria's management as to the competitive and operating environments and
related financial performance of Rational and Pure Atria, as the case may be,
for the relevant periods. We have also relied upon, without independent
verification, the assessment by the management of each of Rational and Pure
Atria of the strategic and other benefits expected to result from the Merger.
We have also relied upon, without independent verification, the assessment by
Pure Atria's management of Rational's technology and products, the timing and
risks associated with the integration of Rational with Pure Atria, and the
validity of, and risks associated with, Rational's future products and
technology. We have not made any independent valuation or appraisal of the
assets, liabilities or technology of Rational or Pure Atria, respectively, nor
have we been furnished with any such appraisals. We have assumed that the
Merger will be accounted for as a "pooling-of-interests" business combination
in accordance with U.S. Generally Accepted Accounting Principles and will be
consummated in accordance with the terms set forth in the Merger Agreement.
Our opinion is necessarily based on economic, market and other conditions as
in effect on, and the information made available to us as of, the date hereof.
We have acted as financial advisor to the Board of Directors of Pure Atria
in connection with this transaction and will receive a fee for our services.
In the past, Deutsche Morgan Grenfell and its affiliates have provided
financing and financial advisory services for Pure Atria and have received
fees for the rendering of these services.
It is understood that this letter is for the information of the Board of
Directors of Pure Atria and may not be used for any other purpose without our
prior written consent, except that this opinion may be included in its
entirety in any filing made by Pure Atria with the Securities and Exchange
Commission with respect to the transactions contemplated by the Merger
Agreement. In addition, we express no recommendation or opinion as to how the
holders of Pure Atria Common Stock should vote at the shareholders' meeting
held in connection with the Merger.
Based upon and subject to the foregoing, we are of the opinion on the date
hereof that the Exchange Ratio pursuant to the Merger Agreement is fair from a
financial point of view to the holders of Pure Atria Common Stock.
Very truly yours,
DEUTSCHE MORGAN GRENFELL INC.
By: _________________________________
George F. Boutros
Managing Director
By: _________________________________
Ethan M. Topper
Managing Director
2
<PAGE>
ANNEX G
AMENDMENT TO CERTIFICATE OF INCORPORATION
OF
RATIONAL SOFTWARE CORPORATION
Rational Software Corporation, a corporation organized and existing under
the laws of the State of Delaware (the "Company"), hereby certifies as
follows:
FIRST: The Board of Directors of the Company, at a meeting duly called and
held in accordance with the Bylaws of the Company and Section 141 of the
Delaware General Corporation Law, as amended, duly adopted resolutions
proposing and declaring advisable the amendment to the Certificate of
Incorporation of the Company as set forth below.
SECOND: Paragraph 4(a) of the Certificate of Incorporation, as amended to
date, hereby is amended to read as follows:
4. (a) The total number of shares of Common Stock which the corporation
shall have authority to issue shall be one hundred fifty million (150,000,000)
and each of such shares shall have a par value of one cent ($0.01).
THIRD. The undersigned, Michael T. Devlin and Robert T. Bond, further verify
that:
A. This Amendment to Certificate of Incorporation has been duly adopted
in accordance with Section 242 of the Delaware General Corporation Law, as
amended.
B. Pursuant to a duly adopted resolution of the Board of Directors of the
Company, the annual meeting of the stockholders of the Company was duly
called and held, upon notice in accordance with Section 222 of the Delaware
General Corporation Law, as amended, at which meeting holders of at least a
majority of the outstanding shares of Common Stock of the Company,
constituting the only outstanding securities of the Company entitled to
vote in respect of the amendment to the Certificate of Incorporation of the
Company as set forth above, duly approved said amendment.
THE UNDERSIGNED, being the President and Secretary, respectively, of
Rational Software Corporation, do make this Amendment to Certificate of
Incorporation, hereby declaring and certifying that this is an act and deed of
the Company and that the facts herein stated are true, and accordingly have
hereunto set their hands this day of , 1997.
_____________________________________
Michael T. Devlin, President
_____________________________________
Robert T. Bond, Secretary
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's Board of Directors to grant, indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act, Article
7 of the Registrant's Certificate (Exhibit 3.01 hereto) and Article VI of the
Registrant's Bylaws (Exhibits 3.02 and 3.03 hereto) provide for
indemnification of its directors, officers, employees and other agents to the
maximum extent permitted by the Delaware Law. In addition, the Registrant has
entered into Indemnification Agreements (Exhibit 10.1 hereto) with its
officers and directors.
The Agreement provides that commencing with the effectiveness of the Merger,
the Registrant will indemnify the current officers and directors of Pure Atria
for any action or inaction by such person prior to the Merger in accordance
with the indemnification agreements between such persons and Pure Atria, as
set forth in the Agreement at Exhibit 2.04 hereof.
ITEM 21. EXHIBITS AND FINANCIAL SCHEDULES
(a) EXHIBITS
<TABLE>
<C> <S>
2.01 Reorganization Agreement among Verdix Corporation, Rational Acquisition
Corporation, and Rational, dated December 15, 1993, is incorporated
herein by reference to Appendix A filed with the Registrant's
Registration Statement on Form S-4, dated February 25, 1994
(Registration No. 33-75724).
2.02 Agreement and Plan of Reorganization dated November 12, 1996 by and
among Rational Software Corporation, Sunshine Acquisition Corp., and
SQA, Inc., is incorporated herein by reference to Appendix A filed with
the Registrant's Registration Statement on Form S-4, dated January 13,
1997, as amended on January 17, 1997 (File No. 333-19669).
2.03 Stock Purchase Agreement by and among Rational Software Corporation,
Performance Awareness Corporation ("PAC"), and all of the Stockholders
of PAC is incorporated herein by reference to Exhibit 2.1 filed with the
Registrant's Form 8-K Current Report dated March 31, 1997 (File No. 0-
12167) ("March 1997 8-K").
2.04 Reorganization Agreement among Rational Software Corporation, Wings
Merger Corporation, and Pure Atria Corporation, dated April 7, 1997,
appears at Appendix A hereof.
3.01 Restatement of the Certificate of Incorporation of the Registrant, dated
August 30, 1996 is incorporated herein by reference to Exhibit 4.01
filed with the Company's Form S-3 Registration Statement on October 3,
1996 (Registration No. 333-13313).
3.02 Bylaws of the Registrant as most recently amended are incorporated
herein by reference to Exhibit 3.9 filed with the Registrant's Form 10-K
for the fiscal year ended March 31, 1996.
3.03 Amendment to Section 3.2 of Bylaws of the Registrant are incorporated
herein by reference to Exhibit 3.02 filed with the Registrant's Form 10-
K for the fiscal year ended March 31, 1997.
4.01 Reference is made to Exhibits 3.01 and 3.02.
4.02 Specimen of Common Stock Certificate is incorporated herein by reference
to Exhibit 4.06 filed with the Registrant's Amendment No. 1 to Form S-3
Registration Statement on May 31, 1995 (File No. 33-91740).
4.03 Form of Affiliate Agreement dated April 7, 1997 by and among Rational
Software Corporation, a Delaware corporation, Pure Atria Corporation, a
Delaware corporation, and certain stockholders of Pure Atria
Corporation, a Delaware corporation herein incorporated by reference to
Exhibit 99.7 filed with the Registrant's Form 8-K Current Report dated
April 7, 1997 (File No. 0-12167).
5.01 Opinion of Wilson Sonsini Goodrich & Rosati, P.C., regarding the
legality of securities being registered.
</TABLE>
II-1
<PAGE>
<TABLE>
<C> <S>
8.01 Tax Opinion of Wilson Sonsini Goodrich & Rosati, P.C., dated June 20,
1997.
8.02 Tax Opinion of Fenwick & West, LPP, dated June 20, 1997.
10.01 Form of the Registrant's Indemnification Agreement is incorporated
herein by reference to Exhibit 10.01 filed with the Registrant's
Registration Statement on Form S-4 (Registration No. 333-19669), filed
on January 13, 1997, as amended on January 17, 1997.
