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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended March 31, 2000
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File Number 0-12167
Rational Software Corporation
(Exact name of Registrant as specified in its charter)
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<S> <C>
Delaware 54-1217099
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
18880 HOMESTEAD ROAD,
CUPERTINO, CA 95014-0721
(Address of principal executive offices) (Zip Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.01 per share
(Title of Class)
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408-863-9900
(Registrant's telephone number including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods as the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
At March 31, 2000, the aggregate market value of Registrant's voting stock
held by nonaffiliates was $6,877,726,380. For the purposes of the preceding
sentence only, "affiliates" is deemed to consist of executive officers and
directors. At March 31, 2000, there were 90,242,679 shares of the Registrant's
$0.01 par value Common Stock outstanding.
Unless indicated otherwise, all Common Stock share numbers and prices have
been adjusted to reflect Rational Software Corporation's May 1995 3:1 reverse
stock split and July 1996 1:2 forward stock split, accomplished by means of a
stock dividend.
Unless indicated otherwise, all financial information has been restated to
reflect Rational Software Corporation's acquisitions of SQA, Inc., and Pure
Atria Corporation, accounted for as poolings of interests.
Certain sections of the Registrant's definitive Proxy Statement for the
2000 Annual Meeting of Stockholders to be held on July 20, 2000, are
incorporated by reference in Part III of this Form 10-K to the extent stated
herein.
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An Index to Exhibits Begins on Page 51
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The statements contained in this Annual Report on Form 10-K include
forward-looking information within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, and are subject to the safe harbor created by those
sections. Such forward-looking statements include without limitation
statements regarding product development plans and schedules, relationships
with strategic partners and other third parties, foreign currency
fluctuations, competition, market conditions, Catapulse operations and
results, year 2000 issues, future acquisitions, trends in overall revenues,
revenue mix, software development costs, tax rates, tax net operating loss
carryforwards, expenses, and other financial statement items. Rational's
actual future results could differ materially from those projected in the
forward-looking information. Factors that could cause actual results to differ
materially include, without limitation, those identified in "Factors That May
Affect Future Results" below.
PART I
ITEM 1--BUSINESS
Overview
We are 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 our business is e-development, that is, helping customers rapidly develop
high-quality software for the Internet-connected global economy. We serve
customers in three principal categories that we refer to as e-business, e-
infrastructure, and e-devices:
. e-business customers include organizations that are leveraging the power
of the Internet to improve their businesses by building business-to-
business and/or business-to-consumer software. Our Internet e-business
customers include Charles Schwab & Co., E*Trade, i2 Technologies,
Merrill Lynch, and Siebel Systems.
. e-infrastructure customers are building the physical and software
infrastructure for the Internet and include communications as well as
operating system and "middleware" software vendors. Our e-infrastructure
customers include America Online, Cisco, Ericsson, IBM, Lucent,
Microsoft, and Sun Microsystems.
. e-devices customers are building devices with embedded software that
provide connectivity to the Internet and other specialized networks. Our
e-devices customers include Hewlett-Packard, Nokia, Motorola, Palm,
Phillips, and Sony.
Industry Background
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 and quality of their software
development; they can no longer afford to trade one off for the other. This
"e-software paradox" becomes increasingly prevalent as software becomes more
business-critical. Accordingly, it is becoming increasingly important for
businesses to adopt more effective approaches to software development.
In addition, software is becoming more complex, requiring coordinated teams
of professionals to develop and deploy it. These teams are comprised of
software professionals numbering in the millions and spanning
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multiple software engineering disciplines. These teams must work in unison to
meet today's increased speed and quality needs. An increasing number of
organizations are seeking to improve the efficiency of their software teams by
addressing the fundamentals of software development at every stage: inception,
analysis, design, development, test, and deployment. Organizations are finding
that they can improve their software development by upgrading their best
practices, applying advanced tools and leveraging the expertise of experienced
vendors.
Our target users are professionals on software development teams employed
by businesses across a variety of industries. These software professionals
span multiple software engineering disciplines--such as analysis, design,
programming and testing--and now number in the millions.
The Rational Solution
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 covers 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.
Our products and services:
. Reduce time-to-market. Our products help organizations improve both
individual and team productivity, reducing the time required to develop
and deploy quality software.
. Improve software quality. Our solution allows testers and developers to
more quickly verify the reliability and functionality of their software.
Using our solution teams can apply more automated testing techniques
earlier in the product development cycle to uncover errors when they are
significantly less costly to fix.
. Improve application performance. We help customers identify performance
bottlenecks and understand the impact of alternative deployment
scenarios. Users of our solutions can estimate the performance of
Internet and other applications under a variety of potential operating
conditions.
. Improve process maturity. Our integrated solution helps customers
improve both the predictability and repeatability of their software
development processes. Our products encourage teams to adopt proven
software engineering best practices, which we deliver in an easy-to-
access format directly from our tools.
. Manage change more effectively. Our products help teams track project
status and manage changes to evolving source code. Our solution helps
organizations leverage technical resources wherever they are located,
and allows multiple team members to work on the same project
simultaneously.
Our Strategy
Our mission is to ensure the successful software development efforts of our
customers. Our strategy is to build customer relationships by offering
comprehensive solutions to the software management problem through an
integrated set of tools, best practices, and services. Key components of our
strategy include:
. Increasing adoption of our integrated solution. While we are the leading
provider of integrated solutions that automate the software development
process, we believe we are currently only serving a small portion of our
potential market. We intend to continue to target new customers based on
the proven benefits of our integrated solution. In addition, we intend
to increase penetration of our existing customers by demonstrating the
benefits of our additional products and services.
. Extending product leadership. We intend to continuously improve the
functionality of our products and services to meet the evolving needs of
our customers. We intend to continue to leverage our strong
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relationship with the software development community as well as our
industry knowledge and expertise to ensure that we maintain our product
leadership. In addition, we will continue to invest significant
resources in research and development to improve our existing products
and develop new products.
. Acquiring or investing in complementary products. To achieve our
objective of providing the most comprehensive software development
solution, we have from time to time acquired businesses, products, or
technologies that are complementary to our business. For example, our
acquisition of ObjecTime extends our capabilities in real-time embedded
systems development. We intend to acquire or invest in other leading
technologies that address the needs of our customers and that we can
integrate into our product family.
. Continuing to form key strategic alliances. We intend to continue to
develop long-term strategic relationships with leading software and
hardware vendors to increase our exposure to potential users and thereby
expand our customer base. Consistent with this strategy, we have entered
into strategic alliances with IBM, Microsoft, Intel, and Hewlett-
Packard. Our strategic alliances provide for such things as technology
cross-licensing, joint development projects, and joint marketing
programs.
Products and Services
Rational Unified Process
Rapid delivery of high-quality software requires cohesive teamwork and a
predictable, well-understood process. Rational satisfies this need with the
Rational Unified Process, a set of software engineering best practices
optimized for rapid development of high-quality software. The Rational Unified
Process combines lessons learned from thousands of customer engagements with
the expertise of industry thought leaders. Its entire contents--including
prescriptive guidelines, templates, and examples--can be directly accessed
from any Rational tool through seamless integrations that make the process
practical. When combined with our comprehensive services and team unifying
tools, the Rational Unified Process serves as a recipe for rapid delivery of
high-quality software.
Rational Integrated Solutions
Our products span the software development life cycle. Rational products
are available in individual editions that address the unique needs of specific
software engineering disciplines, such as project scheduling, system
definition, software development, content management, and system testing. In
addition, many Rational products are available in tightly integrated suite
editions. Our suite editions unify cross-functional teams by automating the
flow of project artifacts and providing shared access to common data. They
provide an easy way for customers to acquire and deploy complete software
development solutions.
Rational Suites
The Rational Suite family provides tightly integrated solutions that make
it easy for customers to acquire and deploy complete software development
solutions. We design each suite around the needs of the various software
engineering disciplines that are part of every software development team. Each
suite also includes a core set of team-unifying tools to improve the
productivity of the entire team.
. Rational Suite AnalystStudio is an answer to the problems facing today's
analysts. Analysts are responsible for collecting, managing, and
communicating project requirements to the entire team. Rational Suite
AnalystStudio optimizes the analyst's effectiveness by combining
powerful tools that collect enhancement requests, manage requirements
information, and visually model use cases for better communication.
. Rational Suite DevelopmentStudio is a complete solution for software
architects and developers. Architects and developers are responsible for
designing software systems and developing code.
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Rational Suite DevelopmentStudio combines the power of visual modeling
for software design and automated testing to improve the quality of the
code before it is handed off to quality assurance professionals.
. Rational Suite DevelopmentStudio RealTime Edition provides an integrated
solution for software teams developing complex, real-time embedded
software applications used in cell phones, pagers, routers, hubs, and
other products fueling the Internet economy. It combines the power of
visual modeling and automated testing with advanced features optimized
for the unique challenges of real-time engineering.
. Rational Suite TestStudio is a fully integrated suite of testing tools
that automates test planning, test developments, test execution, and
defect tracking. Designed for testing and quality assurance
professionals who ensure software systems meet quality standards as well
as end-user requirements, it ensures that a common set of testing tools,
methods, metrics, and data are used by the entire project team.
. Rational Suite PerformanceStudio provides an accurate prediction of an
application's performance under load by enabling organizations to test
their e-business, ERP, and client/server applications as their users
will experience it. Designed for performance engineers and performance
testers, Rational Suite PerformanceStudio integrates functional and
system performance testing to deliver the information needed to make
critical development, deployment, and resource planning decisions.
. Rational Suite Enterprise combines all of the tools of Rational Suite
AnalystStudio, DevelopmentStudio, and TestStudio. Designed for project
leaders and other practitioners who span multiple functional boundaries,
Rational Suite Enterprise provides a complete software development
solution in one easy-to-acquire package.
Configuration and Change Management Solutions
Rational's configuration and change management products unify software
teams by providing comprehensive support for development teams working in
parallel on shared project artifacts, such as source code, binary files,
software models, requirements documents, test cases, and project reports.
. Rational ClearCase is our configuration management solution. ClearCase
accelerates development cycles, ensures the accuracy of releases, and
enables teams to reliably build and patch previously shipped products.
It provides secure and reliable access to project artifacts, allowing
teams to share their work. ClearCase maintains a full audit trail of who
changed what, when, where, and why, manages multiple versions of
software artifacts, and reliably performs "builds" of software systems.
Rational ClearCase MultiSite supports geographic distribution of
software development teams working on shared sets of artifacts.
. Rational ClearQuest is a flexible defect tracking/change request
management system for tracking and reporting on defects and other types
of change requests throughout the development life cycle. ClearQuest
provides reliable project metrics and is fully customizable. ClearQuest
helps project teams ensure that change occurs in a managed fashion.
Combined, Rational ClearCase and Rational ClearQuest offer Unified Change
Management (UCM), an automated process for managing changes to project
activities and artifacts. UCM helps teams get up and running quickly by
providing built-in project workflow and change management support. Its
activity-based approach helps teams work more intuitively by focusing on high-
level activities instead of individual changes to files.
Requirements Management Solutions
Rational RequisitePro is the flagship member of the Rational Requisite
family. This family of tools is designed to make requirements management
intrinsic to the development process by making requirements easy to document,
organize, and track as changes are made throughout the project life cycle.
Rational RequisitePro
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enables team-based requirements management. RequisitePro is supplemented with
RequisiteEnterprise, which adds support for enterprise databases, and
RequisiteWeb, which provides a Web interface for viewing and editing
RequisitePro requirements.
Visual Modeling Solutions
. Rational Rose is a Unified Modeling Language (UML)-based software
modeling tool for designing component-based applications. The UML,
pioneered by Rational and officially adopted as a standard by the Object
Management Group (OMG), is the industry-standard language for
specifying, visualizing, constructing, and documenting the artifacts of
a software system. COM, ActiveX, and JavaBean components can be reverse
engineered to derive interfaces and determine the interrelationships of
all components within a model. Rose gives developers the ability to mix
and match multiple languages, such as C++, Visual Basic, and Java,
within the same model.
. Rational Rose RealTime is a visual modeling environment designed
specifically to address the needs of software teams that manage and
deliver real-time software applications. Rational Rose RealTime combines
market-leading visual modeling technology with advanced model execution
and code generation technology. Rose RealTime also supports the Unified
Modeling Language (UML).
Automated Testing Solutions
Rational's solutions for automated testing help testers and developers
verify the reliability and functionality of their software and improve its
performance.
. Rational Robot lets the user create, modify, and run automated tests on
Web, ERP, and client/server applications. This test automation solution
offers reusability and portability of test recordings across Windows
platforms to provide one recording that plays back on all Windows
platforms. Rational TestFactory automates the creation of test scripts--
so testers do not have to invest significant amounts of time developing
test scripts. Robot and TestFactory are key components of Rational Suite
TestStudio. Rational LoadTest offers load, stress, and multi-user
testing of client/server applications. It automates the use of multiple
transactions from a single test script, the creation of workloads for 10
or 10,000+ users, and the insertion of production-level timing
characteristics.
. Rational Visual Test, an automated, language-independent, software-
testing tool, is designed to test proper software functionality by
rapidly creating tests for applications of virtually any size and
created in any implementation language by capturing those tests for
later reuse.
. Rational Purify, Rational PureCoverage, and Rational Quantify are
designed to help developers and testers verify the reliability of their
software. Purify employs patented object-code insertion (OCI) technology
to executable code and automatically detects many common runtime errors.
PureCoverage also employs OCI technology to analyze executable code and
to report which parts of the code have not been executed and tested.
Quantify helps developers verify software performance by measuring where
time is spent during software execution and by providing users with
accurate data on potential performance bottlenecks. This data tells
users what portions of the application need to be tuned or revised to
improve performance.
Integrated Development Environment Solutions
Rational Apex is a software-engineering environment for control of software
projects. It effectively controls large-scale development efforts, helping
customers improve time-to-market while reducing risk and cost. It also makes
large-scale software reuse possible by directly managing software
architecture, significantly improving the efficiency of the overall software-
development process. Rational Apex runs on UNIX platforms and is available in
versions that support the C/C++ and Ada programming languages for UNIX,
Windows NT, and embedded applications.
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Technical Consulting and Customer Support Services
Rational offers its customers the benefits of nearly 20 years of experience
in developing and applying tools and proven best practices for software
development. This experience is drawn from hundreds of Rational software
consultants working directly with customers, and from extensive internal use
of Rational tools. Rational's professional services facilitate customer
adoption of these tools and best practices, maximizing the probability of
project success. Customers are able to take full advantage of our experience,
avoid common pitfalls, and get maximum value from their investment in
Rational's solution.
Rational and its partners offer a wide range of professional services.
These include tool and technology training delivered onsite or in public
classes, onsite implementation planning, software-engineering mentoring, and
architecture and process consulting. Rational also offers a support program
that entitles a licensee to receive all enhancements and upgrades to the
licensed product that are published in the succeeding 12-month period, as well
as certain other support services.
Business Alliances
Rational works with numerous strategic partners for e-business, e-device,
and e-infrastructure platforms and applications. In this context, Rational
works with vendors such as Microsoft, IBM, Intel, Sun Microsystems,
Peoplesoft, Oracle, Hewlett-Packard, SGI, and others. These relationships may
include technology cross-licensing arrangements and cooperative marketing
relationships as well as exchange of development plans and strategic
directions. Rational's relationship with Microsoft includes, among other
things, Rational providing certain visual modeling technology to Microsoft
that is included in Microsoft's Visual Studio Products.
See "Factors That May Affect Future Results: We depend on strategic
relationships and business alliances for continued growth of our business."
Product Development
Rational believes that its success will depend largely on its ability to
enhance existing products and develop new products that meet the needs of a
rapidly evolving marketplace and increasingly sophisticated and demanding
customers. Rational intends to extend and strengthen its life cycle support
for team-based development by expanding its product offerings, introducing new
products, and offering higher levels of integration among its products.
Rational uses its own software processes and tools extensively in its own
software-development activities. Although Rational has primarily developed
products internally, it may, based on timing and cost considerations, acquire
technologies or products from third parties.
Rational's research and development staff, including product development,
product support, and technical writing personnel, consisted of 690 employees
as of March 31, 2000. Rational's total research and development expenses were
approximately $102.8 million, $71.9 million, and $61.6 million in fiscal years
2000, 1999, and 1998, respectively. As a result of our merger with Pure Atria,
accounted for as a pooling of interests, research and development costs are
presented on a combined basis for fiscal 1998.
Customers and Applications
More than 617,000 licenses of Rational's software products, exclusive of
Rational Visual Test, have been sold to more than 39,000 customers worldwide.
No single customer accounted for 10% or more of revenues in fiscal 2000.
Rational's comprehensive solution of software-development tools and
professional services is used by major organizations in many industry segments
to design, build, and maintain complex software systems.
Sales and Marketing
Rational markets and sells its products and services directly through its
field sales organizations, the World Wide Web, and indirectly through channels
such as value-added resellers (VARs) and distributors.
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Rational's direct selling approach couples sales of its integrated software
tools with high-value technical consulting services. Rational has established
a major-account direct sales and technical consulting organization in the
United States, Canada, Europe, Latin America, and the Asia/Pacific region. In
most regions this direct sales organization includes a telesales operation to
augment its direct sales presence.
Rational's sales, marketing, and professional services organization
consisted of 1,701 employees as of March 31, 2000. This organization operated
out of corporate headquarters in Cupertino, California, operations in
Lexington, Massachusetts, and from field offices in other locations throughout
North America, Europe, and the Asia/Pacific region. Rational's direct
international operations are staffed almost exclusively by local personnel.
Additionally, Rational also has distributors and resellers in the same
regions.
In support of its sales efforts, Rational's marketing department conducts
comprehensive programs, which include:
. maintenance of an extensive World Wide Web site;
. an electronic subscription service for news announcements about
Rational;
. print and web advertising;
. public relations and industry analyst communications;
. trade shows, technical seminars, webinars, and the annual international
Rational User Conference;
. direct mail promotions and other mailings to keep its prospects and
customers informed;
. creation of sales brochures, multi-media CD's, and technical papers;
. management of marketing activities and promotions with members of the
Rational Unified Partners program;
. internal sales product training.
International sales accounted for approximately 41%, 40%, and 34% of the
Company's revenues in fiscal 2000, 1999, and 1998, respectively, and we expect
that international sales will continue to account for a significant portion of
our revenues in the future. International sales are subject to inherent risks,
including:
. unexpected changes in regulatory requirements and tariffs;
. difficulties in staffing and managing foreign operations;
. longer payment cycles;
. greater difficulty in accounts receivable collection;
. potentially adverse tax consequences;
. price controls or other restrictions on foreign currency;
. difficulties in obtaining export and import licenses.
Any material adverse effect on our international business would be likely
to materially and adversely affect our business, operating results, and
financial condition as a whole. There can be no assurance that we will not
experience a material adverse impact on our financial condition and results of
operations from fluctuations in foreign currencies or from macroeconomic
problems in various markets or geographies in the future. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations:
Overview; Revenue; International Sales."
Product Pricing
Rational's software licenses are generally perpetual, fully paid-up
floating or node-locked licenses. Floating licenses limit the number of
simultaneous users on a network instead of being associated with a specific
user or
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computer. Node-locked licenses limit a software license to a single computer.
We also offer other kinds of licenses, such as project licenses that provide
selected Rational tools to all the developers working on a specific project.
We also offer a support program that entitles a licensee to receive all
enhancements and upgrades to the licensed product that are published in the
succeeding 12-month period, as well as certain other support services. Annual
fees for support generally range from 15% to 25% of the software license fee.
Rational's packaged training courses are offered in the form of open-
enrollment public courses and in-house courses at customer facilities.
Additionally, Rational offers packaged consulting services that are generally
priced on a time-and-materials basis.
See "Factors That May Affect Future Results: Promotional product versions
may adversely impact our actual product sales."
Competition
The industry for automating software application development and management
is extremely competitive and rapidly changing. We expect to continue to
experience significant and increasing levels of competition in the future.
Bases of competition include:
. corporate and product reputation;
. innovation with frequent product enhancement;
. breadth of integrated product lines and the availability of integrated
suites and bundles;
. product architecture, functionality, and features;
. product quality, performance, and ease of use;
. quality of support and availability of technical consulting services;
. price.
We face intense competition for each product in our product lines,
generally from both Windows and UNIX vendors. Because individual product sales
are often the first step in a broader customer relationship, our success will
depend in part on our ability to successfully compete with numerous
competitors at each point in their product lines.
We face competition from software development tools and processes developed
internally by customers, including ad hoc integrations of numerous stand-alone
development tools. Customers may be reluctant to purchase products offered by
independent vendors such as ours. As a result, we must educate prospective
customers about the advantages of our products versus internally developed
software quality systems.
Rational faces competition from, among others, Aonix, Compaq, Computer
Associates, Compuware, Continuus Software Corporation, Cyrano, GEC-Marconi,
Green Hills Software, Hewlett-Packard, IBM, Merant, plc (formerly Intersolv,
Inc.), Mercury Interactive Corporation, Microsoft, Oracle, Mortice Kern
Systems (MKS), Perforce Software, Platinum Technology, Inc., Princeton
Softech, Inc., Segue Software, Inc., SGI, SQL Software LTD., StarBase
Corporation, Sun Microsystems, Sybase Inc., Teradyne, and True Software, as
well as numerous other public and privately held software application
development and tools suppliers. We expect additional competition from other
established and emerging companies.
We believe we are well-positioned to compete due to the combination of our:
. integrated family of products supporting component-based development
throughout the software development life cycle;
. emphasis on controlled iterative development and visual modeling;
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. architecture-driven process;
. extensive major-account direct sales and technical consulting
organization;
. supporting channels such as telesales, VARs, distributors, and the World
Wide Web.
We believe that the increased level of competition we observed in fiscal
2000 will continue to increase. Certain of our competitors are more
experienced than we in the development of software engineering tools,
databases, or software development products. Some of our competitors have, and
new competitors may have, larger technical staffs, more established
distribution channels, and greater financial resources than we do. There can
be no assurance that either existing or new competitors will not develop
products that are superior to our products or that achieve greater market
acceptance. Our future success will depend in large part on our ability to
increase our share of target markets and to license additional products and
product enhancements to existing customers. Future competition may result in
price reductions, reduced margins, or loss of sales, which in turn would have
a material adverse effect on our business, results of operations, and
financial condition.
Intellectual Property
We regard our software as proprietary and attempt to protect it under a
combination of copyright, trademark, patent, and trade-secret laws, employee
and third-party nondisclosure agreements, and other methods of protection.
Despite these precautions, it may be possible for unauthorized third parties
to copy certain portions of our products or to reverse engineer or obtain and
use information we regard as proprietary. Although our competitive position
may be affected by our ability to protect our proprietary information, we
believe that trademark and copyright protections are less significant to our
success than are other factors, such as trade-secret protection, the
knowledge, ability, and experience of our personnel, name recognition, and
ongoing product development and support.
Our software products are generally licensed to end users on a right-to-use
basis pursuant to a perpetual license. We license our products primarily under
"shrink-wrap" licenses (that is, licenses included as part of the product
packaging). Shrink-wrap licenses are not negotiated with or signed by
individual licensees and purport to take effect upon the opening of the
product package. Certain provisions of such licenses, including provisions
protecting against unauthorized use, copying, transfer, and disclosure of the
licensed program, may be unenforceable under the laws of certain
jurisdictions. In addition, the laws of some countries do not protect our
proprietary rights to the same extent as do the laws of the United States.
As the number of software products in the industry increases and the
functionality of these products further overlaps, we believe that software
programs will increasingly become subject to infringement claims. There can be
no assurance that third parties will not assert infringement claims against us
in the future with respect to current or future products. Any such assertion
could require us to enter into royalty arrangements or result in costly
litigation.
Employees
We believe our success will depend in part on our continued ability to
attract and retain highly qualified personnel in a competitive market for
experienced and talented software engineers and sales and marketing personnel.
Our employees are not represented by any collective bargaining organization,
and we have never experienced a work stoppage. As of March 31, 2000, our
employee base is as follows:
. product development and support, 690 employees
. sales, marketing, and technical consulting, 1,701 employees
. finance and administration, 324 employees
. total full-time personnel, 2,715 employees
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MANAGEMENT
The following table sets forth certain information with respect to the
executive officers and directors of Rational as of the date hereof.
