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As filed with the Securities and Exchange Commission on May 2, 2000
Registration No. 333-_____
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
Under
The Securities Act of 1933
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RATIONAL SOFTWARE CORPORATION
(Exact name of Registrant as specified in its charter)
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Delaware 54-1217099
(State or other jurisdiction of 18880 Homestead Road (I.R.S. Employer
incorporation or organization) Cupertino, California 95014 Identification Number)
(408) 863-9900
(Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices)
</TABLE>
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Michael T. Devlin
Chief Executive Officer
Rational Software Corporation
18880 Homestead Road
Cupertino, California 95014
(408) 863-9900
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
--------------------------
Copy to:
Katharine A. Martin, Esq.
Wilson Sonsini Goodrich & Rosati
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304
(415) 493-9300
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Approximate date of commencement of proposed sale to the public: From time to
time after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [_]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.[_] _______________
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, please check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.[_]______________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
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Calculation of Registration Fee
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Proposed Maximum Proposed Maximum
Title of Each Class of Securities Amount to be Offering Price Per Aggregate Offering Amount of
to be Registered Registered Security(1) Price(1) Registration Fee
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5% Convertible Subordinated Notes due 2007.... $500,000,000 100% $500,000,000 $132,000
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common stock, $0.01 par value................. (2) (2) (2) (2)
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(1) Includes 6,998,880 shares of common stock initially upon conversion of the
notes at the conversion price of $71.440 per share of common stock.
Pursuant to Rule 416 under the Securities Act, such number of shares of
common stock registered hereby shall include an indeterminate number of
shares of common stock that may be issued in connection with a stock split,
stock dividend, recapitalization or similar event.
(2) Pursuant to Rule 457(i), there is no additional filing fee with respect to
the shares of common stock issuable upon conversion of the notes because no
additional consideration will be received in connection with the exercise
of the conversion privilege.
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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 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MAY 2, 2000
RATIONAL SOFTWARE CORPORATION
$500,000,000
5% Convertible Subordinated Notes Due 2007 and
the Common Stock Issuable Upon Conversion of the Notes
We issued the notes in a private placement in January 2000. This
prospectus will be used by selling securityholders to resell their notes and the
common stock issuable upon conversion of their notes.
The notes are convertible prior to maturity into common stock at an initial
conversion price of $71.44 per share, subject to adjustment in certain events.
We will pay interest on the notes on February 1 and August 1 of each year,
beginning on August 1, 2000. The notes will mature on February 1, 2007, unless
earlier converted or redeemed.
We may redeem all or a portion of the notes on or after February 5, 2003.
In addition, the holders may require us to repurchase the notes upon a change of
control prior to February 1, 2007.
The reported last sales price of our common stock on the Nasdaq National
Market on March 31, 2000 was $76.50 per share. Our common stock is traded on
the Nasdaq National Market under the symbol "RATL."
-----------------------
The securities offered hereby involve a high degree of risk. See "Risk
Factors" beginning on page 6.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
This prospectus is dated
<PAGE>
You should rely only on the information contained in or incorporated by
reference in this prospectus. We have not authorized anyone to provide you with
different information. We are not making an offer of these securities in any
state where the offer is not permitted. You should not assume that the
information contained in or incorporated by reference in this prospectus
supplement or the prospectus is accurate as of any date other than the date on
the front of this prospectus.
TABLE OF CONTENTS
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Where You Can Find More Information......... 3
The Offering................................ 5
Risk Factors................................ 6
Use Of Proceeds............................. 16
Description Of Notes........................ 17
Description Of Capital Stock................ 29
Certain Federal Income Tax Considerations... 31
Selling Securityholders..................... 38
Plan Of Distribution........................ 49
Legal Matters............................... 50
Independent Accountants..................... 51
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Where You Can Find More Information
We file reports, proxy statements and other information with the
Commission, in accordance with the Securities Exchange Act of 1934. You may
read and copy our reports, proxy statements and other information filed by us at
the public reference facilities of the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's Regional
Offices; 7 World Trade Center, 13th Floor, New York, New York 10048. Copies of
such materials can be obtained at prescribed rates from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549.
Please call the Commission at 1-800-SEC-0330 for further information about the
public reference rooms. Our reports, proxy statements and other information
filed with the Commission are available to the public over the Internet at the
Commission's World Wide Web site at http://www.sec.gov.
The Commission allows us to "incorporate by reference" into this prospectus
the information we filed with the Commission. This means that we can disclose
important information by referring you to those documents. The information
incorporated by reference is considered to be a part of this prospectus.
Information that we file later with the Commission will automatically update and
supersede this information. We incorporate by reference the documents listed
below and any future filings made by us with the Commission under Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act until our offering is complete:
. Our Annual Report on Form 10-K for the fiscal year ended March 31, 2000;
. Our Registration Statement on Form 8-A dated May 25, 1984, and amended
on Form 8-A/A, dated May 25, 1995.
You may request a copy of these filings, at no cost, by writing or
telephoning us at the following address:
Investor Relations Department
Rational Software Corporation
18880 Homestead Road
Cupertino, California 95014-6421
Telephone: (408) 863-9900
You should rely only on the information incorporated by reference or
provided in this prospectus. We have not authorized anyone else to provide you
with different information. We are not making an offer of these securities in
any state where the offer is not permitted. You should not assume the
information in this prospectus is accurate as of any date other than the date on
the front of those documents.
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<PAGE>
Summary
This summary highlights some information from this prospectus, and it may
not contain all of the information that is important to you. It is qualified in
its entirety by the more detailed information and consolidated financial
statements, including the notes to the consolidated financial statements,
included or incorporated by reference in this prospectus. You should read the
full text of, and consider carefully the more specific details contained in,
this prospectus. When used on this prospectus, the terms "Rational," "we,"
"our" and "us" refer to Rational Software Corporation and not to the selling
securityholders.
Rational Software Corporation is a leading provider of integrated solutions
that automate the software development process. Our integrated solutions
include unified tools, software engineering best practices and services that
allow customers to successfully and efficiently develop and deploy software.
Rational's solutions help customers organize, automate and simplify the software
development process and enable them to gain a competitive advantage by being
able to more quickly develop and deploy high-quality, mission-critical software.
The focus of out business is e-development, that is, helping customer rapidly
develop high-quality software for the Internet-connected global economy.
Our customers include e-business customers, such as Charles Schwab & Co.,
E*Trade, i2 Technologies, Merrill Lynch and Siebel Systems, that are leveraging
the power of the Internet to improve their businesses by building business-to-
business and/or business-to-consumer software; e-infrastructure companies, such
as America Online, Cisco, Ericsson, IBM, Lucent, Microsoft, and Sun
Microsystems, that are building the physical and software infrastructure for the
Internet; and e-devices customers, such as Hewlett-Packard, Motorola, Nokia,
Palm, Phillips and Sony, that are building devices with embedded software that
provide connectivity to the Internet and other specialized networks.
The rapid growth of the Internet is driving the need for software and
increasing the importance of software development. Software plays a central
role in the development of e-commerce Web sites and related systems and is
embedded in physical devices on which the Internet is built, including routers,
hubs and switches, as well as everyday devices such as mobile phones, hand-held
computing devices and kitchen appliances. The challenge many companies face is
that the significant growth in the demand for software outpaces their ability to
design and build that software. Traditionally, organizations have been able to
trade off speed for quality. However, in today's Internet-centric, rapidly
changing business environment, organizations must increase the speed while
maintaining the quality of their software development. Accordingly, it is
becoming increasingly important for businesses to adopt more effective
approaches to software development.
Our integrated e-development solution includes software development tools,
software engineering best practices and services that unify cross-functional
software teams while also addressing the unique needs of each member of the
team. Our solution cover the crucial phases of the software development life
cycle and automates proven software development best practices. We also offer a
range of services to our customers to help them better implement our solution.
Our goal is to help organizations increase both the speed and quality of their
software development.
We were incorporated in Delaware in 1982. Our principal offices are
located at 18880 Homestead Road , Cupertino, California 95014, our telephone
number is (408) 863-9900 and our website can be accessed at www.rational.com.
Information contained in our website does not constitute part of this
prospectus.
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The Offering
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Securities Offered................... $500,000,000 principal amount of 5% Convertible Subordinated Notes
due 2007.
Interest............................. 5% per year. We will pay interest on February 1 and August 1 of
each year, beginning August 1, 2000.
Conversion........................... You may convert each note into common stock at any time on or before
February 1, 2007 at a conversion price of $71.44 per share, subject
to adjustment if certain events affecting our common stock occur.
Subordination........................ The notes are subordinated to all senior indebtedness and to all
debt and other liabilities of our subsidiaries. As of March 31,
2000, we had $150,545,000 senior indebtedness outstanding. As
of March 31, 2000, our subsidiaries had approximately $66,412,000
of indebtedness and other liabilities to which the notes
were effectively subordinated. Neither we nor our subsidiaries are
limited from incurring additional debt, including senior
indebtedness, under the indenture.
Optional Redemption.................. On or after February 5, 2003, we may redeem the notes at the
redemption prices listed in this prospectus, together with accrued
and unpaid interest.
Change of Control.................... You have the right, at your option, in the event of a change of
control to require us to redeem your notes at 100% of the principal
amount of the notes to be redeemed plus accrued interest.
Use Of Proceeds...................... We will not receive any of the proceeds from the sale by any selling
securityholder of the notes or the underlying common stock.
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RISK FACTORS
Before you invest in the notes or shares of common stock underlying the
notes, you should be aware of various risks, including those described below.
You should carefully consider these risk factors, together with all of the other
information included or incorporated by reference in this prospectus, before you
decide whether to purchase the notes. The risks set out below are not the only
risks we face.
If any of the following risks occur, our business, financial condition and
results of operations could be materially adversely affected. In such case, the
trading price of the notes and common stock could decline, and you may lose all
or part of your investment.
Keep these risk factors in mind when you read "forward-looking" statements
elsewhere in this prospectus and in the documents incorporated herein by
reference. These are statements that relate to our expectations for future
events and time periods. Generally, the words "anticipate," "expect," "intend"
and similar expressions identify forward-looking statements. Forward-looking
statements involve risks and uncertainties, and future events and circumstances
could differ significantly from those anticipated in the forward-looking
statements.
Significant unanticipated fluctuations in our quarterly revenues and operating
results may cause us not to meet securities analysts' or investors' expectations
and may result in a decline in the price of our common stock and the notes.
Our net revenue and operating results are difficult to predict and may
fluctuate significantly from quarter to quarter. If our revenues, operating
results, earnings or future projections are below the levels expected by
securities analysts, our stock price is likely to decline.
Factors that may cause quarterly fluctuations in our operating results
include:
. the discretionary nature of our customers' purchase and budget cycles;
. difficulty predicting the size and timing of customer orders;
. long sales cycles;
. seasonal variations in operating results;
. introduction or enhancement of our products or our competitors'
products;
. changes in our pricing policies or the pricing policies of our
competitors;
. an increase in our operating costs;
. whether we are able to expand our sales and marketing programs;
. the mix of our products and services sold;
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. the level of sales incentives for our direct sales force;
. the mix of sales channels through which our products and services are
sold;
. the mix of our domestic and international sales;
. an increase in the level of our product returns;
. fluctuations in foreign currency exchange rates;
. costs associated with acquisitions; and
. global economic conditions.
In addition, the timing of our product revenues is difficult to predict
because our sales cycles vary substantially from product to product and customer
to customer. We base our operating expenses on our expectations regarding
future revenue levels. As a result, if total revenues for a particular quarter
are below our expectations, we could not proportionately reduce operating
expenses for that quarter. Therefore, a revenue shortfall would have a
disproportionate effect on our operating results for that quarter. In addition,
because our service revenue is largely correlated with our license revenue, a
decline in license revenue could also cause a decline in our service revenue in
the same quarter or subsequent quarters.
As a result of these and other factors, our operating results are subject
to significant variation from quarter to quarter, and we believe that period-to-
period comparisons of our results of operations are not necessarily useful. If
our operating results are below investors or securities analysts' expectations,
the price of our common stock, and therefore the notes could decline
significantly.
If market acceptance of our sophisticated software development tools fails to
grow adequately, our business may suffer.
Our future growth and financial performance will depend in part on broad
market acceptance of off-the-shelf products that address critical elements of
the software development process. Currently the number of software developers
using our products is relatively small compared with the number of developers
using more traditional technology and products, internally developed tools or
manual approaches. Potential customers may be unwilling to make the significant
capital investment needed to purchase our products and retrain their software
developers to build software using our products rather than traditional
techniques. Many of our customers have purchased only small quantities of the
our products, and these or new customers may decide not to broadly implement or
purchase additional units of our products.
If industry standards relating to our business do not gain general acceptance,
we may be unable to continue to develop and market our products and our business
may suffer.
Our future growth and financial performance depends on the development of
industry standards that facilitate the adoption of component-based development,
as well as our ability to play a leading role in the establishment of those
standards. For example, we developed the Unified Modeling Language for visual
modeling, which was adopted by the Object Management Group, or OMG, a software
industry consortium,
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for inclusion in its object analysis and design facility specification. The
official sanction in the future of a competing standard by the OMG or the
promulgation of a competing standard by one or more major platform vendors could
harm our marketing and sales efforts and, in turn, our business.
If we do not develop and enhance new and existing products to keep pace with
technological, market and industry changes, our revenues may decline.
The industry for tools automating software application development and
management is characterized by rapid technological advances, changes in customer
requirements and frequent new product introductions and enhancements. If we
fail to anticipate or respond adequately to technology developments, industry
standards or practices and customer requirements, or if we experience any
significant delays in product development, introduction or integration, our
products may become obsolete or unmarketable, our ability to compete may be
impaired and our revenues may decline. We must respond rapidly to developments
related to Internet and intranet applications, hardware platforms, operating
systems and programming languages. These developments will require us to make
substantial product-development investments.
In addition, rapid growth of, interest in, and use of Internet and intranet
environments is a recent and emerging phenomenon. Our success may depend, in
part, on the compatibility of our products with Internet and intranet
applications. We may fail to effectively adapt our products for use in Internet
or intranet environments, or to produce competitive Internet and intranet
applications.
If we do not effectively compete with new and existing competitors, our revenues
and operating margins will decline.
The industry for tools that automate software development and management is
extremely competitive and rapidly changing. We expect competition to intensify
in the future. We believe our continued success will become increasingly
dependent on our ability to:
. support multiple platforms, including Microsoft Windows and Windows NT,
IBM, commercial Unix and Linux;
. use the latest technologies to support Web-based development of
business-critical applications;
. develop and market a broader line of products for programming languages
such as C++, Visual Basic, Java, Visual Java++ and Java Beans; and
. continually support the rapidly changing standards and technologies used
in the development of Web-based applications as well as off-the-shelf
products.
We face intense competition for each of our products, generally from both
Windows and UNIX vendors. Because individual product sales often lead to a
broader customer relationship, each of our products must be able to successfully
compete with numerous competitors' offerings. Many of our competitors or
potential competitors are much larger than us and may have significantly more
resources and more experience. Moreover, many of our strategic partners compete
with each other and this may adversely impact our relationship with an
individual partner or a number of partners.