10.02 *Agreement for Purchase and Sale of Assets between the Registrant and
Microsoft Corporation, dated October 2, 1996, is incorporated herein by
reference to Exhibit 1 filed with the Registrant's Form 8-K Current
Report dated October 2, 1996 as amended by Exhibit 1 filed with the
Registrant's Form 8-K/A Current Report dated October 16, 1996.
10.03 *Development and License Agreement between the Registrant and Microsoft
Corporation, dated September 24, 1996, is incorporated herein by
reference to Exhibit 2 filed with the Registrant's Form 8-K Current
Report dated October 2, 1996 as amended by Exhibit 2 filed with the
Registrant's Form 8-K/A Current Report dated October 16, 1996.
10.04 Rational Software Corporation Stock Option Plan for Directors is
incorporated herein by reference to Exhibit 1 filed with the
Registrant's Form 8-K Current Report dated October 2, 1996.
10.05 Form of Stock Option Agreements for the Rational Software Corporation
Stock Option Plan for Directors is incorporated herein by reference to
Exhibit 4.6 filed with the Registrant's Form S-8 Registration Statement
on September 18, 1995 (Registration No. 33-97042).
10.06 Voting Agreement dated April 7, 1997 by and among the Registrant and
certain stockholders of Pure Atria Corporation, a Delaware corporation
is incorporated herein by reference to Exhibit 99.2 to the Registrant's
Current Report on Form 8-K dated April 14, 1997.
10.07 Stock Option Agreement dated April 7, 1997, by and between Pure Atria
Corporation, a Delaware corporation, and the Registrant (granting the
Registrant an option to purchase Pure Atria Common Stock) appears at
Annex C hereof.
10.08 Stock Option Agreement dated April 7, 1997, by and between Pure Atria
Corporation, a Delaware corporation, and the Registrant (granting Pure
Atria an option to purchase the Registrant's Common Stock) appears at
Annex D hereof.
10.09 Reference is made to Exhibits 2.01, 2.02, 2.03, and 2.04.
11.01 Statement of computation of the Registrant's per share earnings is
incorporated by reference to Exhibit 11.01 filed with the Registrant's
Form 10-K for the fiscal year ended March 31, 1997.
21.01 Subsidiaries of the Registrant, incorporated by reference to Exhibit
21.01 filed with the Registrant's Form 10-K for the fiscal year ended
March 31, 1997.
23.01 Consent of Ernst & Young LLP.
23.02 Report of KPMG Peat Marwick LLP on Schedule and Consent.
23.03 Consent of Price Waterhouse LLP.
23.04 Consents of Wilson Sonsini Goodrich & Rosati, P.C. (see Exhibits 5.01
and 8.01, above).
23.05 Consent of Fenwick & West LLP (see Exhibit 8.02 above).
24.01 Power of Attorney is contained on the signature pages of this
Registration Statement.
99.1 Rational Stockholder Letter, dated June 27, 1997.
99.2 Pure Atria Stockholder Letter, dated June 27, 1997.
99.3 Rational Notice of Special Meeting of Stockholders, dated June 27, 1997.
99.4 Pure Atria Notice of Special Meeting of Stockholders, dated June 27,
1997.
99.5 Rational Form of Proxy.
99.6 Pure Atria Form of Proxy.
</TABLE>
- --------
* Confidential Treatment Requested.
II-2
<PAGE>
(b) FINANCIAL STATEMENT SCHEDULES
RATIONAL SOFTWARE CORPORATION
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED MARCH 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING ENDING OF
OF PERIOD ADDITIONS DEDUCTIONS PERIOD
---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
March 31, 1997
Allowance for doubtful accounts.... $1,286,015 $929,869 $(255,884) $1,960,000
March 31, 1996
Allowance for doubtful accounts.... 569,600 824,648 (108,233) 1,286,015
March 31, 1995
Allowance for doubtful accounts.... 639,088 272,000 (341,488) 569,600
</TABLE>
PURE ATRIA
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
---------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER AT END OF
DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS YEAR
- ----------- ---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1996
Allowance for doubtful
accounts and returns.. $838 2,380 -- (1,777) $2,041
Year ended December 31,
1995
Allowance for doubtful
accounts and returns.. $592 829 -- (583) $838
Year ended December 31,
1994
Allowance for doubtful
accounts and returns.. $312 442 -- (162) $592
</TABLE>
Schedules not listed above have been omitted because the information required
to be set forth therein is not applicable or is shown in the financial
statements, management's discussion and analysis or notes thereto.
II-3
<PAGE>
ITEM 22. UNDERTAKINGS
(1) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(2) The undersigned Registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c),
the undersigned Registrant undertakes that such reoffering prospectus will
contain the information called for by the applicable registration form with
respect to reofferings by persons who may be deemed underwriters, in addition
to the information called for by the other Items of the applicable form.
(3) The Registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the Registration Statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(4) Insofar as the indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
(5) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the Registration Statement through
the date of responding to the request.
(6) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF SANTA
CLARA, STATE OF CALIFORNIA ON THE 19TH DAY OF JUNE, 1997.
Rational Software Corporation
By: /s/ Robert T. Bond
----------------------------------
Robert T. Bond
Senior Vice President, Chief
Operating Officer,
Chief Financial Officer and
Secretary
POWER OF ATTORNEY
KNOW ALL THESE PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Paul D. Levy and Robert T. Bond and
each of them, jointly and severally, as his attorneys-in-fact, each with fall
power of substitution for him in any and all capacities, to sign any and all
amendments to this Registration Statement, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each said
attorneys-in-fact or his substitute or substitutes, may do or cause to be done
by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Paul D. Levy Chief Executive June 19, 1997
- ------------------------------------- Officer and
PAUL D. LEVY Chairman of the
Board (Principal
Executive Officer)
/s/ Robert T. Bond Senior Vice June 19, 1997
- ------------------------------------- President, Chief
ROBERT T. BOND Operating Officer,
Chief Financial
Officer and
Secretary
(Principal
Financial Officer)
/s/ Timothy A. Brennan Vice President, June 19, 1997
- ------------------------------------- Finance and
TIMOTHY A. BRENNAN Administration
(Principal
Accounting Officer)
/s/ Michael T. Devlin President and June 19, 1997
- ------------------------------------- Director
MICHAEL T. DEVLIN
/s/ James S. Campbell Director June 19, 1997
- -------------------------------------
JAMES S. CAMPBELL
II-5
<PAGE>
SIGNATURE TITLE DATE
/s/ Daniel H. Case III Director June 19, 1997
- -------------------------------------
DANIEL H. CASE III
/s/ Leslie G. Denend Director June 19, 1997
- -------------------------------------
LESLIE G. DENEND
/s/ John E. Montague Director June 19, 1997
- -------------------------------------
JOHN E. MONTAGUE
/s/ Allison R. Schleicher Director June 19, 1997
- -------------------------------------
ALLISON R. SCHLEICHER
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S>
2.01 Reorganization Agreement among Verdix Corporation, Rational Acquisition
Corporation, and Rational, dated December 15, 1993, is incorporated
herein by reference to Appendix A filed with the Registrant's
Registration Statement on Form S-4, dated February 25, 1994
(Registration No. 33-75724).
2.02 Agreement and Plan of Reorganization dated November 12, 1996 by and
among Rational Software Corporation, Sunshine Acquisition Corp., and
SQA, Inc., is incorporated herein by reference to Appendix A filed with
the Registrant's Registration Statement on Form S-4, dated January 13,
1997, as amended on January 17, 1997 (File No. 333-19669).
2.03 Stock Purchase Agreement by and among Rational Software Corporation,
Performance Awareness Corporation ("PAC"), and all of the Stockholders
of PAC is incorporated herein by reference to Exhibit 2.1 filed with the
Registrant's Form 8-K Current Report dated March 31, 1997 (File No. 0-
12167) ("March 1997 8-K").
2.04 Reorganization Agreement among Rational Software Corporation, Wings
Merger Corporation, and Pure Atria Corporation, dated April 7, 1997,
appears at Appendix A hereof.