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Name Position
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Paul D. Levy............ Founder and Chairman of the Board
Michael T. Devlin....... Founder, Chief Executive Officer and Director
Thomas F. Bogan......... President and Chief Operating Officer
David H. Bernstein...... Senior Vice President and General Manager, Products
Timothy A. Brennan...... Senior Vice President, Chief Financial Officer, and Secretary
James P. Cluchey........ Senior Vice President, International Field Operations
Kevin J. Haar........... Senior Vice President, Worldwide Field Operations
Dean Leffingwell........ Senior Vice President, Process and Project Management Products
John R. Lovitt.......... Senior Vice President, Professional Services
Joseph N. Marasco....... Senior Vice President and General Manager
James McGee............. Senior Vice President and General Manager, Modeling and Developer Products
Eric L. Schurr.......... Senior Vice President and General Manager, Marketing and Suite Products
</TABLE>
Mr. Levy, age 44, cofounded Rational in 1981 and is currently Chairman of
the Board. Before April 1999, Mr. Levy also served as Chief Executive Officer
of Rational. Mr. Levy currently serves as a director of Broadbase
Software Inc.
Mr. Devlin, age 45, cofounded Rational in 1981 and is currently Chief
Executive Officer and Director. Before September 1996, Mr. Devlin served as
Chairman of the Board of Rational.
Mr. Bogan, age 48, was named Rational's President and Chief Operating
Officer in April 2000. From April 1999 until April 2000, Mr. Bogan served as
Senior Vice President and Chief Operating Officer. From 1997 to 1999 he served
as Vice President and General Manager, Automated Test. From July 1996 until
February 1997, Mr. Bogan served as Senior Vice President, Finance and
Administration, Chief Financial Officer, Treasurer, and Assistant Secretary of
SQA, Inc. From 1993 to 1996 Mr. Bogan was President and Chief Executive
Officer of Pacific Data Products, Inc., a printer peripherals and networking
vendor.
Mr. Bernstein, age 48, joined the Company in 1982 and has served as Senior
Vice President and General Manager, Products since 1996. Prior to this, he
held various management positions with the Company, most recently as Senior
Vice President and General Manager, Object Technology Products.
Mr. Brennan, age 44, joined the Company in 1994 and has served as Senior
Vice President, Chief Financial Officer, and Secretary since January 1998.
From 1995 until 1998 Mr. Brennan served as Vice President, Finance and
Administration. From 1994 to 1995, he served as the Company's Controller.
Mr. Cluchey, age 52, currently serves as Senior Vice President,
International Field Operations. From 1997 to 1999 he served as Vice President,
International Field Operations. From 1995 to February 1997, Mr. Cluchey served
as Vice President and Managing Director of European Operations of SQA, Inc.
Mr. Haar, age 43, joined the Company in 1986 and currently serves as Senior
Vice President, Worldwide Field Operations. Prior to April 2000, he held
various management positions with the Company, most recently Senior Vice
President, The Americas Field Operations.
Mr. Leffingwell, age 50, was named Senior Vice President, Process and
Project Management Product in 1999. In 1998, he served as Vice President and
General Manager, Rational University. From 1997 to 1998 he served as Vice
President and General Manager, Requirements Management Business Unit. Prior to
joining Rational, he served as Chief Executive Officer of Requisite, Inc.,
which he cofounded in 1994.
11
<PAGE>
Mr. Lovitt, age 55, joined the Company in 1986 and currently serves as
Senior Vice President, Professional Services. From 1996 to 1999 he served as
Senior Vice President, Worldwide Field Operations. From 1990 to 1996
Mr. Lovitt served as Vice President, and subsequently Senior Vice President,
North American Field Operations.
Mr. Marasco, age 54, joined the Company in 1986 and has served as Senior
Vice President and General Manager since 1999. Prior to this, he held various
management positions with the Company, most recently as Senior Vice President,
Operations.
Mr. McGee, age 48, joined Rational as Senior Vice President and General
Manager, Modeling and Developer Products, in January 2000 when Rational
acquired ObjecTime Ltd. Prior to joining Rational, he served as the President
and Chief Executive Officer of ObjecTime Limited, and had been one of its
founders in 1992.
Mr. Schurr, age 42, currently serves as Senior Vice President and General
Manager, Marketing and Suite Products. During 1998 he served as Senior Vice
President, Marketing and Windows Suite Products. From 1997 to 1998 Mr. Schurr
served as Vice President, Product Marketing Commercial IS Products. From 1994
to February 1997, Mr. Schurr served as Vice President, Product Management and
Marketing of SQA.
Factors That May Affect Future Results
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.
Our net revenues 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;
. 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.
12
<PAGE>
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 revenues are largely correlated with
our license revenues, a decline in license revenues could also cause a decline
in our service revenues 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 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 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 enhance 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, 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.
13
<PAGE>
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 we are 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.
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, creating 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 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 work force. We may not
be successful in implementing these initiatives effectively and in a timely
fashion.
14
<PAGE>
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;
. 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
15
<PAGE>
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
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 Rational.
These business relationships often consist of cooperative marketing programs,
joint customer seminars, lead referrals, or joint development projects.
Although certain aspects of some of these relationships are contractual in
nature, many important aspects of these relationships depend 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
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.
If 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.
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.
16
<PAGE>
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
on 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.
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 to 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.
17
<PAGE>
If we cannot successfully integrate our past and future acquisitions and
achieve intended financial or strategic benefits, our revenues may decline
and our expenses 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.
Revenues in any quarter are substantially dependent on orders booked and
shipped in that quarter. Because staffing and operating expenses are based on
anticipated revenue levels and a high percentage of the costs are fixed, small
variations in the timing of the recognition of specific revenues could cause
significant variations in operating results from quarter to quarter.
Historically, the Company has earned a substantial portion of its revenues in
the last weeks of the quarter. To the extent these trends continue, the
failure to achieve such revenues in the last weeks of any given quarter will
have a material adverse effect on the Company's financial results for that
quarter. The Company's revenues are difficult to forecast because Rational's
sales cycles, from initial evaluation to purchase, vary substantially from
customer to customer and from product to product, and because the markets for
Rational's products are rapidly evolving. In addition, the Company's results
will be affected by the number, timing, and significance of new product
announcements by it and its competitors, its ability to develop, introduce,
and market new, enhanced, and integrated versions of its products on a timely
basis, the level of product and price competition, changes in operating
expenses, changes in average selling prices and product mix, any changes in
its sales incentive strategy, the experience level of and any changes in sales
personnel, any changes in sales cycles, the mix of direct and indirect sales,
product returns, and general economic factors, among others. The Company's
sales will also be sensitive to existing and prospective customers' budgeting
practices and global economic conditions.
Although Rational has experienced growth in revenues in recent years, there
can be no assurance that, in the future, Rational will sustain revenue growth
or be profitable on a quarterly or annual basis. Further, the revenues and
operating income (exclusive of nonrecurring operating, restructuring, and
merger-related expenses) experienced by Rational in recent quarters are not
necessarily indicative of future results, and period-to-period comparisons of
Rational's financial results should not be relied on as an indication of
future performance. Fluctuations in operating results have previously resulted
and may continue to result in volatility in the price of Rational's Common
Stock.
Due to all of the foregoing factors, it is possible that in some future
quarter, Rational's operating results will be below the expectations of public
market analysts and investors. In such an event, the price of Rational's
Common Stock would likely be materially adversely affected, and significant
declines in stock prices frequently result in costly and lengthy securities
litigation, with its attendant costs, distraction, and liability exposure.
18
<PAGE>
ITEM 2--PROPERTIES
Rational's headquarters are located in a leased facility, in Cupertino,
California, consisting of approximately 101,000 square feet of office space
occupied under a lease expiring in January 2007. Rational also leases
approximately 95,000 square feet of office space in Santa Clara, California,
under a lease expiring in January 2001, with a renewal option for an
additional five years, and approximately 178,000 square feet of office space
in Lexington, Massachusetts, under a multiple leases expiring through December
2004. The Company has additional field sales and software development offices
in the Americas, Europe, and Asia/Pacific regions.
ITEM 3--LEGAL PROCEEDINGS
The following actions have been filed against the Company, officer Paul D.
Levy, Cowen & Company and an individual Cowen employee, analyst Rehan Syed.
The action, In re Rational Software Securities Litigation, No. 21001-JF (N.D.
Cal. May 26, 1998) is a consolidated action supplanting prior complaints filed
against defendants. The actions are putative shareholder class action
lawsuits. The complaint alleges that defendants violated Sections 10(b) and
20A of the Securities Exchange Act of 1934 through the selective disclosure of
material inside information regarding the Company's prospects and seek damages
on behalf of a class of shareholders who purchased the Company's Common Stock
on October 8, 1997. Plaintiffs have dismissed the Complaint as against the
Company and Mr. Levy.
In December 1996, the Company filed suit against Silicon Graphics, Inc.
("SGI") seeking to recover royalties due to the Company under a license
agreement between SGI and the Company's predecessor in interest, Verdix
Corporation. SGI answered the complaint, denying any liability, and filed a
cross complaint seeking unspecified damages for alleged violations of the same
license agreement. Effective August 12, 1999, the Company and SGI entered an
agreement under which this litigation was settled in its entirety. The terms
of this agreement are confidential. The arrangement, however, will not have
any material impact on the Company's financial statements.
Any adverse outcome to these or future lawsuits against the Company may
result in a material adverse effect on the Company's financial condition.
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
19
<PAGE>
PART II
ITEM 5--MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on the NASDAQ national market under
the symbol RATL. As of March 31, 2000, there were approximately 1,047
stockholders of record of the Company's Common Stock. The Company has not,
since its formation, declared or paid any cash dividends on its Common Stock.
The Company intends to employ all available funds for the development of its
business and, accordingly, does not intend to declare or pay any cash
dividends in the foreseeable future.
The following table sets forth the range of high and low bids for the
Company's Common Stock as quoted on the NASDAQ national market for Rational
Common Stock for the periods indicated:
<TABLE>
<CAPTION>
High Low
------- ------
<S> <C> <C>
Fiscal year ended March 31, 2000:
Fourth Quarter............................................... $105.00 $42.31
Third Quarter................................................ 53.69 27.88
Second Quarter............................................... 40.00 26.38
First Quarter................................................ 37.50 21.88
Fiscal year ended March 31, 1999:
Fourth Quarter............................................... $ 35.63 $22.88
Third Quarter................................................ 27.36 10.88
Second Quarter............................................... 18.94 10.50
First Quarter................................................ 18.13 12.25
</TABLE>
The foregoing reflects interdealer prices without retail markup, markdown,
or commissions and may not necessarily reflect actual transactions.
20
<PAGE>
ITEM 6--SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Fiscal Year Ended March 31,
-------------------------------------------------
2000 1999 1998 1997 1996
---------- -------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statements of
Operations Data:
Net product revenues....... $ 354,497 $259,335 $184,953 $185,133 $126,876
Consulting and support
revenues.................. 217,693 152,481 125,717 92,735 61,261
---------- -------- -------- -------- --------
Total revenues......... 572,190 411,816 310,670 277,868 188,137
Cost of product revenues... 27,297 22,020 19,709 11,777 9,735
Cost of consulting and
support revenues.......... 59,607 40,848 43,356 38,305 26,779
---------- -------- -------- -------- --------
Total cost of
revenues.............. 86,904 62,868 63,065 50,082 36,514
---------- -------- -------- -------- --------
Gross margin............... 485,286 348,948 247,605 227,786 151,623
Operating expenses:
Research and
development............. 102,846 71,869 61,560 47,239 33,773
Sales and marketing...... 220,529 172,448 138,709 108,403 80,063
General and
administrative.......... 50,244 33,910 29,092 27,267 19,481
Charges for acquired in-
process research and
development............. 3,529 -- -- 56,798 20,300
Merger and integration
costs................... -- (1,200) 63,759 42,456 2,961
---------- -------- -------- -------- --------
Total operating
expenses.............. 377,148 277,027 293,120 282,163 156,578
---------- -------- -------- -------- --------
Operating income (loss).... 108,138 71,921 (45,515) (54,377) (4,955)
Other income, net.......... 12,857 12,721 16,689 11,586 4,234
---------- -------- -------- -------- --------
Income (loss) from
continuing operations
before income taxes....... 120,995 84,642 (28,826) (42,791) (721)
Provision for income
taxes..................... 36,765 25,393 9,447 6,820 7,115
Minority interest.......... 1,084 -- -- -- --
---------- -------- -------- -------- --------
Net income (loss)...... $ 85,314 $ 59,249 $(38,273) $(49,611) $ (7,836)
========== ======== ======== ======== ========
Net income (loss) per
common share (pro forma
for fiscal 1996):
Basic.................... $ 0.97 $ 0.69 $ (0.44) $ (0.62) $ (0.11)
Diluted.................. $ 0.89 $ 0.65 $ (0.44) $ (0.62) $ (0.11)
Shares used in computing
per share amounts:
Basic.................... 87,729 85,697 87,575 79,631 69,778
Diluted.................. 95,637 91,849 87,575 79,631 69,778
Consolidated Balance Sheet
Data:
Cash, cash equivalents, and
short-term investments.... $ 906,311 $259,830 $289,470 $327,395 $167,623
Working capital............ 831,858 228,366 228,397 282,974 145,383
Total assets............... 1,225,776 453,956 445,205 456,740 236,213
Long-term obligations...... 501,668 3,696 6,492 3,192 2,189
Stockholders' equity....... 456,307 294,372 287,176 330,109 162,482
</TABLE>
21
<PAGE>
ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The statements contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" include forward-looking
information within the meaning of Section 27A of the Securities Act of 1933,
as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended, and are subject to the safe harbor created by those sections. Such
forward-looking statements include without limitation statements regarding
trends in overall revenues, revenue mix, software development costs, tax
rates, tax net operating loss carryforwards, and liquidity and capital
resources. Rational's actual future results could differ materially from those
projected in the forward-looking information. Factors that could cause actual
results to differ materially include, without limitation, those identified in
"Factors That May Affect Future Results." Rational assumes no obligation to
update the forward-looking information or such factors.
Overview
General
Rational's revenues are derived from product license fees and charges for
services, including technical consulting, training, and customer support. In
accordance with generally accepted accounting principles, Rational software
license revenues are generally recognized when a customer purchase order has
been received and accepted, the software product has been shipped, there are
no uncertainties surrounding product acceptance, the fees are fixed and
determinable, and collection is considered probable. For customer license
agreements that meet these recognition criteria, the portion of the fees
related to software licenses will generally be recognized in the current
period, while the portion of the fees related to services is recognized as the
services are performed. Revenues from consulting and training are recognized
when earned. Rational's license agreements do not provide a right of return,
and reserves are maintained for potential credit losses, of which there have
been only immaterial amounts.
International sales accounted for 41%, 40%, and 34% of Rational's revenues
in fiscal 2000, 1999, and 1998, respectively. Rational expects that
international sales will continue to account for a significant portion of
Rational's revenues in future periods. See "Factors That May Affect Future
Results: Our international operations expose us to greater management,
collections, currency, intellectual property, regulatory, and other risks."
In the fiscal year ended March 31, 2000, Rational's revenues from product
sales grew 37% while revenues from consulting and support grew 43%, resulting
in a net overall increase in revenues of 39%. There can be no assurance that
this revenue mix trend will continue in future periods. See "Factors That May
Affect Future Results: 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; If market acceptance of our sophisticated software
development tools fails to grow adequately, our business may suffer; If we do
not develop and enhance new and existing products to keep pace with
technological, market, and industry changes, our revenues may decline."
Although Rational has experienced increasing revenues in each of the past
five fiscal years, Rational's sales compensation structure has historically
contributed to revenues for the first quarter of a fiscal year being lower
than revenues for the fourth quarter of the prior fiscal year. There can be no
assurance that Rational will continue to experience increasing revenues or
that similar fluctuations will not occur again in the future. See "Factors
That May Affect Future Results: 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."
As a result of the Company's acquisition of Pure Atria Corporation in July
1997, accounted for as a pooling of interests, the information herein and the
accompanying consolidated financial statements and selected financial data are
presented on a combined basis for fiscal 1998 and all applicable periods, as
described in more detail below.
22
<PAGE>
Acquisitions
The Company completed a business combination, accounted for as a pooling of
interests, with Pure Atria Corporation in July 1997. Additionally, the Company
completed a business combination, accounted for as a purchase, with ObjecTime,
Limited, in January, 2000. See Note 3 of Notes to Consolidated Financial
Statements for details of these combinations. See "Factors That May Affect
Future Results: If we cannot successfully integrate our past and future
acquisitions and achieve intended financial or strategic benefits, our
revenues may decline and our expenses increase."
Results of Operations
The following table sets forth for the periods indicated the percentage of
total revenues represented by certain line items from Rational's consolidated
statements of operations:
<TABLE>
<CAPTION>
Fiscal Year
Ended
March 31,
----------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Net product revenues..................................... 62% 63% 60%
Consulting and support revenues.......................... 38 37 40
--- --- ---
Total revenues....................................... 100 100 100
Cost of product revenues................................. 5 5 6
Cost of consulting and support revenues.................. 10 10 14
--- --- ---
Total cost of revenues............................... 15 15 20
--- --- ---
Gross margin............................................. 85 85 80
Operating expenses:
Research and development............................... 18 18 20
Sales and marketing.................................... 38 42 45
General and administrative............................. 9 8 9
Charges for acquired in-process research and
development........................................... 1 -- --
Merger and integration costs........................... -- -- 20
--- --- ---
Total operating expenses............................. 66 68 94
--- --- ---
Income (loss) from continuing operations................. 19 17 (14)
Other income, net........................................ 2 3 5
--- --- ---
Income (loss) before provision for income taxes.......... 21 20 (9)
Provision for income taxes............................... 6 6 3
--- --- ---
Net income (loss).................................... 15% 14% (12)%
=== === ===
</TABLE>
See "Factors That May Affect Future Results: 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."
Fiscal Years Ended March 31, 2000, 1999, and 1998
Revenues
Total revenues increased 39% in fiscal 2000 compared with fiscal 1999 and
33% in fiscal 1999 compared with fiscal 1998.
Net product revenues. Net product revenues increased $95.2 million or 37%
in fiscal 2000 compared with fiscal 1999. This increase is a result of strong
customer acceptance of the Rational Suite family of products,
23
<PAGE>
continued strong customer acceptance of the Company's existing products,
including products for requirements management, modeling, testing, change and
configuration management, increased sales capacity, and increased sales
activity with Internet-related customers across the majority of the Company's
products. Net product revenues increased $74 million or 40% in fiscal 1999
compared with fiscal 1998. This increase is a result of continued strong
customer acceptance of the Company's existing products, including products for
requirements management, modeling, testing, change and configuration
management, the introduction of the Rational Suite family of products, and the
year-to-year increase in sales capacity. See "Factors That May Affect Future
Results: 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; If market acceptance of our sophisticated software development
tools fails to grow adequately, our business may suffer; If we do not develop
and enhance new and existing products to keep pace with technological, market,
and industry changes, our revenues may decline; If we do not effectively
compete with new and existing competitors, our revenues and operating margins
will decline; If we cannot successfully integrate our past and future
acquisitions and achieve intended financial or strategic benefits, our
revenues may decline and our expenses increase; Promotional product versions
may adversely impact our actual product sales."
Consulting and support revenues. Consulting and support revenues increased
$65.2 million or 43% in fiscal 2000 compared with fiscal 1999 and $27 million
or 21% in fiscal 1999 compared with fiscal 1998. These increases reflected
increased revenues related to maintenance contracts, higher demand for
Rational's consulting expertise in advanced software development practices
and, to a lesser extent, increased training and customer-support revenues. See
"Factors That May Affect Future Results: If we fail to maintain and expand our
distribution channels, our business will suffer."
International sales. During fiscal 2000, 1999, and 1998, international
revenues from product sales and related consulting and customer support were
$233.0 million, $165.2 million, and $106.9 million, representing 41%, 40%, and
34% of total revenues, respectively. The growth in international sales during
2000 was due principally to increased sales and marketing activities in
international markets. The Company's international sales are principally
priced in local currencies. The Company enters into short-term forward
currency contracts to hedge against the impact of foreign currency exchange
rate fluctuations on balance sheet exposures denominated in currencies other
than the local, or "functional," currency of the Company or its subsidiaries.
The total amount of these contracts is approximately offset by the underlying
assets and liabilities denominated in nonfunctional currencies and such
contracts are carried at fair market value. The associated gains and losses
were not material to the Company's results of operations in any period
presented. See "Factors That May Affect Future Results: Our international
operations expose us to greater management, collections, currency,
intellectual property, regulatory, and other risks; We are subject to risks
associated with the European monetary conversion; If 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."
Cost of Revenues
Cost of product revenues. Cost of product revenues consists principally of
materials, packaging and freight, amortization of purchased technology, and
royalties. Cost of product revenues increased 24% in fiscal 2000 compared with
fiscal 1999 and 12% in fiscal 1999 compared with fiscal 1998. These costs
represented 8%, 8%, and 11% of net product revenues in fiscal 2000, 1999, and
1998, respectively. In fiscal 2000, the cost of product revenues remained
relatively fixed as a percentage of product sales as a result of improved
economies of scale associated with materials and packaging costs offset by an
increase in royalty expense. In fiscal 1999, the decrease in product cost as a
percentage of product revenues was due primarily to better economies of scale
on materials and packaging and freight with respect to certain products as a
result of increased volume.
Cost of consulting and support revenues. Cost of consulting and support
revenues consists principally of personnel costs for training, consulting, and
customer support. Cost of consulting and support revenues increased 46% in
fiscal 2000 compared with fiscal 1999 and decreased 6% in fiscal 1999 compared
with fiscal 1998. These costs represented 27%, 27%, and 34% of consulting and
support revenues in fiscal 2000, 1999, and 1998,
24
<PAGE>
respectively. In fiscal 2000, the increase in cost is primarily due to
increased headcount commensurate to the demand of growing support activities.
In fiscal 1999, the decrease in cost and cost as a percentage of related
revenues is primarily due to changes to the Company's customer support
business model as a result of combining the Pure Atria and Rational service
organizations following the fiscal 1998 merger, combined with the impact of a
relatively fixed support cost base servicing increased revenues. Additionally,
the cost decreases as a percentage of consulting and support revenues resulted
from an overall higher mix of customer support services, which generally have
a higher gross margin than consulting services.
Operating Expenses
Research and development. Total expenditures for research and development
increased 43% in fiscal 2000 compared with fiscal 1999 and 17% in fiscal 1999
compared with fiscal 1998. Research and development costs represented 18%,
18%, and 20% of total revenues in fiscal 2000, 1999, and 1998, respectively.
The increases in fiscal 2000 as compared with fiscal 1999, and in fiscal 1999
as compared with fiscal 1998, were due primarily to the cost of additional
personnel and related costs incurred in maintaining existing products and
developing new product releases. Additionally, the fiscal 2000 costs include
$4.2 million of costs incurred by Catapulse, the recently formed Internet
venture in which Rational invested $50.0 million in December, 1999. See
"Factors That May Affect Future Results: 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; 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 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."
Rational did not capitalize any software development costs in fiscal 2000,
1999, and 1998 because eligible costs were not material. Rational expects that
the amount of software development costs capitalized in future periods will be
immaterial to Rational's results of operations and financial position because
the time period and the engineering effort required between demonstration of a
product's economic and technological feasibility and the date of product
release has been very short. See "Factors That May Affect Future Results: 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; If
we fail to maintain and expand our distribution channels, our business will
suffer."
Sales and marketing. Sales and marketing expenses increased 28% in fiscal
2000 compared with fiscal 1999 and 24% in fiscal 1999 compared with fiscal
1998. These expenses represented 38%, 42%, and 45% of total revenues in fiscal
2000, 1999, and 1998, respectively. The fiscal 2000 and 1999 increases in
sales and marketing expenses reflect the additional personnel, commissions,
and related costs required in sales and marketing departments to expand
Rational's sales channels, to penetrate new markets, and to increase its
market share in core markets. The fiscal 2000 and 1999 decreases in sales and
marketing expenses as a percentage of total revenues reflect improved
economies of scale. See "Factors That May Affect Future Results: If we fail to
maintain and expand our distribution channels, our business will suffer."