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The recent formation of catapulse, a new Internet company, by our founders could
divert the attention of our management away from our business and affairs and
create potential conflicts of interest.
On December 3, 1999, we closed a $50,000,000 investment in the Series A
Preferred Stock of catapulse, founded by Paul Levy and Mike Devlin. As of
March 31, 2000, after taking into account additional investments by third
parties in catapulse, our Series A Preferred Stock represented approximately 40%
of the voting power of the outstanding capital stock of this entity. Paul Levy
serves as its Chief Executive Officer and Mike Devlin serves as the Vice-
Chairman of the board of directors. catapulse's board of directors is made up
of five directors. Rational has the right to designate two of the members of
its board of directors. As of the date hereof, four of its board of directors
also serve on our board of directors. Paul Levy and Mike Devlin will continue
in their roles as our Chairman of the Board and Chief Executive Officer,
respectively. catapulse is a business-to-business application service provider
that will focus on developing a portal to meet the needs of the global community
of software professionals. catapulse also intends to develop an electronic
marketplace for products and services relating to software development and
intends to develop and deploy a hosted development service for Internet software
development. Rational and catapulse intend to enter into a strategic business
relationship on terms negotiated at arms-length. This strategic relationship
could give rise to conflicts of interest involving the two companies and the
founders in the future. In addition, catapulse could divert the attention of
Paul Levy and Mike Devlin away from the business and affairs of Rational.
If we are unable to manage our growth, our business will suffer.
We have experienced rapid growth in recent years. This growth has placed a
significant strain on our financial, operational, management, marketing and
sales systems and resources. If we are unable to effectively manage growth, our
business, competitive position, results of operations and financial condition
could suffer.
To achieve and manage continued growth, we must continue to expand and
upgrade our information-technology infrastructure and its scalability, including
improvements to various operations, financial, and management information
systems, and expand, train and manage our workforce. We may not be successful
in implementing these initiatives effectively and in a timely fashion.
Our international operations expose us to greater management, collections,
currency, intellectual property, regulatory and other risks.
International sales accounted for approximately 41% of our revenues in
fiscal 2000, 40% in 1999, and 34% in 1998. We expect that international sales
will continue to account for a significant portion of our revenues in future
periods. Our business would be harmed if our international operations
experienced a material downturn. In addition, international sales are subject
to inherent risks, including:
. unexpected changes in regulatory requirements and tariffs;
. unexpected changes in global economic conditions;
. difficulties in staffing and managing foreign operations;
. longer payment cycles;
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. 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 some markets;
. lack of acceptance of localized products in international markets; and
. the effects of high local wage scales and other expenses.
Our international sales are generally transacted through our international
sales subsidiaries. The revenues generated by these subsidiaries, as well as
their local expenses, are generally denominated in local currencies.
Accordingly, the functional currency of each international sales subsidiary is
the local currency. We have engaged in limited hedging activities to protect us
against losses arising from remeasuring assets and liabilities denominated in
currencies other than the functional currency of the related subsidiary. We are
also exposed to foreign exchange rate fluctuations as the financial results of
international subsidiaries are translated into U.S. dollars in consolidation.
As exchange rates vary, these results, when translated, may vary from
expectations and adversely impact our overall expected profitability. We
currently do not hedge against this exposure. Fluctuations in foreign
currencies could harm our financial condition and operating results.
We are subject to risks associated with the European monetary conversion.
In January 1999, the new "Euro" currency was introduced in certain European
countries that are part of the European Monetary Union, or EMU. During 2002,
all EMU countries are expected to begin operating with the Euro as their single
currency. A significant amount of uncertainty exists as to the effect the Euro
will have on the marketplace generally and, additionally, all of the final rules
and regulations have not yet been defined and finalized by the European
Commission with regard to the Euro currency. We are currently assessing the
effect the introduction of the Euro will have on internal accounting systems and
the sales of products. We are not aware of any material operational issues or
costs associated with preparing internal systems for the Euro. However, we do
utilize third-party vendor equipment and software products that may or may not
be EMU-compliant. The failure of any critical components to operate properly
after introduction of the Euro may harm our business or results of operations or
require additional costs to remedy these problems.
If we lose key personnel or cannot hire enough qualified personnel, our ability
to manage our business, develop new products and increase our revenues will
suffer.
We believe that the hiring and retaining of qualified individuals at all
levels in our organization will be essential to our ability to sustain and
manage growth successfully. Competition for highly qualified technical
personnel is intense and we may not be successful in attracting and retaining
the necessary personnel, which may limit the rate at which we can develop
products and generate sales. We will be particularly dependent on the efforts
and abilities of our senior management personnel. The departure of any of our
senior management members or other key personnel could harm our business.
Merger activities can be
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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.
If we fail to maintain and expand our distribution channels, our business will
suffer.
We currently distribute our products primarily through field sales
personnel teamed with highly trained technical support personnel as well as
through our telesales organizations, our Web site and indirectly through
channels such as value-added resellers and distributors. Our ability to achieve
revenue growth in the future will depend in large part on our success in
expanding our direct sales force and in maintaining a high level of technical
consulting, training and customer support.
We depend on strategic relationships and business alliances for continued growth
of our business.
Our development, marketing and distribution strategies rely increasingly on
our ability to form long-term strategic relationships with major software and
hardware vendors, many of whom are substantially larger than us. 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 on the continued cooperation of each party
with us. Merger activity, such as the acquisition of ObjecTime Ltd., may
disrupt these relationships or activities, and some companies may reassess the
value of their relationship with us as a result of this merger activity.
Divergence in strategy or change in focus by or competitive product offerings
by, any of these companies may interfere with our ability to develop, market,
sell, or support our products, which in turn could harm our business. In
addition, one or more of these companies may use the information they gain from
their relationship with us to develop or market competing products.
Our products could contain software defects that could reduce our revenues and
make it more difficult for us to achieve market acceptance of our products.
Software products as complex as those sold by us often contain undetected
errors, or "bugs," or performance problems. These defects are most frequently
found during the period immediately following the introduction of new products
or enhancements to existing products. Despite extensive product testing prior
to introduction, our products have in the past contained software errors that
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 our products could result in loss
of revenues or delays in market acceptance, which could harm our business.
Further, because we rely on our own products in connection with the development
of our software, these errors may make it more difficult to sell our products in
the future.
It we fail to adequately protect our intellectual property rights, competitors
may use our technology and trademarks, which could weaken our competitive
position, reduce our revenues and increase our costs.
We rely on a combination of copyright, trademark, patent, and trade-secret
laws, employee and third-party nondisclosure agreements and other arrangements
to protect our proprietary rights. Despite these precautions, it may be
possible for unauthorized third parties to copy our products or obtain and use
information that we regard as proprietary to create products that compete
against ours. In addition, some license provisions protecting against
unauthorized use, copying, transfer, and disclosure of our licensed programs may
be unenforceable under the laws of certain jurisdictions and foreign countries.
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In addition, the laws of some countries do not protect proprietary rights
to the same extent as do the laws of the United States. To the extent that we
increase our international activities, our exposure to unauthorized copying and
use of our 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 that would relate to our products.
We rely on software licensed from third parties that is used in our products.
We also rely on some software that we license from third parties, including
software that is integrated with internally developed software and used in our
products to perform key functions. These third-party software licenses may not
be available to us on commercially reasonable terms or at all. Further, the
software may not be appropriately supported, maintained or enhanced by the
licensors. The loss of licenses to or the inability to support, maintain and
enhance any of this software could result in increased costs or in delays or
reductions in our product shipments until equivalent software could be
developed, identified, licensed and integrated.
Third parties could assert that our software products and services infringe
their intellectual property rights, which could expose us to increased costs and
litigation.
We expect that we 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. Third parties may assert infringement
claims against us in the future and their claims may or may not be successful.
We could incur substantial costs in defending ourselves and our customers
against their claims. Parties making their claims may be able to obtain
injunctive or other equitable relief that could effectively block our ability to
sell our products in the United States and abroad and could result in an award
of substantial damages against us. In the event of a claim of infringement, we
may be required to obtain one or more licenses from third parties. We cannot be
sure that we can obtain necessary licenses from third parties at a reasonable
cost or at all. Defense of any lawsuit or failure to obtain any required
license could delay shipment of our products and increase our costs.
Year 2000 issues could negatively affect our business.
Although to date we have not experienced any material problems attributable
to the year 2000 problem with respect to our software products and internal
systems, it is possible that our current products could contain undetected
errors or defects associated with year 2000 date functions that may result in
material costs or liabilities to us in the future. Moreover, our software
directly and indirectly interacts with a large number of third party hardware
and software systems, each of which may contain or introduce undetected errors
or defects. We are unable to predict to what extent our business may be
affected if our software or the systems that operate in conjunction with our
software experience a material year 2000 related failure. Any year 2000 defect
in our products or the software and hardware systems with which our products
operate, as well as any year 2000 errors caused by older non-current products
that were not upgraded by our customers, could expose us to litigation that
could require us to incur significant costs in defending the litigation or
expose us to the risk of significant damages. The risks of this litigation may
be particularly acute due to the mission-critical applications for which our
products are used.
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Promotional product versions may adversely impact our actual product sales.
Our marketing strategy relies in part on making elements of our technology
available for no charge or at a very low price, either directly or by
incorporating these elements into products offered by third parties, such as
Microsoft, with whom we have strategic alliances. This strategy is designed to
expose our products to a broader customer base than our historical customer base
and to encourage potential customers to purchase an upgrade or other higher-
priced product from us. We may not be able to introduce enhancements to our
full-price products or versions of our products with intermediate functionality
at a rate necessary to adequately differentiate them from the promotional
versions, particularly in cases where our partners are distributing versions of
our products with other desirable features, which could reduce sales of our
products.
If we cannot successfully integrate our past and future acquisitions and achieve
intended financial or strategic benefits, our revenues may decline and our
expenses may increase.
We have acquired a number of businesses, technologies and products, most
recently in January 2000. If we fail to achieve the intended financial or
strategic benefits of past and future acquisitions, our operating results will
suffer. Acquisitions entail numerous risks, including:
. difficulty with the assimilation of acquired operations and products;
. failure to achieve targeted synergies;
. inability to retain key employees of the acquired companies;
. loss of key business relationships of the acquired company; and
. diversion of the attention of our management team.
In addition, if we undertake future acquisitions, we may issue dilutive
securities, assume or incur additional debt obligations, incur large one-time
expenses or acquire intangible assets that would result in significant future
amortization expense. Any of these events could harm our business.
Substantial leverage and debt service obligations may adversely affect our cash
flow.
We will have substantial amounts of outstanding indebtedness, primarily the
notes, upon the completion of this offering. As a result of this indebtedness,
our principal and interest payment obligations will increase substantially.
There is the possibility that we may be unable to generate cash sufficient to
pay the principal of, interest on and other amounts due in respect of our
indebtedness when due. We may also add additional equipment loans and lease
lines to finance capital expenditures and may obtain additional long term debt,
working capital lines of credit and lease lines.
Our substantial leverage could have significant negative consequences,
including:
. increasing our vulnerability to general adverse economic and industry
conditions;
. limiting our ability to obtain additional financing;
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. requiring the dedication of a substantial portion of our expected cash
flow from operations to service our indebtedness, thereby reducing the
amount of our expected cash flow available for other purposes, including
capital expenditures;
. limiting our flexibility in planning for, or reacting to, changes in our
business and the industry in which we compete; and
. placing us at a possible competitive disadvantage relative to less
leveraged competitors and competitors that have better access to capital
resources.
The notes will rank below our existing and future senior debt, and we may be
unable to repay our obligations under the notes.
The notes will be unsecured and subordinated in right of payment to all of
our existing and future senior debt. Because the notes are subordinate to our
senior debt, if we experience:
. a bankruptcy, liquidation or reorganization;
. an acceleration of the notes due to an event of default under the
indenture; or
. other specified events;
we will be permitted to make payments on the notes only after we have satisfied
all of our senior debt obligations. Therefore, we may not have sufficient
assets remaining to pay amounts due on any or all of the notes. In addition,
the notes effectively will be subordinate to all liabilities, including trade
payables, of our subsidiaries and any subsidiaries that we may in the future
acquire or establish. Consequently, our right to receive assets of any
subsidiaries upon their liquidation or reorganization, and the rights of the
holders of the notes to share in those assets, would be subordinate to the
claims of the subsidiaries' creditors.
The notes will be our obligations exclusively. The indenture for the notes
does not limit our ability, or that of any of our presently existing or future
subsidiaries, to incur senior debt, other indebtedness and other liabilities.
We may have difficulty paying what we owe under the notes if we, or any of our
subsidiaries, incur additional indebtedness or other liabilities. As of
March 31, 2000, we had approximately $151 million of senior debt outstanding,
and our subsidiaries had approximately $66 million of outstanding indebtedness
and other liabilities (excluding intercompany liabilities). From time to time
we and our subsidiaries may incur additional indebtedness, including senior
debt, which could adversely affect our ability to pay our obligations under the
notes.
We may be unable to repay or repurchase the notes.
At maturity, the entire outstanding principal amount of the notes will
become due and payable. In addition, if we experience a change in control, as
defined in "Description of the Notes--Repurchase at Option of Holders Upon a
Change in Control", each holder of the notes may require us to repurchase all or
a portion of that holder's notes. At maturity or if a change in control occurs,
we may not have sufficient funds or may be unable to arrange for additional
financing to pay the principal amount or repurchase price due. Under the terms
of the indenture for the notes, we may elect, if we meet certain conditions, to
pay the repurchase price
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with shares of common stock. Any future borrowing arrangements or agreements
relating to senior debt to which we become a party may contain restrictions on,
or prohibitions against, our repayments or repurchases of the notes. If the
maturity date or change in control occurs at a time when our other arrangements
prohibit us from repaying or repurchasing the notes, we could try to obtain the
consent of the lenders under those arrangements, or we could attempt to
refinance the borrowings that contain the restrictions. If we do not obtain the
necessary consents or refinance these borrowings, we will be unable to repay or
repurchase the notes. In that case, our failure to repurchase any tendered notes
or repay the notes due upon maturity would constitute an event of default under
the indenture. Any such default, in turn, may cause a default under the terms of
our senior debt. As a result, in those circumstances, the subordination
provisions of the indenture would, absent a waiver, prohibit any repayment or
repurchase of the notes until we pay the senior debt in full.
The price of our common stock and therefore the price of our notes may fluctuate
significantly, which may result in losses for investors.
The market price for our common stock may be volatile. We expect our stock
price to be subject to fluctuations as a result of a variety of factors,
including factors beyond our control. These include:
. actual or anticipated variations in our quarterly operating results;
. announcements of technological innovations or new products or services
by us or our competitors;
. announcements relating to strategic relationships or acquisitions;
. changes in earnings estimates by securities' analysts;
. statements by securities' analysts regarding our announced acquisitions;
. conditions or trends in the software industry; and
. changes in the economic performance and/or market valuations of other
software and high-technology companies.
Because of the volatility, we may fail to meet the expectations of our
stockholders or of securities analysts at some time in the future, and our stock
price, and therefore the price of our notes, could decline as a result.
There may be no public market for the notes, and there may be restrictions on
resale of the notes.
Prior to this offering, there has been no trading market for the notes.