3.01 Restatement of the Certificate of Incorporation of the Registrant, dated
August 30, 1996 is incorporated herein by reference to Exhibit 4.01
filed with the Company's Form S-3 Registration Statement on October 3,
1996 (Registration No. 333-13313).
3.02 Bylaws of the Registrant as most recently amended are incorporated
herein by reference to Exhibit 3.9 filed with the Registrant's Form 10-K
for the fiscal year ended March 31, 1996.
3.03 Amendment to Section 3.2 of Bylaws of the Registrant are incorporated
herein by reference to Exhibit 3.02 filed with the Registrant's Form 10-
K for the fiscal year ended March 31, 1997.
4.01 Reference is made to Exhibits 3.01 and 3.02.
4.02 Specimen of Common Stock Certificate is incorporated herein by reference
to Exhibit 4.06 filed with the Registrant's Amendment No. 1 to Form S-3
Registration Statement on May 31, 1995 (File No. 33-91740).
4.03 Form of Affiliate Agreement dated April 7, 1997 by and among Rational
Software Corporation, a Delaware corporation, Pure Atria Corporation, a
Delaware corporation, and certain stockholders of Pure Atria
Corporation, a Delaware corporation herein incorporated by reference to
Exhibit 99.7 filed with the Registrant's Form 8-K Current Report dated
April 7, 1997 (File No. 0-12167).
5.01 Opinion of Wilson Sonsini Goodrich & Rosati, P.C., regarding the
legality of securities being registered.
8.01 Tax Opinion of Wilson Sonsini Goodrich & Rosati, P.C., dated June 20,
1997.
8.02 Tax Opinion of Fenwick & West, LPP, dated June 20, 1997.
10.01 Form of the Registrant's Indemnification Agreement is incorporated
herein by reference to Exhibit 10.01 filed with the Registrant's
Registration Statement on Form S-4 (Registration No. 333-19669), filed
on January 13, 1997, as amended on January 17, 1997.
10.02 *Agreement for Purchase and Sale of Assets between the Registrant and
Microsoft Corporation, dated October 2, 1996, is incorporated herein by
reference to Exhibit 1 filed with the Registrant's Form 8-K Current
Report dated October 2, 1996 as amended by Exhibit 1 filed with the
Registrant's Form 8-K/A Current Report dated October 16, 1996.
10.03 *Development and License Agreement between the Registrant and Microsoft
Corporation, dated September 24, 1996, is incorporated herein by
reference to Exhibit 2 filed with the Registrant's Form 8-K Current
Report dated October 2, 1996 as amended by Exhibit 2 filed with the
Registrant's Form 8-K/A Current Report dated October 16, 1996.
</TABLE>
<PAGE>
<TABLE>
<C> <S>
10.04 Rational Software Corporation Stock Option Plan for Directors is
incorporated herein by reference to Exhibit 1 filed with the
Registrant's Form 8-K Current Report dated October 2, 1996.
10.05 Form of Stock Option Agreements for the Rational Software Corporation
Stock Option Plan for Directors is incorporated herein by reference to
Exhibit 4.6 filed with the Registrant's Form S-8 Registration Statement
on September 18, 1995 (Registration No. 33-97042).
10.06 Voting Agreement dated April 7, 1997 by and among the Registrant and
certain stockholders of Pure Atria Corporation, a Delaware corporation
is incorporated herein by reference to Exhibit 99.2 to the Registrant's
Current Report on Form 8-K dated April 14, 1997.
10.07 Stock Option Agreement dated April 7, 1997, by and between Pure Atria
Corporation, a Delaware corporation, and the Registrant (granting the
Registrant an option to purchase Pure Atria Common Stock) appears at
Annex C hereof.
10.08 Stock Option Agreement dated April 7, 1997, by and between Pure Atria
Corporation, a Delaware corporation, and the Registrant (granting Pure
Atria an option to purchase the Registrant's Common Stock) appears at
Annex D hereof.
10.09 Reference is made to Exhibits 2.01, 2.02, 2.03, and 2.04.
11.01 Statement of computation of the Registrant's per share earnings is
incorporated by reference to Exhibit 11.01 filed with the Registrant's
Form 10-K for the fiscal year ended March 31, 1997.
21.01 Subsidiaries of the Registrant, incorporated by reference to Exhibit
21.01 filed with the Registrant's Form 10-K for the fiscal year ended
March 31, 1997.
23.01 Consent of Ernst & Young LLP.
23.02 Report of KPMG Peat Marwick LLP on Schedule and Consent.
23.03 Consent of Price Waterhouse LLP.
23.04 Consents of Wilson Sonsini Goodrich & Rosati, P.C. (see Exhibits 5.01
and 8.01, above).
23.05 Consent of Fenwick & West LLP (see Exhibit 8.02 above).
24.01 Power of Attorney is contained on the signature pages of this
Registration Statement.
99.1 Rational Stockholder Letter, dated June 27, 1997.
99.2 Pure Atria Stockholder Letter, dated June 27, 1997.
99.3 Rational Notice of Special Meeting of Stockholders, dated June 27, 1997.
99.4 Pure Atria Notice of Special Meeting of Stockholders, dated June 27,
1997.
99.5 Rational Form of Proxy.
99.6 Pure Atria Form of Proxy.
</TABLE>
- --------
* Confidential Treatment Requested.
<PAGE>
EXHIBIT 5.01
June 20, 1997
Rational Software Corporation
2800 San Tomas Expressway
Santa Clara, CA 95051
Re: Registration Statement on Form S-4
----------------------------------
Gentlemen:
We have examined the Registration Statement on Form S-4 to be filed by you
with the Securities and Exchange Commission on or about June 20, 1997 (the
"Registration Statement"), in connection with the registration under the
Securities Act of 1933, as amended, of 42,500,000 shares of your Common Stock
(the "Shares"), all of which are either authorized but heretofore unissued or
will be duly authorized upon approval by your stockholders of Proposal No. 2 in
the Registration Statement. The Shares are to be exchanged for outstanding
shares of Pure Atria Corporation Common Stock as described in the Registration
Statement and pursuant to the Agreement and Plan of Reorganization by and among
Rational Software Corporation, Wings Merger Corporation and Pure Atria
Corporation (the "Agreement") filed as an exhibit thereto. As your counsel, we
have examined the proceedings taken and proposed to be taken in connection with
said issuance of the Shares.
It is our opinion that, upon completion of the proceedings being taken or
to be taken prior to the issuance of the Shares, and upon completion of the
proceedings being taken in order to permit such transactions to be carried out
in accordance with the securities laws of the various states, where required,
the Shares when issued in the manner referred to in the Registration Statement
will be legally and validly issued, fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement, and further consent to the use of our name wherever appearing in the
Registration Statement, including the Prospectus/Joint Proxy Statement
constituting a part thereof, and any amendment thereto.
Very truly yours,
/s/ Wilson Sonsini Goodrich & Rosati
------------------------------------
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
<PAGE>
Exhibit 8.01
June 20, 1997
Rational Software Corporation
2800 San Tomas Expressway
Santa Clara, California 95051
Ladies and Gentlemen:
We have acted as counsel for Rational Software Corporation, a Delaware
corporation ("Rational") in connection with the preparation and execution of the
Agreement and Plan of Reorganization dated as of April 7, 1997 (the
"Reorganization Agreement") by and among Rational, Wings Merger Corporation, a
wholly-owned subsidiary of Rational incorporated in Delaware ("Merger Sub"),
and Pure Atria Corporation, a California corporation ("Pure Atria"). Pursuant to
the Reorganization Agreement, Merger Sub will merge with and into Pure Atria
(the "Merger"), and Pure Atria will become a wholly-owned subsidiary of
Rational. Unless otherwise defined, capitalized terms referred to herein have
the meanings set forth in the Reorganization Agreement. All section references,
unless otherwise indicated, are to the Internal Revenue Code of 1986, as amended
(the "Code").