General and administrative. General and administrative expenses increased
48% in fiscal 2000 compared with fiscal 1999 and 17% in fiscal 1999 compared
with fiscal 1998. General and administrative expenses represented 9%, 8%, and
9% of total revenues in fiscal 2000, 1999, and 1998, respectively. The fiscal
2000 increase in general and administrative expenses resulted from increased
employee-related expenses associated with staffing requirements needed to
support the Company's expanding business as well as additional amortization of
goodwill associated with the January 2000 acquisition of ObjecTime Limited.
See "Factors That May Affect Future Results: If we are unable to manage our
growth, our business will suffer; 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."
Charges for acquired in-process research and development. In-process
research and development represents the present value of the estimated cash
flow expected to be generated by acquired technology that at the acquisition
date has not yet reached the point of technological feasibility and does not
have an alternative
25
<PAGE>
future use. In fiscal 2000, write-offs associated with acquired in-process
research and development included $3.5 million related to the acquisition of
ObjecTime Limited. See "Factors That May Affect Future Results: If we cannot
successfully integrate our past and future acquisitions and achieve intended
financial or strategic benefits, our revenues may decline and our expenses
increase."
Merger and integration costs. In fiscal 1999, the Company substantially
completed certain elements of the organizational integrations following the
July 1997 Pure Atria merger. This consisted primarily of exiting certain
nonstrategic consulting activities, realignment of marketing activities, and
consolidation of certain sales offices. In the December 1998 quarter, charges
related to this activity, totaling approximately $3.3 million, were primarily
for severance costs associated with employee terminations, and charges
associated with facilities closures. These charges were offset by a reduction
of previously accrued facilities expenses related to the Pure Atria merger
totaling $4.5 million. The facilities expense reduction was due to greater-
than-expected recoveries from subleasing. The net impact in fiscal 1999 was a
merger and integration cost reduction of $1.2 million. The net cost reduction
of $1.2 million is the result of ongoing assessment and estimation of costs
associated with the prior combinations of Rational and other companies. Such
assessment will continue until all related costs are incurred or determinable.
In fiscal 1998, merger-related expenses of $63.8 million were recorded related
to the merger of Rational and Pure Atria to accrue transaction costs,
severance costs associated with employee terminations, costs associated with
conforming employee benefits plans, charges associated with the closure of
duplicate facilities, and asset writedowns related to duplicate business
systems. The actions related to severance and administrative costs are
substantially complete. See "Factors That May Affect Future Results: If we are
unable to manage our growth, our business will suffer; If we cannot
successfully integrate our past and future acquisitions and achieve intended
financial or strategic benefits, our revenues may decline and our expenses
increase."
Interest Expense
The increase in interest expense in fiscal 2000 is a result of the
Convertible Subordinated Notes which the Company sold and began incurring
interest expense for in last quarter of fiscal 2000. Interest expense incurred
in fiscal 1999 and 1998 relates to interest on capital leases which have since
expired.
Interest Income
Interest income has fluctuated as a result of operating results and the
amount of cash available for investment in interest-bearing accounts. Interest
income increased $4.2 million to $17.0 million in fiscal 2000 and decreased $4
million to $12.8 million in fiscal 1999. The increase in other income in
fiscal 2000 is due primarily to an increase in cash and cash equivalents as a
result of annual operating income, the fourth quarter sale of Convertible
Subordinated Notes and interest earned by Catapulse, Inc., offset by a
reduction of cash used for repurchase of Company stock in the first half of
the fiscal year, and an increase in tax exempt investments. The decrease in
fiscal 1999 is due primarily to a lower average amount of invested cash
resulting from repurchase of Company Common Stock and to declining interest
rates. See "Factors That May Affect Future Results: 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."
Income Taxes
The income tax provisions for fiscal 2000, 1999, and 1998 differ from tax
computed at the federal statutory income tax rate due to the impact of
nondeductible charges for acquired in-process research and development,
goodwill, merger-related costs, and foreign losses resulting in no U.S. tax
benefit, as well as foreign and state income taxes, offset by earnings
permanently reinvested in offshore operations, the realized benefit of net
operating loss carryforwards, and research credit carryforwards. The Company's
effective tax rate is expected to increase to 30% in fiscal 2001.
Net undistributed earnings of the foreign subsidiaries considered
permanently reinvested amounted to approximately $24 million at March 31,
2000. Accordingly, no provision for U.S. federal and state income taxes has
been provided thereon. Upon distribution of those earnings in the form of
dividends or otherwise, the
26
<PAGE>
Company would be subject to both U.S. income taxes (subject to an adjustment
for foreign tax credits) and withholding taxes payable to the various foreign
countries.
As of March 31, 2000, Rational had net operating loss carryforwards for
federal income tax purposes of approximately $83 million that expire in years
2001 through 2020. The Company also had tax credit carryforwards for federal
and state purposes of approximately $7.5 million and $4.0 million,
respectively, that expire in years 2001 through 2020, if not utilized. As a
result of various public offerings and business combinations, the Company and
some of its acquired entities experienced an ownership change as defined in
section 382 of the Internal Revenue Code. Due to the passing of time, the
Company's net operating loss carryforwards and tax credit carryforwards are no
longer subject to limitation.
Under Statement of Financial Accounting Standards No. 109 (FAS 109),
deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. FAS 109 provides for the recognition of
deferred tax assets if realization of such assets is more likely than not.
Based on the weight of available evidence, the Company has provided a
valuation allowance against certain foreign tax credit carryforwards and the
future amortization of certain intangible assets. The Company will continue to
evaluate the realizability of the deferred tax assets on a quarterly basis.
Minority Interest
In fiscal 2000 the Company's subsidiary, Catapulse, Inc., incurred $4.2
million of research and development costs and earned $1.2 million of interest
income on cash balances. Minority interest, net of tax, for fiscal 2000 was
$1.1 million.
Liquidity and Capital Resources at March 31, 2000
As of March 31, 2000, Rational had cash, cash equivalents, and short-term
investments of $906 million and working capital of $832 million. Net cash
provided by operating activities for the period ended March 31, 2000, was
composed primarily of net income plus noncash charges for depreciation and
amortization, charges for acquired in-process research and development,
noncash merger and integration costs, tax benefits from employee stock plans,
increases in accrued employee benefits and accrued expenses, income taxes
payable, and deferred revenues and a decrease in deferred tax assets. These
were offset primarily by increases in accounts receivable, and prepaid
expenses, and a decrease in accounts payable. Total cash, cash equivalents,
and short-term investments for the period ended March 31, 1999, was $260
million and working capital was $228 million. Net cash provided by operating
activities for the period ended March 31, 1999, was composed primarily of net
income plus noncash charges for depreciation and amortization, tax benefits
from employee stock plans, increases in income taxes payable and deferred
revenues, and a decrease in noncash merger and integration liabilities. These
were offset primarily by a decrease in accrued merger and integration expenses
and increases in accounts receivable, deferred tax assets, and prepaid
expenses.
Net cash used in investing activities resulted primarily from net purchases
and maturities and sales of short-term investments of $293 million in fiscal
2000, $36.6 million in fiscal 1999, and $80.7 million in fiscal 1998 and
expenditures for fixed assets and net changes in other assets of $44.2 million
in fiscal 2000, $23.2 million in fiscal 1999, and $38.6 million in fiscal
1998. Net cash used for business and product acquisitions totaled
$13.2 million in fiscal 2000 and $15.5 million in 1998 (see Notes 3 and 4 of
Notes to Consolidated Financial Statements).
Net cash provided in financing activities in fiscal 2000 resulted primarily
from net proceeds from the sale of Convertible Subordinated Notes of $484.6
million, issuance of Common Stock under the employee stock plans of $74.6
million and proceeds received from minority investors in Catapulse, Inc. of
$24.5 million. This is offset by $61.4 million used to repurchase Common
Stock. In fiscal 1999 net cash used in financing activities resulted primarily
from $118.1 million used to repurchase Common Stock and $2 million used to
decrease long-term debt, offset by $36 million received from issuance of
Common Stock under the employee stock plans.
27
<PAGE>
In April 1998, the Board of Directors authorized the Company to repurchase
up to 6 million shares of its Common Stock in the open market to be used for
general corporate purposes. The Company completed that repurchase program
during the September 1998 quarter. In October 1998, the Board of Directors
authorized the Company to repurchase an additional 6 million shares of its
Common Stock in the open market to be used for general corporate purposes.
Through March 31, 2000, the Company had repurchased a total of 2.1 million
shares of its Common Stock, including repurchases authorized in April 1998 and
October 1998, for a total cash outlay of approximately $61.4 million.
Repurchases helped offset dilution from stock issued under the company's stock
option and stock purchase plans.
The Company believes that expected cash flow from operations combined with
existing cash, cash equivalents, and short-term investments will be sufficient
to meet its cash requirements for the foreseeable future. See "Factors That
May Affect Future Results: 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; If we cannot successfully integrate our past and future
acquisitions and achieve intended financial or strategic benefits, our
revenues may decline and our expenses increase."
ITEM 7(A)--QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk, including changes in interest rates
and currency exchange rates. To manage the volatility relating to these
exposures, the Company employs established policies and procedures to manage
its exposure to fluctuations in interest rates and changes in known or
forecasted currency exchange rates.
Foreign Currency Risk
A portion of the Company's business is conducted in currencies other than
the U.S. dollar. Changes in the value of major foreign currencies relative to
the local or "functional" currency of the Company or its subsidiaries may
adversely affect operating results. The Company enters into short-term forward
foreign exchange contracts designed to mitigate the impact of foreign currency
exchange rate fluctuations on balance sheet exposures denominated in
currencies other than the "functional" currency. The total amount of these
contracts is approximately offset by the underlying assets and liabilities
denominated in nonfunctional currencies. Forward contracts are accounted for
on a mark-to-market basis with realized and unrealized gains or losses
recognized in the period in which they are incurred. Such contracts meet the
criteria established in FAS 52 for hedge accounting treatment. As the Company
finds it impractical to hedge all foreign currency exposures, the Company will
continue to experience foreign currency gains and losses. The Company does not
use derivative financial instruments for speculative trading purposes, nor
does it hold or issue leveraged derivative financial instruments.
At March 31, 2000 and 1999, the Company had outstanding forward exchange
contracts, all having maturities of less than 90 days, to exchange various
nonfunctional currencies for U.S. dollars or Euros in the aggregate amounts
(U.S. dollar equivalent) of $47.1 million and $34.3 million, respectively. The
net gains and losses associated with all forward exchange contracts in fiscal
2000, 1999, and 1998 are not material to the Company's results of operations.
Interest Rate Risk
The Company's exposure to market rate risk for changes in interest rates
relates primarily to the Company's investment portfolio. All the Company's
cash equivalents and short-term investments are classified as available-for-
sale and are recorded at amounts that approximate fair value based on quoted
market prices at March 31, 2000 and 1999. Unrecognized gains and losses and
declines in value judged to be other than temporary on available-for-sale
securities are included in other income. The cost of securities sold is based
on the specific identification method. Realized gains and losses on sales of
available-for-sale securities were immaterial for the years ended March 31,
2000 and 1999. There were no significant unrealized holding gains or losses on
such
28
<PAGE>
securities at March 31, 2000 and 1999. The table below presents notional
amounts and related weighted-average interest rates by year of maturity for
our investment portfolio and long-term debt obligations at March 31, 2000:
<TABLE>
<CAPTION>
2000 2001 2002 2003 2004 Thereafter Total Fair value
-------- -------- -------- ---- ---- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cash equivalents
Fixed rate............ $163,108 -- -- -- -- -- $163,108 $163,108
Average rate.......... 5.89% -- -- -- -- -- 5.89%
Variable rate......... $157,621 -- -- -- -- -- $157,621 $157,621
Average rate.......... 5.06% -- -- -- -- -- 5.06%
Short term investments
Fixed rate............ $ 90,765 $244,555 $104,284 -- -- -- $439,604 $439,604
Average rate.......... 5.96% 5.88% 6.80% -- -- -- 6.11%
Auction rate preferrds
Fixed rate............ $ 53,566 -- -- -- -- -- $ 53,566 $ 53,566
Average rate.......... 5.83% -- -- -- -- -- 5.83%
-------- -------- -------- --- --- -------- -------- --------
Total investments
securities............. $465,060 $244,555 $104,284 -- -- -- $813,899 $813,899
-------- -------- -------- --- --- -------- -------- --------
Average rates........... 5.62% 5.88% 6.80% -- -- -- 5.85%
-------- -------- -------- --- --- -------- -------- --------
Long-term debt
Fixed rate............ -- -- -- -- -- $500,000 $500,000 $500,000
Average rate.......... -- -- -- -- -- 5.00% 5.00%
-------- -------- -------- --- --- -------- -------- --------
</TABLE>
29
<PAGE>
ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Rational Software Corporation
We have audited the accompanying consolidated balance sheets of Rational
Software Corporation as of March 31, 2000 and 1999, and the related
consolidated statements of operations, stockholders' equity, comprehensive
income (loss) and cash flows for each of the three years in the period ended
March 31, 2000. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Rational
Software Corporation at March 31, 2000 and 1999, and the consolidated results
of its operations, comprehensive income (loss) and its cash flows for each of
the three years in the period ended March 31, 2000, in conformity with
accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Palo Alto, California
April 18, 2000
30
<PAGE>
RATIONAL SOFTWARE CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
March 31,
---------------------
2000 1999
---------- ---------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents............................. $ 413,230 $ 59,965
Short-term investments................................ 493,081 199,865
Accounts receivable, net of allowance for doubtful
accounts of $3,259 and $3,226 in 2000 and 1999,
respectively......................................... 148,818 92,367
Deferred tax assets................................... 9,384 22,881
Prepaid expenses and other assets..................... 10,671 9,176
---------- ---------
Total current assets................................ 1,075,184 384,254
Property and equipment, net............................. 52,440 45,445
Other assets, net....................................... 98,152 24,257
---------- ---------
Total assets........................................ $1,225,776 $ 453,956
========== =========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable...................................... $ 8,496 $ 13,848
Accrued employee benefits............................. 49,290 27,212
Income taxes payable.................................. 24,323 19,652
Other accrued expenses................................ 33,257 16,334
Current portion of accrued merger and integration
expenses............................................. 5,147 2,619
Deferred revenues..................................... 122,813 76,223
---------- ---------
Total current liabilities........................... 243,326 155,888
Accrued rent............................................ 968 896
Long-term accrued merger and integration expenses....... 700 2,800
Convertible subordinated notes.......................... 500,000 --
---------- ---------
Total liabilities................................... 744,994 159,584
---------- ---------
Minority interest....................................... 24,475 --
Stockholders' equity:
Common stock, $0.01 par value, 150,000 shares
authorized, 99,622 and 93,381 shares issued and
outstanding in 2000 and 1999, respectively........... 996 933
Additional paid-in capital............................ 709,488 562,742
Deferred stock compensation........................... (2,763) --
Treasury stock, 9,379 and 7,306 shares in 2000 and
1999, respectively................................... (180,851) (119,488)
Accumulated deficit................................... (60,699) (146,013)
Accumulated other comprehensive loss.................. (9,864) (3,802)
---------- ---------
Total stockholders' equity.......................... 456,307 294,372
---------- ---------
Total liabilities and stockholders' equity.......... $1,225,776 $ 453,956
========== =========
</TABLE>
See Notes to Consolidated Financial Statements
31
<PAGE>
RATIONAL SOFTWARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended March 31,
---------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Net product revenues............................. $354,497 $259,335 $184,953
Consulting and support revenues.................. 217,693 152,481 125,717
-------- -------- --------
Total revenues................................. 572,190 411,816 310,670
Cost of product revenues......................... 27,297 22,020 19,709
Cost of consulting and support revenues.......... 59,607 40,848 43,356
-------- -------- --------
Total cost of revenues......................... 86,904 62,868 63,065
-------- -------- --------
Gross margin..................................... 485,286 348,948 247,605
Operating expenses:
Research and development expenses.............. 102,846 71,869 61,560
Sales and marketing expenses................... 220,529 172,448 138,709
General and administrative expenses............ 50,244 33,910 29,092
Charges for acquired in-process research and
development................................... 3,529 -- --
Merger and integration costs................... -- (1,200) 63,759
-------- -------- --------
Total operating expenses..................... 377,148 277,027 293,120
-------- -------- --------
Operating income (loss).......................... 108,138 71,921 (45,515)
Interest expense................................. 4,132 37 70
Interest income.................................. 16,989 12,758 16,759
-------- -------- --------
Income (loss) before income taxes.............. 120,995 84,642 (28,826)
Provision for income taxes....................... 36,765 25,393 9,447
Minority interest................................ 1,084 -- --
-------- -------- --------
Net income (loss)................................ $ 85,314 $ 59,249 $(38,273)
======== ======== ========
Net income (loss) per share--basic............... $ 0.97 $ 0.69 $ (0.44)
======== ======== ========
Shares used in computing net income (loss) per
share--basic.................................... 87,729 85,697 87,575
======== ======== ========
Net income (loss) per share--diluted............. $ 0.89 $ 0.65 $ (0.44)
======== ======== ========
Shares used in computing net income (loss) per
share--diluted.................................. 95,637 91,849 87,575
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements
32
<PAGE>
RATIONAL SOFTWARE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Deferred Other Total
------------- Paid-In Stock Treasury Accumulated Comprehensive Stockholders'
Shares Amount Capital Compensation Stock Deficit Loss Equity
------ ------ ---------- ------------ --------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31,
1997................... 84,502 $845 $455,753 -- $ (1,340) $(123,828) $(1,321) $ 330,109
Exercise of common stock
options................ 2,057 22 5,141 -- -- -- -- 5,163
Issuance of common stock
under Employee Stock
Purchase Plan.......... 698 6 6,178 -- -- -- -- 6,184
Cumulative translation
adjustment............. -- -- -- -- -- -- (53) (53)
Net loss................ -- -- -- -- -- (38,273) -- (38,273)
Net transactions of Pure
Atria from January 1,
1997, to March 31,
1997................... 1,718 17 27,646 -- -- (43,161) (456) (15,954)
------ ---- -------- ------- --------- --------- ------- ---------
Balance at March 31,
1998................... 88,975 $890 $494,718 -- $ (1,340) $(205,262) $(1,830) $ 287,176
Exercise of common stock
options................ 3,553 34 27,745 -- -- -- -- 27,779
Issuance of common stock
under Employee Stock
Purchase Plans......... 853 9 8,258 -- -- -- -- 8,267
Tax benefit from
employee stock plans... -- -- 32,021 -- -- -- -- 32,021
Treasury stock
repurchases............ -- -- -- -- (118,148) -- -- (118,148)
Cumulative translation
adjustment............. -- -- -- -- -- -- (1,972) (1,972)
Net income.............. -- -- -- -- -- 59,249 -- 59,249
------ ---- -------- ------- --------- --------- ------- ---------
Balance at March 31,
1999................... 93,381 $933 $562,742 -- $(119,488) $(146,013) $(3,802) $ 294,372
Exercise of common stock
options................ 5,244 53 64,579 -- -- -- -- 64,632
Issuance of common stock
under Employee Stock
Purchase Plans......... 626 6 9,930 -- -- -- -- 9,936
Tax benefit from
employee stock plans... -- -- 36,825 -- -- -- -- 36,825
Compensation expense.... -- -- 484 -- -- -- -- 484
Deferred stock
compensation........... -- -- 3,044 (3,044) -- -- -- --
Amortization of deferred
stock compensation..... -- -- -- 281 -- -- -- 281
Issuance of common stock
for acquisition........ 371 4 31,884 -- -- -- -- 31,888
Treasury stock
repurchases............ -- -- -- -- (61,363) -- -- (61,363)
Cumulative translation
adjustment............. -- -- -- -- -- -- (6,062) (6,062)
Net income.............. -- -- -- -- -- 85,314 -- 85,314
------ ---- -------- ------- --------- --------- ------- ---------
Balance at March 31,
2000................... 99,622 $996 $709,488 $(2,763) $(180,851) $ (60,699) $(9,864) $ 456,307
====== ==== ======== ======= ========= ========= ======= =========
</TABLE>
See Notes to Consolidated Financial Statements
33
<PAGE>
RATIONAL SOFTWARE CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------
2000 1999 1998
------- ------- --------
<S> <C> <C> <C>
Net income (loss)................................... $85,314 $59,249 $(38,273)
Other comprehensive income:
Foreign currency translation adjustments, net of
tax of $(1,819), $(592), and $(153).............. (4,243) (1,380) (356)
------- ------- --------
Comprehensive income (loss)......................... $81,071 $57,869 $(38,629)
======= ======= ========
</TABLE>
See Notes to Consolidated Financial Statements
34
<PAGE>
RATIONAL SOFTWARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Operating activities:
Net income (loss)............................ $ 85,314 $ 59,249 $ (38,273)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Charges for acquired in-process research and
development................................ 3,529 -- --
Depreciation................................ 18,860 14,285 13,387
Amortization................................ 7,570 4,480 7,496
Compensation expense related to stock
options.................................... 765 -- --
Tax benefits from employee stock plans...... 36,825 32,021 --
Noncash merger and integration costs........ 2,338 5,699 7,625
Changes in operating assets and liabilities:
Accounts receivable........................ (54,806) (20,988) (8,336)
Prepaid expenses and other, net............ (1,040) (1,937) (318)
Deferred tax assets........................ 13,497 (11,035) (4,851)
Accounts payable........................... (5,641) 586 (521)
Accrued employee benefits and other accrued
expenses.................................. 31,209 1,418 5,671
Income taxes payable....................... 4,671 4,393 11,225
Accrued merger and integration expenses.... 428 (32,106) (1,322)
Deferred revenues.......................... 44,164 23,516 10,490
--------- --------- ---------
Net cash provided by operating activities.... 187,683 79,581 2,273
Investing activities:
Purchase of short-term investments........... (524,642) (327,012) (486,710)
Maturities and sales of short-term
investments................................. 231,426 290,388 406,008
Purchases of property and equipment.......... (24,474) (21,742) (29,961)
Proceeds from sale of fixed assets........... -- -- 4,850
Net changes in other assets.................. (19,738) (1,454) (8,657)
Business combinations, net of cash acquired.. (13,208) -- (15,498)
--------- --------- ---------
Net cash used in investing activities........ (350,636) (59,820) (129,968)
Financing activities:
Principal payments under long-term debt and
capital lease obligations................... -- (1,951) (1,770)
Net proceeds from sale of convertible notes.. 484,600 -- --
Net proceeds from issuances of common stock.. 74,568 36,046 11,347
Purchase of treasury stock................... (61,363) (118,148) --
Proceeds from minority investors in
Catapulse, Inc.............................. 24,475 -- --
--------- --------- ---------
Net cash (used in) provided by financing
activities.................................. 522,280 (84,053) 9,577
Effect of changes in foreign currency
exchange rate on cash....................... (6,062) (1,972) (509)
--------- --------- ---------
Net (decrease) increase in cash and cash
equivalents................................. 353,265 (66,264) (118,627)
Cash and cash equivalents at beginning of
year........................................ 59,965 126,229 244,856
--------- --------- ---------
Cash and cash equivalents at end of year..... $ 413,230 $ 59,965 $ 126,229
========= ========= =========
Supplemental disclosure of cash flow
information:
Cash paid for income taxes................... $ 4,077 $ 4,100 $ 2,577
</TABLE>
See Notes to Consolidated Financial Statements
35
<PAGE>
RATIONAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
1. Organization and Significant Accounting Policies
Organization and basis of presentation. Rational Software Corporation (the
Company) was incorporated under the laws of Delaware on July 28, 1982. The
Company develops, markets, and supports a comprehensive solution for companies
that depend on its ability to develop and deploy software. The Company
provides an integrated suite of software products and services designed to
improve the software development process.
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries, including Pure Atria Corporation which
merged with the Company effective July 30, 1997. The historical consolidated
financial statements of the Company for the period prior to this merger date
have been restated to reflect the merger, which has been accounted for as a
pooling of interests. Consolidated results include the Company's share of
operating results of Catapulse, Inc. All intercompany transactions and
balances have been eliminated upon consolidation.