Although the Initial Purchasers have advised us that they currently intend to
make a market in the notes, they are not obligated to do so and may discontinue
their market-making activities at any time without notice. Consequently, we
cannot ensure that any market for the notes will develop, or if one does
develop, that it will continue for any period of time. If an active market for
the notes fails to develop or continue, this failure could harm the trading
price of the notes. We do not intend to apply for listing of the notes on any
securities exchange or any automated quotation system.
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We have not registered the notes and the common stock issuable upon
conversion of the notes under the Securities Act. They are not transferable
except upon satisfaction of the conditions described under "Notice to
Investors". Although we have agreed to use our reasonable efforts to have the
SEC declare effective a shelf registration statement covering the notes and the
common issuable upon conversion of the notes within 180 days after we issue the
notes, we may not be able to have the registration statement declared effective
within that time period, or at all.
USE OF PROCEEDS
We will not receive any proceeds from the sale by any selling
securityholder of the notes or the underlying common stock.
Ratio Of Earnings To Fixed Charges
The ratio of earnings to fixed charges for each of the periods indicated is
as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
---------------------------------------------------------------------------
March 31, March 31, March 31, March 31, March 31,
1996 1997 1998 1999 2000
---------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges..... N/A N/A N/A 26.0x 29.05x
</TABLE>
These computations include us and our consolidated subsidiaries. For these
ratios, "earnings" represents income before taxes plus fixed charges (excluding
capitalized interest net of amortization). "Fixed charges" consists of:
. interest expense plus the portion of rent expense under operating leases
deemed by us to be representative of the interest factor, and
. amortization of debt issuance costs.
Rational would have had to generate additional earnings of $.7, $42.8, and
$28.8 million for the years ended March 31, 1996, 1997 and 1998, respectively to
achieve a ratio of 1:1.
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<PAGE>
DESCRIPTION OF NOTES
The notes were issued under an indenture dated as of January 27, 2000,
between Rational and State Street Bank and Trust Company of California, N.A., as
trustee. A copy of the indenture and the registration rights agreement have
been filed as an exhibit to this registration statement.
The following description is a summary of the material provisions of the
notes and the indenture. It does not purport to be complete. This summary is
subject to and is qualified by reference to all the provisions of the indenture,
including the definitions of certain terms used in the indenture. Wherever
particular provisions or defined terms of the indenture or form of note are
referred to, these provisions or defined terms are incorporated in this
prospectus by reference.
As used in this "Description of Notes" section, references to "Rational,"
"we," "our" or "us" refer solely to Rational Software Corporation and not its
subsidiaries.
General
We issued $500,000,000 of notes in a private placement in January 2000.
The notes are general unsecured obligations of Rational. Our payment
obligations under the notes are subordinated to our senior indebtedness as
described under "--Subordination of Notes." The notes are convertible into
common stock as described under "--Conversion of Notes." The notes were issued
in denominations of $1,000 and multiples of $1,000. The notes will mature on
February 1, 2007 unless earlier converted, redeemed at our option or redeemed at
your option upon a change of control.
We are not subject to any financial covenants under the indenture. In
addition, we are not restricted under the indenture from paying dividends,
incurring debt, including senior indebtedness, or issuing or repurchasing our
securities.
The interest rate on the notes is 5% per year. We will pay interest on
February 1 and August 1 of each year, beginning August 1, 2000 to record holders
at the close of business on the preceding January 15 and July 15, as the case
may be, except:
. interest payable upon redemption will be paid to the person to whom
principal is payable, unless the redemption date is an interest payment
date; and
. as set forth in the next sentence.
In case you convert your note into common stock during the period after any
record date but prior to the next interest payment date either:
. we will not be required to pay interest on the interest payment date if
the note has been called for redemption on a redemption date that occurs
during this period; or
. we will not be required to pay interest on the interest payment date if
the note is to be redeemed in connection with a fundamental change on a
repurchase date that occurs during this period; or
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<PAGE>
. if otherwise, any note not called for redemption that is submitted for
conversion during this period must also be accompanied by an amount
equal to the interest due on the interest payment date on the converted
principal amount, unless at the time of conversion there is a default in
the payment of interest on the notes. See "--Conversion of Notes."
We will maintain an office in the Borough of Manhattan, the City of New
York for the payment of interest, which shall initially be an office or agency
of the trustee.
We may pay interest either:
. by check mailed to your address as it appears in the note register,
provided that if you are a holder with an aggregate principal amount in
excess of $2.0 million, you shall be paid, at your written election, by
wire transfer in immediately available funds; or
. by transfer to an account maintained by you in the United States.
However, payments to The Depository Trust Company, New York, New York,
which we refer to as DTC, will be made by wire transfer of immediately available
funds to the account of DTC or its nominee. Interest will be computed on the
basis of a 360-day year composed of twelve 30-day months.
Conversion of Notes
You may convert your note, in whole or in part, into common stock through
the final maturity date of the notes, subject to prior redemption of the notes.
If we call notes for redemption, you may convert the notes until the close of
business on the redemption date unless we fail to pay the redemption price. If
you have submitted your notes for redemption upon a change of control, you may
convert your notes only if you withdraw your conversion election. You may
convert your notes in part so long as this part is $1,000 principal amount or an
integral multiple of $1,000. If any notes not called for redemption are
converted after a record date for any interest payment date and prior to the
next interest payment date, the notes must be accompanied by an amount equal to
the interest payable on the interest payment date on the converted principal
amount unless a default exists at the time of conversion.
The initial conversion price for the notes is $71.44 per share of common
stock, subject to adjustment as described below. We will not issue fractional
shares of common stock upon conversion of notes. Instead, we will pay cash
equal to the market price of the common stock at the close of business on the
conversion date. Except as described below, you will not receive any accrued
interest or dividends upon conversion.
To convert your note into common stock you must:
. complete and manually sign the conversion notice on the back of the note
or facsimile of the conversion notice and deliver this notice to the
conversion agent;
. surrender the note to the conversion agent;
. if required, furnish appropriate endorsements and transfer documents;
. if required, pay all transfer or similar taxes; and
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<PAGE>
. if required, pay funds equal to interest payable on the next interest
payment date.
The date you comply with these requirements is the conversion date under the
indenture.
We will adjust the conversion price if the following events occur:
(1) we issue common stock as a dividend or distribution on our common
stock;
(2) we issue to all holders of common stock certain rights, options or
warrants to purchase our common stock at less than the then current
market price of such common stock (determined as provided in the
indenture) as of the record date for shareholders entitled to receive
such rights, options or warrants;
(3) we subdivide, combine or reclassify our common stock;
(4) we distribute to all common stock holders capital stock of evidences
of indebtedness, shares of capital stock, stock, cash or assets
(including securities, but excluding those dividends, rights, options,
warrants and distributions referred to above, dividends and
distributions paid exclusively in cash and distributions upon mergers
or consolidations discussed below);
(5) we distribute cash (excluding any cash portion of the distributions
referred to in the immediately preceding clause, or we distribute cash
upon a merger of consolidation which the next succeeding paragraph
applies) to all holders of our common stock in an aggregate amount
that, combined together with (1) other such all-cash distributions
made within the preceding 365-day market period in respect of which no
adjustment has been made and (2) any cash and the fair market value
of other consideration payable in connection with any tender offer by
us or any of our subsidiaries for our common stock concluded within
the preceding 365-day period in respect of which no adjustment has
been made, exceeds 10% of our market capitalization (being the product
of the current market price per share of the common stock on the
record date for such distribution and the number of shares of common
stock then outstanding), and
(6) we or one of our subsidiaries successfully competes a tender offer for
our common stock which involves an aggregate consideration that,
together with (1) any cash and other consideration payable in a tender
offer by us or any of our subsidiaries for our common stock expiring
within the 365-day period preceding the expiration of such tender
offer in respect of which no adjustment has been made and (2) the
aggregate amount of any such all-cash distributions referred to in the
immediately preceding clause above to all holders of our common stock
within the 365-day period preceding the expiration of such tender
offer in respect of which no adjustments have been made, exceeds 10%
of our market capitalization of the expiration of such tender offer.
(7) we reserve the right to effect such increases in the conversion rate
in addition to those required by the foregoing provisions as we
consider to be advisable in order that any event treated for United
States federal income tax purposes as a dividend of stock or stock
rights will not be taxable to the recipients. We will not be required
to make any adjustment to the conversion rate until the cumulative
adjustments amount to 1.0% or more of the conversion
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rate. We will compute all adjustments to the conversion rate and will
give notice by mail to holders of the registered notes of any
adjustments.
(8) in case of any consolidation or merger of Rational with or into
another entity or any merger of another entity into Rational (other
than a merger which does not result in any reclassification,
conversion, exchange or cancellation of our common stock), or in case
of any sale or transfer of all or substantially all of our assets,
each note then outstanding will become convertible only into the kind
and amount of securities, cash and other property receivable upon such
consolidation, merger, sale or transfer by a holder of the number of
shares of common stock into which the notes were convertible
immediately prior to the consolidation or merger or sale or transfer.
(9) we may increase the conversion rate for any period of at least 20
days, upon at least 15 days notice, if our Board of Directors
determines that the increase would be in our best interest. The Board
of Directors' determination in this regard will be conclusive. We will
give holders of notes at least 15 days' notice of such an increase in
the conversion rate. Any increase, however, will not be taken into
account for purposes of determining whether the closing price of our
common stock exceeds the conversion price by 105% in connection with
an event which otherwise would be a Change In Control as defined
below.
(10) if at any time we make a distribution of property to our stockholders
that would be taxable to such stockholders as a dividend for United
States federal income tax purposes, such as distributions of evidences
of indebtedness or assets of Rational, but generally not stock
dividends on common stock or rights to subscribe for common stock,
and, pursuant to the anti-dilution provisions of the Indenture, the
number of shares into which notes are convertible is increased, that
increase may be deemed for United States federal income tax purposes
to be the payment of a taxable dividend to holders of notes. See
"Certain United States Federal Income Tax Consequences."
Optional Redemption by Rational
The notes are not entitled to any sinking fund. At any time on or after
February 5, 2003, we may redeem the notes in whole or in part at the following
prices expressed as a percentage of the principal amount:
<TABLE>
<CAPTION>
Period Redemption Price
- ------ ----------------
<S> <C>
Beginning on February 5, 2003 and ending on January 31, 2004............................ 102.857%
Beginning on February 1, 2004 and ending on January 31, 2005............................ 102.143%
Beginning on February 1, 2005 and ending on January 31, 2006............................ 101.429%
Beginning on February 1, 2006 and ending on January 31, 2007............................ 100.714%
</TABLE>
and 100% at February 1, 2007. In each case, we will pay interest to, but
excluding, the redemption date. If the redemption date is an interest payment
date, interest shall be paid to the record holder on the relevant record date.
We are required to give notice of redemption by mail to holders not more than 60
but not less than 30 days prior to the redemption date.
If less than all of the outstanding notes are to be redeemed, the trustee
shall select the notes to be redeemed in principal amounts of $1,000 or integral
multiples of $1,000 by lot, pro rata or by another method the trustee considers
fair and appropriate. If a portion of your notes is selected for partial
redemption and you
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<PAGE>
convert a portion of your notes, the converted portion shall be deemed to be of
the portion selected for redemption.
Repurchase at Option of Holders Upon a Change in Control
If a Change in Control as defined below occurs, you will have the right, at
your option, to require us to repurchase all of your notes not previously called
for redemption, or any portion of the principal amount thereof, that is equal to
$1,000 or an integral multiple of $1,000. The price we are required to pay is
100% of the principal amount of the notes to be repurchased, together with
interest accrued to, but excluding, the repurchase date.
At our option, instead of paying the repurchase price in cash, we may pay
the repurchase price in our common stock valued at 95% of the average of the
closing prices of the our common stock for the five trading days immediately
preceding and including the third day prior to the repurchase date. We may only
pay the repurchase price in our common stock if we satisfy conditions provided
in the indenture.
Within 30 days after the occurrence of a Change in Control, we are
obligated to give to you notice of the Change in Control and of the repurchase
right arising as a result of the Change of Control. We must also deliver a copy
of this notice to the Trustee. To exercise the repurchase right, you must
deliver on or before the 30th day after the date of our notice irrevocable
written notice to the Trustee of your exercise of your repurchase right,
together with the notes with respect to which the right is being exercised. We
are required to repurchase the notes on the date that is 45 days after the date
of our notice.
A Change in Control will be deemed to have occurred at the time after the
notes are originally issued that any of the following occurs:
(1) any person, including any syndicate or group deemed to be a "person" under
Section 13(d)(3) of the Exchange Act, acquires beneficial ownership,
directly or indirectly, through a purchase, merger or other acquisition
transaction or series of transactions, of shares of our capital stock
entitling the person to exercise 50% or more of the total voting power of
all shares of our capital stock that is entitled to vote generally in
elections of directors, other than an acquisition by us, any of our
subsidiaries or any of our employee benefit plans; or
(2) we merge or consolidate with or into any other person, any merger of
another person into us, or we convey, sell, transfer or lease all or
substantially all of our assets to another Person, other than (a) any such
transaction (i) that does not result in any reclassification, conversion,
exchange or cancellation of outstanding shares of our capital stock and
(ii) pursuant to which the holders of our common stock immediately prior to
such transaction have the entitlement to exercise, directly or indirectly,
50% or more of the total voting power of all shares of capital stock
entitled to vote generally in the election of directors of the continuing
or surviving corporation immediately after such transaction and (b) any
merger which is effected solely to change our jurisdiction of incorporation
and results in a reclassification, conversion or exchange of outstanding
shares of our common stock into solely shares of common stock.
However, a Change in Control will not be deemed to have occurred if either
(A) the closing price per share of our common stock for any five trading days
within the period of 10 consecutive trading days ending immediately after the
later of the Change in Control or the public announcement of the Change in
Control, in the case of a Change in Control relating to an acquisition of
capital stock, or the period of 10 consecutive
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trading days ending immediately before the Change in Control, in the case of
Change in Control relating to a merger, consolidation or asset sale, equals or
exceeds 105% of the conversion price of the notes in effect on each of those
trading days, or (B) all of the consideration (excluding cash payments for
fractional shares and cash payments made pursuant to dissenters' appraisal
rights) in a merger or consolidation otherwise constituting a Change of Control
under clause (1) and/or clause (2) above consists of shares of common stock
traded on a national securities exchange or quoted on the Nasdaq National Market
(or will be so traded or quoted immediately following such merger or
consolidation) and as a result of such merger or consolidation the notes become
convertible into such common stock.
For purposes of these provisions:
. the conversion price is equal to $1,000 divided by the conversion rate;
. whether a person is a "beneficial owner" will be determined in
accordance with Rule 13d-3 under the Exchange Act; and
. "person" includes any syndicate or group that would be deemed to be a
"person" under Section 13(d)(3) of the Exchange Act.
Rule 13e-4 under the Exchange Act requires the dissemination of prescribed
information to security holders in the event of an issuer tender offer and may
apply in the event that the repurchase option becomes available to you. We will
comply with this rule to the extent it applies at that time.