You have requested our opinion regarding certain United States federal
income tax consequences of the Merger. In delivering this opinion, we have
reviewed and relied upon (without any independent investigation) the facts,
statements, descriptions and representations set forth in the Reorganization
Agreement (including Exhibits), the Registration Statement on Form S-4 filed
with the Securities and Exchange Commission (which contains a prospectus and
joint proxy statement of Rational and Pure Atria) (the "Registration Statement")
and such other documents pertaining to the Merger as we have deemed necessary
or appropriate. We have also relied upon (without any independent
investigation) certificates of officers of Rational and Pure Atria,
respectively (the "Officers' Certificates") and representations made by certain
shareholders of Pure Atria in "Affiliate Agreements".
In connection with rendering this opinion, we have also assumed (without
any independent investigation) that:
1. Original documents (including signatures) are authentic,
documents submitted to us as copies conform to the original documents, and there
has been (or will be by the Effective Time)
<PAGE>
Rational Software Corporation
June 20, 1997
Page 2
due execution and delivery of all documents where due execution and delivery are
prerequisites to effectiveness thereof;
2. Any representation or statement referred to above made "to the
knowledge of," "to the best of the knowledge" or otherwise similarly qualified
is correct without such qualification. As to all matters in which a person or
entity making a representation referred to above has represented that such
person or entity either is not a party to, does not have, or is not aware of,
any plan, intention, understanding or agreement, there is in fact no such plan,
intention, understanding or agreement.
3. All statements, descriptions and representations contained in
any of the documents referred to herein or otherwise made to us are true and
correct in all material respects and no actions have been (or will be) taken
which are inconsistent with such representations.
4. The Merger will be reported by Rational and Pure Atria on their
respective federal income tax returns in a manner consistent with the opinion
set forth below; and
5. The Merger will be consummated in accordance with the
Reorganization Agreement (and without any waiver, breach or amendment of any of
the provisions thereof) and will be effective under the applicable state law.
Based on our examination of the foregoing items and subject to the
assumptions, exceptions, limitations and qualifications set forth herein, we are
of the opinion that, if the Merger is consummated in accordance with the
Reorganization Agreement (and without any waiver, breach or amendment of any of
the provisions thereof) and the statements set forth in the Officers'
Certificates and Affiliate Agreements are true and correct as of the Effective
Time, then for federal income tax purposes the Merger will constitute as a
"reorganization" as defined in Section 368(a) of the Code.
This opinion represents and is based upon our best judgment regarding
the application of federal income tax laws arising under the Code, existing
judicial decisions, administrative regulations and published rulings and
procedures. Our opinion is not binding upon the Internal Revenue Service or the
courts, and there is no assurance that the Internal Revenue Service will not
successfully assert a contrary position. Furthermore, no assurance can be given
that future legislative, judicial or administrative changes, on either a
prospective or retroactive basis, would not adversely affect the accuracy of the
conclusions stated herein. Nevertheless, we undertake no responsibility to
advise you of any new developments in the application or interpretation of the
federal income tax laws.
This opinion addresses only the classification of the Merger as a
reorganization under Section 368(a) of the Code, and does not address any other
federal, state, local or foreign tax
<PAGE>
Rational Software Corporation
June 20, 1997
Page 3
consequences that may result from the Merger or any other transaction (including
any transaction undertaken in connection with the Merger).
No opinion is expressed as to any transaction other than the Merger as
described in the Reorganization Agreement or to any transaction whatsoever,
including the Merger, if all the transactions described in the Reorganization
Agreement are not consummated in accordance with the terms of such
Reorganization Agreement and without waiver or breach of any material provision
thereof or if all of the representations, warranties, statements and assumptions
upon which we relied are not true and accurate at all relevant times. In the
event any one of the statements, representations, warranties or assumptions upon
which we have relied to issue this opinion is incorrect, our opinion might
be adversely affected and may not be relied upon.
This opinion has been delivered to you for the purpose of satisfying
the requirements of Section 6.1(d) of the Reorganization Agreement. It may not
be relied upon for any other purpose or by any other person or entity, and may
not be made available to any other person or entity without our prior written
consent. We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name under the heading "Certain
Federal Income Tax Considerations." In giving such consent, we do not thereby
admit that we are in the category of persons whose consent is required under
Section 7 of the Securities Act of 1933, as amended.
Very truly yours,
/s/ Wilson Sonsini Goodrich & Rosati P.C.
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
<PAGE>
Exhibit 8.02
June 20, 1997
VIA FEDEX DELIVERY
PURE ATRIA CORPORATION
18880 Homestead Road
Cupertino, California 95014
Attention: Board of Directors
Re: Exhibit Tax Opinion for the S-4 Registration Statement Filed
------------------------------------------------------------
in Connection With the Merger Transaction Involving Pure
--------------------------------------------------------
Atria Corporation and Rational Software Corporation.
----------------------------------------------------
Ladies and Gentlemen:
We have been requested to render this opinion concerning
certain matters of U.S. federal income tax law in connection with the proposed
merger (the "Merger") involving Pure Atria Corporation, a corporation organized
and existing under the laws of the State of Delaware ("PURE ATRIA"), Rational
Software Corporation, a corporation organized and existing under the laws of the
State of Delaware ("RATIONAL"), and Wings Merger Corporation, a wholly-owned
subsidiary of Rational, organized and existing under the laws of the State of
Delaware ("MERGER SUB"). The Merger is further described in and is in accordance
with the Securities and Exchange Commission Form S-4 Registration Statement
(No.333- _________________) filed on June 20, 1997, and Exhibits thereto, as
thereafter amended at any time to and including the date hereof (the "S-4
Registration Statement"). Our opinion has been requested solely in connection
with the filing of the S-4 Registration Statement with the Securities and
Exchange Commission with respect to the Merger.
The Merger is structured as a statutory merger of MERGER SUB
with and into PURE ATRIA, with PURE ATRIA surviving the merger and becoming a
wholly-owned subsidiary of RATIONAL, all pursuant to the applicable corporate
laws of the State of Delaware and in accordance with the Agreement and Plan of
Reorganization by and among PURE ATRIA, RATIONAL and MERGER SUB, dated as of
April 7, 1997, and exhibits thereto (collectively, the "Agreement") and the
related Agreement of Merger (collectively, the "Merger Agreements"). Except as
otherwise indicated, capitalized terms used herein have the meanings set forth
in the Merger Agreements. All section references, unless otherwise indicated,
are to the Internal Revenue Code of 1986, as amended (the "Code").
1
<PAGE>
We have acted as legal counsel to PURE ATRIA in connection
with the Merger. As such, and for the purpose of rendering this opinion, we have
examined and are relying upon (without any independent investigation or review
thereof) the truth and accuracy, at all relevant times, of the statements,
covenants, representations and warranties contained in the following documents
(including all schedules and exhibits thereto), among others:
1. The S-4 Registration Statement (including exhibits
thereto);
2. The Merger Agreements;
3. An Officers' Tax Certificate of RATIONAL and MERGER SUB
dated June 20, 1997, signed by an authorized officer of each of RATIONAL and
MERGER SUB and delivered to us from RATIONAL and MERGER SUB and incorporated
herein by reference; a copy of this Certificate of Officer is attached hereto as
Exhibit A; and
4. An Officer's Tax Certificate of PURE ATRIA dated June 20,
1997, signed by an authorized officer of PURE ATRIA and delivered to us from
PURE ATRIA and incorporated herein by reference; a copy of this Certificate of
Officer is attached hereto as Exhibit B.
In addition, we have reviewed such other instruments and
documents related to the formation, organization and operation of PURE ATRIA,
RATIONAL and MERGER SUB or the consummation of the Merger and the transactions
contemplated thereby as we have deemed necessary or appropriate.