Use of estimates. The preparation of the financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Revenue recognition. The Company generally recognizes software license
revenues when a customer purchase order has been received and accepted, the
software product has been shipped, there are no uncertainties surrounding
product acceptance, the fees are fixed and determinable, and collection is
considered probable. For customer license agreements, which meet these
recognition criteria, the portion of the fees related to software licenses
will generally be recognized in the current period, while the portion of the
fees related to services is recognized as the services are performed. Revenues
from software royalties, whether they are advance payments that are
nonrefundable or minimum royalty guarantee payable over a fixed period, are
recorded when the earnings process is complete and collection is considered
probable. Revenues from consulting services are recognized when earned.
Customer support revenues are deferred and recognized on a straight-line basis
over the period covered by the customer support agreements. Contract revenues,
which generally represent special or custom engineering development with
milestone payments, are recognized under the percentage of completion method
in conformity with Accounting Research Bulletin No. 45, "Long-Term
Construction-Type Contracts," using the relevant guidance in Statement of
Position 81-1, "Accounting for Performance of Construction-Type and Certain
Production-Type Contracts." The Company considers all arrangements with
payment terms extending beyond twelve months and other arrangements with
payment terms longer than normal not to be fixed or determinable.
The Company adopted Statement of Position (SOP) 97-2 "Software Revenue
Recognition," as amended by SOP 98-4, in fiscal 1999. SOP 97-2 was further
amended by SOP 98-9 which the Company adopted in fiscal 2000. This Statement
supersedes Statement of Position 91-1 on software revenue recognition. This
Statement establishes revenue recognition criteria for arrangements to deliver
software that do not require significant production, modifications, or
customization of the software. This Statement also establishes guidelines for
recognizing revenues when multiple elements exist in a software arrangement.
The Company believes that the adoption of this Statement did not have a
material effect on its financial statements for fiscal 1999 or 2000.
Translation of local currencies. The Company's international subsidiaries
operate primarily using local functional currencies. Accordingly, all assets
and liabilities of these subsidiaries are translated using exchange rates in
effect at the end of the period, and revenues and costs are translated using
average exchange rates for the period. The resulting cumulative translation
adjustments are presented as a separate component of stockholders' equity.
Realized and unrealized exchange gains or losses from transaction adjustments
are reflected in operations and have not been material.
36
<PAGE>
RATIONAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
March 31, 2000
Earnings (loss) per share. Calculation of earnings (loss) per share is as
follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------
2000 1999 1998
------- ------- --------
<S> <C> <C> <C>
Numerator:
Net income (loss).................................... $85,314 $59,249 $(38,273)
======= ======= ========
Denominator:
Denominator for basic net income (loss) per share--
weighted average shares............................. 87,729 85,697 87,575
Incremental common shares attributable to shares
issuable under employee stock plans (Treasury Stock
Method)............................................. 7,908 6,152 --
------- ------- --------
Denominator for diluted net income (loss) per share--
weighted average shares and assumed conversions..... 95,637 91,849 87,575
======= ======= ========
Net income (loss) per share--basic................... $ 0.97 $ 0.69 $ (0.44)
======= ======= ========
Net income (loss) per share--diluted................. $ 0.89 $ 0.65 $ (0.44)
======= ======= ========
</TABLE>
The effect of options to purchase 151,018 and 185,112 shares of Common
Stock was not included in the computation of the 2000 and 1999, respectively,
diluted earnings per share because the options' exercise price was greater
than the average market price of common shares. The effect of converting
6,998,880 shares of Common Stock from outstanding Convertible Notes issued in
2000 was not included in diluted earnings per share because the assumed
conversion would be antidilutive.
Cash, cash equivalents, and short-term investments. Cash equivalents are
highly liquid investments with original maturity dates of three months or less
at the date of acquisition. Investments with maturity dates of greater than
three months are considered to be short-term investments.
All the Company's cash equivalents and short-term investments are
classified as available-for-sale and are recorded at amounts that approximate
fair value based on quoted market prices at March 31, 2000 and 1999.
Unrecognized gains and losses and declines in value judged to be other than
temporary on available-for-sale securities are included in interest income.
The cost of securities sold is based on the specific identification method.
Property and equipment. The Company's property and equipment are recorded
at cost and are generally depreciated over three- to five-year periods using
the straight-line method. The cost of furniture and equipment under capital
leases is recorded at the lower of the present value of the minimum lease
payments or the fair value of the asset and is amortized over the shorter of
the term of the related lease or the estimated useful life of the asset.
Leasehold improvements are depreciated over the remaining life of the lease.
In accordance with Statement of Financial Accounting Standards No. 121 (FAS
121), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of," the Company is required to review for impairment
long-lived assets, certain identifiable intangibles, and goodwill related to
those assets whenever events or changes in circumstances indicate that the
carrying amount of an asset might not be recoverable. In certain situations,
an impairment loss has been recognized.
Goodwill and other intangibles. Goodwill represents the excess purchase
price of net tangible and intangible assets acquired in business combinations
over their estimated fair value. Other intangibles mainly
37
<PAGE>
RATIONAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
March 31, 2000
represent developed and core technology, and assembled workforce. Goodwill and
other intangibles are being amortized on a straight-line basis over their
estimated useful lives which range from 1 to 4 years. The Company reviews
goodwill and other intangibles to assess recoverability from future operations
using undiscounted cash flows. In management's opinion, no material impairment
exists at March 31, 2000. Accumulated amortization of goodwill and other
intangibles was $65.8 million and $58.2 million as of March 31, 2000 and 1999,
respectively.
Stock-based compensation. The Company has elected to follow Accounting
Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its employee stock
options, because the alternative fair value accounting provided for under FASB
Statement No. 123 (FAS 123), "Accounting for Stock-Based Compensation,"
requires use of option valuation models that were not developed for use in
valuing employee stock options. The Company generally grants stock options for
a fixed number of shares to employees with an exercise price equal to the fair
value of the shares at the date of grant, and accordingly, no compensation
expense is recorded. The Company recognizes compensation expense for those
options granted with an exercise price less than the fair value of the
underlying Common Stock at the date of grant.
Fair value of financial instruments. The carrying values reported in the
balance sheet for cash and cash equivalents, short-term investments, and long-
term debt approximate fair value. The fair value of short-term investments is
based on quoted market prices.
Advertising costs. The Company expenses advertising costs as incurred.
Advertising costs totaled $10.1 million, $6.6 million, and $6.5 million for
the years ended March 31, 2000, 1999, and 1998, respectively.
Reclassifications. Certain prior-year amounts have been reclassified to
conform with current-year presentation.
Recent pronouncements. In June 1998, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (FAS 133). FAS
133 is effective for all fiscal quarters of all fiscal years beginning after
June 15, 2000. FAS 133 requires that all derivative instruments be recorded on
the balance sheet at their fair value. Changes in the fair value of
derivatives are recorded each period in either current earnings or other
comprehensive income, depending on whether a derivative is designated as part
of a hedge transaction and, if it is, the type of hedge transaction. For fair
value hedge transactions in which the Company is hedging changes in fair value
of an asset, liability, or firm commitment, changes in the fair value of the
derivative instrument will generally be offset in the income statement by
changes in the fair value of the hedged item. For cash flow hedge
transactions, in which the Company is hedging the variability of cash flows
related to a variable-rate asset, liability, or a forecasted transaction,
changes in the fair value of the derivative instrument will be reported in
other comprehensive income. The gains and losses on the derivative instrument
that are reported in other comprehensive income will be reclassified as
earnings in the periods in which earnings are impacted by the variability of
the cash flows of the hedged item. The ineffective portion of all hedges will
be recognized in current earnings. The Company will adopt FAS 133 in fiscal
2002. Adoption of FAS 133 is not expected to have a material impact on the
Company's consolidated financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements,
referred to as SAB 101, SAB 101 summarizes certain of the SEC staffs views in
applying generally accepted accounting principles to revenue recognition. The
Company has
38
<PAGE>
RATIONAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
March 31, 2000
evaluated SAB 101 and believes it will not have a material impact on our
financial position or results of operations.
2. Risks Due to Concentrations
Concentrations of credit risk. Financial instruments that potentially
subject the Company to concentrations of credit risk consist primarily of cash
equivalents, short-term investments, and accounts receivable. The Company's
investment policy limits its exposure to concentrations of credit risk for
cash equivalents and short-term investments. The Company sells its products
primarily to major corporations that develop software and systems integrators
that serve a wide variety of international markets. Collateral or deposits
generally are not required from customers who demonstrate a positive credit
record and sound financial condition. The Company maintains reserves for
potential credit losses, and such losses have been within management's
expectations. No single customer accounted for 10% or more of total revenues
for all periods presented.
International sales. International sales currently account for
approximately 41% of the Company's revenues, and the Company expects that
international sales will continue to account for a significant portion of the
Company's revenues in future periods. Any material adverse effect on the
Company's international business would have a material adverse effect on the
Company's financial statements. Also, the Company's international sales are
generally denominated in foreign currencies. Losses on the conversion of
foreign-denominated receivables into U.S. dollars may have a material adverse
effect on the Company's financial statements.
A portion of the Company's business is conducted in currencies other than
the U.S. dollar. Changes in the value of major foreign currencies relative to
the local, or "functional" currency of the Company or its subsidiaries may
adversely affect operating results. The Company enters into short-term forward
foreign exchange contracts designed to mitigate the impact of foreign currency
exchange rate fluctuations on balance sheet exposures denominated in
currencies other than the "functional" currency. The total amount of these
contracts is approximately offset by the underlying assets and liabilities
denominated in nonfunctional currencies. Forward contracts are accounted for
on a mark-to-market basis with realized and unrealized gains or losses
recognized in the period in which they are incurred. Such contracts meet the
criteria established in FAS 52 for hedge accounting treatment. As the Company
finds it impractical to hedge all foreign currency exposures, the Company will
continue to experience foreign currency gains and losses. The Company does not
use derivative financial instruments for speculative trading purposes, nor
does it hold or issue leveraged derivative financial instruments.
At March 31, 2000 and 1999, the Company had outstanding forward exchange
contracts, all having maturities of less than 90 days, to exchange various
nonfunctional currencies for U.S. dollars, Dutch guilders, or Euros in the
aggregate amounts (U.S. dollar equivalent) of $47.1 million and $34.3 million,
respectively. Two major U.S. multinational banks are counterparty to all these
contracts. The gains and losses associated with all forward exchange contracts
when combined with the gains and losses on the underlying exposures hedged in
fiscal 2000, 1999, and 1998 were not material to the Company's results of
operations.
3. Acquisitions
Purchase of ObjecTime Limited. On January 13, 2000, the Company completed
the acquisition of ObjecTime Limited (OTL). OTL was a developer of visual
design and code generation software tools used for development of embedded
software. The Company acquired all outstanding shares of OTL capital stock in
exchange for approximately $9,045,000 in cash and 371,400 shares of the
Company's Common Stock. The Company also assumed all outstanding options to
purchase OTL Common Stock in exchange for options to
39
<PAGE>
RATIONAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
March 31, 2000
purchase 358,546 shares of the Company's Common Stock. Prior to the
consummation of this deal, the Company held a 19.9 percent ownership in OTL
from an initial investment of approximately $9,000,000 made in December 1997.
Total purchase price of OTL, including the prior investment and
acquisition-related costs of approximately $6,028,000, was approximately
$58,832,000. The acquisition was accounted for as a purchase and the total
purchase price was allocated based on an independent appraisal as follows (in
thousands):
<TABLE>
<S> <C>
Acquired developed technology.................................... $ 1,610
Acquired core technology......................................... 4,250
Acquired in-process research and development..................... 3,529
Acquired workforce............................................... 1,427
Acquired goodwill and other intangibles.......................... 45,151
Net book value of acquired assets and liabilities which
approximate fair value.......................................... 2,865
-------
Total purchase price........................................... $58,832
=======
</TABLE>
The purchase price allocation resulted in a $3,529,000 charge related to
the value of acquired in-process research and development in the fourth
quarter of fiscal 2000. The value of acquired in-process research and
development represents the appraised value of technology in the development
stage that had not yet reached economic and technological feasibility. In
reaching this determination, the Company used a present value net income
approach and considered, among other factors, the stage of development of each
product, the time and resources needed to complete each product, and expected
income and associated risks. The developed technology, core technology,
goodwill, and other intangibles are being amortized on a straight-line basis
over periods from one to four years, the estimated useful lives of these
acquired assets. The results of OTL are included in consolidated results of
operation from January 13, 2000.
The Company has formulated an exit plan effective at the date of the
acquisition with respect to duplicate facilities, assets with no future
economic benefit, relocation of key employees to better align and integrate
their responsibilities and involuntary termination of certain OTL employees
whose responsibilities were redundant or not deemed necessary. The exit plan
has been initiated as of March 31, 2000, and will be completed in fiscal 2001.
Total severance pay and relocation costs of the plan, expected to be
approximately $1,311,000, have been included in the purchase price allocation.
The unaudited pro forma consolidated results for the Company had the
acquisition been consummated April 1, 1998, excluding the charge for acquired
in-process research and development recorded in fiscal 2000, are as follows
(in thousands except per share amounts):
<TABLE>
<CAPTION>
Year Ended March
31,
-----------------
2000 1999
-------- --------
(unaudited)
<S> <C> <C>
Revenues................................................ $581,701 $422,681
Net Income.............................................. 87,476 56,056
Diluted net income per share............................ $ 0.91 $ 0.61
</TABLE>
Merger with Pure Atria Corporation. On July 30, 1997, the Company acquired
Pure Atria Corporation (Pure Atria) pursuant to which the Company issued
approximately 39.082 million shares of Common Stock. In addition, each
outstanding option or right to purchase Pure Atria Common Stock under various
stock option and purchase plans was assumed by the Company. Pure Atria was
primarily involved in developing, marketing, and supporting a comprehensive,
integrated suite of software products that enabled the production of reliable,
high-
40
<PAGE>
RATIONAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
March 31, 2000
quality software and improved the development process. This acquisition was
accounted for as a pooling of interests, and accordingly, the Company's
consolidated financial statements and notes thereto have been restated to
include the financial position and results of this merger for the three-month
period ended June 30, 1997. For the three-month period ended June 30, 1997,
preceding the combination, Rational and Pure Atria unaudited, pro forma
revenues were $42,928,000 and $23,220,000, respectively, and Rational and Pure
Atria unaudited, pro forma net income (loss) was $7,814,000 and $(2,686,000),
respectively.
4. Cash Equivalents and Short-Term Investments
The Company's short-term investments are as follows (in thousands):
<TABLE>
<CAPTION>
March 31,
-----------------
2000 1999
-------- --------
<S> <C> <C>
Bank certificates of deposit............................ $ 50,077 $ --
U.S. treasury and agency obligations.................... 169,755 5,060
Municipal obligations................................... 126,376 48,149
Corporate securities.................................... 146,873 146,656
-------- --------
Total................................................. $493,081 $199,865
======== ========
</TABLE>
Realized gains and losses on sales of available-for-sale securities were
immaterial for the years ended March 31, 2000 and 1999. There were no
significant unrealized holding gains or losses on such securities at March 31,
2000 and 1999.
Debt securities at March 31, 2000 and 1999, by contractual maturity, are
shown below (in thousands). Expected maturities may differ from contractual
maturities because issuers of the securities may have the right to prepay
obligations.
<TABLE>
<CAPTION>
March 31,
-----------------
2000 1999
-------- --------
<S> <C> <C>
Short-term investments:
Due in one year or less................................ $243,357 $140,031
Due after one year..................................... 249,724 59,834
-------- --------
Total................................................ $493,081 $199,865
======== ========
</TABLE>
5. Property and Equipment
Property and equipment is as follows (in thousands):
<TABLE>
<CAPTION>
March 31,
------------------
2000 1999
-------- --------
<S> <C> <C>
Computer, office, and manufacturing equipment.......... $ 82,838 $ 71,754
Office furniture....................................... 13,957 10,535
Leasehold improvements................................. 13,850 10,905
Construction in progress............................... 5,687 3,113
-------- --------
116,332 96,307
Accumulated depreciation and amortization.............. (63,892) (50,862)
-------- --------
Net property and equipment............................. $ 52,440 $ 45,445
======== ========
</TABLE>
41
<PAGE>
RATIONAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
March 31, 2000
6. Accrued Merger and Integration Expenses
Merger expenses consist principally of transaction fees for investment
bankers, attorneys, accountants, financial printing, and other related
charges. Integration costs include severance and other employee-related
charges, elimination of redundant facilities, write-off of excess property and
equipment and certain intangible assets, and other professional fees. Details
of the merger and integration provisions recorded over the past 3 years are as
follows (in thousands):
<TABLE>
<CAPTION>
Severance Asset
and Other Write-Offs
Transaction Employee-Related and Lease
Costs Charges Cancellations Other Total
----------- ---------------- ------------- ------- --------
<S> <C> <C> <C> <C> <C>
Accrued as of March 31,
1997................... $ 1,134 $ 11,778 $ 3,021 $ 2,797 $ 18,730
Provision recorded at
acquisition of Pure
Atria.................. 15,629 18,339 19,352 10,439 63,759
Noncash charges......... -- -- (6,469) (1,156) (7,625)
Cash payments........... (15,556) (21,773) (2,006) (7,635) (46,970)
-------- -------- ------- ------- --------
Accrued as of March 31,
1998................... $ 1,207 $ 8,344 $13,898 $ 4,445 $ 27,894
Change in estimate...... (1,078) (668) (4,585) 5,131 (1,200)
Noncash charges......... -- -- (2,927) (2,772) (5,699)
Cash payments........... (129) (7,043) (1,600) (6,804) (15,576)
-------- -------- ------- ------- --------
Accrued as of March 31,
1999................... $ -- $ 633 $ 4,786 $ -- $ 5,419
Provision recorded at
acquisition of OTL..... 1,124 1,311 1,510 2,083 6,028
Noncash charges......... -- -- (1,464) (874) (2,338)
Cash payments........... (458) (1,539) (180) (1,085) (3,262)
-------- -------- ------- ------- --------
Accrued as of March 31,
2000................... $ 666 $ 405 $ 4,652 $ 124 $ 5,847
======== ======== ======= ======= ========
</TABLE>
Severance and other employee-related charges. As a result of the mergers,
certain technical support, customer service, distribution, sales, marketing,
and administrative functions were combined and reduced. Approximately 29, 26,
and 37 employees were terminated in fiscal 2000, 1999, and 1998, respectively,
as a result of this activity. The Company also committed to pay noncontingent
retention bonuses, commissions, and relocation costs to other employees, and
these costs have been included in the accrual.
Asset write-offs and lease cancellations. The Company has consolidated
duplicate offices in North America and Europe and has relocated the North
American headquarters to a larger facility. The accrual includes lease
payments resulting from the planned closure of these facilities, which are
expected to continue through the lease term, or penalties associated with
early termination of the leases. Certain intangibles that will have no benefit
to the combined operations were written off. Redundant property and equipment
were either disposed of or written down to their estimated net realizable
value.
Other. Other expenses specific to the OTL acquisition included costs
associated with, communication of the merger to employees' and costs accrued
to provide future support and maintenance for former OTL customers. Expenses
specific to the Pure Atria acquisition included costs associated with
communication of the merger to employees, with discontinuance of the Pure
Vision product line, and termination of European and Asian distributors.
7. Convertible Subordinated Notes
During February 2000, Rational completed an offering of $500.0 million of
Convertible Subordinated Notes (the "Notes"), to qualified institutional
buyers in reliance on Rule 144A under the Securities Act of 1933.
42
<PAGE>
RATIONAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
March 31, 2000
Interest on the five percent Notes, which mature on February 1, 2007, is
payable on February 1 and August 1 of each year, commencing August 1, 2000.
The Notes are convertible into shares of Rational Common Stock at any time
prior to the close of business on the maturity date, unless previously
redeemed, at a conversion price of $71.44 per share, subject to anti-dilution
adjustments. This is equivalent to a conversion rate of 13.9983 shares of
Common Stock per $1,000 of principal amount due at maturity. The Notes are
redeemable, in whole or in part, at the option of the Company on or after
February 5, 2003, and upon at least 30 days', but no more than 60 days',
notice. The redemption price, expressed as a percentage of principal plus
accrued interest through the date of the redemption, is as follows for the 12-
month periods beginning in February of the following years:
<TABLE>
<CAPTION>
Redemption
Year Price
---- ----------
<S> <C>
2003.............................. 102.857%
2004.............................. 102.143%
2005.............................. 101.429%
2006.............................. 100.714%
</TABLE>
In the event of a change of control, as defined, each holder of the Notes
may require the Company to repurchase its Notes, in whole or in part, for cash
or, at the Company's option, for Common Stock (valued at 95% of the average
last reported sale prices for the five trading days immediately preceding the
repurchase date) at a repurchase price of 100% of the principal amount of the
Notes to be repurchased, plus accrued interest to the repurchase date. The
Notes are unsecured and subordinated in right of payment in full to all
existing and future Senior Indebtedness of the Company. Expenses associated
with the offering of approximately $15.4 million were deferred in other assets
and are being amortized over the term of the Notes. The Company has reserved
6,998,880 shares of Common Stock for conversion of the Notes.
8. Commitments and Contingencies
The Company leases its primary office space under operating leases. Rental
expense for facilities was approximately $15.1 million, $12.3 million, and
$13.4 million for the fiscal years ended March 31, 2000, 1999, and 1998,
respectively. Estimated future rents from sublease agreements are $2.1 million
and $198,000 in fiscal 2001, and 2002, respectively. Future minimum rental
payments, net of sublease income, are as follows for the fiscal years
indicated as of March 31 (in thousands):
<TABLE>
<S> <C>
2001................................. $21,716
2002................................. 18,737
2003................................. 16,648
2004................................. 14,462
2005................................. 10,337
Thereafter........................... 17,442
-------
$99,342
=======
</TABLE>
As of March 31, 2000, the Company had three letters of credit outstanding
in the amount of $62,500, $3 million, and $1 million guaranteeing certain
rental payments at its office locations in Lexington, Massachusetts, and
Cupertino, California.
Legal matters. The following actions have been filed against the Company,
officer Paul D. Levy, Cowen & Company and an individual Cowen employee,
analyst Rehan Syed. The action, In re Rational Software Securities Litigation,
No. 21001-JF (N.D. Cal. May 26, 1998) is a consolidated action supplanting
prior complaints filed against defendants. The actions are putative
shareholder class action lawsuits. The complaint
43
<PAGE>
RATIONAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
March 31, 2000
alleges that defendants violated Sections 10(b) and 20A of the Securities
Exchange Act of 1934 through the selective disclosure of material inside
information regarding the Company's prospects and seek damages on behalf of a
class of shareholders who purchased the Company's Common Stock on October 8,
1997. Plaintiffs have dismissed the Complaint as against the Company and Mr.
Levy.
In December 1996, the Company filed suit against Silicon Graphics, Inc.
("SGI") seeking to recover royalties due to the Company under a license
agreement between SGI and the Company's predecessor in interest, Verdix
Corporation. SGI answered the complaint, denying any liability, and filed a
cross complaint seeking unspecified damages for alleged violations of the same
license agreement. Effective August 12, 1999, the Company and SGI entered an
agreement under which this litigation was settled in its entirety. The terms
of this agreement are confidential. The arrangement, however, will not have
any material impact on the Company's financial statements.
From time to time, the Company is subject to legal claims. Historically,
the cost of resolution of the claims has not been significant. However, any
adverse outcome to these or future lawsuits against the Company may result in
a material adverse effect on the Company's financial condition.
9. Stockholders' Equity
Stock repurchase program. In April 1998, the Company's Board of Directors
authorized the purchase of up to 6 million shares of the Company's Common
Stock from time to time in the open market. The Company completed the
repurchase of these 6 million shares by August 1998 for an aggregate cost of
$98.4 million. In October 1998, the Company's Board of Directors authorized
the purchase of an additional 6 million shares. As of March 31, 2000, the
Company had repurchased approximately 2.1 million shares of its Common Stock
under this program for an aggregate cost of $61.4 million.
The stock repurchase program is intended to help offset the dilution
resulting from shares issued under the Company's employee stock plans. The
timing and size of any future stock repurchases are subject to market
conditions, stock prices, and the Company's cash position and other cash
requirements going forward.