We may, to the extent permitted by applicable law, at any time purchase
notes in the open market, by tender at any price or by private agreement. Any
note that we purchase may, to the extent permitted by applicable law and subject
to restrictions contained in the purchase agreement with the Initial Purchasers,
be re-issued or resold or may, at our option, be surrendered to the Trustee for
cancellation. Any notes surrendered for cancellation may not be re-issued or
resold and will be canceled promptly.
The definition of Change in Control includes a phrase relating to the
conveyance, transfer, sale, lease or disposition of "all or substantially all"
of our assets. There is no precise, established definition of the phrase
"substantially all" under applicable law. Accordingly, your ability to require
us to repurchase your notes as a result of conveyance, transfer, sale, lease or
other disposition of less than all of our assets may be uncertain.
The foregoing provisions would not necessarily provide you with protection
if we are involved in a highly leveraged or other transaction that may adversely
affect you.
Our ability to repurchase notes upon the occurrence of a Change in Control
is subject to important limitations. Some of the events constituting a Change
in Control could result in an event of default under our Senior Debt. Moreover,
a Change in Control could cause an event of default under, or be prohibited or
limited by, the terms of our Senior Debt. As a result, unless we were to obtain
a waiver, a repurchase of the notes in cash could be prohibited under the
subordination provisions of the Indenture until the Senior Debt is paid in full.
Although we have the right to repurchase the notes with our common stock,
subject to certain conditions, we cannot assure you that we would have the
financial resources, or would be able to arrange financing, to pay the
repurchase price in cash for all the notes that might be delivered by holders of
notes seeking to exercise the repurchase right. If we were to fail to
repurchase the notes when required following a
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Change in Control, an Event of Default under the Indenture would occur, whether
or not such repurchase is permitted by the subordination provisions of the
Indenture. Any such default may, in turn, cause a default under our Senior Debt.
See "--Subordination of Notes".
Subordination of Notes
The notes are subordinated and, as a result, the payment of the principal,
any premium and interest (including Liquidated Damages) on the notes, including
amounts payable on any redemption or repurchase, will be subordinated to the
prior payment in full, in cash or other payment satisfactory to holders of
Senior Debt, of all of our Senior Debt. The notes are also effectively
subordinated to any debt or other liabilities of our subsidiaries. On March
31, 2000 we had approximately $151 million of Senior Debt and our subsidiaries
had approximately $66 million of liabilities (excluding intercompany
liabilities).
"Senior Debt" is defined in the Indenture to mean: the principal of (and
premium, if any) and interest (including all interest accruing subsequent to the
commencement of any bankruptcy or similar proceeding, whether or not a claim for
post-petition interest is allowable as a claim in any such proceeding) on, and
all fees and other amounts payable in connection with, the following, whether
absolute or contingent, secured or unsecured, due or to become due, outstanding
on the date of the Indenture or thereafter created, incurred or assumed:
. our indebtedness evidenced by a credit or loan agreement, note, bond,
debenture or other written obligation,
. all of our obligations for money borrowed,
. all of our obligations evidenced by a note or similar instrument given
in connection with the acquisition of any businesses, properties or
assets of any kind,
. our obligations (1) as lessee under leases required to be capitalized on
the balance sheet of the lessee under generally accepted accounting
principles or (2) as lessee under other leases for facilities, capital
equipment or related assets, whether or not capitalized, entered into or
leased for financing purposes,
. all of our obligations under interest rate and currency swaps, caps,
floors, collars, hedge agreements, forward contracts or similar
agreements or arrangements,
. all of our obligations with respect to letters of credit, bankers'
acceptances and similar facilities (including reimbursement obligations
with respect to the foregoing),
. all of our obligations issued or assumed as the deferred purchase price
of property or services (but excluding trade accounts payable and
accrued liabilities arising in the ordinary course of business),
. all obligations of the type referred to in the above clauses of another
person and all dividends of another person, the payment of which, in
either case, we have assumed or guaranteed, or for which we are
responsible or liable, directly or indirectly, jointly or severally, as
obligor, guarantor or otherwise, or which are secured by a lien on our
property, and
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. renewals, extensions, modifications, replacements, restatements and
refundings of, or any indebtedness or obligation issued in exchange for,
any such indebtedness or obligation described in the above clauses of
this definition.
Senior Debt will not include the notes or any other indebtedness or
obligation if its terms or the terms of the instrument under which or pursuant
to which it is issued expressly provide that it is not superior in right of
payment to the notes.
We may not make any payment on account of principal, premium or interest
(including Liquidation Damages, if any) on the notes, or redemption or
repurchase of the notes, if either of the following occurs:
. we default in our obligations to pay principal, premium, interest or
other amounts on our Senior Debt, including a default under any
redemption or repurchase obligation, and the default continues beyond
any grace period that we may have to make those payments; or
. any other default occurs and is continuing on any Designated Senior Debt
and (1) the default permits the holders of the Designated Senior Debt to
accelerate its maturity and (2) the Trustee has received a notice (a
"Payment Blockage Notice") of the default from Rational, the holder of
such debt or such other person permitted to give such notice under the
Indenture.
If payments of the notes have been blocked by a payment default on Senior
Debt, payments on the notes may resume when the payment default has been cured
or waived or ceases to exist. If payments on the notes have been blocked by a
nonpayment default, payments on the notes may resume on the earlier of (1) the
date the nonpayment default is cured or waived or ceases to exist or (2) 179
days after the Payment Blockage Notice is received.
No nonpayment default that existed on the day a Payment Blockage Notice was
delivered to the Trustee can be used as the basis for any subsequent Payment
Blockage Notice. In addition, once a holder of Designated Senior Debt has
blocked payment on the notes by giving a Payment Blockage Notice, no new period
of payment blockage can be commenced pursuant to a subsequent Payment Blockage
Notice until both of the following are satisfied:
. 365 days have elapsed since the effectiveness of the immediately prior
Payment Blockage Notice; and
. all scheduled payments of principal, any premium and interest with
respect to the notes that have come due have been paid in full in cash.
"Designated Senior Debt" means our obligations under any particular Senior
Debt in which the instrument creating or evidencing the same or the assumption
or guarantee thereof (or related agreements or documents to which we are a
party) expressly provides that such indebtedness shall be "Designated Senior
Debt" for purposes of the Indenture. The instrument, agreement or other document
evidencing any Designated Senior Debt may place limitations and conditions on
the right of such Senior Debt to exercise the rights of Designated Senior Debt.
In addition, upon any acceleration of the principal due on the notes as a
result of an Event of Default or payment or distribution of our assets to
creditors upon any dissolution, winding up, liquidation or reorganization,
whether voluntary or involuntary, marshaling of assets, assignment for the
benefit of creditors,
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or in bankruptcy, insolvency, receivership or other similar proceedings, all
principal, premium, if any, interest and other amounts due on all Senior Debt
must be paid in full before you are entitled to receive any payment. By reason
of such subordination, in the event of insolvency, our creditors who are holders
of Senior Debt are likely to recover more, ratably, than the you are, and you
will likely to experience a reduction or elimination of payments on the notes.
In addition, the notes will be "structurally subordinated" to all
indebtedness and other liabilities, including trade payables and lease
obligations, of our subsidiaries. This occurs because any right of Rational to
receive any assets of our subsidiaries upon their liquidation or reorganization,
and the right of the holders of the notes to participate in those assets, will
be effectively subordinated to the claims of that subsidiary's creditors,
including trade creditors, except to the extent that Rational itself is
recognized as a creditor of such subsidiary, in which case the claims of
Rational would still be subordinate to any security interest in the assets of
the subsidiary and any indebtedness of the subsidiary senior to that held by
Rational.
The Indenture does not limit our ability to incur Senior Debt or our
ability or the ability of our subsidiaries to incur any other indebtedness.
Certain Definitions
Mergers and Sales of Assets by the Company
We may not consolidate with or merge into any other person or convey,
transfer, sell or lease our properties and assets substantially as an entirety
to any person, and we may not permit any person to consolidate with or merge
into us or convey, transfer, sell or lease such person's properties and assets
substantially as an entirety to us unless:
. the person formed by such consolidation or into or with which we are
merged or the person to which our properties and assets are so conveyed,
transferred, sold or leased, shall be a corporation, limited liability
company, partnership or trust organized and existing under the laws of
the United States, any State within the United States or the District of
Columbia and, if we are not the surviving person, the surviving person
assumes the payment of the principal of, premium, if any, and interest
on the notes and the performance of our other covenants under the
Indenture, and
. immediately after giving effect to the transaction, no Event of Default,
and no event that, after notice or lapse of time or both, would become
an Event of Default, will have occurred and be continuing.
Events of Default; Notice and Waiver
The following will be events of default under the indenture:
. we fail to pay principal of or premium, if any, on any note when due,
whether or not prohibited by the subordination provisions of the
indenture;
. we fail to pay any interest, including any liquidated damages, on any
note when due, which failure continues for 30 days, whether or not
prohibited by the subordination provisions of the indenture;
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. we fail to provide notice of a Change in Control, whether or not such
notice is prohibited by the subordination provisions of the indenture;
. we fail to perform any other covenant in the denture, which failure
continues for 60 days after written notice as provided in the indenture;
. any indebtedness under any bonds, debentures, notes or other evidences
of indebtedness for money borrowed (or any guarantee thereof) by us or
any of our significant subsidiaries in an aggregate principal amount in
excess of $10,000,000 is not paid when due either at its stated maturity
or upon acceleration thereof, and such indebtedness is not discharged,
or such acceleration is not rescinded or annulled, within a period of 30
days after notice as provided in the indenture; and
. certain events of bankruptcy, insolvency or reorganization involving us
or any of our significant subsidiaries.
Subject to the provisions of the indenture relating to the duties of their
trustee in case an event of default shall occur and be continuing, the Trustee
will be under no obligation to exercise any of its rights or powers under the
indenture at the request or direction of any holder, unless the holder shall
have offered reasonable indemnity to the trustee. Subject to providing
indemnification of the trustee, the holders of a majority in aggregate principal
amount of the outstanding notes will have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the trustee
or exercising any trust or power conferred on the trustee.
If an event of default other than an event of default arising from events
of insolvency, bankruptcy or reorganization with respect to Rational occurs and
is continuing, either the trustee or the holders of at least 25% in principal
amount of the outstanding notes may, subject to the subordination provisions of
the Indenture, accelerate the maturity of all notes. However, after such
acceleration, but before a judgment or decree based on acceleration, the holders
of a majority in aggregate principal amount of outstanding notes may, under
certain circumstances, rescind and annul the acceleration if all vents of
default, other than the non-payment of principal of the notes which have become
due solely by such declaration of acceleration, have been cured or waived as
provided in the indenture. If an event of default arising from events of
insolvency, bankruptcy or reorganization with respect to Rational occurs, then
the principal of, and accrued interest on, all the notes will automatically
become immediately due and payable without any declaration or other act on. the
part of the holders of the notes or the trustee. For information as to waiver
of defaults, see "- Modification of the Indenture."
You will not have any right to institute any proceeding with respect to the
indenture, or for any remedy under the indenture, unless you give the trustee
written notice of a continuing Event of Default and the holders of at least 25%
in aggregate principal amount of the outstanding notes have made written
request, and offered reasonable indemnity, to the trustee to institute
proceedings, and the trustee has not received from the holders of a majority in
aggregate principal amount of the outstanding notes a direction inconsistent
with the written request and shall have failed to institute such proceeding
within 60 days. However, these limitations do not apply to a suit instituted by
you for the enforcement of payment of the principal of, premium, if any, or
interest, including liquidated damages, on your note on or after the respective
due dates expressed in your note or your right to convert your note in
accordance with the indenture.
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We will be required to furnish to the trustee annually a statement as to
our performance of certain of our obligations under the Indenture and as to any
default in such performance.
Modification of the Indenture
The indenture contains provision for convening meetings of the holders of
notes to consider matters affecting their interests.
Certain limited modifications of the Indenture may be made without the
necessity of obtaining the consent of the holders of the notes. Other
modifications and amendments of the Indenture may be made, and certain past
defaults by us may be waived, either (i) with the written consent of the holders
of not less than a majority in aggregate principal amount of the notes at the
time outstanding or (ii) by the adoption of a resolution, at a meeting of
holders of the notes at which a quorum is present, by the holders of at least
66%% in aggregate principal amount of the notes represented at such meeting. The
quorum at any meeting called to adopt a resolution will be persons holding or
representing a majority in aggregate principal amount of the notes at the time
outstanding and, at any reconvened meeting adjourned for lack of a quorum, 25%
of such aggregate principal amount.
However, a modification or amendment requires the consent of the holder of
each outstanding note affected if it would:
. change the stated maturity of the principal or interest of a note;
. reduce the principal amount of, or any premium or interest on, any note;
. reduce the amount payable upon a redemption or mandatory repurchase;
. modify the provisions with respect to the repurchase rights of holders
of notes in a manner adverse to the holders;
. change the place or currency of payment on a note;
. impair the right to institute suit for the enforcement of any payment on
any note;
. modify our obligation to maintain an office or agency in New York City;
. modify the subordination provisions in a manner that is adverse to the
holders of the notes;
. adversely affect the right to convert the notes;
. modify our obligation to deliver information required under Rule 144A to
permit resales of the notes and common stock issued upon conversion of
the notes if we cease to be subject to the reporting requirements under
the Exchange Act;
. reduce the above-stated percentage of the principal amount of the
holders whose consent is needed to modify or amend the indenture;
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. reduce the percentage of the principal amount of the holders whose
consent is needed to waive compliance with certain provisions of the
Indenture or to waive certain defaults; or
. reduce the percentage required for the adoption of a resolution or the
quorum required at any meeting of holders of notes at which a resolution
is adopted.
The holders of a majority in aggregate principal amount of the outstanding
notes may waive compliance by us with certain restrictive provisions of the
indenture by written consent. Holders of a majority of the principal amount of
notes attending a meeting may also waive compliance by us with certain
restrictive provisions of the Indenture by the adoption of a resolution at the
meeting if a quorum of holders are present and certain other conditions are met.
The holders of a majority in aggregate principal amount of the outstanding notes
also may waive by written consent any past default under the Indenture, except a
default in the payment of principal, premium, if any, or interest.
Information Concerning the Trustee
We have appointed State Street Bank and Trust Company of California, N.A.,
the trustee under the indenture, as paying agent, conversion agent, note
registrar and custodian for the notes. The trustee or its affiliates may
provide banking and other services to us in the ordinary course of their
business.
The indenture contains certain limitations on the rights of the trustee, as
long as it or any of its affiliates remains our creditor, to obtain payment of
claims in certain cases or to realize on certain property received on any claim
as security or otherwise. The trustee and its affiliates will be permitted to
engage in other transactions with us. However, if the trustee or any affiliate
continues to have any conflicting interest and a default occurs with respect to
the notes, the trustee must eliminate such conflict or resign.
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DESCRIPTION OF CAPITAL STOCK
We are authorized to issue up to 150,000,000 shares of common stock, $0.01
par value.
Common Stock
As of March 31, 2000, there were 90,242,679 shares of our common stock
outstanding that were held of record by approximately 1,047 stockholders.