In connection with rendering this opinion, we have assumed or
obtained representations and are relying thereon (without any independent
investigation or review thereof) that:
(1) Original documents (including signature) are authentic,
documents submitted to us as copies conform to the original documents, and there
has been (or will be by the Effective Time of the Merger) due execution and
delivery of all documents where due execution and delivery are prerequisites to
the effectiveness thereof;
(2) Any representation or statement referred to above made
"to the best of knowledge" or otherwise similarly qualified is correct without
such qualification;
(3) The Merger will be consummated pursuant to the Merger
Agreements and will be effective under applicable state law;
(4) There is no plan or intention on the part of the PURE
ATRIA stockholders to engage in a sale, exchange, transfer, distribution,
pledge, disposition or any other transaction which would result in a direct or
indirect disposition of (a) shares of RATIONAL Common Stock to be issued to PURE
ATRIA stockholders in the Merger, which shares would have an aggregate fair
market value, as of the Effective Date of the Merger, in excess of 50% of the
aggregate fair market value, immediately prior to the Merger, of all outstanding
shares of PURE
2
<PAGE>
ATRIA stock, or (b) more than 50% of the shares of RATIONAL Common Stock to be
received in exchange for PURE ATRIA Common Stock in the Merger.
(5) Following the Mergers, PURE ATRIA will continue its
historic business or use a significant portion of its historic business assets
in a business;
(6) To the extent any expenses relating to the Merger (or the
"plan of reorganization" within the meaning of Treas. Reg. ss. 1.368-1(c) with
respect to the Merger) are funded directly or indirectly by a party other than
the incurring party, such expenses will be within the guidelines established in
Revenue Ruling 73-54, 1973-1 C.B. 187;
(7) No outstanding indebtedness of PURE ATRIA, RATIONAL, or
MERGER SUB has or will represent equity for tax purposes; no outstanding equity
of PURE ATRIA, RATIONAL, or MERGER SUB has represented or will represent
indebtedness for tax purposes; no outstanding security, instrument, agreement or
arrangement that provides for, contains, or represents either a right to acquire
RATIONAL capital stock (or to share in the appreciation thereof) constitutes or
will constitute "stock" for purposes of Section 368(c) of the Code;
(8) None of PURE ATRIA, RATIONAL, or MERGER SUB is, or will
be at the time of the Merger, an investment company as defined in ss.
368(a)(2)(F) of the Code; and
(9) The opinion, dated June 20, 1997, from Wilson Sonsini to
RATIONAL in satisfaction of Section 6.1(d) of the Agreement has been delivered
and has not been withdrawn.
Based on the foregoing documents, materials, assumptions and
information, and subject to the qualifications and assumptions set forth herein,
our opinion is that, if the Merger is consummated in accordance with the
provisions of the Agreement and the exhibits thereto (and without any waiver,
breach or amendment of any of the provisions thereof), the Merger of PURE ATRIA
with and into MERGER SUB, with PURE ATRIA surviving the Merger, will qualify as
a reorganization within the meaning of Section 368(a) of the Code, and that
RATIONAL, MERGER SUB, and PURE ATRIA each will be a "party to the
reorganization" within the meaning of Section 368(b) of the Code.
Our opinions set forth above are based on the existing
provisions of the Code, Treasury Regulations (including Temporary and Proposed
Treasury Regulations) promulgated under the Code, published Revenue Rulings,
Revenue Procedures and other announcements of the Internal Revenue Service (the
"Service") and existing court decisions, any of which could be changed at any
time. Any such changes might be retroactive with respect to transactions entered
into prior to the date of such changes and could significantly modify the
opinions set forth above. Nevertheless, we undertake no responsibility to advise
you of any subsequent developments in the application, operation or
interpretation of the U.S. federal income tax laws.
Our opinions concerning certain of the U.S. federal tax
consequences of the Merger are limited to the specific U.S. federal tax
consequence presented above. No opinion is expressed as to any transaction other
than the Merger, including any transaction undertaken in connection with the
Merger. In addition, this opinion does not address any estate, gift, state,
3
<PAGE>
local or foreign tax consequences that may result from the Merger. In
particular, we express no opinion regarding: (i) the amount, existence, or
availability after the Merger, of any of the U.S. federal income tax attributes
of PURE ATRIA, RATIONAL or MERGER SUB; (ii) any transaction in which PURE ATRIA
Common Stock is acquired or RATIONAL Common Stock is disposed other than
pursuant to the Merger; (iii) the potential application of the "disqualifying
disposition" rules of Section 421 of the Code to dispositions of PURE ATRIA
Common Stock; (iv) the effects of the Merger and RATIONAL'S assumption of
outstanding options to acquire PURE ATRIA stock on the holders of such options
under any PURE ATRIA employee stock option or stock purchase plan, respectively;
(v) the effects of the Merger on any PURE ATRIA stock acquired by the holder
subject to the provision of Section 83(a) of the Code; (vi) the effects of the
Merger on any payment which is or may be subject to the provisions of ss. 280G
of the Code; and (vii) the application of the collapsible corporation provisions
of ss. 341 of the Code to PURE ATRIA, RATIONAL or MERGER SUB as a result of the
Merger.
In addition to the request for our opinion on this specific matter
of federal income tax law, you have been asked to review the discussion of
federal income tax issues contained in the Registration Statement. We have
reviewed the discussion entitled "Certain Federal Income Tax Consideration"
contained in the Registration Statement and believe that such information fairly
presents the current federal income tax law applicable to the Merger, and the
material tax consequences to RATIONAL, MERGER SUB, PURE ATRIA and PURE ATRIA's
shareholders as a result of the Merger.
No ruling has been or will be requested from the Service
concerning the U.S. federal income tax consequences of the Merger. In reviewing
this opinion, you should be aware that the opinion set forth above represents
our conclusions regarding the application of existing U.S. federal income tax
law to the instant transaction. If the facts vary from those relied upon
(including if any representations, covenant, warranty or assumption upon which
we have relied is inaccurate, incomplete, breached or ineffective), our opinions
contained herein could be inapplicable. You should be aware that an opinion of
counsel represents only counsel's best legal judgment, and has no binding effect
or official status of any kind, and that no assurance can be given that contrary
positions may not be taken by the Service or that a court considering the issues
would not hold otherwise.
This opinion is being delivered solely for the purpose of being
included as an exhibit to the Registration Statement; it may not be relied upon
or utilized for any other purpose (including, without limitation, satisfying any
conditions in the Agreement) or by any other person or entity, and may not be
made available to any other person or entity, without our prior written consent.
We do, however, consent to the use of this opinion as an exhibit to the
Registration
4
<PAGE>
Statement and to the use of our name in the Registration Statement wherever it
appears.
Very truly yours,
/s/ Fenwick & West LLP
--------------------------
FENWICK & WEST LLP
A LIMITED LIABILITY PARTNERSHIP INCLUDING
PROFESSIONAL CORPORATIONS
5
<PAGE>
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated April 22, 1997, included in the Prospectus/Joint Proxy
Statement of Rational Software Corporation that is made a part of the
Registration Statement (Form S-4) and Prospectus of Rational Software
Corporation for the registration of up to 42,500,000 shares of its common stock.
/s/ Ernst & Young LLP
San Jose, California
June 20, 1997
<PAGE>
Exhibit 23.02
INDEPENDENT AUDITORS' REPORT ON SCHEDULE AND CONSENT
The Board of Directors
Pure Atria Corporation:
The audits referred to in our report dated January 21, 1997, except as to Note
2, which is as of February 3, 1997, included the related financial statement
schedule as of December 31, 1996 and for each of the years in the three-year
period ended December 31, 1996, included in the registration statement. This
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on this financial statement schedule
based on our audits. In our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
We consent to the use of our reports included herein and the references to our
firm under the heading "Experts" in the Prospectus/Joint Proxy Statement.
/s/ KPMG PEAT MARWICK LLP
San Jose, California
June 20, 1997
<PAGE>
Exhibit 23.03
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of this Registration Statement on Form S-4 of Rational
Software Corporation of our report dated November 27, 1996 relating to the
financial statements of Integrity QA Software, Inc., for the period from
inception (November 1, 1995) through September 30, 1996, which appears on page
F-20 of Pure Atria Corporation's Registration Statement on Form S-4 (No.