Stock options. The Company provides equity incentives to employees and
directors by means of incentive stock options and nonstatutory options which
historically have been provided under various stock option plans. The Company
now issues options from the Stock Option Plan for Directors, the 1997 Stock
Option Plan, and the 1997 Supplemental Plan. Stock options generally vest over
a period of four years. Under these plans, the Company may grant either
nonstatutory or incentive stock options, and the option price per share cannot
be less than 85% of fair value in the case of nonstatutory options, or 100% of
fair value in the case of incentive stock options, determined on the date that
the option is granted. Under these plans, the Company has reserved 20,169,442
shares for issuance at March 31, 2000. Options generally expire 10 years from
the date of grant.
44
<PAGE>
RATIONAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
March 31, 2000
Activity under the plans including options assumed by the Company in
mergers (adjusted for exchange ratios) is summarized as follows:
<TABLE>
<CAPTION>
Options Outstanding
---------------------
Weighted-
Shares Average
Available Exercise
for Grant Options Price
---------- ---------- ---------
<S> <C> <C> <C>
Balance at March 31, 1997.................... 570,574 15,428,269 $17.08
Net transactions of Pure Atria during the
period from January 1, 1997, to March 31,
1997....................................... 1,611,351 (416,912) 25.65
Additional shares authorized................ 4,350,000 -- --
Granted..................................... (6,523,621) 6,523,621 13.71
Exercised................................... -- (2,056,891) 10.52
Canceled.................................... 1,910,661 (1,910,661) 20.41
Expired or retired.......................... (1,204,801) -- --
---------- ---------- ------
Balance at March 31, 1998.................... 714,164 17,567,426 $12.57
Additional shares authorized................ 4,450,000 -- --
Granted..................................... (6,138,937) 6,138,937 15.32
Exercised................................... -- (3,552,847) 7.95
Canceled.................................... 3,983,241 (3,983,241) 20.39
Expired or retired.......................... (1,321,043) -- --
---------- ---------- ------
Balance at March 31, 1999.................... 1,687,425 16,170,275 $12.63
Additional shares authorized................ 18,364,132 -- --
Granted..................................... (8,806,677) 8,806,677 40.52
Exercised................................... -- (5,248,301) 12.42
Canceled.................................... 1,079,773 (1,079,773) 18.92
Expired or retired.......................... (404,089) -- --
---------- ---------- ------
Balance at March 31, 2000.................... 11,920,564 18,648,878 $25.09
========== ========== ======
</TABLE>
In November 1997, the Company entered into agreements with most of its
employees to reprice (at the closing price for the Company's Common Stock on
November 14, 1997, of $10.00) employees' stock options for an aggregate of
approximately 6.9 million shares of Common Stock. In April 1998, the Company
entered into agreements with certain executive officers to reprice (at the
closing price for the Company's Common Stock on April 2, 1998, of $13.38)
employee stock options for an aggregate of approximately 1.7 million shares of
Common Stock. All employees participating in the repricing agreed to certain
limitations on the disposition of repriced options. The foregoing table has
not been adjusted for such repriced options.
45
<PAGE>
RATIONAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
March 31, 2000
In fiscal 2000 the Company recorded deferred stock compensation of
$3,044,000 representing the difference between the exercise price and the
deemed fair value of Catapulse, which results are consolidated with Rational,
Common Stock on the date such stock options were granted. The Company also
recorded amortization of deferred stock compensation of $281,000 in fiscal
2000. At March 31, 2000 the Company had $2,763,000 of remaining unamortized
deferred compensation. Additionally, as a result of accelerating the vesting
period of certain stock options, the Company recorded compensation expense of
$484,000.
At March 31, 2000, options to purchase 5,504,938 shares of Common Stock
were exercisable and unrestricted at a weighted-average exercise price of
$13.26. At March 31, 2000, the range of options outstanding and exercisable is
as follows:
<TABLE>
<CAPTION>
Options Exercisable
Options Outstanding and Unrestricted
--------------------------------- ---------------------
Weighted-
Average
Remaining Weighted- Weighted-
Contractual Average Average
Range of Shares Life Exercise Number Exercise
Exercise Prices Outstanding (years) Price Exercisable Price
--------------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$0.0018-$ 3.47 428,462 4.35 $ 1.68 411,132 $ 1.73
$ 3.75-$10.00 3,277,519 6.66 9.76 2,165,142 9.69
$ 10.06-$11.13 2,172,017 8.06 10.85 466,559 10.87
$ 11.18-$13.38 2,519,810 7.11 12.65 1,266,897 12.88
$ 13.56-$23.94 2,200,971 8.33 19.58 657,070 18.53
$ 24.00-$30.50 1,000,667 8.63 27.48 215,699 27.29
$ 30.75-$30.75 2,070,126 9.53 30.75 184,915 30.75
$ 31.13-$51.56 1,692,214 9.56 42.25 90,494 40.97
$ 52.31-$52.31 3,192,762 9.84 52.31 47,030 52.31
$ 71.75-$71.75 94,330 9.92 71.75 0 0.00
---------- ---- ------ --------- ------
18,648,878 8.28 $25.09 5,504,938 $13.26
========== ==== ====== ========= ======
</TABLE>
Employee Stock Purchase Plans. During fiscal 1999, all remaining shares
previously approved by the stockholders for the "1994 Employee Stock Purchase
Plan" were issued. In July 1998, the "1998 Employee Stock Purchase Plan" was
approved by the shareholders with an initial 2 million shares reserved. Under
both plans, substantially all employees may purchase Common Stock through
payroll deductions at a price equal to 85% of the lower of fair values as of
the date of the employee's entrance into the plan or the end of each six-month
purchase period. Employees may elect to have up to 10% of their compensation
withheld to purchase company stock, with a value not to exceed $25,000 in any
calendar year. During fiscal 2000, approximately 626,138 shares were issued
under the plans.
46
<PAGE>
RATIONAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
March 31, 2000
Stock-based compensation. Pro forma information regarding net income (loss)
and earnings (loss) per share is required by FAS 123 for awards granted or
modified after December 31, 1994, as if the Company had accounted for its
stock-based awards to employees under the fair value method of FAS 123. The
fair value of the Company's stock-based awards to employees was estimated
using a Black-Scholes option pricing model. The Black-Scholes model requires
the input of highly subjective assumptions, including the expected stock price
volatility. Because the Company's stock-based awards to employees have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its stock-
based awards to employees. The fair value of the Company's stock-based awards
to employees was estimated assuming no expected dividends and the following
weighted-average assumptions:
<TABLE>
<CAPTION>
Year Ended March 31,
-----------------------------
2000 1999 1998 2000 1999 1998
---- ---- ---- ---- ---- ----
Stock Options ESPP
-------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Expected life (in years).......................... 3.60 3.35 3.02 0.62 0.60 0.50
Expected volatility............................... 0.76 0.72 0.60 0.74 0.67 0.60
Risk-free interest rate........................... 6.10 5.21 5.80 5.61 5.15 5.54
</TABLE>
For pro forma purposes, the estimated fair value of the Company's stock-
based awards to employees is amortized over the options' vesting period (for
options) and the six-month purchase period (for stock purchases under the
ESPP). The Company's pro forma information is as follows (in thousands, except
for per share amounts):
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------
2000 1999 1998
------- ------- --------
<S> <C> <C> <C>
Net income (loss):
As reported................................... $85,314 $59,249 $(38,273)
Pro forma..................................... 20,089 13,635 (90,277)
Basic net income (loss) per share:
As reported................................... $ 0.97 $ 0.69 $ (0.44)
Pro forma..................................... 0.23 0.16 (1.03)
Diluted net income (loss) per share:
As reported................................... $ 0.89 $ 0.65 $ (0.44)
Pro forma..................................... 0.21 0.15 (1.03)
</TABLE>
The effects of applying FAS 123 in this pro forma disclosure are not
indicative of future amounts. FAS 123 does not apply to awards made prior to
1995. Additional awards in future years are anticipated.
The weighted-average fair value of options granted at market value during
fiscal 2000, 1999, and 1998 was $24.03, $7.76, and $5.63 per share,
respectively. The weighted-average fair value of employee stock purchase
rights during fiscal 2000, 1999, and 1998 was $10.39, $4.82, and $4.17 per
share, respectively.
47
<PAGE>
RATIONAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
March 31, 2000
10. Income Taxes
Income (loss) before income taxes and the provision for income taxes
consist of the following (in thousands):
<TABLE>
<CAPTION>
March 31,
----------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Income (loss) before income taxes:
United States............................. $ 68,072 $ 51,372 $ 424
Foreign................................... 52,923 33,270 (29,250)
-------- -------- --------
Total................................... $120,995 $ 84,642 $(28,826)
-------- -------- --------
Provision for income taxes:
Current:
Federal................................. $ -- $ 1,469 $ 9,908
State................................... 56 3,120 2,220
Foreign................................. 8,656 3,904 2,170
-------- -------- --------
Total................................. $ 8,712 $ 8,493 $ 14,298
-------- -------- --------
Deferred:
Federal................................. $ (8,498) $(13,858) $ (5,988)
State................................... (274) (1,263) (375)
-------- -------- --------
Total................................. $ (8,772) $(15,121) $ (6,363)
-------- -------- --------
Charge in lieu of taxes attributable to
employee stock plans....................... $ 36,825 $ 32,021 $ --
Charge in lieu of taxes resulting from
initial recognition of acquired tax
benefits that were allocated to reduce
intangible assets related to the acquired
entity..................................... -- -- 1,512
-------- -------- --------
Total................................... $ 36,765 $ 25,393 $ 9,447
======== ======== ========
</TABLE>
The provision for income taxes differs from the amount of income tax
determined by applying the applicable U.S. statutory federal income tax rate
as a result of the following differences (in thousands):
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------
2000 1999 1998
------- ------- --------
<S> <C> <C> <C>
Income tax provision (benefit) at the federal
statutory rate................................... $42,348 $29,625 $(10,089)
State income taxes (net of federal benefit)....... 4,781 5,502 1,845
Tax benefit of net operating loss carryforwards... -- (7,027) (19,260)
Tax benefit of research credit carryforwards...... (6,336) (3,000) --
Nondeductible charges for acquired in-process
research and development, and goodwill........... 2,285 -- --
Foreign taxes in excess of U.S. statutory rates... 603 1,333 651
Foreign earnings permanently reinvested in foreign
operations....................................... (8,400) -- --
Nondeductible losses attributable to Catapulse.... 1,047 -- --
Nondeductible merger-related costs................ -- -- 6,075
Foreign losses not resulting in a U.S. tax
benefit.......................................... 1,077 -- 21,297
Change in valuation allowance..................... -- (1,474) 7,562
Other............................................. (640) 434 1,366
------- ------- --------
Total........................................... $36,765 $25,393 $ 9,447
======= ======= ========
</TABLE>
48
<PAGE>
RATIONAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
March 31, 2000
Significant components of the Company's deferred tax assets are as follows
(in thousands):
<TABLE>
<CAPTION>
March 31,
------------------
2000 1999
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $ 31,939 $ 22,218
Tax credit carryforwards.................................. 10,052 6,865
Allowances, reserves, and accrued expenses................ 10,943 9,240
Property, equipment, and intangibles...................... 2,640 6,058
Other..................................................... 1,466 1,928
-------- --------
Gross deferred tax assets............................... 57,040 46,309
Less valuation allowance................................ (8,517) (11,100)
-------- --------
Total deferred tax assets............................... 48,523 35,209
Deferred tax liabilities:
Unremitted earnings of foreign subsidiaries............... (12,848) (5,337)
-------- --------
Total deferred tax liabilities.......................... (12,848) (5,337)
-------- --------
Net deferred tax assets..................................... $ 35,675 $ 29,872
======== ========
</TABLE>
The valuation allowance decreased by $2.6 million and $19.9 million in 2000
and 1999, respectively. In 2000, the $2.6 million decrease was primarily
attributable to previously unbenefitted research and development tax credits.
In 1999, approximately $18.4 million of such decrease was attributable to the
tax benefit associated with employee stock plans and was credited to
additional paid-in capital.
Net undistributed earnings of the foreign subsidiaries considered
permanently reinvested amounted to approximately $24 million at March 31,
2000. Accordingly, no provision for U.S. federal and state income taxes has
been provided thereon. Upon distribution of those earnings in the form of
dividends or otherwise, the Company would be subject to both U.S. income taxes
(subject to an adjustment for foreign tax credits) and withholding taxes
payable to the various foreign countries.
FASB Statement No. 109 provides for the recognition of deferred tax assets
if realization of such assets is more likely than not. Based on the weight of
available evidence, the Company has provided a valuation allowance against
certain foreign tax credit carryforwards and the future amortization of
certain intangible assets. The Company will continue to evaluate the
realizability of the deferred tax asset on a quarterly basis.
At March 31, 2000, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $83 million that expire in 2001
through 2020. The Company also had tax credit carryforwards for federal and
state purposes of approximately $7.5 million and $4.0 million, respectively,
that expire in 2001 through 2020, if not utilized. As a result of various
public offerings and business combinations, the Company and some of its
acquired entities experienced an ownership change as defined in section 382 of
the Internal Revenue Code. Due to the passing of time, the Company's net
operating loss carryforwards and tax credit carryforwards are no longer
subject to limitation.
11. Segment Information
The Company has adopted FAS 131 for the fiscal year ended March 31, 1999.
The Company's software products and related services are developed and
marketed to support heterogeneous environments in a broad
49
<PAGE>
RATIONAL SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
March 31, 2000
customer base. Management uses one measurement of profitability for its
business within a single operating segment. The Company markets its software
products and related services in the United States, Europe, and other parts of
the world.
Geographic revenues and long-lived asset information are as follows (in
thousands):
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Revenues:
United States................................. $339,116 $246,650 $203,810
Europe........................................ 167,507 121,848 82,202
Other......................................... 65,567 43,318 24,658
-------- -------- --------
Consolidated................................ $572,190 $411,816 $310,670
======== ======== ========
Long-lived assets:
United States................................. $ 87,272 $ 60,178 $391,951
Europe........................................ 6,816 6,117 38,011
Other......................................... 56,504 3,407 15,243
-------- -------- --------
Consolidated................................ $150,592 $ 69,702 $445,205
======== ======== ========
</TABLE>
"Other" represents Canada, Latin America, and the Asia/Pacific region.
Export sales out of the U.S. have been made primarily to customers in Europe,
Australia, and Canada and represent less than 10% of U.S. revenues in all
periods.
12. Quarterly Information (Unaudited)
The following table presents unaudited quarterly operating results for each
of the Company's eight quarters in the two-year period ended March 31, 2000
(in thousands, except per share amounts).
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------
September December
June 30 30 31 March 31
-------- --------- -------- --------
<S> <C> <C> <C> <C>
Fiscal 2000:
Total revenues.......................... $117,423 $128,161 $146,187 $180,419
Gross margin............................ 99,800 109,165 124,218 152,103
Operating income........................ 17,823 24,396 31,855 34,064
Net income.............................. 14,693 19,325 25,380 25,916
Net income per share--basic............. 0.17 0.22 0.29 0.29
Net income per share--diluted........... 0.16 0.21 0.27 0.26
Fiscal 1999:
Total revenues.......................... $ 82,971 $ 94,656 $109,133 $125,056
Gross margin............................ 67,208 79,759 93,674 108,307
Operating income........................ 8,321 14,194 22,525 26,881
Net income.............................. 8,005 12,200 17,954 21,090
Net income per share--basic............. 0.09 0.14 0.21 0.25
Net income per share--diluted........... 0.09 0.14 0.20 0.23
</TABLE>
50
<PAGE>
ITEM 9--CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10--DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Reference is made to "election of directors" in the Company's proxy
statement for the 2000 annual meeting of stockholders, incorporated by
reference herein.
ITEM 11--EXECUTIVE COMPENSATION
Reference is made to "executive compensation" and "performance graph" in
the Company's proxy statement for the 2000 annual meeting of stockholders,
incorporated by reference herein.
ITEM 12--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Reference is made to "beneficial ownership of Common Stock" in the
Company's proxy statement for the 2000 annual meeting of stockholders,
incorporated by reference herein.
ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to "certain transactions" in the Company's proxy
statement for the 2000 annual meeting of stockholders, incorporated by
reference herein.
PART IV
ITEM 14--EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
See Item 8 of this Form 10-K.
2. FINANCIAL STATEMENT SCHEDULES
The following financial statement schedule of the Company for each of the
years ended March 31, 2000, 1999, and 1998, is filed as part of this Form 10-K
and should be read in conjunction with the consolidated financial statements
and related notes thereto of the Company.
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
Schedule II--Valuation and Qualifying Accounts.................... S-1
</TABLE>
Schedules other than those listed above have been omitted because they are
either not required or not applicable or because the information is otherwise
included.
51
<PAGE>
3. EXHIBITS
<TABLE>
<CAPTION>
Exhibit
-------
<C> <S>
3.01 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.
3.02 Bylaws as amended through October 1999.
4.01 Reference is made to Exhibits 3.01 and 3.02.
4.02 Specimen of Common Stock Certificate is incorporated by reference to
Exhibit 4.06 filed with the Registrant's Amendment No. 1 to Form S-3
Registration Statement on May 31, 1995 (File No. 33-91740).
4.03 Indenture by and between Registrant and State Street Bank and Trust
Company of California, N.A., dated as of February 2, 2000, with
respect to 5% Convertible Subordinated Notes due February 1, 2007.
4.04 Registration Rights Agreement of the Registrant, dated as of
February 2, 2000, with respect to 5% Convertible Subordinated Notes
due February 1, 2007.
10.01 Relocation Agreement with David Bernstein is incorporated herein by
reference to Exhibit 10 filed with the Registrant's Form 10-Q dated
November 14, 1997.
10.02 *Form of Employment Agreement is incorporated by reference to
Exhibit 10.03 filed with the Registrant's Form 10-K dated June 1,
1998.
10.03 *Form of Employment Agreement. is incorporated by reference to
Exhibit 10.04 filed with the Registrant's Form 10-K dated June 1,
1998.
10.04 Form of Stock Option Repricing Agreement is incorporated by
reference to Exhibit 10.05 filed with the Registrant's Form 10-K
dated June 1, 1998.
10.05 Form of Director and Officer Indemnification Agreement incorporated
herein by reference to Exhibit 10.1 filed with the Registrant's
Registration Statement on Form S-4, dated January 17, 1997, as
amended on January 17, 1997.
10.06 *Rational Software Corporation Stock Option Plan for Directors is
incorporated herein by reference to Exhibit 1 filed with the
Registrant's Form 8-K Current Report dated October 2, 1996.
10.07 *Form of Stock Option Agreements for the Rational Software
Corporation Stock Option Plan for Directors is incorporated herein
by reference to Exhibit 4.6 filed with the Registrant's Form S-8
Registration Statement on September 18, 1995 (Registration No. 33-
97042).
21.01 Subsidiaries of the Registrant.
23.01 Consent of Ernst & Young LLP, independent auditors.
24.01 Power of attorney is contained on the signature pages of this
registration statement.
27.1 Annual financial data schedule.
</TABLE>
- --------
* Indicates those exhibits that are management contracts or compensatory plans
or arrangements required to be filed as an exhibit to this form.
52
<PAGE>
(b) REPORTS ON FORM 8-K
Item 2: On January 21, 2000, the Company filed Form 8-K regarding the
closing of the acquisition of ObjecTime Limited
Item 5: On January 24, 2000, the Company filed Form 8-K announcing a
proposed private offering of Convertible Subordinated Notes.
Item 5: On January 31, 2000, the Company filed Form 8-K announcing that the
Company had entered into an agreement to sell Convertible Subordinated Notes.
Item 5: On February 16, 2000, the Company filed Form 8-K regarding the
completion of the agreement to sell Convertible Subordinated Notes.
53
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Rational Software Corporation
<TABLE>
<S> <C>
Date: May 1, 2000 /s/ Timothy A. Brennan
----------------------------------------
Timothy A. Brennan,
Senior Vice President,
Chief Financial Officer, and Secretary
</TABLE>
POWER OF ATTORNEY
KNOW ALL THESE PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Thomas F. Bogan and Timothy A. Brennan,
jointly and severally, as such person's true and lawful attorneys-in-fact and
agents, each with full power of substitution, for such person, in any and all
capacities, to sign any and all amendments (including post-effective
amendments) to this report on Form 10-K, and to file with same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as full to all
intents and purposes as such person might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact and agent, or his
substitutes, may do or be done by virtue hereof. Pursuant to the requirements
of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Paul D. Levy Founder and Chairman of the May 1, 2000
____________________________________ Board
Paul D. Levy
/s/ Michael T. Devlin Founder, Chief Executive May 1, 2000
____________________________________ Officer, and Director
Michael T. Devlin
/s/ Thomas F. Bogan President and Chief May 1, 2000
____________________________________ Operating Officer
Thomas F. Bogan
/s/ Timothy A. Brennan Senior Vice President, Chief May 1, 2000
____________________________________ Financial Officer, and
Timothy A. Brennan Secretary (principal
financial officer and
principal accounting
officer)
/s/ Leslie G. Denend Director May 1, 2000
____________________________________
Leslie G. Denend
/s/ John E. Montague Director May 1, 2000
____________________________________
John E. Montague
/s/ Allison R. Schleicher Director May 1, 2000
____________________________________
Allison R. Schleicher
</TABLE>
54
<PAGE>
RATIONAL SOFTWARE CORPORATION
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
Years Ended March 31, 2000, 1999, and 1998
(in thousands)
<TABLE>
<CAPTION>
Balance
Balance at
at Ending
Beginning of
of Period Additions Deductions Period
--------- --------- ---------- -------
<S> <C> <C> <C> <C>
March 31, 2000
Allowance for doubtful accounts........ $3,226 $287 $ (254) $3,259
March 31, 1999
Allowance for doubtful accounts........ $3,638 $ -- $ (412) $3,226
March 31, 1998
Allowance for doubtful accounts........ $4,001 $664 $(1,027) $3,638
</TABLE>
INDEX OF ATTACHED EXHIBITS
<TABLE>
<C> <S>
3.02 Bylaws as amended through October 1999.
4.03 Indenture by and between Registrant and State Street Bank and Trust
Company of California, N.A.
4.04 Registration Rights Agreement of the Registrant
21.01 Subsidiaries of Registrant
23.01 Consent of Ernst & Young LLP, Independent Auditors
27.1 Annual financial data schedule
</TABLE>
For documents incorporated by reference, see Item 14(a)(3) above.