The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. Rational
stockholders do not have cumulative voting rights in the election of directors,
and accordingly, holders of a majority of the shares voting are able to elect
all of the directors. Subject to preferences that may be granted to any then
outstanding preferred stock, holders of common stock are entitled to receive
ratably such dividends as may be declared by the Board of Directors out of funds
legally available therefor as well as any distributions to the stockholders.
See "Price Range of Common Stock and Dividend Policy." In the event of our
liquidation, dissolution or winding up, holders of common stock are entitled to
share ratably in all our assets remaining after payment of liabilities and the
liquidation preference of any then outstanding preferred stock. Holders of
common stock have no preemptive or other subscription or conversion rights.
There are no redemption or sinking fund provisions applicable to the common
stock.
Registration Rights
Pursuant to an agreement and plan of acquisition and arrangement entered
into on December 14, 1999 between Rational and holders of a total of
approximately 371,400 shares of our common stock, we are required to file a
registration statement under the Securities Act at our expense with respect to
such holders' shares, and we are required to use our diligent reasonable efforts
to effect such registration.
Anti-Takeover Effects of Provisions of Our Charter and Bylaws
Our Certificate of Incorporation provides for the Board of Directors to be
divided into three classes, with staggered three-year terms. As a result, only
one class of directors will be elected at each of our annual meetings of
stockholders, with the other classes continuing for the remainder of their
respective three-year terms. Stockholders have no cumulative voting rights, and
stockholders representing a majority of the shares of common stock outstanding
are able to elect all of the directors. Our Bylaws also provide that all
stockholder's actions must be effected at a duly called meeting of stockholders
and not by a consent in writing; the Bylaws provide that only our President, our
Board of Directors and stockholders entitled to cast not less than ten percent
of the votes at a meeting may call a special meeting of stockholders.
The classification of the Board of Directors and lack of cumulative voting
will make it more difficult for our existing stockholders to replace the Board
of Directors as well as for another party to obtain control of us by replacing
the Board of Directors. Since the Board of Directors has the power to retain
and discharge our officers, these provisions could also make it more difficult
for existing stockholders or another party to effect a change in management.
These and other provisions may have the effect of deterring hostile
takeovers or delaying changes in control or our management. These provisions
are intended to enhance the likelihood of continued stability in the composition
of the Board of Directors and in the policies furnished by the Board of
Directors and to
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discourage certain types of transactions that may involve an actual or
threatened change of control. These provisions are designed to reduce our
vulnerability to an unsolicited acquisition proposal. The provisions also are
intended to discourage certain tactics that may be used in proxy fights.
However, such provisions could have the effect of discouraging others from
making tender offers for our shares and, as a consequence, they also may inhibit
fluctuations in the market price of our shares that could result from actual or
rumored takeover attempts.
Section 203 of The Delaware General Corporation Law
We are subject to Section 203 of the Delaware General Corporation Law
("Section 203"), which subject to certain exceptions, prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholder for a period of three years following the date that such stockholder
became an interested stockholder, unless: (i) prior to such date, the Board of
Directors of the corporation approved either the business combination or the
transaction that resulted in the stockholder becoming an interested holder, (ii)
upon consummation of the transaction that resulted in the stockholder becoming
an interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding for purposes of determining the number of shares
outstanding those shares owned (a) by persons who are directors and also
officers and (b) 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.
In general, Section 203 defines business combination to include: (i) any
merger or consolidation involving the corporation and the interested
stockholder, (ii) any sale, transfer, pledge or other disposition of 10% or more
of the assets of the corporation involving the interested stockholder, (iii)
subject to certain exceptions, any transaction that 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 that has the effect
of increasing the proportionate share of the stock or 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 interested stockholder as an 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. See "--Antitakeover Effects of Provisions
of Our Charter and Bylaws."
Transfer Agent and Registrar
The Transfer Agent and Registrar for the common stock is ChaseMellon
Shareholder Services, L.L.C. Its address is 50 California Street, 10th Floor,
San Francisco, California 94111 and its telephone number is (415) 954-9533.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of certain U.S. federal income tax
considerations relating to the purchase, ownership and disposition of the notes
and common stock into which notes may be converted, but does not purport to be a
complete analysis of all the potential tax considerations relating thereto.
This summary is based on laws, regulations, rulings and decisions now in effect,
all of which are subject to change or differing interpretation possibly with
retroactive effect. Except as specifically discussed below with regard to Non-
U.S. Holders, this summary applies only to beneficial owners that will hold
notes and common stock into which notes may be converted as "capital assets,"
within the meaning of Section 1221 of the Internal Revenue Code of 1986, as
amended (called the "Code"), and who, for U.S. federal income tax purposes, are:
. individual citizens or residents of the U.S.,
. corporations, partnerships or other entities created or organized in or
under the laws of the U.S. or of any political subdivision thereof
(unless, in the case of a partnership, Treasury Regulations otherwise
provide),
. estates, the incomes of which are subject to U.S. federal income
taxation regardless of the source of such income, or
. trusts subject to the primary supervision of a U.S. court and the
control of one or more U.S. persons (called "U.S. Holders").
Persons other than U.S. holders (called "Non-U.S. Holders") are subject to
special U.S. federal income tax considerations, some of which are discussed
below. This discussion does not address tax considerations applicable to an
investor's particular circumstances or to investors that may be subject to
special tax rules, such as banks, holders subject to the alternative minimum
tax, tax-exempt organizations, insurance companies, foreign persons or entities,
except to the extent specifically set forth below, dealers in securities or
currencies, persons that will hold notes as a position in a hedging transaction,
"straddle" or "conversion transaction" for tax purposes or persons deemed to
sell notes or common stock under the constructive sale provisions of the Code.
This summary discusses the tax considerations applicable to initial purchasers
of the notes who purchase the notes at their "issue price" as defined in Section
1273 of the Code and does not discuss the tax considerations applicable to
subsequent purchasers of the notes. Rational has not sought any ruling from the
Internal Revenue Service (the "IRS") or an opinion of counsel with respect to
the statements made and the conclusions reached in the following summary, and
there can be no assurance that the IRS will agree with such statements and
conclusions. In addition, the IRS is not precluded from successfully adopting a
contrary position. This summary does not consider the effect of the federal
estate or gift tax laws or the tax laws, except as set forth below with respect
to Non-U.S. Holders, of any applicable foreign, state, local or other
jurisdiction.
Investors considering the purchase of notes should consult their own tax
advisors with respect to the application of the united states federal income tax
laws to their particular situations as well as any tax consequences arising
under the federal estate or gift tax rules or under the laws of any state, local
or foreign taxing jurisdiction or under any applicable tax treaty.
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U.S. Holders
Taxation of Interest
Interest paid on the notes will be included in the income of a U.S. Holder
as ordinary income at the time it is treated as received or accrued, in
accordance with such holder's regular method of accounting for U.S. federal
income tax purposes. Under Treasury Regulations, the possibility of an
additional payment under a note may be disregarded for purposes of determining
the amount of interest or original issue discount income to be recognized by a
holder in respect of such note (or the timing of such recognition) if the
likelihood of the payment, as of the date the notes are issued, is remote.
Failure of Rational to cause this shelf registration statement to be declared
effective may result in the payment of predetermined liquidated damages under
Rational's registration rights agreement. In addition, a holder may require
Rational to redeem any and all of his notes in the event of a fundamental
change. Rational believes that the likelihood of a liquidated damages payment
with respect to the notes is remote and does not intend to treat such
possibility as affecting the yield to maturity of any note. Similarly, Rational
intends to take the position that a "fundamental change" is remote under the
Treasury Regulations, and likewise does not intend to treat the possibility of a
"fundamental change" as affecting the yield to maturity of any note. In the
event either contingency occurs, it would affect the amount and timing of the
income that must be recognized by a U.S. Holder of notes. There can be no
assurance that the IRS will agree with such positions.
Sale, Exchange or Redemption of the Notes
Upon the sale, exchange, other than a conversion, or redemption of a note,
a U.S. Holder generally will recognize capital gain or loss equal to the
difference between:
. the amount of cash proceeds and the fair market value of any property
received on the sale, exchange or redemption, except to the extent such
amount is attributable to accrued interest income not previously
included in income, which will be taxable as ordinary income, or is
attributable to accrued interest that was previously included in income,
which amount may be received without generating further income, and
. such holder's adjusted tax basis in the note.
A U.S. Holder's adjusted tax basis in a note generally will equal the cost of
the note to such holder. Such capital gain or loss will be long-term capital
gain or loss if the U.S. Holder's holding period in the note is more than one
year at the time of sale, exchange or redemption. Long-term capital gains
recognized by certain noncorporate U.S. Holders, including individuals, will
generally be subject to a maximum rate of tax of 20%. The deductibility of
capital losses is subject to limitations.
Conversion of the Notes
A U.S. Holder generally will not recognize any income, gain or loss upon
conversion of a note into common stock except with respect to cash received in
lieu of a fractional share of common stock. A U.S. Holder's tax basis in the
common stock received on conversion of a note will be the same as such holder's
adjusted tax basis in the note at the time of conversion, reduced by any basis
allocable to a fractional share interest, and the holding period for the common
stock received on conversion will generally include the holding period of the
note converted. However, a U.S. Holder's tax basis in shares of common stock
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considered attributable to accrued interest generally will equal the amount of
such accrued interest included in income, and the holding period for such shares
shall begin on the date of conversion.
Cash received in lieu of a fractional share of common stock upon conversion
will be treated as a payment in exchange for the fractional share of common
stock. Accordingly, the receipt of cash in lieu of a fractional share of common
stock generally will result in capital gain or loss, measured by the difference
between the cash received for the fractional share and the holder's adjusted tax
basis in the fractional share.
Dividends
Distributions, if any, made on the common stock after a conversion
generally will be included in the income of a U.S. Holder as ordinary dividend
income to the extent of Rational's current or accumulated earnings and profits.
Distributions in excess of Rational's current and accumulated earnings and
profits will be treated as a return of capital to the extent of the U.S.
Holder's basis in the common stock and thereafter as capital gain.
Holders of convertible debt instruments such as the notes may, in certain
circumstances, be deemed to have received distributions of stock if the
conversion price of such instruments is adjusted. Adjustments to the conversion
price made pursuant to a bona fide reasonable adjustment formula which has the
effect of preventing the dilution of the interest of the holders of the debt
instruments, however, will generally not be considered to result in a
constructive distribution of stock. Certain of the possible adjustments
provided in the notes will not qualify as being pursuant to a bona fide
reasonable adjustment formula. If such adjustments are made, the U.S. Holders
of notes will be deemed to have received constructive distributions taxable as
dividends to the extent of Rational's current and accumulated earnings and
profits even though they have not received any cash or property as a result of
such adjustments. In certain circumstances, the failure to provide for such an
adjustment may result in taxable dividend income to the U.S. Holders of common
stock.
Sale of Common Stock
Upon the sale or exchange of common stock a U.S. Holder generally will
recognize capital gain or loss equal to the difference between:
. the amount of cash and the fair market value of any property received
upon the sale or exchange, and
. such U.S. Holder's adjusted tax basis in the common stock.
Such capital gain or loss will be long-term capital gain or loss if the U.S.
Holder's holding period in common stock is more than one year at the time of the
sale or exchange. Long-term capital gains recognized by certain non-corporate
U.S. Holders, including individuals, will generally be subject to a maximum rate
of tax of 20%. A U.S. Holder's basis and holding period in common stock
received upon conversion of a note are determined as discussed above under
"Conversion of Notes." The deductibility of capital losses is subject to
limitations.
Special Tax Rules Applicable to Non-U.S. Holders
In general, subject to the discussion below concerning backup withholding:
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(1) Payments of principal or interest on the notes by Rational or any
paying agent to a beneficial owner of a note that is a Non-U.S. Holder will
not be subject to U.S. withholding tax, provided that, in the case of
interest:
. such Non-U.S. Holder does not own, actually or constructively, 10% or
more of the total combined voting power of all classes of stock of
Rational entitled to vote within the meaning of Section 871(h)(3) of the
Code,
. such Non-U.S. Holder is not a "controlled foreign corporation" with
respect to which Rational is a "related person" within the meaning of
the Code,
. such Non-U.S. Holder is not a bank receiving interest described in
Section 881(c)(3)(A) of the Code, and
. the certification requirements under Section 871(h) or Section 881(c) of
the Code and Treasury Regulations thereunder (discussed below) are
satisfied,
(2) A Non-U.S. Holder of a note or common stock will not be subject to
U.S. federal income tax on gains realized on the sale, exchange or other
disposition of such note or common stock unless:
. such Non-U.S. Holder is an individual who is present in the U.S. for 183
days or more in the taxable year of sale, exchange or other disposition,
and certain conditions are met,
. such gain is effectively connected with the conduct by the Non-U.S.
Holder of a trade or business in the U.S. and, if certain U.S. income
tax treaties apply, is attributable to a U.S. permanent establishment
maintained by the Non-U.S. Holder,
. the Non-U.S. Holder is subject to Code provisions applicable to certain
U.S. expatriates, or
. in the case of common stock held by a person who holds more than 5% of
such stock, Rational is or has been, at any time within the shorter of
the five-year period preceding such sale or other disposition or the
period such Non-U.S. Holder held the common stock, a U.S. real property
holding corporation (called a "USRPHC") for U.S. federal income tax
purposes, and Rational does not believe that it is currently a USRPHC or
that it will become one in the future,
(3) Interest on notes not excluded from U.S. withholding tax as
described in (1) above and dividends on common stock after conversion
generally will be a subject to U.S. withholding tax at a 30% rate, except
where an applicable tax treaty provides for the reduction or elimination of
such withholding tax.
To satisfy the certification requirements referred to in the fourth bullet
point of (1) above, Sections 871(h) and 881(c) of the Code and currently
effective Treasury Regulations thereunder require that either:
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. the beneficial owner of a note must certify, under penalties of perjury,
to Rational or its paying agent, as the case may be, that such owner is
a Non-U.S. Holder and must-provide such owner's name and address, and
U.S. taxpayer identification number (called "TIN"), if any, or
. a securities clearing organization, bank or other financial institution
that holds customer securities in the ordinary course of its trade or
business (called a "financial institution") and holds the note on behalf
of the beneficial owner thereof must certify, under penalties of
perjury, to Rational or its paying agent, as the case may be, that such
certificate has been received from the beneficial owner and must furnish
the payor with a copy thereof.
Such requirement will be fulfilled if the beneficial owner of a note certifies
on IRS Form W-8 or successor form, under penalties of perjury, that it is a Non-
U.S. Holder and provides its name and address or any financial institution
holding the note on behalf of the beneficial owner files a statement with the
withholding agent to the effect that it has received such a statement from the
beneficial owner, and furnishes the withholding agent with a copy thereof.
Treasury Regulations effective for payments made after December 31, 2000,
will provide alternative methods for satisfying the certification requirements
described above and below, subject to certain grandfathering provisions. These
new regulations also require, in the case of notes held by a foreign
partnership, that:
. the certification be provided by the partners rather than by the foreign
partnership, and
. the partnership provide certain information, including a TIN. A look-
through rule will apply in the case of tiered partnerships.
If a Non-U.S. Holder of a note or common stock is engaged in a trade or
business in the U.S. and if interest on the note, dividends on the common stock,
or gain realized on the sale, exchange or other disposition of the note or
common stock is effectively connected with the conduct of such trade or business
(and, if certain tax treaties apply, is attributable to a U.S. permanent
establishment maintained by the Non-U.S. Holder in the U.S.), the Non-U.S.