333-19819) dated January 24, 1997, which is incorporated by reference in Pure
Atria Corporation's Current Report on Form 8-K dated January 31, 1997. We also
consent to the reference to us under the heading "Experts" in such Prospectus.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
San Jose, California
June 20, 1997
<PAGE>
EXHIBIT 99.1
[LOGO OF RATIONAL SOFTWARE CORPORATION APPEARS HERE]
June 27, 1997
Dear Stockholder:
As most of you are aware, Rational Software Corporation ("Rational") has
entered into an agreement providing for the merger of Pure Atria Corporation
("Pure Atria") with Rational in a strategic business combination (the
"Merger"). At our Special Meeting of Stockholders (the "Special Meeting") on
July 30, 1997, you will be asked to consider and vote upon the reservation and
issuance of shares of the Common Stock, par value $0.01 per share, of Rational
(the "Rational Common Stock") to the stockholders of Pure Atria pursuant to an
Agreement and Plan of Reorganization, dated as of April 7, 1997 (the
"Agreement"), by and among Rational, Pure Atria and Wings Merger Corporation,
a wholly owned subsidiary of Rational ("Merger Sub"), and upon an amendment to
Rational's Certificate of Incorporation increasing the authorized number of
shares of Common Stock from 75,000,000 to 150,000,000, which, among other
things, will provide Rational with a sufficient number of authorized but
unissued shares of Common Stock to consummate the Merger.
In the Merger, Merger Sub will be merged with and into Pure Atria, which
will be the surviving corporation and will become a wholly owned subsidiary of
Rational. As used herein, the term "Combined Company" means Rational and Pure
Atria and their respective subsidiaries as a consolidated entity following the
Merger.
Pursuant to the Merger, each outstanding share of Common Stock, par value
$0.0001 per share, of Pure Atria (the "Pure Atria Common Stock") will be
converted into the right to receive 0.9 (the "Exchange Ratio") shares of
Rational Common Stock, and each outstanding option or right to purchase Pure
Atria Common Stock under the Pure Atria stock option plans or the Pure Atria
stock purchase plan will be assumed by Rational and will become an option or
right to purchase Rational Common Stock, with appropriate adjustments to be
made to the number of shares issuable thereunder and the exercise price
thereof based on the Exchange Ratio. The shares of Rational Common Stock held
by Rational stockholders immediately prior to the Merger will remain unchanged
by the Merger.
Based upon the capitalization of Pure Atria as of the close of business on
March 31, 1997, an aggregate of approximately 38,542,000 shares of Rational
Common Stock will be issued to Pure Atria stockholders in the Merger and
Rational will assume options and rights to purchase Pure Atria Common Stock
for up to approximately 6,951,000 additional shares of Rational Common Stock.
Based upon the capitalization of Rational and Pure Atria as of the close of
business on March 31, 1997, immediately following the Merger, the former
securityholders of Pure Atria will hold approximately 45% of the Combined
Company's outstanding voting power, and approximately 45% of the Combined
Company's capital stock calculated on a fully diluted basis. The foregoing
numbers of shares and percentages are subject to change in the event that the
capitalization of either Rational or Pure Atria changes subsequent to March
31, 1997, and prior to the effective time of the Merger.
The proposals relating to the Merger are described more fully in the
accompanying Notice of Special Meeting of Stockholders and Prospectus/Joint
Proxy Statement.
After careful consideration, Rational's Board of Directors has determined
that the Merger is fair from a financial point of view to, and in the best
interests of Rational. Therefor, Rational's Board of Directors has approved
the Agreement and the transactions contemplated thereby by the unanimous vote
of all non-interested directors, and recommends that you vote FOR the
proposals relating to the Merger.
<PAGE>
In addition, Rational has retained the investment banking firm of Hambrecht &
Quist LLC ("Hambrecht & Quist") to advise it with respect to the consideration
to be paid by Rational in the Merger. Hambrecht & Quist has advised the Board
of Directors of Rational (the "Rational Board") that, in its opinion, the
consideration to be paid by Rational is fair from a financial point of view to
Rational. A copy of the Hambrecht & Quist opinion dated as of April 6, 1997 is
attached to the Prospectus/Joint Proxy Statement as Annex E.
The Rational Board believes the Merger offers Rational and its stockholders a
number of important benefits, including the strategic fit between the two
companies' product lines and their respective technologies, development,
managerial, sales and marketing resources, the potential ability of the
Combined Company to better serve customers with broader, more integrated
product offerings and the opportunity for enhanced stockholder value over the
long term.
All stockholders are invited to attend the Special Meeting in person. The
reservation and issuance of the shares of Rational Common Stock in connection
with the Merger requires the affirmative vote of the majority of the total
votes cast at the Special Meeting regarding such proposal. The amendment to
Rational's Certificate of Incorporation requires the affirmative vote of the
holders of a majority of the shares of Rational Common Stock outstanding as of
the record date. THE MERGER CANNOT BE CONSUMMATED UNLESS BOTH PROPOSALS ARE
APPROVED.
Stockholders are urged to review carefully the information contained in the
accompanying Prospectus/Joint Proxy Statement, including in particular the
information under the captions "Rational Special Meeting--Recommendation of the
Rational Board," "Proposal No. 1: The Merger--Risk Factors," "--Approval of the
Merger and Related Transactions--Joint Reasons for the Merger," and "--
Rational's Reasons for the Merger" prior to making any voting decision.
Whether or not you expect to attend the Special Meeting in person, please
complete, sign and promptly return the enclosed proxy card in the enclosed
postage-prepaid envelope to assure representation of your shares. You may
revoke your proxy at any time before it has been voted, and if you attend the
Special Meeting you may vote in person even if you have previously returned
your proxy card. Your prompt cooperation will be greatly appreciated.
Sincerely,
/s/ Paul D. Levy
Paul D. Levy
Chief Executive Officer
Santa Clara, California
YOUR PROXY IS IMPORTANT--PLEASE VOTE PROMPTLY
<PAGE>
EXHIBIT 99.2
PURE ATRIA
(LOGO)
June 27, 1997
Dear Stockholder:
As most of you are aware, Pure Atria Corporation ("Pure Atria") has entered
into a definitive merger agreement to combine with Rational Software
Corporation ("Rational") in a strategic business combination (the "Merger").
At our Special Meeting of Stockholders (the "Special Meeting") on July 30,
1997, you will be asked to consider and vote upon the adoption and approval of
the Agreement and Plan of Reorganization, dated as of April 7, 1997 (the
"Agreement"), by and among Rational, its wholly owned subsidiary, Wings Merger
Corporation ("Merger Sub"), and Pure Atria and the transactions contemplated
thereby.
In the Merger, Merger Sub will be merged with and into Pure Atria, which
will be the surviving corporation and will become a wholly owned subsidiary of
Rational. As used herein, the term "Combined Company" means Rational and Pure
Atria and their respective subsidiaries as a consolidated entity following the
Merger.
Pursuant to the Merger, each outstanding share of Common Stock, par value
$0.0001 per share, of Pure Atria (the "Pure Atria Common Stock") will be
converted into the right to receive 0.9 (the "Exchange Ratio") shares of
Common Stock, par value $0.01 per share, of Rational (the "Rational Common
Stock") and each outstanding option or right to purchase Pure Atria Common
Stock under the Pure Atria stock option plans or the Pure Atria stock purchase
plan will be assumed by Rational and will become an option or right to
purchase Rational Common Stock, with appropriate adjustments to be made to the
number of shares issuable thereunder and the exercise price thereof based on
the Exchange Ratio. The shares of Rational Common Stock held by Rational
stockholders immediately prior to the Merger will remain unchanged by the
Merger.
Based upon the capitalization of Pure Atria as of the close of business on
March 31, 1997, an aggregate of approximately 38,542,000 shares of Rational
Common Stock will be issued to Pure Atria stockholders in the Merger and
Rational will assume options and rights to purchase Pure Atria Common Stock
for up to approximately 6,951,000 additional shares of Rational Common Stock.