55
<PAGE>
EXHIBIT 3.02
BYLAWS
OF
RATIONAL SOFTWARE CORPORATION
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I - CORPORATE OFFICES............................................................. 1
1.1 REGISTERED OFFICE............................................................. 1
1.2 OTHER OFFICES................................................................. 1
ARTICLE II - MEETINGS OF STOCKHOLDERS..................................................... 1
2.1 PLACE OF MEETINGS............................................................. 1
2.2 ANNUAL MEETING................................................................ 1
2.3 SPECIAL MEETING............................................................... 2
2.4 NOTICE OF STOCKHOLDERS' MEETINGS.............................................. 2
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE.................................. 2
2.6 QUORUM........................................................................ 2
2.7 ADJOURNED MEETING; NOTICE..................................................... 3
2.8 CONDUCT OF BUSINESS........................................................... 3
2.9 VOTING........................................................................ 3
2.10 WAIVER OF NOTICE.............................................................. 3
2.11 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING....................... 4
2.12 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS................... 4
2.13 PROXIES....................................................................... 5
2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE......................................... 5
ARTICLE III - DIRECTORS................................................................... 5
3.1 POWERS........................................................................ 5
3.2 NUMBER OF DIRECTORS........................................................... 6
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS....................... 6
3.4 RESIGNATION AND VACANCIES..................................................... 6
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE...................................... 7
3.6 REGULAR MEETINGS.............................................................. 7
3.7 SPECIAL MEETINGS; NOTICE...................................................... 7
3.8 QUORUM........................................................................ 8
3.9 WAIVER OF NOTICE.............................................................. 8
3.10 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING............................. 8
3.11 FEES AND COMPENSATION OF DIRECTORS............................................ 9
</TABLE>
-i-
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
3.12 APPROVAL OF LOANS TO OFFICERS................................................. 9
3.13 REMOVAL OF DIRECTORS.......................................................... 9
ARTICLE IV - COMMITTEES................................................................... 9
4.1 COMMITTEES OF DIRECTORS....................................................... 9
4.2 COMMITTEE MINUTES............................................................. 10
4.3 MEETINGS AND ACTION OF COMMITTEES............................................. 10
ARTICLE V - OFFICERS...................................................................... 11
5.1 OFFICERS...................................................................... 11
5.2 APPOINTMENT OF OFFICERS....................................................... 11
5.3 SUBORDINATE OFFICERS.......................................................... 11
5.4 REMOVAL AND RESIGNATION OF OFFICERS........................................... 11
5.5 VACANCIES IN OFFICES.......................................................... 12
5.6 CHAIRMAN OF THE BOARD......................................................... 12
5.7 CHIEF EXECUTIVE OFFICER....................................................... 12
5.8 PRESIDENT..................................................................... 12
5.9 VICE PRESIDENTS............................................................... 12
5.10 SECRETARY..................................................................... 13
5.11 CHIEF FINANCIAL OFFICER....................................................... 13
5.12 ASSISTANT SECRETARY........................................................... 13
5.13 ASSISTANT TREASURER........................................................... 14
5.14 REPRESENTATION OF SHARES OF OTHER CORPORATIONS................................ 14
5.15 AUTHORITY AND DUTIES OF OFFICERS.............................................. 14
ARTICLE VI - INDEMNITY.................................................................... 14
6.1 THIRD PARTY ACTIONS........................................................... 14
6.2 ACTIONS BY OR IN THE RIGHT OF THE CORPORATION................................. 15
6.3 SUCCESSFUL DEFENSE............................................................ 15
6.4 DETERMINATION OF CONDUCT...................................................... 16
6.5 PAYMENT OF EXPENSES IN ADVANCE................................................ 16
6.6 INDEMNITY NOT EXCLUSIVE....................................................... 16
6.7 INSURANCE INDEMNIFICATION..................................................... 16
6.8 THE CORPORATION............................................................... 17
</TABLE>
-ii-
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
6.9 EMPLOYEE BENEFIT PLANS........................................................ 17
6.10 CONTINUATION OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES................... 17
ARTICLE VII - RECORDS AND REPORTS......................................................... 17
7.1 MAINTENANCE AND INSPECTION OF RECORDS......................................... 17
7.2 INSPECTION BY DIRECTORS....................................................... 18
7.3 ANNUAL STATEMENT TO STOCKHOLDERS.............................................. 18
ARTICLE VIII - GENERAL MATTERS............................................................ 19
8.1 CHECKS........................................................................ 19
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS.............................. 19
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES........................................ 19
8.4 SPECIAL DESIGNATION ON CERTIFICATES........................................... 20
8.5 LOST CERTIFICATES............................................................. 20
8.6 CONSTRUCTION; DEFINITIONS..................................................... 20
8.7 DIVIDENDS..................................................................... 20
8.8 FISCAL YEAR................................................................... 21
8.9 SEAL.......................................................................... 21
8.10 TRANSFER OF STOCK............................................................. 21
8.11 STOCK TRANSFER AGREEMENTS..................................................... 21
8.12 INADVERTENT TERMINATION OF S CORPORATION STATUS............................... 21
8.13 REGISTERED STOCKHOLDERS....................................................... 22
ARTICLE IX - AMENDMENTS................................................................... 22
</TABLE>
-iii-
<PAGE>
BYLAWS
------
OF
--
RATIONAL SOFTWARE CORPORATION
-----------------------------
ARTICLE I
CORPORATE OFFICES
-----------------
1.1 REGISTERED OFFICE
-----------------
The registered office of the corporation shall be in the City of
Wilmington, County of New Castle, State of Delaware. The name of the registered
agent of the corporation at such location is The Corporation Trust Company.
1.2 OTHER OFFICES
-------------
The board of directors may at any time establish other offices at any place
or places where the corporation is qualified to do business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
------------------------
2.1 PLACE OF MEETINGS
-----------------
Meetings of stockholders shall be held at any place, within or outside the
State of Delaware, designated by the board of directors. In the absence of any
such designation, stockholders' meetings shall be held at the registered office
of the corporation.
2.2 ANNUAL MEETING
--------------
The annual meeting of stockholders shall be held each year on a date and at
a time designated by the board of directors. In the absence of such designation
the annual meeting of stockholders shall be held on the ______________ of ___ of
each year at _________. However, if such day falls on a legal holiday, then the
meeting shall be held at the same time and place on the next succeeding business
day. At the meeting, directors shall be elected and any other proper business
may be transacted.
<PAGE>
2.3 SPECIAL MEETING
---------------
A special meeting of the stockholders may be called at any time by the
board of directors, or by the chairman of the board, or by the president, or by
one or more stockholders holding shares in the aggregate entitled to cast not
less than ten percent of the votes at that meeting.
If a special meeting is called by any person or persons other than the
board of directors, the request shall be in writing, specifying the time of such
meeting and the general nature of the business proposed to be transacted, and
shall be delivered personally or sent by registered mail or by telegraphic or
other facsimile transmission to the chairman of the board, the president or the
secretary of the corporation. No business may be transacted at such special
meeting otherwise than specified in such notice. The officer receiving the
request shall cause notice to be promptly given to the stockholders entitled to
vote, in accordance with the provisions of Sections 2.4 and 2.5 of this Article
II, that a meeting will be held at the time requested by the person or persons
calling the meeting, not less than ten (10) nor more than sixty (60) days after
the receipt of the request. Nothing contained in this paragraph of this Section
2.3 shall be construed as limiting, fixing, or affecting the time when a meeting
of stockholders called by action of the board of directors may be held.
2.4 NOTICE OF STOCKHOLDERS' MEETINGS
--------------------------------
All notices of meetings with stockholders shall be in writing and shall be
sent or otherwise given in accordance with Section 2.5 of these bylaws not less
than ten (10) nor more than sixty (60) days before the date of the meeting to
each stockholder entitled to vote at such meeting. The notice shall specify the
place, date, and hour of the meeting, and, in the case of a special meeting, the
purpose or purposes for which the meeting is called.
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
--------------------------------------------
Written notice of any meeting of stockholders, if mailed, is given when
deposited in the United States mail, postage prepaid, directed to the
stockholder at such shareholder's address as it appears on the records of the
corporation. An affidavit of the Secretary or an Assistant Secretary or of the
transfer agent of the corporation that the notice has been given shall, in the
absence of fraud, be prima facie evidence of the facts stated therein.
2.6 QUORUM
------
The holders of a majority of the stock issued and outstanding and entitled
to vote thereat, present in person or represented by proxy, shall constitute a
quorum at all meetings of the stockholders for the transaction of business
except as otherwise provided by statute or by the certificate of incorporation.
If, however, such quorum is not present or represented at any meeting of the
stockholders, then either (i) the Chairman of the meeting or (ii) the
stockholders entitled to vote thereat, present in person or represented by
proxy, shall have power to adjourn the meeting from
-2-
<PAGE>
time to time, without notice other than announcement at the meeting, until a
quorum is present or represented. At such adjourned meeting at which a quorum is
present or represented, any business may be transacted that might have been
transacted at the meeting as originally noticed.
2.7 ADJOURNED MEETING; NOTICE
-------------------------
When a meeting is adjourned to another time or place, unless these bylaws
otherwise require, notice need not be given of the adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting the corporation may transact any business that
might have been transacted at the original meeting. If the adjournment is for
more than thirty (30) days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.
2.8 CONDUCT OF BUSINESS
-------------------
The chairman of any meeting of stockholders shall determine the order of
business and the procedure at the meeting, including such regulation of the
manner of voting and the conduct of business.
2.9 VOTING
------
The stockholders entitled to vote at any meeting of stockholders shall be
determined in accordance with the provisions of Section 2.12 of these bylaws,
subject to the provisions of Sections 217 and 218 of the General Corporation Law
of Delaware (relating to voting rights of fiduciaries, pledgors and joint owners
of stock and to voting trusts and other voting agreements).
Except as provided in the last paragraph of this Section 2.9, or as may be
otherwise provided in the certificate of incorporation, each stockholder shall
be entitled to one vote for each share of capital stock held by such
stockholder.
2.10 WAIVER OF NOTICE
----------------
Whenever notice is required to be given under any provision of the General
Corporation Law of Delaware or of the certificate of incorporation or these
bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the stockholders need be specified in any written waiver of notice unless so
required by the certificate of incorporation or these bylaws.
-3-
<PAGE>
2.11 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
-------------------------------------------------------
Unless otherwise provided in the certificate of incorporation, any action
required by this chapter to be taken at any annual or special meeting of
stockholders of a corporation, or any action that may be taken at any annual or
special meeting of such stockholders, may be taken without a meeting, without
prior notice, and without a vote if a consent in writing, setting forth the
action so taken, is signed by the holders of outstanding stock having not less
than the minimum number of votes that would be necessary to authorize or take
such action at a meeting at which all shares entitled to vote thereon were
present and voted.
Prompt notice of the taking of the corporate action without a meeting by
less than unanimous written consent shall be given to those stockholders who
have not consented in writing. If the action which is consented to is such as
would have required the filing of a certificate under any section of the General
Corporation Law of Delaware if such action had been voted on by stockholders at
a meeting thereof, then the certificate filed under such section shall state, in
lieu of any statement required by such section concerning any vote of
stockholders, that written notice and written consent have been given as
provided in Section 228 of the General Corporation Law of Delaware.
2.12 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS
-----------------------------------------------------------
In order that the corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment thereof,
or entitled to express consent to corporate action in writing without a meeting,
or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock or for the purpose of any other lawful
action, the board of directors may fix, in advance, a record date, which shall
not be more than sixty (60) nor less than ten (10) days before the date of such
meeting, nor more than sixty (60) days prior to any other action.
If the board of directors does not so fix a record date:
(i) The record date for determining stockholders entitled to
notice of or to vote at a meeting of stockholders shall be at the close of
business on the day next preceding the day on which notice is given, or, if
notice is waived, at the close of business on the day next preceding the
day on which the meeting is held.
(ii) The record date for determining stockholders entitled to
express consent to corporate action in writing without a meeting, when no
prior action by the board of directors is necessary, shall be the day on
which the first written consent is expressed.
(iii) The record date for determining stockholders for any
other purpose shall be at the close of business on the day on which the board of
directors adopts the resolution relating thereto.
-4-
<PAGE>
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the board of directors may fix a new record date for the
adjourned meeting.
2.13 PROXIES
-------
Each stockholder entitled to vote at a meeting of stockholders or to
express consent or dissent to corporate action in writing without a meeting may
authorize another person or persons to act for the stockholder by a written
proxy, signed by the stockholder and filed with the secretary of the
corporation, but no such proxy shall be voted or acted upon after three (3)
years from its date, unless the proxy provides for a longer period. A proxy
shall be deemed signed if the stockholder's name is placed on the proxy (whether
by manual signature, typewriting, telegraphic transmission or otherwise) by the
stockholder or the stockholder's attorney-in-fact. The revocability of a proxy
that states on its face that it is irrevocable shall be governed by the
provisions of Section 212(c) of the General Corporation Law of Delaware.
2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE
-------------------------------------
The officer who has charge of the stock ledger of a corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present. Such list shall
presumptively determine the identity of the stockholders entitled to vote at the
meeting and the number of shares held by each of them.
ARTICLE III
DIRECTORS
---------
3.1 POWERS
------
Subject to the provisions of the General Corporation Law of Delaware and
any limitations in the certificate of incorporation or these bylaws relating to
action required to be approved by the stockholders or by the outstanding shares,
the business and affairs of the corporation shall be managed and all corporate
powers shall be exercised by or under the direction of the board of directors.
-5-
<PAGE>
3.2 NUMBER OF DIRECTORS
-------------------
The Board of Directors shall consist of eight (8) persons and shall be
divided into three (3) classes as specified or determined pursuant to the
Certificate of Incorporation of the corporation as in effect from time to time.
No reduction of the authorized number of directors shall have the effect of
removing any director before that director's term of office expires.
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS
-------------------------------------------------------
Except as provided in Section 3.4 of these bylaws, directors shall be
elected at each annual meeting of stockholders to hold office until the next
annual meeting. Directors need not be stockholders unless so required by the
certificate of incorporation or these bylaws, wherein other qualifications for
directors may be prescribed. Each director, including a director elected to
fill a vacancy, shall hold office until his or her successor is elected and
qualified or until the director's earlier resignation or removal.
Elections of directors need not be by written ballot.
3.4 RESIGNATION AND VACANCIES
-------------------------
Any director may resign at any time upon written notice to the attention of
the Secretary of the corporation. When one or more directors so resigns and the
resignation is effective at a future date, a majority of the directors then in
office, including those who have so resigned, shall have power to fill such
vacancy or vacancies, the vote thereon to take effect when such resignation or
resignations shall become effective, and each director so chosen shall hold
office as provided in this section in the filling of other vacancies.
Unless otherwise provided in the certificate of incorporation or these
bylaws:
(i) Vacancies and newly created directorships resulting from
any increase in the authorized number of directors elected by all of the
stockholders having the right to vote as a single class may be filled by a
majority of the directors then in office, although less than a quorum, or
by a sole remaining director.
(ii) Whenever the holders of any class or classes of stock or
series thereof are entitled to elect one or more directors by the
provisions of the certificate of incorporation, vacancies and newly created
directorships of such class or classes or series may be filled by a
majority of the directors elected by such class or classes or series
thereof then in office, or by a sole remaining director so elected.
-6-
<PAGE>
If at any time, by reason of death or resignation or other cause, the
corporation should have no directors in office, then any officer or any
stockholder or an executor, administrator, trustee or guardian of a stockholder,
or other fiduciary entrusted with like responsibility for the person or estate
of a stockholder, may call a special meeting of stockholders in accordance with
the provisions of the certificate of incorporation or these bylaws, or may apply
to the Court of Chancery for a decree summarily ordering an election as provided
in Section 211 of the General Corporation Law of Delaware.
If, at the time of filling any vacancy or any newly created directorship,
the directors then in office constitute less than a majority of the whole board
(as constituted immediately prior to any such increase), then the Court of
Chancery may, upon application of any stockholder or stockholders holding at
least ten (10) percent of the total number of the shares at the time outstanding
having the right to vote for such directors, summarily order an election to be
held to fill any such vacancies or newly created directorships, or to replace
the directors chosen by the directors then in office as aforesaid, which
election shall be governed by the provisions of Section 211 of the General
Corporation Law of Delaware as far as applicable.
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
The board of directors of the corporation may hold meetings, both regular
and special, either within or outside the State of Delaware.
Unless otherwise restricted by the certificate of incorporation or these
bylaws, members of the board of directors, or any committee designated by the
board of directors, may participate in a meeting of the board of directors, or
any committee, by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and such participation in a meeting shall constitute presence in
person at the meeting.
3.6 REGULAR MEETINGS
----------------
Regular meetings of the board of directors may be held without notice at
such time and at such place as shall from time to time be determined by the
board.
3.7 SPECIAL MEETINGS; NOTICE
------------------------
Special meetings of the board of directors for any purpose or purposes may
be called at any time by the chairman of the board, the president, any vice
president, the secretary or any two (2) directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges prepaid, addressed to each director at that director's address
as it is shown on the records of the corporation. If the notice is mailed, it
shall be deposited in the United States mail at least four (4) days before the
time of the holding
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of the meeting. If the notice is delivered personally or by telephone or by
telegram, it shall be delivered personally or by telephone or to the telegraph
company at least forty-eight (48) hours before the time of the holding of the
meeting. Any oral notice given personally or by telephone may be communicated
either to the director or to a person at the office of the director who the
person giving the notice has reason to believe will promptly communicate it to
the director. The notice need not specify the purpose or the place of the
meeting, if the meeting is to be held at the principal executive office of the
corporation.
3.8 QUORUM
------
At all meetings of the board of directors, a majority of the authorized
number of directors shall constitute a quorum for the transaction of business
and the act of a majority of the directors present at any meeting at which there
is a quorum shall be the act of the board of directors, except as may be
otherwise specifically provided by statute or by the certificate of
incorporation. If a quorum is not present at any meeting of the board of
directors, then the directors present thereat may adjourn the meeting from time
to time, without notice other than announcement at the meeting, until a quorum
is present.
A meeting at which a quorum is initially present may continue to transact
business notwithstanding the withdrawal of directors, if any action taken is
approved by at least a majority of the required quorum for that meeting.
3.9 WAIVER OF NOTICE
----------------
Whenever notice is required to be given under any provision of the General
Corporation Law of Delaware or of the certificate of incorporation or these
bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the directors, or members of a committee of directors, need be specified in
any written waiver of notice unless so required by the certificate of
incorporation or these bylaws.
3.10 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
-------------------------------------------------
Unless otherwise restricted by the certificate of incorporation or these
bylaws, any action required or permitted to be taken at any meeting of the board
of directors, or of any committee thereof, may be taken without a meeting if all
members of the board or committee, as the case may be, consent thereto in
writing and the writing or writings are filed with the minutes of proceedings of
the board or committee.
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3.11 FEES AND COMPENSATION OF DIRECTORS
----------------------------------
Unless otherwise restricted by the certificate of incorporation or these
bylaws, the board of directors shall have the authority to fix the compensation
of directors.
3.12 APPROVAL OF LOANS TO OFFICERS
-----------------------------
The corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the corporation or of its
subsidiary, including any officer or employee who is a director of the
corporation or its subsidiary, whenever, in the judgment of the directors, such
loan, guaranty or assistance may reasonably be expected to benefit the
corporation. The loan, guaranty or other assistance may be with or without
interest and may be unsecured, or secured in such manner as the board of
directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing in this section contained shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
3.13 REMOVAL OF DIRECTORS
--------------------
Unless otherwise restricted by statute, by the certificate of incorporation
or by these bylaws, any director or the entire board of directors may be
removed, with or without cause, by the holders of a majority of the shares then
entitled to vote at an election of directors; provided, however, that, so long
as shareholders of the corporation are entitled to cumulative voting, if less
than the entire board is to be removed, no director may be removed without cause
if the votes cast against the director's removal would be sufficient to elect
the director if then cumulatively voted at an election of the entire board of
directors.
No reduction of the authorized number of directors shall have the effect of
removing any director prior to the expiration of such director's term of office.
ARTICLE IV
COMMITTEES
----------
4.1 COMMITTEES OF DIRECTORS
-----------------------
The board of directors may, by resolution passed by a majority of the whole
board, designate one or more committees, with each committee to consist of one
or more of the directors of the corporation. The board may designate one or
more directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members thereof
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present at any meeting and not disqualified from voting, whether or not such
member or members constitute a quorum, may unanimously appoint another member of
the board of directors to act at the meeting in the place of any such absent or
disqualified member. Any such committee, to the extent provided in the
resolution of the board of directors or in the bylaws of the corporation, shall
have and may exercise all the powers and authority of the board of directors in
the management of the business and affairs of the corporation, and may authorize
the seal of the corporation to be affixed to all papers that may require it; but
no such committee shall have the power or authority to (i) amend the certificate
of incorporation (except that a committee may, to the extent authorized in the
resolution or resolutions providing for the issuance of shares of stock adopted
by the board of directors as provided in Section 151(a) of the General
Corporation Law of Delaware, fix the designations and any of the preferences or
rights of such shares relating to dividends, redemption, dissolution, any
distribution of assets of the corporation or the conversion into, or the
exchange of such shares for, shares of any other class or classes or any other
series of the same or any other class or classes of stock of the corporation or
fix the number of shares of any series of stock or authorize the increase or
decrease of the shares of any series), (ii) adopt an agreement of merger or
consolidation under Sections 251 or 252 of the General Corporation Law of
Delaware, (iii) recommend to the stockholders the sale, lease or exchange of all
or substantially all of the corporation's property and assets, (iv) recommend to
the stockholders a dissolution of the corporation or a revocation of a
dissolution, or (v) amend the bylaws of the corporation; and, unless the board
resolution establishing the committee, the bylaws or the certificate of
incorporation expressly so provide, no such committee shall have the power or
authority to declare a dividend, to authorize the issuance of stock, or to adopt
a certificate of ownership and merger pursuant to Section 253 of the General
Corporation Law of Delaware.
4.2 COMMITTEE MINUTES
-----------------
Each committee shall keep regular minutes of its meetings and report the
same to the board of directors when required.
4.3 MEETINGS AND ACTION OF COMMITTEES
---------------------------------
Meetings and actions of committees shall be governed by, and held and taken
in accordance with, the provisions of Article III of these bylaws, Section 3.5
(place of meetings and meetings by telephone), Section 3.6 (regular meetings),
Section 3.7 (special meetings and notice), Section 3.8 (quorum), Section 3.9
(waiver of notice), and Section 3.10 (action without a meeting), with such
changes in the context of those bylaws as are necessary to substitute the
committee and its members for the board of directors and its members; provided,
however, that the time of regular meetings of committees may be determined
either by resolution of the board of directors or by resolution of the
committee, that special meetings of committees may also be called by resolution
of the board of directors and that notice of special meetings of committees
shall also be given to all alternate members, who shall have the right to attend
all meetings of the committee. The board of directors may adopt rules for the
government of any committee not inconsistent with the provisions of these
bylaws.
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ARTICLE V
OFFICERS
--------
5.1 OFFICERS
--------
The officers of the corporation shall be a president, a chief executive
officer, a chief financial officer and a secretary. The corporation may also
have, at the discretion of the board of directors, a chairman of the board, one
or more vice presidents, one or more assistant vice presidents, one or more
assistant secretaries, one or more assistant treasurers, and any such other
officers as may be appointed in accordance with the provisions of Section 5.3 of
these bylaws. Any number of offices may be held by the same person.
5.2 APPOINTMENT OF OFFICERS
-----------------------
The officers of the corporation, except such officers as may be appointed
in accordance with the provisions of Sections 5.3 or 5.5 of these bylaws, shall
be appointed by the board of directors, subject to the rights, if any, of an
officer under any contract of employment.
5.3 SUBORDINATE OFFICERS
--------------------
The board of directors may appoint, or empower the president to appoint,
such other officers and agents as the business of the corporation may require,
each of whom shall hold office for such period, have such authority, and perform
such duties as are provided in these bylaws or as the board of directors may
from time to time determine.
5.4 REMOVAL AND RESIGNATION OF OFFICERS
-----------------------------------
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by an
affirmative vote of the majority of the board of directors at any regular or
special meeting of the board or, except in the case of an officer chosen by the
board of directors, by any officer upon whom such power of removal may be
conferred by the board of directors.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the officer is a
party.
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5.5 VACANCIES IN OFFICES
--------------------
Any vacancy occurring in any office of the corporation shall be filled by
the board of directors.
5.6 CHAIRMAN OF THE BOARD
---------------------
The chairman of the board, if such an officer be elected, shall, if
present, preside at meetings of the board of directors and exercise and perform
such other powers and duties as may from time to time be assigned to him or her
by the board of directors or as may be prescribed by these bylaws. If there is
no chief executive officer and no president, then the chairman of the board
shall also be the chief executive officer of the corporation and shall have the
powers and duties prescribed in Section 5.7 of these bylaws.
5.7 CHIEF EXECUTIVE OFFICER
-----------------------
Subject to the supervisory powers, if any, as may be given by the board of
directors to the chairman of the board, if there be such an officer, the chief
executive officer shall, subject to the control of the board of directors, have
general supervision, direction, and control of the business and the officers of
the corporation. In the absence or nonexistence of a chairman of the board, the
chief executive officer shall preside at meetings of the board of directors.
The chief executive officer shall have such other powers and duties as may be
prescribed by the board of directors or these bylaws.
5.8 PRESIDENT
---------
The president shall preside at all meetings of the stockholders and, in the
absence or nonexistence of a chairman of the board and a chief executive
officer, at all meetings of the board of directors. The president shall have
the general powers and duties of management usually vested in the office of
president of a corporation and shall have such other powers and duties as may be
prescribed by the board of directors or these bylaws. If there is no chief
executive officer, then the president shall also be the chief executive officer
of the corporation and shall have the powers and duties prescribed in Section
5.7 of these bylaws.
5.9 VICE PRESIDENTS
---------------
In the absence or disability of the president, the vice presidents, if any,
in order of their rank as fixed by the board of directors or, if not ranked, a
vice president designated by the board of directors, shall perform all the
duties of the president and when so acting shall have all the powers of, and be
subject to all the restrictions upon, the president. The vice presidents shall
have such other powers and perform such other duties as from time to time may be
prescribed for them respectively by the board of directors, these bylaws, the
president or the chairman of the board.