Holder, although exempt from U.S. withholding tax (provided that the
certification requirements discussed in the next sentence are met), will
generally be subject to U.S. federal income tax on such interest, dividends or
gain on a net income basis in the same manner as if it were a U.S. Holder. In
lieu of the certificate described above, such a Non-U.S. Holder will be
required, under currently effective Treasury Regulations, to provide Rational
with a properly executed IRS Form 4224 or successor form in order to claim an
exemption from withholding tax. In addition, if such Non-U.S. Holder is a
foreign corporation, it may be subject to a branch profits tax equal to 30%, or
such lower rate provided by an applicable treaty, of its effectively connected
earnings and profits for the taxable year, subject to certain adjustments.
U.S. Federal Estate Tax
A note held by an individual who at the time of death is not a citizen or
resident of the U.S., as specially defined for U.S. federal estate tax purposes,
will not be subject to U.S. federal estate tax if the individual did not
actually or constructively own 10% or more of the total combined voting power of
all classes of stock of Rational and, at the time of the individual's death,
payments with respect to such note would not have been effectively connected
with the conduct by such individual of a trade or business in the U.S. common
stock held by an individual who at the time of death is not a citizen or
resident of the U.S., as
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<PAGE>
specially defined for U.S. federal estate tax purposes, will be included in such
individual's estate for U.S. federal estate tax purposes, unless an applicable
estate tax treaty otherwise applies.
Non-U.S. Holders should consult with their tax advisors regarding U.S. and
foreign tax consequences with respect to the notes and common stock.
Backup Withholding and Information Reporting
Backup withholding of U.S. federal income tax at a rate of 31% may apply to
payments pursuant to the terms of a note or common stock to a U.S. Holder that
is not an "exempt recipient" and that fails to provide certain identifying
information, such as the holder's TIN, in the manner required. Generally,
individuals are not exempt recipients, whereas corporations and certain other
entities are exempt recipients. Payments made in respect of a note or common
stock must be reported to the Service, unless the U.S. Holder is an exempt
recipient or otherwise establishes an exemption.
In the case of payments of interest on a note to a Non-U.S. Holder,
Treasury Regulations provide that backup withholding and information reporting
will not apply to payments with respect to which either requisite certification
has been received or an exemption has otherwise been established, provided that
neither Rational nor a paying agent has actual knowledge that the holder is a
U.S. Holder or that the conditions of any other exemption are not in fact
satisfied.
Dividends on the common stock paid to Non-U.S. Holders that are subject to
U.S. withholding tax, as described above, generally will be exempt from U.S.
backup withholding tax but will be subject to certain information reporting.
Payments of the proceeds of the sale of a note or common stock to or
through a foreign office of a U.S. broker or a foreign office of a broker that
is a U.S. related person (either a "controlled foreign corporation" (within the
meaning of the Code) or a foreign person, 50% or more of whose gross income from
all sources for the three-year period ending with the close of its taxable year
preceding the payment was effectively connected with the conduct of a trade or
business within the U.S.) are currently subject to certain information reporting
requirements, unless the payee is an exempt recipient or such broker has
evidence in its records that the payee is a Non-U.S. Holder and no actual
knowledge that such evidence is false and certain other conditions are met.
Temporary Treasury Regulations indicate that such payments are not currently
subject to backup withholding.
Under current Treasury Regulations, payments of the proceeds of a sale of a
note or common stock to or through the U.S. office of a broker will be subject
to information reporting and backup withholding unless the payee certifies under
penalties of perjury as to his or her status as a Non-U.S. Holder and satisfies
certain other qualifications (and no agent of the broker who is responsible for
receiving or reviewing such statement has actual knowledge that it is incorrect)
and provides his or her name and address or the payee otherwise establishes an
exemption.
Any amounts withheld under the backup withholding rules from a payment to a
holder of a note or common stock will be allowed as a refund or credit against
such holder's U.S. federal income tax provided that the required information is
furnished to the IRS in a timely manner.
As noted above, new regulations will generally be applicable to payments
made after December 31, 2000. In general, these new regulations do not
significantly alter the substantive withholding and information
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<PAGE>
reporting requirements but unify current certification procedures and forms and
clarify reliance standards. Under these new regulations, special rules apply
which permit the shifting of primary responsibility for withholding to certain
financial intermediaries acting on behalf of beneficial owners. A holder of a
note or common stock should consult with its tax advisor regarding the
application of the backup withholding rules to its particular situation, the
availability of an exemption therefrom, the procedure for obtaining such an
exemption, if available, and the impact of these new regulations on payments
made with respect to notes or common stock after December 31, 2000.
The preceding discussion of certain U.S. federal income tax considerations
is for general information only and is not tax advice. Accordingly, each
prospective investor should consult its own tax adviser as to the particular U.S
federal, state, and local tax consequences of purchasing, holding and disposing
of the notes and common stock of Rational. Tax advisors should also be
consulted as to the U.S. estate and gift tax consequences and the foreign tax
consequences of purchasing, holding and disposing of the notes and common stock
of Rational, as well as the consequences of any proposed change in applicable
laws.
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<PAGE>
SELLING SECURITYHOLDERS
We originally issued the notes in a private placement in January 2000.
Selling securityholders may offer and sell the notes and the underlying common
stock pursuant to this prospectus.
The following table contains information as of April 26, 2000, with respect
to the selling securityholders and the principal amount of notes and the
underlying common stock beneficially owned by each selling security holders that
may be offered using this prospectus.
Selling Security Holders
<TABLE>
<CAPTION>
Principal
Amount at
Maturity of Number of
Notes Shares of
Beneficially Percentage of Common Stock Percentage of
Owned That Notes That May Common Stock
Name May Be Sold Outstanding Be Sold (1) Outstanding (2)
- ---------------------------------------------------- ----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
1976 Distribution Trust FBP A.R. Lauder / 19,000 0.00% 266 0.00%
Zinterhofer
1976 Distribution Trust FBP Jane A. Lauder 19,000 0.00% 266 0.00%
Aftra Health Fund 900,000 0.18% 12,598 0.01%
AIG / National Union Fire Insurance 1,485,000 0.30% 20,787 0.02%
Aloha Airlines Non-Pilots Pension Trust 205,000 0.04% 2,870 0.00%
Aloha Airlines Pilots Retirement Trust 120,000 0.02% 1,680 0.00%
Amoco Corporation Master Trust for Employee 3,960,000 0.79% 55,431 0.06%
Pension Plans
Argent Classic Convertible Arbitrage Fund 6,000,000 1.20% 83,987 0.08%
(Bermuda) L.P.
Arkansas PERS 3,725,000 0.75% 52,142 0.05%
Associated Electric & Gas Insurance Services 900,000 0.18% 12,598 0.01%
Limited
</TABLE>
-38-
<PAGE>
<TABLE>
<CAPTION>
Principal
Amount at
Maturity of Number of
Notes Shares of
Beneficially Percentage of Common Stock Percentage of
Owned That Notes That May Common Stock
Name May Be Sold Outstanding Be Sold (1) Outstanding (2)
- ---------------------------------------------------- ----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
Bank Austria Cayman Island, Ltd. 3,000,000 0.60% 41,993 0.04%
Bankers Trust Company trustee for Chrysler 3,270,000 0.65% 45,773 0.05%
Corp. Employee #1 Pension Plan
Bear, Stearns & Co., Inc. 2,000,000 0.40% 27,996 0.03%
Boilermaker-Blacksmith Pension Trust 700,000 0.14% 9,798 0.01%
Boulder II Limited 3,000,000 0.60% 41,993 0.04%
British Virgin Islands Social Security Board 55,000 0.01% 770 0.00%
Brown & Williamson Tobacco Master Retirement 250,000 0.05% 3,499 0.00%
Trust
C&H Sugar Company, Inc. 320,000 0.06% 4,479 0.00%
CALAMOS Convertible Fund - CALAMOS 850,000 0.17% 11,898 0.01%
Investment trust
CALAMOS Convertible Portfolio - CALAMOS 25,000 0.01% 350 0.00%
Advisors Trust
CALAMOS Growth and Income Fund - CALAMOS 500,000 0.10% 6,999 0.01%
Investment Trust
California Public Employees' Retirement 2,500,000 0.50% 34,994 0.04%
System, Nominee Name: Surfboard & Co.
Champion International Corporation Master 275,000 0.06% 3,849 0.00%
Retirement Trust
</TABLE>
-39-
<PAGE>
<TABLE>
<CAPTION>
Principal
Amount at
Maturity of Number of
Notes Shares of
Beneficially Percentage of Common Stock Percentage of
Owned That Notes That May Common Stock
Name May Be Sold Outstanding Be Sold (1) Outstanding (2)
- ----------------------------------------------------- ----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
Christian Science Trustees for Gifts and
Endowments 600,000 0.12% 8,399 0.01%
Chrysler Corporation Master Retirement Trust 6,685,000 1.34% 93,575 0.09%
Circlet (IMA) Limited 2,000,000 0.40% 27,996 0.03%
City of Knoxville Pension System 175,000 0.04% 2,450 0.00%
City University of New York 102,000 0.02% 1,428 0.00%
Continental Assurance Company Separate
Account (E) 2,000,000 0.40% 27,996 0.03%
Credit Suisse First Boston Corporation 2,500,000 0.50% 34,994 0.04%
David Lipscomb University General Endowment 300,000 0.06% 4,199 0.00%
Delaware PERS 3,595,000 0.72% 50,322 0.05%
Delphi Foundation, Inc. 36,000 0.01% 504 0.00%
Delta Airlines Master Trust 2,495,000 0.50% 34,924 0.04%
Delta Airlines Master Trust 1,100,000 0.22% 15,398 0.02%
EQAT Alliance Balanced Account 5,450,000 1.09% 76,288 0.08%
EQAT Alliance Growth & Income Account 8,110,000 1.62% 113,522 0.11%
</TABLE>
-40-
<PAGE>
<TABLE>
<CAPTION>
Principal
Amount at
Maturity of Number of
Notes Shares of
Beneficially Percentage of Common Stock Percentage of
Owned That Notes That May Common Stock
Name May Be Sold Outstanding Be Sold (1) Outstanding (2)
- ----------------------------------------------------- ----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
EQAT Alliance Growth Investors 4,550,000 0.91% 63,690 0.06%
Equitable Life Assurance Separate Account -
Balanced 310,000 0.06% 4,339 0.00%
Equitable Life Assurance Separate Account -
Convertible 5,480,000 1.10% 76,708 0.08%
Family Service Life Insurance Co. 350,000 0.07% 4,899 0.00%
Fidelity Financial Trust: Fidelity
Convertible Securities Fund 5,000,000 1.00% 69,989 0.07%
Franklin and Marshall College 244,000 0.05% 3,415 0.00%
General Motors Employees Global Group
Pension Trust 6,786,000 1.36% 94,989 0.10%
General Motors Foundation, Inc. 369,000 0.07% 5,165 0.01%
Grady Hospital Foundation 140,000 0.03% 1,960 0.00%
Granville Capital Corporation 21,400,000 4.28% 299,552 0.30%
Guardian Life Insurance Co. 6,400,000 1.28% 89,586 0.09%
Guardian Pension Trust 250,000 0.05% 3,499 0.00%
Hawaiian Airlines Employees Pension Plan -
IAM 180,000 0.04% 2,520 0.00%
Hawaiian Airlines Pension Plan for Salaried
Employees 45,000 0.01% 630 0.00%
</TABLE>
-41-
<PAGE>
<TABLE>
<CAPTION>
Principal
Amount at
Maturity of Number of
Notes Shares of
Beneficially Percentage of Common Stock Percentage of
Owned That Notes That May Common Stock
Name May Be Sold Outstanding Be Sold (1) Outstanding (2)
- ----------------------------------------------------- ----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
Hawaiian Airlines Pilots Retirement Plan 275,000 0.06% 3,849 0.00%
HT Insight Convertible Securities Fund 500,000 0.10% 6,999 0.01%
ICI American Holdings Trust 1,715,000 0.34% 24,006 0.02%
Independence Blue Cross 100,000 0.02% 1,400 0.00%
Island Holdings 85,000 0.02% 1,190 0.00%
J.P. Morgan Securities, Inc. 1,000,000 0.20% 13,998 0.01%
JMG Triton Offshore Fund, Ltd. 1,000,000 0.20% 13,998 0.01%
Key Asset Mgmt FAO Victory Convertible
Securities Fund 1,000,000 0.20% 13,998 0.01%
Knoxville Utilities Board Retirement System 100,000 0.02% 1,400 0.00%
Lazard Freres & Co. LLC 100,000 0.02% 1,400 0.00%
Local Initiatives Support Corporation 63,000 0.01% 882 0.00%
Mainstay Convertible Fund 6,400,000 1.28% 89,586 0.09%
Mainstay Strategic Value Fund 200,000 0.04% 2,800 0.00%
Mainstay VP Convertible Portfolio 250,000 0.05% 3,499 0.00%
</TABLE>
-42-
<PAGE>
<TABLE>
<CAPTION>
Principal
Amount at
Maturity of Number of
Notes Shares of
Beneficially Percentage of Common Stock Percentage of
Owned That Notes That May Common Stock
Name May Be Sold Outstanding Be Sold (1) Outstanding (2)
- ----------------------------------------------------- ----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
Massachusetts Mutual Life Insurance Company 2,700,000 0.54% 37,794 0.04%
MassMutual Corporate Investors 1,000,000 0.20% 13,998 0.01%
MassMutual Corporate Value Partners Limited 1,600,000 0.32% 22,396 0.02%
MassMutual High Yield Partners II LLC 2,700,000 0.54% 37,794 0.04%
MassMutual Participation Investors 500,000 0.10% 6,999 0.01%
McMahan Securities Company L.P. 30,000 0.01% 420 0.00%
Memphis Light, Gas & Water Retirement Fund 2,875,000 0.58% 40,244 0.04%
Merrill Lynch Convertible Fund, Inc. 250,000 0.05% 3,499 0.00%
Merrill Lynch Insurance Group 491,000 0.10% 6,873 0.01%
Motion Picture Industry Health Plan - Active
Member Fund 775,000 0.16% 10,848 0.01%
Motion Picture Industry Health Plan -
Retiree Member Fund 390,000 0.08% 5,459 0.01%
Motors Insurance Company 1,809,000 0.36% 25,322 0.03%
MSD Portfolio LP - Investments 7,500,000 1.50% 104,983 0.11%
Nalco Chemical Company 645,000 0.13% 9,029 0.01%
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Principal
Amount at
Maturity of Number of
Notes Shares of
Beneficially Percentage of Common Stock Percentage of
Owned That Notes That May Common Stock
Name May Be Sold Outstanding Be Sold (1) Outstanding (2)
- --------------------------------------------------- ----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
New Orleans Firefighters Pension / Relief 161,000 0.03% 2,254 0.00%
Fund
New York Life Insurance and Annuity 1,500,000 0.30% 20,997 0.02%
Corporation
New York Life Insurance Company 15,000,000 3.00% 209,966 0.21%
New York Life Separate Account #7 1,000,000 0.20% 13,998 0.01%
Occidental Petroleum Corporation 271,000 0.05% 3,793 0.00%
OCM Convertible Trust 3,380,000 0.68% 47,312 0.05%
Ohio Bureau of Workers Compensation 225,000 0.05% 3,149 0.00%
Pacific Life Insurance Company 1,500,000 0.30% 20,997 0.02%
Partners Reinsurance Company Ltd. 1,385,000 0.28% 19,387 0.02%
Penn Treaty Network America Insurance Company 290,000 0.06% 4,059 0.00%
Port Authority of Allegheny Country 700,000 0.14% 9,798 0.01%
Retirement and Disability Allowance Plan
for the Employees Represented by Local 85
of the Amalgamated Transit Union
PRIM Board 4,050,000 0.81% 56,691 0.06%
Queens Health Plan 70,000 0.01% 980 0.00%
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Principal
Amount at
Maturity of Number of
Notes Shares of
Beneficially Percentage of Common Stock Percentage of
Owned That Notes That May Common Stock
Name May Be Sold Outstanding Be Sold (1) Outstanding (2)
- ------------------------------------------------ ----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
Scudder Dividend and Growth Fund 350,000 0.07% 4,899 0.00%
Shell Pension Trust 369,000 0.07% 5,165 0.01%
Solomon Brothers Asset Management, Inc. 9,925,000 1.99% 138,928 0.14%
SPT 500,000 0.10% 6,999 0.01%
Starvest Combined Portfolio 2,010,000 0.40% 28,135 0.03%
State Employees' Retirement Fund of State of 3,395,000 0.68% 47,522 0.05%
Delaware
State of Connecticut Combined Investment 7,530,000 1.51% 105,403 0.11%
Funds
State of Maryland 2,210,000 0.44% 30,935 0.03%
State of Oregon / SAIF Corporation 8,130,000 1.63% 113,802 0.11%