Based upon the capitalization of Rational and Pure Atria as of the close of
business on March 31, 1997, immediately following the Merger, the former
securityholders of Pure Atria will hold approximately 45% of the Combined
Company's outstanding voting power, and approximately 45% of the Combined
Company's capital stock calculated on a fully diluted basis. The foregoing
numbers of shares and percentages are subject to change in the event that the
capitalization of either Rational or Pure Atria changes subsequent to March
31, 1997, and prior to the effective time of the Merger.
The accompanying Prospectus/Joint Proxy Statement describes more fully the
proposal relating to the Merger.
After careful consideration, the Pure Atria Board of Directors has
determined that the Merger is fair from a financial point of view to, and in
the best interests of, Pure Atria and its stockholders. Therefore, Pure
Atria's Board of Directors has adopted and approved the Agreement and the
transactions contemplated thereby by unanimous vote, and recommends that you
vote FOR the adoption and approval of the Agreement and the transactions
contemplated thereby.
In addition, Pure Atria has retained the investment banking firm of Deutsche
Morgan Grenfell Inc. ("DMG") as its financial advisor in connection with the
Merger. DMG has delivered to the Pure Atria Board of Directors its opinion,
dated as of April 6, 1997, that, as of such date, the Exchange Ratio pursuant
to the Merger is fair from a financial point of view to the holders of Pure
Atria Common Stock. A copy of the DMG opinion is attached to the
Prospectus/Joint Proxy Statement as Annex F.
<PAGE>
The Board of Directors of Pure Atria believes the Merger offers Pure Atria
and its stockholders a number of important benefits, including the strategic
fit between the two companies' product lines and their respective
technologies, development, managerial, sales and marketing resources, the
potential ability of the Combined Company to better serve customers with
broader, more integrated product offerings, and the opportunity for enhanced
stockholder value over the long term.
All stockholders are invited to attend the Special Meeting in person. The
affirmative vote of holders of a majority of the shares of Pure Atria Common
Stock outstanding as of the record date is necessary for adoption and approval
of the Agreement and the transactions contemplated thereby.
Stockholders are urged to review carefully the information contained in the
accompanying Prospectus/Joint Proxy Statement, including in particular the
information under the captions "Pure Atria Special Meeting--Recommendation of
the Pure Atria Board," "Proposal No. 1: The Merger--Risk Factors," "--Approval
of the Merger and Related Transactions--Joint Reasons for the Merger," and "--
Pure Atria's Reasons for the Merger" prior to making any voting decision in
connection with their Pure Atria Common Stock.
Whether or not you expect to attend the Special Meeting in person, please
complete, sign and promptly return the enclosed proxy card in the enclosed
postage-prepaid envelope to assure representation of your shares. You may
revoke your proxy at any time before it has been voted, and if you attend the
Special Meeting you may vote in person even if you have previously returned
your proxy card. Your prompt cooperation will be greatly appreciated.
Sincerely,
Reed Hastings
President and Chief Executive
Officer
Cupertino, California
YOUR PROXY IS IMPORTANT--PLEASE VOTE PROMPTLY
PURE ATRIA STOCKHOLDERS SHOULD NOT SURRENDER OR OTHERWISE ATTEMPT TO
EXCHANGE THEIR PURE ATRIA STOCK CERTIFICATES FOR RATIONAL STOCK CERTIFICATES
UNLESS AND UNTIL THEY HAVE RECEIVED APPROPRIATE NOTICE AND INSTRUCTIONS FOR
EXCHANGE.
<PAGE>
EXHIBIT 99.3
RATIONAL SOFTWARE CORPORATION
2800 SAN TOMAS EXPRESSWAY
SANTA CLARA, CALIFORNIA 95051
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JULY 30, 1997
TO THE STOCKHOLDERS OF RATIONAL SOFTWARE CORPORATION:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the "Special
Meeting") of Rational Software Corporation, a Delaware corporation
("Rational"), will be held on July 30, 1997 at 11:30 a.m., local time, at 2800
San Tomas Expressway, Santa Clara, California.
At the Special Meeting you will be asked to consider and vote upon the
following matters:
(1) The reservation and issuance of shares of the Common Stock, par value
$0.01 per share, of Rational (the "Rational Common Stock") to the
stockholders of Pure Atria Corporation ("Pure Atria") pursuant to an
Agreement and Plan of Reorganization, dated as of April 7, 1997 (the
"Agreement"), by and among Rational, Pure Atria and Wings Merger
Corporation, a wholly owned subsidiary of Rational ("Merger Sub"),
providing, among other things, (i) for the merger of Merger Sub with and
into Pure Atria, resulting in Pure Atria becoming a wholly owned subsidiary
of Rational (the "Merger"), (ii) for the conversion of outstanding shares
of Common Stock, par value $.0001 per share, of Pure Atria ("Pure Atria
Common Stock") into the right to receive 0.9 (the "Exchange Ratio") shares
of Rational Common Stock, and (iii) for each outstanding option or right to
purchase Pure Atria Common Stock under the Pure Atria stock option plans
and the Pure Atria stock purchase plan to be assumed by Rational and to
become an option or right to purchase Rational Common Stock, with
appropriate adjustments to be made to the number of shares issuable
thereunder and the exercise price thereof based on the Exchange Ratio;
(2) To approve an amendment of Rational's Certificate of Incorporation to
increase the authorized number of shares of Common Stock from 75,000,000 to
150,000,000, which will, among other things, provide Rational with a
sufficient number of authorized but unissued shares of Common Stock to
consummate the Merger; and
(3) To transact such other business as may properly come before the
Special Meeting or any adjournment thereof.
Each proposal is described more fully in the accompanying Prospectus/Joint
Proxy Statement.
Stockholders of record at the close of business on June 17, 1997 are
entitled to notice of, and to vote at, the Special Meeting and any
adjournments or postponements thereof. All stockholders are cordially invited
to attend the Special Meeting in person.
By Order of the Board of Directors
Paul D. Levy
Chief Executive Officer
Santa Clara, California
June 27, 1997
WHETHER OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE,
DATE AND SIGN THE ENCLOSED PROXY CARD AND MAIL IT PROMPTLY IN THE ENCLOSED
ENVELOPE IN ORDER TO ASSURE REPRESENTATION OF YOUR SHARES. NO POSTAGE NEED BE
AFFIXED IF THE PROXY CARD IS MAILED IN THE UNITED STATES.
<PAGE>
EXHIBIT 99.4
PURE ATRIA CORPORATION
18880 HOMESTEAD ROAD
CUPERTINO, CA 95014
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JULY 30, 1997
TO THE STOCKHOLDERS OF PURE ATRIA CORPORATION:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the "Special
Meeting") of Pure Atria Corporation, a Delaware corporation ("Pure Atria"),
will be held at the offices of Fenwick & West LLP, Two Palo Alto Square, Palo
Alto, California 94306 on July 30, 1997, at 9:00 a.m., local time.
At the Special Meeting you will be asked to consider and vote upon the
following matters:
1. Approval and adoption of the Agreement and Plan of Reorganization (the
"Agreement"), dated as of April 7, 1997, by and among Rational Software
Corporation, a Delaware corporation ("Rational"), Wings Merger Corporation,
a Delaware corporation and wholly owned subsidiary of Rational ("Merger
Sub"), and Pure Atria and the transactions contemplated thereby.
2. Such other matters as may properly come before the Special Meeting or
any postponements or adjournments thereof.
The Agreement contemplates that (i) Merger Sub will be merged with and into
Pure Atria, with Pure Atria becoming the surviving corporation, thereby
becoming a wholly owned subsidiary of Rational (the "Merger"), (ii) each share
of Common Stock, $0.0001 par value per share, of Pure Atria ("Pure Atria
Common Stock"), will be converted into the right to receive, and become
exchangeable for, 0.9 (the "Exchange Ratio") shares of Common Stock, $0.01 par
value per share, of Rational ("Rational Common Stock") and (iii) each
outstanding option or right to purchase Pure Atria Common Stock will be
assumed by Rational and will become an option or right to purchase Rational
Common Stock, with appropriate adjustments to be made to the number of shares
issuable thereunder and the exercise price thereof based on the Exchange
Ratio.