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<PAGE>
5.10 SECRETARY
---------
The secretary shall keep or cause to be kept, at the principal executive
office of the corporation or such other place as the board of directors may
direct, a book of minutes of all meetings and actions of directors, committees
of directors, and stockholders. The minutes shall show the time and place of
each meeting, whether regular or special (and, if special, how authorized and
the notice given), the names of those present at directors' meetings or
committee meetings, the number of shares present or represented at stockholders'
meetings, and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal executive
office of the corporation or at the office of the corporation's transfer agent
or registrar, as determined by resolution of the board of directors, a share
register, or a duplicate share register, showing the names of all stockholders
and their addresses, the number and classes of shares held by each, the number
and date of certificates evidencing such shares, and the number and date of
cancellation of every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings of
the stockholders and of the board of directors required to be given by law or by
these bylaws. The secretary shall keep the seal of the corporation, if one be
adopted, in safe custody and shall have such other powers and perform such other
duties as may be prescribed by the board of directors or by these bylaws.
5.11 CHIEF FINANCIAL OFFICER
-----------------------
The chief financial officer shall keep and maintain, or cause to be kept
and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital
retained earnings, and shares. The books of account shall at all reasonable
times be open to inspection by any director.
The chief financial officer shall deposit all moneys and other valuables in
the name and to the credit of the corporation with such depositories as may be
designated by the board of directors. The chief financial officer shall disburse
the funds of the corporation as may be ordered by the board of directors, shall
render to the president and directors, whenever they request it, an account of
all his or her transactions as chief financial officer and of the financial
condition of the corporation, and shall have other powers and perform such other
duties as may be prescribed by the board of directors or these bylaws.
The chief financial officer shall be the treasurer of the corporation.
5.12 ASSISTANT SECRETARY
-------------------
The assistant secretary, or, if there is more than one, the assistant
secretaries in the order determined by the stockholders or board of directors
(or if there be no such determination, then in
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the order of their election) shall, in the absence of the secretary or in the
event of his or her inability or refusal to act, perform the duties and exercise
the powers of the secretary and shall perform such other duties and have such
other powers as may be prescribed by the board of directors or these bylaws.
5.13 ASSISTANT TREASURER
-------------------
The assistant treasurer, or, if there is more than one, the assistant
treasurers, in the order determined by the stockholders or board of directors
(or if there be no such determination, then in the order of their election),
shall, in the absence of the chief financial officer or in the event of his or
her inability or refusal to act, perform the duties and exercise the powers of
the chief financial officer and shall perform such other duties and have such
other powers as may be prescribed by the board of directors or these bylaws.
5.14 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
----------------------------------------------
The chairman of the board, the president, any vice president, the chief
financial officer, the secretary or assistant secretary of this corporation, or
any other person authorized by the board of directors or the president or a vice
president, is authorized to vote, represent, and exercise on behalf of this
corporation all rights incident to any and all shares of any other corporation
or corporations standing in the name of this corporation. The authority granted
herein may be exercised either by such person directly or by any other person
authorized to do so by proxy or power of attorney duly executed by such person
having the authority.
5.15 AUTHORITY AND DUTIES OF OFFICERS
--------------------------------
In addition to the foregoing authority and duties, all officers of the
corporation shall respectively have such authority and perform such duties in
the management of the business of the corporation as may be designated from time
to time by the board of directors or the stockholders.
ARTICLE VI
INDEMNITY
---------
6.1 THIRD PARTY ACTIONS
-------------------
The corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending, or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of
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another corporation, partnership, joint venture trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement (if such settlement is approved in advance by the corporation,
which approval shall not be unreasonably withheld) actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
---------------
itself, create a presumption that the person did not act in good faith and in a
manner which such person reasonably believed to be in or not opposed to the best
interest of the corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
6.2 ACTIONS BY OR IN THE RIGHT OF THE CORPORATION
---------------------------------------------
The corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that such person is or was a director, officer, employee or
agent of corporation, or is or was serving at the request of the corporation as
a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against expenses (including attorneys'
fees) and amounts paid in settlement (if such settlement is approved in advance
by the corporation, which approval shall not be unreasonably withheld) actually
and reasonably incurred by such person in connection with the defense or
settlement of such action or suit if the person acted in good faith and in
manner the person reasonably believed to be in or not opposed to the best
interests of the corporation, except that no indemnification shall be made in
respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation unless and only to the extent that the
Delaware Court of Chancery or the court in which such action or suit was brought
shall determine upon application that, despite the adjudication of liability but
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the Delaware Court of
Chancery or such other court shall deem proper. Notwithstanding any other
provision of this Article VI, no person shall be indemnified hereunder for any
expenses or amounts paid in settlement with respect to any action to recover
short-swing profits under Section 16(b) of the Securities Exchange Act of 1934,
as amended.
6.3 SUCCESSFUL DEFENSE
------------------
To the extent that a director, officer, employee or agent of the
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in Sections 6.1 and 6.2, or in defense of
any claim, issue or matter therein, such person shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by the
person in connection therewith.
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<PAGE>
6.4 DETERMINATION OF CONDUCT
------------------------
Any indemnification under Sections 6.1 and 6.2 (unless ordered by a court)
shall be made by the corporation only as authorized in the specific case upon a
determination that the indemnification of the director, officer, employee or
agent is proper in the circumstances because the person has met the applicable
standard of conduct set forth in Sections 6.1 and 6.2. Such determination shall
be made (1) by the Board of Directors or the Executive Committee by a majority
vote of a quorum consisting of directors who were not parties to such action,
suit or proceeding or (2) or if such quorum is not obtainable or, even if
obtainable, a quorum of disinterested directors so directs, by independent legal
counsel in a written opinion, or (3) by the stockholders. Notwithstanding the
foregoing, a director, officer, employee or agent of the Corporation shall be
entitled to contest any determination that the director, officer, employee or
agent has not met the applicable standard of conduct set forth in Sections 6.1
and 6.2 by petitioning a court of competent jurisdiction.
6.5 PAYMENT OF EXPENSES IN ADVANCE
------------------------------
Expenses incurred in defending a civil or criminal action, suit or
proceeding, by an individual who may be entitled to indemnification pursuant to
Section 6.1 or 6.2, shall be paid by the corporation in advance of the final
disposition of such action, suit or proceeding upon receipt of an undertaking by
or on behalf of the director, officer, employee or agent to repay such amount if
it shall ultimately be determined that the individual is not entitled to be
indemnified by the corporation as authorized in this Article VI.
6.6 INDEMNITY NOT EXCLUSIVE
-----------------------
The indemnification and advancement of expenses provided by or granted
pursuant to the other sections of this Article VI shall not be deemed exclusive
of any other rights to which those seeking indemnification or advancement of
expenses may be entitled under any by-law, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in their official
capacity and as to action in another capacity while holding such office.
6.7 INSURANCE INDEMNIFICATION
-------------------------
The corporation shall have the power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against any liability asserted against the
person and incurred by the person in any such capacity or arising out of the
person's status as such, whether or not the corporation would have the power to
indemnify such person against such liability under the provisions of this
Article VI.
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<PAGE>
6.8 THE CORPORATION
---------------
For purposes of this Article VI, references to "the corporation" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, and employees or agents, so that
any person who is or was a director, officer, employee or agent of such
constituent corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, shall stand in the same
position under and subject to the provisions of this Article VI (including,
without limitation the provisions of Section 6.4) with respect to the resulting
or surviving corporation as the person would have with respect to such
constituent corporation if its separate existence had continued.
6.9 EMPLOYEE BENEFIT PLANS
----------------------
For purposes of this Article VI, references to "other enterprises" shall
include employee benefit plans; references to "fines" shall include any excise
taxes assessed on a person with respect to an employee benefit plan; and
references to "serving at the request of the corporation" shall include any
service as a director, officer, employee or agent of the corporation which
imposes duties on, or involves services by, such director, officer, employee, or
agent with respect to an employee benefit plan, its participants, or
beneficiaries; and a person who acted in good faith and in a manner he
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the corporation" as referred to in this Article
VI.
6.10 CONTINUATION OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES
-----------------------------------------------------------
The indemnification and advancement of expenses provided by, or granted
pursuant to, this Article VI shall, unless otherwise provided when authorized or
ratified, continue as to a person who has ceased to be a director, officer,
employee or agent and shall inure to the benefit of the heirs, executors and
administrators of such person.
ARTICLE VII
RECORDS AND REPORTS
-------------------
7.1 MAINTENANCE AND INSPECTION OF RECORDS
-------------------------------------
The corporation shall, either at its principal executive officer or at such
place or places as designated by the board of directors, keep a record of its
stockholders listing their names and
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addresses and the number and class of shares held by each stockholder, a copy of
these bylaws as amended to date, accounting books, and other records.
Any stockholder of record, in person or by attorney or other agent, shall,
upon written demand under oath stating the purpose thereof, have the right
during the usual hours for business to inspect for any proper purpose the
corporation's stock ledger, a list of its stockholders, and its other books and
records and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing that authorizes the attorney or other agent so to act on
behalf of the stockholder. The demand under oath shall be directed to the
corporation at its registered office in Delaware or at its principal place of
business.
The officer who has charge of the stock ledger of the corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, showing the address of each stockholder and the number of
shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
7.2 INSPECTION BY DIRECTORS
-----------------------
Any director shall have the right to examine the corporation's stock
ledger, a list of its stockholders, and its other books and records for a
purpose reasonably related to his or her position as a director. The Court of
Chancery is hereby vested with the exclusive jurisdiction to determine whether a
director is entitled to the inspection sought. The Court may summarily order
the corporation to permit the director to inspect any and all books and records,
the stock ledger, and the stock list and to make copies or extracts therefrom.
The Court may, in its discretion, prescribe any limitations or conditions with
reference to the inspection, or award such other and further relief as the Court
may deem just and proper.
7.3 ANNUAL STATEMENT TO STOCKHOLDERS
--------------------------------
The board of directors shall present at each annual meeting, and at any
special meeting of the stockholders when called for by vote of the stockholders,
a full and clear statement of the business and condition of the corporation.
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ARTICLE VIII
GENERAL MATTERS
---------------
8.1 CHECKS
------
From time to time, the board of directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other evidences of indebtedness that are issued in
the name of or payable to the corporation, and only the persons so authorized
shall sign or endorse those instruments.
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS
------------------------------------------------
The board of directors, except as otherwise provided in these bylaws, may
authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the board of directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES
--------------------------------------
The shares of the corporation shall be represented by certificates,
provided that the board of directors of the corporation may provide by
resolution or resolutions that some or all of any or all classes or series of
its stock shall be uncertificated shares. Any such resolution shall not apply
to shares represented by a certificate until such certificate is surrendered to
the corporation. Notwithstanding the adoption of such a resolution by the board
of directors, every holder of stock represented by certificates and upon request
every holder of uncertificated shares shall be entitled to have a certificate
signed by, or in the name of the corporation by the chairman or vice-chairman of
the board of directors, or the president or vice-president, and by the chief
financial officer or an assistant treasurer, or the secretary or an assistant
secretary of such corporation representing the number of shares registered in
certificate form. Any or all of the signatures on the certificate may be a
facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate has ceased to be
such officer, transfer agent or registrar before such certificate is issued, it
may be issued by the corporation with the same effect as if the person were such
officer, transfer agent or registrar at the date of issue.
The corporation may issue the whole or any part of its shares as partly
paid and subject to call for the remainder of the consideration to be paid
therefor. Upon the face or back of each stock certificate issued to represent
any such partly paid shares, upon the books and records of the corporation in
the case of uncertificated partly paid shares, the total amount of the
consideration to
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be paid therefor and the amount paid thereon shall be stated. Upon the
declaration of any dividend on fully paid shares, the corporation shall declare
a dividend upon partly paid shares of the same class, but only upon the basis of
the percentage of the consideration actually paid thereon.
8.4 SPECIAL DESIGNATION ON CERTIFICATES
-----------------------------------
If the corporation is authorized to issue more than one class of stock or
more than one series of any class, then the powers, the designations, the
preferences, and the relative, participating, optional or other special rights
of each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock; provided, however, that,
except as otherwise provided in Section 202 of the General Corporation Law of
Delaware, in lieu of the foregoing requirements there may be set forth on the
face or back of the certificate that the corporation shall issue to represent
such class or series of stock a statement that the corporation will furnish
without charge to each stockholder who so requests the powers, the designations,
the preferences, and the relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
8.5 LOST CERTIFICATES
-----------------
Except as provided in this Section 8.5, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and cancelled at the same time. The corporation
may issue a new certificate of stock or uncertificated shares in the place of
any certificate theretofore issued by it, alleged to have been lost, stolen or
destroyed, and the corporation may require the owner of the lost, stolen or
destroyed certificate, or the owner's legal representative, to give the
corporation a bond sufficient to indemnify it against any claim that may be made
against it on account of the alleged loss, theft or destruction of any such
certificate or the issuance of such new certificate or uncertificated shares.
8.6 CONSTRUCTION; DEFINITIONS
-------------------------
Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the Delaware General Corporation Law shall
govern the construction of these bylaws. Without limiting the generality of
this provision, the singular number includes the plural, the plural number
includes the singular, and the term "person" includes both a corporation and a
natural person.
8.7 DIVIDENDS
---------
The directors of the corporation, subject to any restrictions contained in
(i) the General Corporation Law of Delaware or (ii) the certificate of
incorporation, may declare and pay dividends
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upon the shares of its capital stock. Dividends may be paid in cash, in
property, or in shares of the corporation's capital stock.
The directors of the corporation may set apart out of any of the funds of
the corporation available for dividends a reserve or reserves for any proper
purpose and may abolish any such reserve. Such purposes shall include but not be
limited to equalizing dividends, repairing or maintaining any property of the
corporation, and meeting contingencies.
8.8 FISCAL YEAR
-----------
The fiscal year of the corporation shall be fixed by resolution of the
board of directors and may be changed by the board of directors.
8.9 SEAL
----
The corporation may adopt a corporate seal, which shall be adopted and
which may be altered by the board of directors, and may use the same by causing
it or a facsimile thereof to be impressed or affixed or in any other manner
reproduced.
8.10 TRANSFER OF STOCK
-----------------
Upon surrender to the corporation or the transfer agent of the corporation
of a certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignation or authority to transfer, it shall be the duty of the
corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate, and record the transaction in its books.
8.11 STOCK TRANSFER AGREEMENTS
-------------------------
The corporation shall have power to enter into and perform any agreement
with any number of stockholders of any one or more classes of stock of the
corporation to restrict the transfer of shares of stock of the corporation of
any one or more classes owned by such stockholders in any manner not prohibited
by the General Corporation Law of Delaware.
8.12 INADVERTENT TERMINATION OF S CORPORATION STATUS
-----------------------------------------------
No stockholder shall sell or transfer any stock of the corporation in a
transaction which would cause termination of an otherwise valid election to
receive tax treatment under Subchapter S of the Internal Revenue Code or
analogous provision of a successor statute, or termination of S Corporation
status under the California Revenue and Taxation Code or successor statute.
This paragraph shall not apply if the majority of the voting power of the
corporation has consented by stockholder vote or written consent to such sale or
transfer.
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8.13 REGISTERED STOCKHOLDERS
-----------------------
The corporation shall be entitled to recognize the exclusive right of a
person registered on its books as the owner of shares to receive dividends and
to vote as such owner, shall be entitled to hold liable for calls and
assessments the person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of another person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
ARTICLE IX
AMENDMENTS
----------
The bylaws of the corporation may be adopted, amended or repealed by the
stockholders entitled to vote; provided, however, that the corporation may, in
its certificate of incorporation, confer the power to adopt, amend or repeal
bylaws upon the directors. The fact that such power has been so conferred upon
the directors shall not divest the stockholders of the power, nor limit their
power to adopt, amend or repeal bylaws.
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<PAGE>
Certificate of Secretary
------------------------
of
--
Amendment to Bylaws
-------------------
The undersigned hereby certifies that the undersigned is the duly elected,
qualified and acting Secretary of Rational Software Corporation (the "Company")
and that the amendment to Section 3.2 of the Company's Bylaws set forth below
was duly adopted by the Board of Directors of the Company on October 24, 1995 to
become effective on December 1, 1995.
"3.2 NUMBER OF DIRECTORS
--------------------
The Board of Directors shall consist of seven (7) persons and shall be
divided into three (3) classes as specified or determined pursuant to the
Certificate of Incorporation of the Corporation as in effect from time to time.
No reduction of the authorized number of directors shall have the effect of
removing any director before that director's term of office expires."
IN WITNESS WHEREOF the undersigned has hereunto set the undersigned's hand
this 25th day of October 1995.
/S/ Ralph E. Alexander
-----------------------
Ralph E. Alexander
Secretary
<PAGE>
Certificate of Secretary
------------------------
of
--
Amendment to Bylaws
-------------------
The undersigned hereby certifies that the undersigned is the duly elected,
qualified and acting Secretary of Rational Software Corporation (the "Company")
and that the amendment to Article III, Section 3.2 of the Company's Bylaws set
forth below was duly adopted by the Board of Directors of the Company on
February 20, 1997 to become effective on February 20, 1997.
"3.2 NUMBER OF DIRECTORS
--------------------
The Board of Directors shall consist of eight (8) persons and shall be
divided into three (3) classes as specified or determined pursuant to the
Certificate of Incorporation of the Corporation as in effect from time to time.
IN WITNESS WHEREOF the undersigned has hereunto set the undersigned's hand
this 20th day of February 1997.
/S/ Robert T. Bond
-------------------
Robert T. Bond
Secretary
<PAGE>
Certificate of Secretary
------------------------
of
--
Amendment to Bylaws
-------------------
The undersigned hereby certifies that the undersigned is the duly elected,
qualified and acting Secretary of Rational Software Corporation (the "Company")
and that the amendment to Section 3.2 of the Company's Bylaws set forth below
was duly adopted by the Board of Directors of the Company on March 19, 1998.
"3.2 NUMBER OF DIRECTORS
--------------------
The Board of Directors shall consist of seven (7) persons and shall be
divided into three (3) classes as specified or determined pursuant to the
Certificate of Incorporation of the Corporation as in effect from time to time.
No reduction of the authorized number of directors shall have the effect of
removing any director before that director's term of office expires."
IN WITNESS WHEREOF the undersigned has hereunto set the undersigned's hand
this 20th day of March 1998.
/S/ Timothy A. Brennan
-----------------------
Timothy A. Brennan
Secretary
<PAGE>
Certificate of Secretary
------------------------
Of
--
Amendment to Bylaws
-------------------
The undersigned hereby certifies that the undersigned is the duly elected,
qualified and acting Secretary of Rational Software Corporation (the "Company")
and that the amendment to Section 3.2 of the Company's Bylaws set forth below
was duly adopted by the Board of Directors of the Company on September 13, 1999
to become effective on such date.
"3.2 NUMBER OF DIRECTORS
The Board of Directors shall consist of six (6) persons and shall be
divided into three (3) classes as specified or determined pursuant to the
Certificate of Incorporation of the Corporation as in effect from time to time.
No reduction of the authorized number of directors shall have the effect of
removing any director before that director's term of office expires."
IN WITNESS WHEREOF the undersigned has hereunto set the undersigned's hand
this 13th day of September, 1999.
/S/ Timothy A. Brennan
-----------------------
Timothy A. Brennan
Secretary
<PAGE>
Certificate of Secretary
------------------------
of
--
Amendment to Bylaws
-------------------
The undersigned hereby certifies that the undersigned is the duly elected,
qualified and acting Secretary of Rational Software Corporation (the "Company")
and that the amendment to Section 3.2 of the Company's Bylaws set forth below
was duly adopted by the Board of Directors of the Company on October 13, 1999.
"3.2 NUMBER OF DIRECTORS
--------------------
The Board of Directors shall consist of five (5) persons and shall be
divided into three (3) classes as specified or determined pursuant to the
Certificate of Incorporation of the Corporation as in effect from time to time.
No reduction of the authorized number of directors shall have the effect of
removing any director before that director's term of office expires."
IN WITNESS WHEREOF the undersigned has hereunto set the undersigned's hand
this 13th day of October 1999.