State of Oregon Equity 7,175,000 1.44% 100,434 0.10%
State Street Bank Custodian for GE Pension 1,726,000 0.35% 24,160 0.02%
Trust
Summer Hill Equity Income LLC 150,000 0.03% 2,100 0.00%
The Dow Chemical Company Employees' 1,200,000 0.24% 16,797 0.02%
Retirement Plan
The First Foundation 800,000 0.16% 11,198 0.01%
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Principal
Amount at
Maturity of Number of
Notes Shares of
Beneficially Percentage of Common Stock Percentage of
Owned That Notes That May Common Stock
Name May Be Sold Outstanding Be Sold (1) Outstanding (2)
- ----------------------------------------------- ----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
The Grable Foundation 203,000 0.04% 2,842 0.00%
The TCW Group, Inc. 17,475,000 3.50% 244,611 0.25%
The Travelers Indemnity Company 2,800,000 0.56% 39,194 0.04%
The Travelers Insurance Company 1,790,000 0.36% 25,056 0.03%
The Travelers Insurance Company Separate 210,000 0.04% 2,940 0.00%
Account TLAC
The Travelers Series Trust Convertible Bond 200,000 0.04% 2,800 0.00%
Portfolio
Transamerica Life Insurance and Annuity 17,800,000 3.56% 249,160 0.25%
Company
Transamerica Occidental Life Insurance 5,000,000 1.00% 69,989 0.07%
Company
Transamerica Premier High Yield Fund 1,000,000 0.20% 13,998 0.01%
Tribeca Investments LLC 2,000,000 0.40% 27,996 0.03%
United Food and Commercial Workers Local 300,000 0.06% 4,199 0.00%
1262 and Employers Pension Fund
Value Line Convertible Fund, Inc. 500,000 0.10% 6,999 0.01%
Van Kampen Convertible Securities Fund 470,000 0.09% 6,579 0.01%
Van Kampen Harbor Fund 2,530,000 0.51% 35,414 0.04%
</TABLE>
-46-
<PAGE>
<TABLE>
<CAPTION>
Principal
Amount at
Maturity of Number of
Notes Shares of
Beneficially Percentage of Common Stock Percentage of
Owned That Notes That May Common Stock
Name May Be Sold Outstanding Be Sold (1) Outstanding (2)
- ------------------------------------------------ ----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
Van Waters and Rogers, Inc. Retirement Plan 200,000 0.04% 2,800 0.00%
(f.k.a. Univar Corporation)
Vanguard Convertible Securities Fund, Inc. 6,965,000 1.39% 97,494 0.10%
White River Securities LLC 2,000,000 0.40% 27,996 0.03%
Zeneca Holdings Trust 1,045,000 0.21% 14,628 0.01%
Zurich HFR Master Hedge Fund Index Ltd. 40,000 0.01% 560 0.00%
Any other holder of Notes or future 205,687,000 41.14% 2,879,157 2.83%
transferee, pledgee, donee or successor of
any holder (3)(4)
</TABLE>
- ------------------
* Less than 1%.
(1) Assumes conversion of all of the holder's notes at a conversion price of
$71.440 per share of common stock. However, this conversion price will be
subject to adjustment as described under "Description of Notes--Conversion
of Notes." As a result, the amount of common stock issuable upon
conversion of the notes may increase or decrease in the future.
(2) Calculated based on Rule 13d-3(d)(i) of the Exchange Act using 98,907,569
shares of common stock outstanding as of March 31, 2000. In calculating
this amount, we treated as outstanding the number of shares of common
stock issuable upon conversion of all of that particular holder's notes.
However, we did not assume the conversion of any other holder's notes.
(3) Information about other selling security holders will be set forth in
prospectus supplements, if required.
(4) Assumes that any other holders of notes, or any future transferees,
pledgees, donees or successors of or from any such other holders of notes,
do not beneficially own any common stock other than the common stock
issuable upon conversion of the notes at the initial conversion rate.
We prepared this table based on the information supplied to us by the
selling securityholders named in the table.
The selling securityholders listed in the above table may have sold or
transferred, in transactions exempt from the registration requirements of the
Securities Act, some or all of their notes since the date on which the
information in the above table is presented. Information about the selling
securityholders may change from over time. Any changed information will be set
forth in prospectus supplements.
-47-
<PAGE>
Because the selling securityholders may offer all or some of their notes or
the underlying common stock from time to time, we cannot estimate the amount of
the notes or underlying common stock that will be held by the selling
securityholders upon the termination of any particular offering. See "Plan of
Distribution."
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<PAGE>
PLAN OF DISTRIBUTION
We will not receive any of the proceeds of the sale of the notes and the
underlying common stock offered by this prospectus. The notes and the
underlying common stock may be sold from time to time to purchasers:
. directly by the selling securityholders;
. through underwriters, broker-dealers or agents who may receive
compensation in the form of discounts, concessions or commissions from
the selling securityholders or the purchasers of the notes and the
underlying common stock.
The selling securityholders and any such broker-dealers or agents who
participate in the distribution of the notes and the underlying common stock may
be deemed to be "underwriters." As a result, any profits on the sale of the
notes and underlying common stock by selling securityholders and any discounts,
commissions or concessions received by any such broker-dealers or agents might
be deemed to be underwriting discounts and commissions under the Securities Act.
If the selling securityholders were to deemed underwriters, the selling
securityholders may be subject to certain statutory liabilities of, including,
but not limited to, Sections 11, 12 and 17 of the Securities Act and Rule 10b-5
under the Exchange Act.
If the notes and underlying common stock are sold through underwriters or
broker-dealers, the selling securityholders will be responsible for underwriting
discounts or commissions or agent's commissions.
The notes and underlying common stock may be sold in one or more
transactions at:
. fixed prices;
. prevailing market prices at the time of sale;
. varying prices determined at the time of sale; or
. negotiated prices.
These sales may be effected in transactions:
. on any national securities exchange or quotation service on which the
notes and underlying common stock may be listed or quoted at the time of
the sale, including the Nasdaq National Market in the case of the common
stock;
. in the over-the-counter market;
. in transactions otherwise than on such exchanges or services or in the
over-the-counter market; or
. through the writing of options.
These transactions may include block transactions or crosses. Crosses are
transactions in which the same broker acts as an agent on both sides of the
trade.
-49-
<PAGE>
In connection with sales of the notes and underlying common stock or
otherwise, the selling securityholders may enter into hedging transactions with
broker-dealers. These broker-dealers may in turn engage in short sales of the
notes and underlying common stock in the course of hedging their positions. The
selling securityholders may also sell the notes and underlying common stock
short and deliver notes and underlying common stock to close out short
positions, or loan or pledge notes and underlying common stock to broker-dealers
that in turn may sell the notes and underlying common stock.
To our knowledge, there are currently no plans, arrangement or
understandings between any selling securityholders and any underwriter, broker-
dealer or agent regarding the sale of the notes and the underlying common stock
by the selling securityholders. Selling securityholders may not sell any or all
of the notes and the underlying common stock offered by them pursuant to this
prospectus. In addition, we cannot assure you that any such selling
securityholder will not transfer, devise or gift the notes and the underlying
common stock by other means not described in this prospectus.
Our common stock trades on the Nasdaq National Market under the symbol
"RATL." We do not intend to apply for listing of the notes on any securities
exchange or for quotation through Nasdaq. Accordingly, no assurance can be
given as to the development of liquidity or any trading market for the notes.
See "Risk Factors--There may be no public market for the notes, and there may be
restrictions on resale of the notes."
There can be no assurance that any selling securityholder will sell any or
all of the notes or underlying common stock pursuant to this prospectus. In
addition, any notes or underlying common stock covered by this prospectus that
qualify for sale pursuant to Rule 144 or Rule 144A of the Securities Act may be
sold under Rule 144 or Rule 144A rather than pursuant to this prospectus.
The selling securityholders and any other person participating in such
distribution will be subject to the Exchange Act. The Exchange Act rules
include, without limitation, Regulation M, which may limit the timing of
purchases and sales of any of the notes and the underlying common stock by the
selling securityholders and any other such person. In addition, Regulation M of
the Exchange Act may restrict the ability of any person engaged in the
distribution of the notes and the underlying common stock to engage in market-
making activities with respect to the particular notes and the underlying common
stock being distributed for a period of up to five business days prior to the
commencement of such distribution. This may affect the marketability of the
notes and the underlying common stock and the ability of any person or entity to
engage in market-making activities with respect to the notes and the underlying
common stock.
Pursuant to the registration rights agreement filed as an exhibit to this
registration statement, we and the selling securityholders will be indemnified
by the other against certain liabilities, including certain liabilities under
the Securities Act or will be entitled to contribution in connection with these
liabilities.
We have agreed to pay substantially all of the expenses incidental to the
registration, offering and sale of the notes and underlying common stock to the
public other than commissions, fees and discounts of underwriters, brokers,
dealers and agents.
LEGAL MATTERS
The validity of the issuance of Rational Software Corporation's securities
offered by this prospectus will be passed upon for Rational Software Corporation
by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California.
-50-
<PAGE>
INDEPENDENT ACCOUNTANTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements and schedule included in our Annual report on form 10-K
for the year ended March 31, 2000, as set forth in their report, which is
incorporated by reference in this prospectus and elsewhere in the registration
statement. Our financial statements and schedule are incorporated by reference
in reliance on Ernst & Young LLP's report, given on their authority as expects
in accounting and auditing.
-51-
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The aggregate estimated (other than the registration fee) expenses to be
paid by the Registrant in connection with this offering are as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............. $ 132,000
Trustee's fees and expenses..................................... 15,015,000
Accounting fees and expenses.................................... 96,000
Legal fees and expenses......................................... 254,000
Miscellaneous................................................... 174,000
-----------
Total...................................................... $15,671,000
===========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS OF RATIONAL
CERTIFICATE OF INCORPORATION
[Article 10 of our Certificate of Incorporation provides that, to the
fullest extent permitted by Delaware law, as the same now exists or may
hereafter be amended, a director shall not be personally liable to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director. Delaware law provides that directors of a corporation will
not be personally liable for monetary damages for breach of their fiduciary
duties as directors, except for liability:
. for any breach of their duty of loyalty to the corporation or its
stockholders,
. for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law,
. for unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General
Corporation Law, or
. for any transaction from which the director derived an improper personal
benefit.]
BYLAWS
INDEMNIFICATION ARRANGEMENTS
Our bylaws provide that our directors, officers and agents shall be
indemnified against expenses including attorneys' fees, judgments, fines,
settlements actually and reasonably incurred in connection with any proceeding
arising out of their status as such, if such director, officer or agent acted in
good faith and in a manner he or she reasonably believed to be in or not opposed
to the best interests of Rational Software Corporation, and, with the respect to
any criminal action or proceeding, had no reasonable cause to believe such
conduct was unlawful.
II-1
<PAGE>
We have entered into agreements to indemnify our directors and officers, in
addition to the indemnification provided for in our Certificate of Incorporation
and Bylaws. These agreements, among other things, indemnify our directors and
officers for certain expenses, including attorney's fees, judgments, fines and
settlement amounts incurred by any such person in any action or proceeding,
including any action by or in the right of Rational, arising out of such
person's services as a director or officer of Rational, any subsidiary of
Rational or any other company or enterprise to which the person provides
services at the request of Rational.
ITEM 16. EXHIBITS
The following exhibits are filed herewith or incorporated by reference
herein:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------ -------------
<C> <S>
3.1 The Company's Certificate of Incorporation, as amended through July 30, 1997, is incorporated
herein by reference to Exhibit 3.1 filed with the Registrant's Form 10-Q dated November 14,
1997.
3.2 The Company's Bylaws, as amended through October 1999 is incorporated herein by reference to
Exhibit 3.02 filed with the Registrant's 10-K dated May 1, 2000.
4.1 Indenture is incorporated herein by reference to Exhibit 4.03 filed with the Registrant's 10-K
dated May 1, 2000.
4.2 Registration Rights Agreement is incorporated herein by reference to Exhibit 4.04 filed with
the Registrant's 10-K dated May 1, 2000.
4.3 Form of Note (included in Exhibit 4.1)
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
12.1 Computation of Ratio of Earnings to Fixed Charges.
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2 Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation (included in Exhibit
5.1).
24.1 Power of Attorney of certain directors and officers of Rational Software Corporation (see page
II-4 of this Form S-3).
25.1 Form T-1 Statement of Eligibility of Trustee for Indenture under the Trust Indenture Act of
1939.
</TABLE>
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(a) To include any prospectus required by Section 10(a)(3) of the
Securities Act,
(b) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the Registration Statement.
II-2
<PAGE>
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement,
(c) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement; provided,
however, that clauses (a) and (b) do not apply if the information required to be
included in a post-effective amendment by such clauses is contained in periodic
reports filed with or furnished to the Securities and Exchange Commission by the
Registrant pursuant to Section 13 or Section 15(d) of the Securities Exchange
Act of 1934 (the "Exchange Act") that are incorporated by reference in the
Registration Statement.
(2) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(4) That, for purposes of determining any liability under the Securities
Act, each filing of the Registrant's annual report pursuant to Section 13(a) or
Section 15(d) of the Exchange Act that is incorporated by reference in this
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.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 15 above, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities, other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding, is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement on Form S-3 to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Cupertino, State of California, on May 2, 2000.