The proposal relating to the Merger is described more fully in the
accompanying Prospectus/Joint Proxy Statement.
Stockholders of record as of the close of business on June 17, 1997 will be
entitled to notice of, and to vote at, the Special Meeting and any
adjournments or postponements thereof.
All stockholders are cordially invited to attend the Special Meeting in
person.
For the Board of Directors
Reed Hastings
President and Chief Executive
Officer
Cupertino, California
June 27, 1997
WHETHER OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE,
DATE AND SIGN THE ENCLOSED PROXY CARD AND MAIL IT PROMPTLY IN THE ENCLOSED
ENVELOPE IN ORDER TO ASSURE REPRESENTATION OF YOUR SHARES. NO POSTAGE NEED BE
AFFIXED IF THE PROXY CARD IS MAILED IN THE UNITED STATES.
<PAGE>
Exhibit 99.5
- --------------------------------------------------------------------------------
PROXY
RATIONAL SOFTWARE CORPORATION
SPECIAL MEETING OF STOCKHOLDERS
July 30, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned stockholder of Rational Software Corporation, a Delaware
corporation (the "Company"), hereby acknowledges receipt of the Notice of
Special Meeting of Stockholders and Prospectus/Joint Proxy Statement, each dated
June 30, 1997, and hereby appoints Paul D. Levy and Robert T. Bond, and each of
them, with full power of substitution, as Proxy or Proxies, to vote all shares
of the Common Stock of the undersigned at the Special Meeting of Stockholders of
the Company to be held on July 30, 1997, and at any adjournments thereof, upon
the proposals set forth on this form of proxy and described in the
Prospectus/Joint Proxy Statement, and in their discretion with respect to such
other matters as may be brought before the meeting or any adjournments thereof.
(Continued and to be signed on the other side)
- --------------------------------------------------------------------------------
[UP ARROW APPEARS HERE] FOLD AND DETACH HERE [UP ARROW APPEARS HERE]
<PAGE>
- --------------------------------------------------------------------------------
(1) To approve the reservation and issuance of shares of the Common Stock, par
value $0.01 per share, of Rational (the "Rational Common Stock") to the
stockholders of Pure Atria Corporation ("Pure Atria") pursuant to an
Agreement and Plan of Reorganization, dated April 7, 1997, by and among
Rational, Pure Atria and Wings Merger Corporation, a wholly owned subsidiary
of Rational ("Merger Sub"), providing, among other things, (i) for the
merger of Merger Sub with and into Pure Atria, resulting in Pure Atria
becoming a wholly owned subsidiary of Rational (the "Merger"), (ii) for the
conversion of outstanding shares of Common Stock, par value $.0001 per
share, of Pure Atria ("Pure Atria Common Stock") into the right to receive
0.9 (the "Exchange Ratio") shares of Rational Common Stock, and (iii) that
each outstanding option or right to purchase Pure Atria Common Stock under
the Pure Atria stock option plans and the Pure Atria stock purchase plan
will be assumed by Rational and will become an option or right to purchase
Rational Common Stock, with appropriate adjustments to be made to the number
of shares issuable thereunder and the exercise price thereof based on the
Exchange Ratio.
Please mark
your votes as
indicated in
this example [X]
FOR AGAINST ABSTAIN
[_] [_] [_]
(2) To approve the amendment and restatement of Rational's Certificate of
Incorporation to increase the authorized number of shares of Common Stock
from 75,000,000 to 150,000,000, which will, among other things, provide
Rational with a sufficient number of authorized but unissued shares of
Common Stock to consummate the Merger.
Please mark
your votes as
indicated in
this example [X]
FOR AGAINST ABSTAIN
[_] [_] [_]
THIS PROXY WILL BE VOTED AS DIRECTED OR IF NO DIRECTION IS INDICATED, WILL BE
VOTED FOR EACH OF THE PROPOSALS LISTED ABOVE, AND AS SAID PROXIES DEEM ADVISABLE
ON SUCH OTHER MATTERS AS MAY COME BEFORE THE MEETING
Either of such Proxies or substitutes shall have and may exercise all of the
powers of said Proxies hereunder.
Signatures(s) ________________________________________________ Date___________
(This proxy should be marked, dated, signed by the stockholder or stockholders
exactly as the stockholder's or stockholders' names appear hereon, and returned
promptly in the enclosed envelope. Persons signing in a fiduciary or
representative capacity should so indicate. If shares are held by joint tenants,
as community property or otherwise by more than one person, all should sign).
- --------------------------------------------------------------------------------
[UP ARROW APPEARS HERE] FOLD AND DETACH HERE [UP ARROW APPEARS HERE]
<PAGE>
Exhibit 99.6
- -------------------------------------------------------------------------------
PROXY
PURE ATRIA CORPORATION
18880 HOMESTEAD ROAD, CUPERTINO, CA 95014
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS
July 30, 1997
The undersigned hereby appoints W. Geoffrey Stein and Chuck Bay, and each of
them singly, proxies for the undersigned, with full power of attorney and power
of substitution to vote all shares of Common Stock which the undersigned is
entitled to vote at the Special Meeting of Stockholders (the "Meeting") of Pure
Atria Corporation, a Delaware corporation (the "Company"), to be held on July
30, 1997, at 9:00 A.M., and at any adjournment or postponement thereof, upon the
matters set forth in the Notice of Special Meeting of Stockholders and
accompanying Prospectus/Joint Proxy Statement, each dated June 27, 1997, receipt
of which is hereby acknowledged.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS. THIS PROXY WILL
BE VOTED AS SPECIFIED OR, WHERE NO DIRECTION IS GIVEN, WILL BE VOTED FOR THE
PROPOSAL IN ITEM 1. A VOTE TO TRANSACT SUCH OTHER BUSINESS AS MAY BE PROPERLY
TAKEN UNDER ITEM 2 WILL BE VOTED IN ACCORDANCE WITH THE JUDGMENT OF THE
PERSONS HEREINBEFORE NAMED AS ATTORNEYS.
STOCKHOLDERS WHO ATTEND THE SPECIAL MEETING OF STOCKHOLDERS MAY VOTE IN
PERSON EVEN THOUGH THEY HAVE PREVIOUSLY MAILED THIS PROXY. PLEASE DATE, SIGN
AND RETURN THIS PROXY PROMPTLY IN THE ENCLOSED PRE-PAID, PRE-ADDRESSED
ENVELOPE.
PLEASE VOTE AND SIGN ON OTHER SIDE AND RETURN PROMPTLY IN ENCLOSED ENVELOPE.
(Continued and to be signed on reverse side)
- -------------------------------------------------------------------------------
[UP ARROW APPEARS HERE] FOLD AND DETACH HERE [UP ARROW APPEARS HERE]
<PAGE>
- --------------------------------------------------------------------------------
(1) Approval and adoption of the Agreement and Plan of Reorganization dated as
of April 7, 1997, by and among Rational Software Corporation, a Delaware
corporation, Wings Merger Corporation, a Delaware corporation and wholly
owned subsidiary of Rational, and Pure Atria and the Certificate of Merger
and the Merger contemplated thereby.
Please mark
your votes as
indicated in
this example [X]
FOR AGAINST ABSTAIN
[_] [_] [_]
(2) Such other matters as may properly come before the Special Meeting or any
postponements or adjournments of the Special Meeting.
Please mark
your votes as
indicated in
this example [X]
FOR AGAINST ABSTAIN
[_] [_] [_]
MARK HERE
FOR ADDRESS
CHANGE AND
NOTE AT LEFT [_]
IMPORTANT: Please date this Proxy and sign exactly as your name(s) appear(s)
hereon. If stock is held jointly, each owner should sign. If signing as
attorney, executor, administrator, trustee, guardian or other fiduciary please
give your full title as such.
Signature(s) __________________________ Date _________________________________
- --------------------------------------------------------------------------------
[UP ARROW APPEARS HERE] FOLD AND DETACH HERE [UP ARROW APPEARS HERE]