RATIONAL SOFTWARE CORPORATION
By: /s/ Timothy A. Brennan
---------------------------------
Name: Timothy A. Brennan
Title: Senior Vice Presidnet, Chief
Financial Officer, and Secretary
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Thomas F. Bogan and Timothy A.
Brennan, and each of them acting individually, as his attorney-in-fact, each
with full power of substitution, for him in any and all capacities, to sign any
and all amendments to this Registration Statement on Form S-3, 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 of said attorneys-in-fact, or any substitute, may do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ PAUL D. LEVY Founder and Chairman of the Board May 2, 2000
- ---------------------------------------
Paul D. Levy
/s/ MICHAEL T. DEVLIN Founder, Chief Executive Officer and May 2, 2000
- --------------------------------------- Director
Michael T. Devlin
/s/ THOMAS F. BOGAN President and Chief Operating Officer May 2, 2000
- ---------------------------------------
Thomas F. Bogan
/s/ TIMOTHY A. BRENNAN Senior Vice President, Chief Financial May 2, 2000
- --------------------------------------- Officer, and Secretary (Principal
Timothy A. Brennan Financial Officer and Principal
Accounting Officer)
/s/ LESLIE G. DENAND Director May 2, 2000
- ---------------------------------------
Leslie G. Denend
/s/ JOHN E. MONTAGUE Director May 2, 2000
- ---------------------------------------
John E. Montague
/s/ ALLISON R. SCHLEICHER Director May 2, 2000
- ---------------------------------------
Allison R. Schleicher
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------ -------------
<C> <S>
3.1 The Company's Certificate of Incorporation, as amended through July 30, 1997, is incorporated
herein by reference to Exhibit 3.1 filed with the Registrant's Form 10-Q dated November 14,
1997.
3.2 The Company's Bylaws, as amended through October 1999 is incorporated herein by reference to
Exhibit 3.02 filed with the Registrant's 10-K dated May 1, 2000.
4.1 Indenture is incorporated herein by reference to Exhibit 4.02 filed with the Registrant's 10-K
dated May 1, 2000.
4.2 Registration Rights Agreement is incorporated herein by reference to Exhibit 4.03 filed with
the Registrant's 10-K dated May 1, 2000.
4.3 Form of Note (included in Exhibit 4.1)
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
12.1 Computation of Ratio of Earnings to Fixed Charges.
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2 Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation (included in Exhibit
5.1).
24.1 Power of Attorney of certain directors and officers of Rational Software Corporation (see
page II-4 of this Form S-3).
25.1 Form T-1 Statement of Eligibility of Trustee for Indenture under the Trust Indenture Act of
1939.
</TABLE>
- ------------------------
<PAGE>
Exhibit 5.1
May 02, 2000
Rational Software Corporation
18880 Homestead Road
Cupertino, California 95014
RE: REGISTRATION STATEMENT OF FORM S-3
Ladies and Gentlemen:
We are acting as counsel for Rational Software Corporation, a Delaware
corporation (the "Company") in connection with the registration under the
Securities Act of 1933, as amended, of $500,000,000 aggregate principal amount
of 5% Convertible Subordinated Notes due 2007 (the "Notes"), and such
indeterminate number of shares of Common Stock, $0.01 par value (the "Common
Stock"), of the Company, as may be required for issuance upon conversion of the
Notes (the "Conversion Shares"). The Notes and the Conversion Shares are to be
offered and sold by certain securityholders of the Company (the "Selling
Securityholders"). In this regard we have participated in the preparation of a
Registration Statement on Form S-3 relating to the Notes and the Conversion
Shares. (Such Registration Statement, as it may be amended from time to time, is
herein referred to as the "Registration Statement").
We are of the opinion that the Notes have been duly authorized and are
binding obligations of the Company entitled to the benefits of the Indenture
dated as of February 2, 2000, between the Company and State Street Bank and
Trust Company of California, N.A., as Trustee. We are of the further opinion
that the Conversion Shares have been duly authorized and, when issued by the
Company upon conversion of the Notes in accordance with the Indenture, will be
legally issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the use of our name under the caption "Legal
Matters" in the Registration Statement and the Prospectus included therein.
Sincerely,
WILSON SONSINI GOODRICH & ROSATI Professional
Corporation
/s/ WILSON SONSINI GOODRICH & ROSATI, P.C.
<PAGE>
Exhibit 12.01
Rational software Corporation
Computation of Ratio of Earnings to Fixed Charges
(In thousands, except ratio data)
Years ended March 31,
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
Earnings:
Net income (loss) before
income taxes (721) (42,791) (28,826) 84,642 122,079
Fixed charges (1) 1,321 1,981 3,687 3,384 4,352
Total earnings, as adjusted 600 (40,810) (25,139) 88,026 126,431
Divided by fixed charges 1,321 1,981 3,687 3,384 4,352
Ratio of earnings to fixed
charges (2) n/a n/a n/a 26.01 29.05
(1) Fixed charges consist of interest expense incurred, including capital
leases and the option of rental expense under operating leases deemed by
Rational Software Corporation to be representative of the interest factor.
(2) Rational Software Corporation would have had to generate additional
earnings of $.7, $42.8, and $28.8 million for the years ended march 31, 1996,
1997, and 1998, respectively, to achieve a ratio of 1:1.
<PAGE>
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENDT AUDITORS
We consent to the reference of our firm under the caption "Experts" in the
Registration Statement (Form S-3) and related Prospectus of Rational Software
Corporation for the registration of $500,000,000 of 5% Subordinate Notes due
February 1, 2007 and 6,998,880 shares of its common stock and to the
incorporation by reference therein of our report dated April 18, 2000, with
respect to the consolidated financial statements and schedule of Rational
Software Corporation included in its Annual Report (Form 10-K) for the year
ended March 31, 2000, filed with the Securities and Exchange Commission.
/S/ Ernst & Young LLP
Palo Alto, California
April 28, 2000
<PAGE>
Exhibit 25.1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM T-1
_________
STATEMENT OF ELIGIBILITY UNDER THE
TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
Check if an Application to Determine Eligibility
of a Trustee Pursuant to Section 305(b)(2) [x]
STATE STREET BANK AND TRUST COMPANY OF CALIFORNIA, NATIONAL ASSOCIATION
(Exact name of trustee as specified in its charter)
<TABLE>
<S> <C>
United States 06-1143380
(Jurisdiction of incorporation or (I.R.S. Employer
organization if not a U.S. national bank) Identification No.)
</TABLE>
633 West 5th Street, 12th Floor, Los Angeles, California 90071
(Address of principal executive offices) (Zip Code)
Lynda A. Vogel, Senior Vice President and Managing Director
633 West 5th Street, 12th Floor, Los Angeles, California 90071
(213) 362-7399
(Name, address and telephone number of agent for service)
RATIONAL SOFTWARE CORPORATION
(Exact name of obligor as specified in its charter)
<TABLE>
<CAPTION>
<S> <C>
CALIFORNIA 54-1217099
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
18880 HOMESTEAD ROAD, CUPERTINO, CALIFORNIA 95014
(Address of principal executive offices) (Zip Code)
5% SENIOR SUBORDINATED CONVERTIBLE DEBENTURES DUE 2007
(TYPE OF SECURITIES)
<PAGE>
GENERAL
Item 1. General Information.
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervisory authority to which
it is subject.
Comptroller of the Currency, Western District Office, 50
Fremont Street, Suite 3900, San Francisco, California, 94105-2292
(b) Whether it is authorized to exercise corporate trust powers.
Trustee is authorized to exercise corporate trust powers.
Item 2. Affiliations with Obligor.
If the Obligor is an affiliate of the trustee, describe each such
affiliation.
The obligor is not an affiliate of the trustee or of its parent,
State Street Bank and Trust Company.
(See notes on page 2.)
Item 3. through Item 15. Not applicable.
Item 16. List of Exhibits.
List below all exhibits filed as part of this statement of eligibility.
1. A copy of the articles of association of the trustee as now in effect.
A copy of the Articles of Association of the trustee, as now in
effect, is on file with the Securities and Exchange Commission as an
Exhibit with corresponding exhibit number to the Form T-1of Western Digital
Corporation, filed pursuant to Section 305(b)(2) of the Trust Indenture Act
of 1939, as amended (the "Act"), on May 12, 1998 (Registration No. 333-
52463), and is incorporated herein by reference.
2. A copy of the certificate of authority of the trustee to commence
business, if not contained in the articles of association.
A Certificate of Corporate Existence (with fiduciary powers) from the
Comptroller of the Currency, Administrator of National Banks is on file
with the Securities and Exchange Commission as an Exhibit with
corresponding exhibit number to the Form T-1 of Western Digital
Corporation, filed pursuant to Section 305(b)(2) of the Act, on May 12,
1998 (Registration No. 333-52463), and is incorporated herein by reference.
3. A copy of the authorization of the trustee to exercise corporate
trust powers, if such authorization is not contained in the documents
specified in paragraph (1) or (2), above.
Authorization of the Trustee to exercise fiduciary powers (included
in Exhibits 1 and 2; no separate instrument).
4. A copy of the existing by-laws of the trustee, or instruments
corresponding thereto.
A copy of the by-laws of the trustee, as now in effect, is on file
with the Securities and Exchange Commission as an Exhibit with
corresponding exhibit number to the Form T-1 of Western Digital
Corporation, filed pursuant to Section 305(b)(2) of the Act, on May 12,
1998 (Registration No. 333-52463), and is incorporated herein by reference.
1
<PAGE>
5. A copy of each indenture referred to in Item 4. if the obligor is in
default.
Not applicable.
6. The consents of United States institutional trustees required by
Section 321(b) of the Act.
The consent of the trustee required by Section 321(b) of the Act
is annexed hereto as Exhibit 6 and made a part hereof.
7. A copy of the latest report of condition of the trustee published
pursuant to law or the requirements of its supervising or examining
authority.
A copy of the latest report of condition of the trustee
published pursuant to law or the requirements of its supervising
or examining authority is annexed hereto as Exhibit 7 and made a
part hereof.
NOTES
In answering any item of this Statement of Eligibility which relates to
matters peculiarly within the knowledge of the obligor or any underwriter for
the obligor, the trustee has relied upon information furnished to it by the
obligor and the underwriters, and the trustee disclaims responsibility for the
accuracy or completeness of such information.
The answer furnished to Item 2. of this statement will be amended, if
necessary, to reflect any facts which differ from those stated and which would
have been required to be stated if known at the date hereof.
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, as
amended, the trustee, State Street Bank and Trust Company of California,
National Association, a national banking association, organized and existing
under the laws of the United States of America, has duly caused this statement
of eligibility to be signed on its behalf by the undersigned, thereunto duly
authorized, all in the City of Los Angeles, and State of California, on the 1st
day of May, 2000.
STATE STREET BANK AND TRUST COMPANY
OF CALIFORNIA, NATIONAL ASSOCIATION
By: /S/ STEPHEN RIVERO
---------------------------
NAME: Stephen Rivero
TITLE: Vice President
2
<PAGE>
EXHIBIT 6
CONSENT OF THE TRUSTEE
Pursuant to the requirements of Section 321(b) of the Trust Indenture Act
of 1939, as amended, in connection with the proposed issuance by Rational
Software Corporation of its 5% Convertible Subordinated Notes Due 2007, we
hereby consent that reports of examination by Federal, State, Territorial or
District authorities may be furnished by such authorities to the Securities and
Exchange Commission upon request therefor.
STATE STREET BANK AND TRUST COMPANY
OF CALIFORNIA, NATIONAL ASSOCIATION
By: /S/ STEPHEN RIVERO
---------------------------
NAME: Stephen Rivero
TITLE: Vice President
Dated: May 1, 2000
3
<PAGE>
EXHIBIT 7
Consolidated Report of Condition and Income for A Bank With Domestic Offices
Only and Total Assets of Less Than $100 Million of State Street Bank and Trust
Company of California, a national banking association duly organized and
existing under and by virtue of the laws of the United States of America, at the
close of business March 31, 2000, published in accordance with a call made by
--------------
the Federal Deposit Insurance Corporation pursuant to the required law: 12
U.S.C. Section 324 (State member banks); 12 U.S.C. Section 1817 (State nonmember
banks); and 12 U.S.C. Section 161 (National banks).
<TABLE>
<CAPTION>
Thousands
ASSETS of Dollars
Cash and balances due from depository institutions:
<S> <C>
Noninterest-bearing balances and currency and coins...................................................... 6,121
Interest-bearing balances................................................................................ 0
Securities................................................................................................... 38
Federal funds sold and securities purchased
under agreements to resell in domestic offices
of the bank and its Edge subsidiary...................................................................... 0
Loans and lease financing receivables:
Loans and leases, net of unearned income ................................................. 0
Allowance for loan and lease losses ...................................................... 0
Allocated transfer risk reserve........................................................... 0
Loans and leases, net of unearned income and allowances ................................................. 0
Assets held in trading accounts.............................................................................. 0
Premises and fixed assets.................................................................................... 22
Other real estate owned...................................................................................... 0
Investments in unconsolidated subsidiaries................................................................... 0
Customers' liability to this bank on acceptances outstanding................................................. 0
Intangible assets............................................................................................ 0
Other assets................................................................................................. 1,213
-----
Total assets................................................................................................. 7,394
=====
</TABLE>
LIABILITIES
<TABLE>
<CAPTION>
Deposits:
<S> <C>
In domestic offices...................................................................................... 0
Noninterest-bearing......................................................................... 0
Interest-bearing............................................................................ 0
In foreign offices and Edge subsidiary................................................................... 0
Noninterest-bearing......................................................................... 0
Interest-bearing............................................................................ 0
Federal funds purchased and securities sold under
agreements to repurchase in domestic offices of
the bank and of its Edge subsidiary...................................................................... 0
Demand notes issued to the U.S. Treasury and Trading Liabilities............................................. 0
Other borrowed money......................................................................................... 0
Subordinated notes and debentures............................................................................ 0
Bank's liability on acceptances executed and outstanding..................................................... 0
Other liabilities............................................................................................ 3,530
-----
Total liabilities............................................................................................ 3,530
=====
</TABLE>
EQUITY CAPITAL
<TABLE>
<S> <C>
Perpetual preferred stock and related surplus................................................................ 0
Common stock................................................................................................. 500
Surplus...................................................................................................... 750
Undivided profits and capital reserves/Net unrealized holding gains (losses)................................. 2,614
Cumulative foreign currency translation adjustments.......................................................... 0
Total equity capital......................................................................................... 3,864
-----
Total liabilities and equity capital......................................................................... 7,394
=====
</TABLE>
4
<PAGE>
I, John J. Saniuk, Vice President and Comptroller of the above named bank do
hereby declare that this Report of Condition and Income for this report date
have been prepared in conformance with the instructions issued by the
appropriate Federal regulatory authority and is true to the best of my knowledge
and belief.
/S/ JOHN J. SANIUK
We, the undersigned directors, attest to the correctness of this Report of
Condition and declare that it has been examined by us and to the best of our
knowledge and belief has been prepared in conformance with the instructions
issued by the appropriate Federal regulatory authority and is true and correct.
/S/ ALAN D. GREENE
/S/ BRYAN R. CALDER
/S/ LYNDA A. VOGEL
5