/S/ Timothy A. Brennan
-----------------------
Timothy A. Brennan
Secretary
<PAGE>
EXHIBIT 4.3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
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<S> <C>
ARTICLE I DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION......... 1
SECTION 1.1 Definitions........................................... 1
SECTION 1.2 Compliance Certificates And Opinions.................. 10
SECTION 1.3 Form of Documents Delivered to the Trustee............ 11
SECTION 1.4 Acts of Holders of Securities......................... 11
SECTION 1.5 Notices, Etc to the Trustee and Company............... 13
SECTION 1.6 Notice to Holders of Securities; Waiver............... 14
SECTION 1.7 Effect of Headings and Table of Contents.............. 14
SECTION 1.8 Successors and Assigns................................ 14
SECTION 1.9 Separability Clause................................... 14
SECTION 1.10 Benefits of Indenture................................. 15
SECTION 1.11 Governing Law......................................... 15
SECTION 1.12 Legal Holidays........................................ 15
SECTION 1.13 Conflict With Trust Indenture Act..................... 15
ARTICLE II SECURITY FORMS................................................. 16
SECTION 2.1 Form Generally........................................ 16
SECTION 2.2 Form of Security...................................... 16
SECTION 2.3 Form of Certificate of Authentication................. 29
SECTION 2.4 Form of Conversion Notice............................. 30
SECTION 2.5 Form of Assignment.................................... 31
ARTICLE III THE SECURITIES................................................ 32
SECTION 3.1 Title and Terms....................................... 32
SECTION 3.2 Denominations......................................... 32
SECTION 3.3 Execution, Authentication, Delivery and Dating........ 33
SECTION 3.4 Global Securities; Non-global Securities; Book-entry
Provisions............................................ 33
SECTION 3.5 Registration; Registration of Transfer and Exchange;
Restrictions on Transfer.............................. 35
SECTION 3.6 Mutilated, Destroyed, Lost or Stolen Securities....... 38
SECTION 3.7 Payment of Interest; Interest Rights Preserved........ 39
SECTION 3.8 Persons Deemed Owners................................. 40
SECTION 3.9 Cancellation.......................................... 40
SECTION 3.10 Computation of Interest............................... 40
SECTION 3.11 CUSIP Numbers......................................... 41
ARTICLE IV SATISFACTION AND DISCHARGE..................................... 41
SECTION 4.1 Satisfaction And Discharge of Indenture............... 41
</TABLE>
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(continued)
<TABLE>
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<S> <C>
SECTION 4.2 Application of Trust Money............................ 42
ARTICLE V REMEDIES........................................................ 43
SECTION 5.1 Events of Default..................................... 43
SECTION 5.2 Acceleration of Maturity; Rescission and Annulment.... 44
SECTION 5.3 Collection of Indebtedness and Suits for Enforcement
by Trustee............................................ 45
SECTION 5.4 Trustee May File Proofs of Claim...................... 46
SECTION 5.5 Trustee May Enforce Claims Without Possession of
Securities............................................ 47
SECTION 5.6 Application of Money Collected........................ 47
SECTION 5.7 Limitation on Suits................................... 47
SECTION 5.8 Unconditional Right of Holders to Receive Principal,
Premium and Interest and to Convert................... 48
SECTION 5.9 Restoration of Rights and Remedies.................... 48
SECTION 5.10 Rights and Remedies Cumulative........................ 48
SECTION 5.11 Delay or Omission Not Waiver.......................... 49
SECTION 5.12 Control by Holders of Securities...................... 49
SECTION 5.13 Waiver of Past Defaults............................... 49
SECTION 5.14 Undertaking for Costs................................. 49
SECTION 5.15 Waiver of Stay, Usury or Extension Laws............... 50
ARTICLE VI THE TRUSTEE.................................................... 50
SECTION 6.1 Certain Duties and Responsibilities................... 50
SECTION 6.2 Notice of Defaults.................................... 51
SECTION 6.3 Certain Rights of Trustee............................. 52
SECTION 6.4 Not Responsible for Recitals or Issuance of
Securities............................................ 53
SECTION 6.5 May Hold Securities, Act as Trustee under Other
Indentures............................................ 53
SECTION 6.6 Money Held in Trust................................... 53
SECTION 6.7 Compensation and Reimbursement........................ 53
SECTION 6.8 Corporate Trustee Required; Eligibility............... 54
SECTION 6.9 Resignation and Removal; Appointment of Successor..... 54
SECTION 6.10 Acceptance of Appointment by Successor................ 55
SECTION 6.11 Merger, Conversion, Consolidation or Succession to
Business.............................................. 56
SECTION 6.12 Authenticating Agents................................. 56
SECTION 6.13 Disqualification; Conflicting Interests............... 57
SECTION 6.14 Preferential Collection of Claims Against Company..... 57
ARTICLE VII CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE.......... 58
SECTION 7.1 Company May Consolidate, Etc,......................... 58
SECTION 7.2 Successor Substituted................................. 58
</TABLE>
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(continued)
<TABLE>
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<S> <C>
ARTICLE VIII SUPPLEMENTAL INDENTURES...................................... 59
SECTION 8.1 Supplemental Indentures Without Consent of Holders
of Securities......................................... 59
SECTION 8.2 Supplemental Indentures with Consent of Holders of
Securities............................................ 60
SECTION 8.3 Execution of Supplemental Indentures.................. 61
SECTION 8.4 Effect of Supplemental Indentures..................... 61
SECTION 8.5 Reference in Securities to Supplemental Indentures.... 61
SECTION 8.6 Notice of Supplemental Indentures..................... 61
ARTICLE IX MEETINGS OF HOLDERS OF SECURITIES.............................. 62
SECTION 9.1 Purposes for Which Meetings May Be Called............. 62
SECTION 9.2 Call, Notice and Place of Meetings.................... 62
SECTION 9.3 Persons Entitled to Vote at Meetings.................. 62
SECTION 9.4 Quorum; Action........................................ 62
SECTION 9.5 Determination of Voting Rights; Conduct and
Adjournment of Meetings............................... 63
SECTION 9.6 Counting Votes and Recording Action of Meetings....... 64
ARTICLE X COVENANTS....................................................... 64
SECTION 10.1 Payment of Principal, Premium and Interest............ 64
SECTION 10.2 Maintenance of Offices or Agencies.................... 65
SECTION 10.3 Money for Security Payments to Be Held in Trust....... 65
SECTION 10.4 Existence............................................. 66
SECTION 10.5 Maintenance of Properties............................. 67
SECTION 10.6 Payment of Taxes and Other Claims..................... 67
SECTION 10.7 Registration and Listing.............................. 67
SECTION 10.8 Statement by Officers as to Default................... 67
SECTION 10.9 Delivery of Certain Information....................... 68
SECTION 10.10 Resale of Certain Securities.......................... 68
SECTION 10.11 Registration Rights................................... 69
SECTION 10.12 Waiver of Certain Covenants........................... 70
ARTICLE XI REDEMPTION OF SECURITIES....................................... 71
SECTION 11.1 Right of Redemption................................... 71
SECTION 11.2 Applicability of Article.............................. 71
SECTION 11.3 Election to Redeem; Notice to Trustee................. 71
SECTION 11.4 Selection by Trustee of Securities to Be Redeemed..... 71
SECTION 11.5 Notice of Redemption.................................. 72
SECTION 11.6 Deposit of Redemption Price........................... 73
SECTION 11.7 Securities Payable on Redemption Date................. 73
</TABLE>
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(continued)
<TABLE>
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<S> <C>
SECTION 11.8 Conversion Arrangement on Call for Redemption......... 74
ARTICLE XII CONVERSION OF SECURITIES...................................... 74
SECTION 12.1 Conversion Privilege and Conversion Rate.............. 74
SECTION 12.2 Exercise of Conversion Privilege...................... 75
SECTION 12.3 Fractions of Shares................................... 76
SECTION 12.4 Adjustment of Conversion Rate......................... 77
SECTION 12.5 Notice of Adjustments of Conversion Rate.............. 81
SECTION 12.6 Notice of Certain Corporate Action.................... 82
SECTION 12.7 Company to Reserve Common Stock....................... 83
SECTION 12.8 Taxes on Conversions.................................. 83
SECTION 12.9 Covenant as to Common Stock........................... 83
SECTION 12.10 Cancellation of Converted Securities.................. 83
SECTION 12.11 Provision in Case of Consolidation, Merger or Sale
of Assets............................................. 83
SECTION 12.12 Rights Issued in Respect of Common Stock.............. 84
SECTION 12.13 Responsibility of Trustee for Conversion Provisions... 85
ARTICLE XIII SUBORDINATION OF SECURITIES.................................. 85
SECTION 13.1 Securities Subordinate to Senior Debt................. 85
SECTION 13.2 No Payment in Certain Circumstances, Payment over
of Proceeds upon Dissolution, Etc..................... 86
SECTION 13.3 Prior Payment to Senior Debt upon Acceleration of
Securities............................................ 88
SECTION 13.4 Payment Permitted If No Default....................... 88
SECTION 13.5 Subrogation to Rights of Holders of Senior Debt....... 88
SECTION 13.6 Provisions Solely to Define Relative Rights........... 88
SECTION 13.7 Trustee to Effectuate Subordination................... 89
SECTION 13.8 No Waiver of Subordination Provisions................. 89
SECTION 13.9 Notice to Trustee..................................... 89
SECTION 13.10 Reliance on Judicial Order or Certificate of
Liquidating Agent..................................... 90
SECTION 13.11 Trustee Not Fiduciary for Holders of Senior Debt...... 91
SECTION 13.12 Reliance by Holders of Senior Debt on Subordination
Provisions............................................ 91
SECTION 13.13 Rights of Trustee as Holder of Senior Debt;
Preservation of Trustee's Rights...................... 91
SECTION 13.14 Article Applicable to Paying Agents................... 91
SECTION 13.15 Certain Conversions and Repurchases Deemed Payment.... 91
ARTICLE XIV REPURCHASE OF SECURITIES AT THE OPTION OF THE HOLDER
UPON A CHANGE IN CONTROL............................................. 92
SECTION 14.1 Right to Require Repurchase........................... 92
</TABLE>
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(continued)
<TABLE>
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SECTION 14.2 Conditions to the Company's Election to Pay the
Repurchase Price in Common Stock...................... 93
SECTION 14.3 Notices; Method of Exercising Repurchase Right, Etc... 93
SECTION 14.4 Certain Definitions................................... 96
SECTION 14.5 Consolidation, Merger, etc............................ 97
ARTICLE XV HOLDERS LISTS AND REPORTS BY TRUSTEE AND COMPANY;
NON-RECOURSE......................................................... 98
SECTION 15.1 Company to Furnish Trustee Names and Addresses
of Holders............................................ 98
SECTION 15.2 Preservation of Information........................... 98
SECTION 15.3 Reserved.............................................. 99
SECTION 15.4 Reports by Trustee.................................... 99
SECTION 15.5 Reports by Company.................................... 99
ARTICLE XVI IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND
DIRECTORS............................................................ 99
SECTION 16.1 Indenture and Securities Solely Corporate
Obligations........................................... 99
</TABLE>
<PAGE>
INDENTURE, dated as of February 2, 2000, between RATIONAL SOFTWARE
CORPORATION, a corporation duly organized and existing under the laws of the
State of Delaware, having its principal office at 18880 Homestead Road,
Cupertino, CA 95014 (herein called the "Company"), and STATE STREET BANK AND
TRUST COMPANY OF CALIFORNIA, N.A., a national banking association organized
under the laws of the United States, as Trustee hereunder (herein called the
"Trustee").
RECITALS OF THE COMPANY
The Company has duly authorized the creation of an issue of its 5%
Convertible Subordinated Notes due February 1, 2007 (herein called the
"Securities") of substantially the tenor and amount hereinafter set forth, and
to provide therefor the Company has duly authorized the execution and delivery
of this Indenture.
All things necessary to make the Securities, when the Securities are
executed by the Company and authenticated and delivered hereunder, the valid
obligations of the Company, and to make this Indenture a valid agreement of the
Company, in accordance with their and its terms, have been done. Further, all
things necessary to duly authorize the issuance of the Common Stock of the
Company issuable upon the conversion of the Securities, and to duly reserve for
issuance the number of shares of Common Stock issuable upon such conversion,
have been done.
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase of the
Securities by the Holders thereof, it is mutually covenanted and agreed, for the
equal and proportionate benefit of all Holders of the Securities, as follows:
ARTICLE I
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
SECTION 1.1 Definitions.
-----------
For all purposes of this Indenture, except as otherwise expressly provided
or unless the context otherwise requires:
(1) the terms defined in this Article have the meanings assigned to them
in this Article and include the plural as well as the singular;
(2) all accounting terms not otherwise defined herein have the meanings
assigned to them in accordance with generally accepted accounting principles in
the United States, and, except as otherwise herein expressly provided, the term
"generally accepted accounting principles" with respect to any computation
required or permitted hereunder shall mean such accounting principles as are
generally accepted at the date of such computation; and
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<PAGE>
(3) the words "herein", "hereof" and "hereunder" and other words of similar
import refer to this Indenture as a whole and not to any particular Article,
Section or other subdivision.
"Act", when used with respect to any Holder of a Security, has the meaning
specified in Section 1.4.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control", when used with respect to any specified Person, means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"Agent Member" means any member of, or participant in, the Depositary.
"Applicable Procedures" means, with respect to any transfer or transaction
involving a Global Security or beneficial interest therein, the rules and
procedures of The Depository Trust Company, in each case to the extent
applicable to such transaction and as in effect from time to time.
"Authenticating Agent" means any Person authorized pursuant to Section 6.12
to act on behalf of the Trustee to authenticate Securities.
"Board of Directors" means either the board of directors of the Company or
any duly authorized committee of that board.
"Board Resolution" means a resolution duly adopted by the Board of
Directors, a copy of which, certified by the Secretary or an Assistant Secretary
of the Company to have been duly adopted by the Board of Directors and to be in
full force and effect on the date of such certification, shall have been
delivered to the Trustee.
"Business Day", when used with respect to any Place of Payment, Place of
Conversion or any other place, as the case may be, means each Monday, Tuesday,
Wednesday, Thursday and Friday which is not a day on which banking institutions
in such Place of Payment, Place of Conversion or other place, as the case may
be, are authorized or obligated by law or executive order to close; provided,
however, that a day on which banking institutions in New York, New York are
authorized or obligated by law or executive order to close shall not be a
Business Day for purposes of Section 13.9.
"Change in Control" has the meaning specified in Section 14.4(2).
"Closing Price Per Share" means, with respect to the Common Stock, for any
day, (i) the last reported bid price regular way on the Nasdaq National Market
or, (ii) if the Common Stock is not quoted on the Nasdaq National Market, the
last reported sale price regular way per share or, in case no such reported sale
takes place on such day, the average of the reported closing bid and asked
prices regular way, in either case, on the principal national securities
exchange on which the
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<PAGE>
Common Stock is listed or admitted to trading, or (iii) if the Common Stock is
not quoted on the Nasdaq National Market or listed or admitted to trading on any
national securities exchange, the average of the closing bid prices in the over-
the-counter market as furnished by any New York Stock Exchange member firm
selected from time to time by the Company for that purpose.
"Code" has the meaning specified in Section 2.1.
"Commission" means the United States Securities and Exchange Commission, as
from time to time constituted, created under the Exchange Act, or, if at any
time after the execution of this instrument such Commission is not existing and
performing the duties now assigned to it under the Trust Indenture Act, then the
body performing such duties at such time.
"Common Stock" means the Common Stock, par value $0.01 per share, of the
Company authorized at the date of this instrument as originally executed.
Subject to the provisions of Section 12.11, shares issuable on conversion or
repurchase of Securities shall include only shares of Common Stock or shares of
any class or classes of common stock resulting from any reclassification or
reclassifications thereof; provided, however, that if at any time there shall be
more than one such resulting class, the shares so issuable on conversion of
Securities shall include shares of all such classes, and the shares of each such
class then so issuable shall be substantially in the proportion which the total
number of shares of such class resulting from all such reclassifications bears
to the total number of shares of all such classes resulting from all such
reclassifications.
"common stock" includes any stock of any class of capital stock which has
no preference in respect of dividends or of amounts payable in the event of any
voluntary or involuntary liquidation, dissolution or winding up of the issuer
thereof and which is not subject to redemption by the issuer thereof.
"Company" means the Person named as the "Company" in the first paragraph of
this instrument until a successor Person shall have become such pursuant to the
applicable provisions of this Indenture, and thereafter "Company" shall mean
such successor Person.
"Company Notice" has the meaning specified in Section 14.3.
"Company Request" or "Company Order" means a written request or order
signed in the name of the Company by its (i) Chairman of the Board, its Vice
Chairman of the Board, its Chief Executive Officer, its President, an Executive
Vice President or a Vice President, and by its (ii) Principal financial officer,
Treasurer, an Assistant Treasurer, its Secretary or an Assistant Secretary, and
delivered to the Trustee.
"Constituent Person" has the meaning specified in Section 12.11.
"Conversion Agent" means any Person authorized by the Company to convert
Securities in accordance with Article XII. The Company has initially appointed
the Trustee as its Conversion Agent pursuant to Section 10.2 hereof.
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"Conversion Price" has the meaning specified in Section 14.4(3).
"Conversion Rate" has the meaning specified in Section 12.1.
"Corporate Trust Office" means the office of the Trustee at which at any
particular time the trust created by this Indenture shall be principally
administered (which at the date of this Indenture is located at 633 West 5th
Street, 12th Floor, Los Angeles, California 90071, Attention: Corporate Trust
Administration (Rational Software Corporation, 5% Convertible Subordinated
Notes due February 1, 2007)).
"corporation" means a corporation, company, association, joint-stock
company or business trust.
"Defaulted Interest" has the meaning specified in Section 3.7.
"Depositary" means, with respect to any Securities (including any Global
Securities), a clearing agency that is registered as such under the Exchange Act
and is designated by the Company to act as Depositary for such Securities (or
any successor securities clearing agency so registered).
"Designated Senior Debt" means the Company's 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 the Company is a party) expressly provides that such Senior Debt shall be
"Designated Senior Debt" for purposes of this Indenture (provided that such
instrument, agreement or other document may place limitations and conditions on
the right of such Senior Debt to exercise the rights of Designated Senior Debt).
"Distribution Date" shall mean the "Distribution Date" as such term is
defined in the Registration Rights Agreement.
"Dollar" or "U.S. $" means a dollar or other equivalent unit in such coin
or currency of the United States as at the time shall be legal tender for the
payment of public and private debts.
"DTC" means The Depository Trust Company, a New York corporation.
"Effective Failure" has the meaning specified in Section 10.11.
"Effectiveness Period" has the meaning specified in Section 10.11.
"Event of Default" has the meaning specified in Section 5.1.
"Exchange Act" means the United States Securities Exchange Act of 1934 (or
any successor statute), as amended from time to time.
"Global Security" means a Security that is registered in the Security
Register in the name of a Depositary or a nominee thereof.
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"Holder" means the Person in whose name the Security is registered in the
Security Register.
"Indenture" means this instrument as originally executed or as it may from
time to time be supplemented or amended by one or more indentures supplemental
hereto entered into pursuant to the applicable provisions hereof, including, for
all purposes of this instrument and any such supplemental indenture, the
provisions of the Trust Indenture Act that are deemed to be a part of and govern
this instrument and any such supplemental indenture, respectively.
"Initial Purchasers" means Goldman, Sachs & Co., Credit Suisse First Boston
Corporation and Chase Securities, Inc.
"Interest Payment Date" means the Stated Maturity of an installment of
interest on the Securities.
"Issue Date" means February 2, 2000.
"Liquidated Damages" has the meaning specified in Section 10.11.
"Maturity", when used with respect to any Security, means the date on which
the principal of such Security becomes due and payable as therein or herein
provided, whether at the Stated Maturity or by declaration of acceleration, call
for redemption, exercise of the repurchase right set forth in Article XIV or
otherwise.
"Non-electing Share" has the meaning specified in Section 12.11.
"Notice of Default" has the meaning specified in Section 5.1.
"Officers' Certificate" means a certificate signed by (i) the Chairman of
the Board, a Vice Chairman of the Board, the Chief Executive Officer, the
President, an Executive Vice President or a Vice President and by (ii) the
principal financial officer, the Treasurer, an Assistant Treasurer, the
Secretary or an Assistant Secretary of the Company, and delivered to the
Trustee. One of the Officers signing an Officers' Certificate given pursuant to
Section 10.8 shall be the principal executive, financial or accounting officer
of the Company.
"Opinion of Counsel" means a written opinion of counsel, who may be counsel
for the Company and who shall be acceptable to the Trustee.
"Outstanding", when used with respect to Securities, means, as of the date
of determination, all Securities theretofore authenticated and delivered under
this Indenture, except:
(i) Securities theretofore canceled by the Trustee or delivered
to the Trustee for cancellation;
(ii) Securities for the payment or redemption of which money in
the necessary amount has been theretofore deposited with the
Trustee or any Paying Agent (other than the Company) in
trust or set aside and segregated in trust by the
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Company (if the Company shall act as its own Paying Agent) for
the Holders of such Securities, provided that if such
Securities are to be redeemed, notice of such redemption has
been duly given pursuant to this Indenture or provision
therefor satisfactory to the Trustee has been made;
(iii) Securities which have been paid pursuant to Section 3.6 or in
exchange for or in lieu of which other Securities have been
authenticated and delivered pursuant to this Indenture, other
than any such Securities in respect of which there shall have
been presented to the Trustee proof satisfactory to it that
such Securities are held by a bona fide purchaser in whose
hands such Securities are valid obligations of the Company; and
(iv) Securities converted into Common Stock pursuant to Article XII;
provided, however, that in determining whether the Holders of the requisite
principal amount of Outstanding Securities are present at a meeting of Holders
of Securities for quorum purposes or have given any request, demand,
authorization, direction, notice, consent or waiver hereunder, Securities owned
by the Company or any other obligor upon the Securities or any Affiliate of the
Company or such other obligor shall be disregarded and deemed not to be
Outstanding, except that, in determining whether the Trustee shall be protected
in relying upon any such determination as to the presence of a quorum or upon
any such request, demand, authorization, direction, notice, consent or waiver,
only Securities which a Responsible Officer of the Trustee has been notified in
writing to be so owned shall be so disregarded. Securities so owned which have
been pledged in good faith may be regarded as Outstanding if the pledgee is not
the Company or any other obligor upon the Securities or any Affiliate of the
Company or such other obligor, and the Trustee shall be protected in relying
upon an Officer's Certificate to such effect.
"Over-allotment Option" has the meaning specified in Section 3.1.
"Paying Agent" means any Person authorized by the Company to pay the
principal of or interest on any Securities on behalf of the Company and, except
as otherwise specifically set forth herein, such term shall include the Company
if it shall act as its own Paying Agent. The Company has initially appointed the
Trustee as its Paying Agent pursuant to Section 10.2 hereof.
"Payment Blockage Notice" has the meaning specified in Section 13.2.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, trust, estate, unincorporated organization or
government or any agency or political subdivision thereof.
"Place of Conversion" has the meaning specified in Section 3.1.
"Place of Payment" has the meaning specified in Section 3.1.
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"Predecessor Security" of any particular Security means every previous
Security evidencing all or a portion of the same debt as that evidenced by such
particular Security; and, for the purposes of this definition, any Security
authenticated and delivered under Section 3.6 in exchange for or in lieu of a
mutilated, destroyed, lost or stolen Security shall be deemed to evidence the
same debt as the mutilated, destroyed, lost or stolen Security.
"Purchase Agreement" means the Purchase Agreement, dated as of January 27,
2000, between the Company and the Initial Purchasers, as such agreement may be
amended from time to time.
"Qualified Institutional Buyer" shall mean a "qualified institutional
buyer" as defined in Rule 144A.
"Record Date" means any Regular Record Date or Special Record Date.
"Record Date Period" means the period from the close of business of any
Regular Record Date next preceding any Interest Payment Date to the opening of
business on such Interest Payment Date.
"Redemption Date", when used with respect to any Security to be redeemed,
means the date fixed for such redemption by or pursuant to this Indenture.
"Redemption Price", when used with respect to any Security to be redeemed,
means the price at which it is to be redeemed pursuant to this Indenture.
"Registrable Securities" has the meaning specified in Section 10.11.
"Registration Default" has the meaning specified in Section 10.11.
"Registration Rights Agreement" means the Registration Rights Agreement,
dated as of February 2, 2000 between the Company and the Initial Purchasers, as
such agreement may be amended from time to time.
"Regular Record Date" for interest payable in respect of any Security on
any Interest Payment Date means the January 15 or July 15 (whether or not a
Business Day), as the case may be, next preceding such Interest Payment Date.
"Representative" means the (a) indenture trustee or other trustee, agent or
representative for any Senior Debt or (b) with respect to any Senior Debt that
does not have any such trustee, agent or other representative, (i) in the case
of such Senior Debt issued pursuant to an agreement providing for voting
arrangements as among the holders or owners of such Senior Debt, any holder or
owner of such Senior Debt acting with the consent of the required persons
necessary to bind such holders or owners of such Senior Debt and (ii) in the
case of all other such Senior Debt, the holder or owner of such Senior Debt.
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"Repurchase Date" has the meaning specified in Section 14.1.
"Repurchase Price" has the meaning specified in Section 14.1.
"Responsible Officer", when used with respect to the Trustee, means any
officer within the Corporate Trust Office of the Trustee with direct
responsibility for the administration of this Indenture and also means, with
respect to a particular corporate trust matter, any other officer to whom such
matter is referred because of his knowledge and familiarity with the particular
subject.
"Restricted Global Security" has the meaning specified in Section 2.1.
"Restricted Securities" means all Securities required pursuant to Section
3.5(3) to bear any Restricted Securities Legend. Such term includes the
Restricted Global Security.
"Restricted Securities Certificate" means a certificate substantially in
the form set forth in Annex A.
"Restricted Securities Legend" means, collectively, the legends
substantially in the forms of the legends required in the form of Security set
forth in Section 2.2 to be placed upon each Restricted Security.
"Rule 144A" means Rule 144A under the Securities Act (or any successor
provision), as it may be amended from time to time.
"Rule 144A Information" has the meaning specified in Section 10.9.
"Securities" has the meaning ascribed to it in the first paragraph under
the caption "Recitals of the Company".
"Securities Act" means the United States Securities Act of 1933 (or any
successor statute), as amended from time to time.
"Security Register" and "Security Registrar" have the respective meanings
specified in Section 3.5.
"Senior Debt" means 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 this Indenture or thereafter created, incurred or assumed: (a) indebtedness
of the Company evidenced by a credit or loan agreement, note, bond, debenture or
other written obligation, (b) all obligations of the Company for money borrowed,
(c) all obligations of the Company evidenced by a note or similar instrument
given in connection with the acquisition of any businesses, properties or assets
of any kind, (d) obligations of the Company (i) as lessee under leases required
to be capitalized on the balance sheet of the lessee
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under generally accepted accounting principles and (ii) as lessee under other
leases for facilities, capital equipment or related assets, whether or not
capitalized, entered into or leased for financing purposes, (e) all obligations
of the Company under interest rate and currency swaps, caps, floors, collars,
hedge agreements, forward contracts or similar agreements or arrangements, (f)
all obligations of the Company with respect to letters of credit, bankers'
acceptances and similar facilities (including reimbursement obligations with
respect to the foregoing), (g) all obligations of the Company 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), (h) all obligations of the type referred to in clauses (a) through
(g) above of another Person and all dividends of another Person, the payment of
which, in either case, the Company has assumed or guaranteed, or for which the
Company is responsible or liable, directly or indirectly, jointly or severally,
as obligor, guarantor or otherwise, or which is secured by a lien on the
property of the Company, and (i) renewals, extensions, modifications,
replacements, restatements and refundings of, or any indebtedness or obligation
issued in exchange for, any such indebtedness or obligation described in clauses
(a) through (h) of this paragraph; provided, however, that Senior Debt shall not
include any such indebtedness or obligation if the terms of such indebtedness or
obligation (or the terms of the instrument under which, or pursuant to which it
is issued) expressly provide that such indebtedness or obligation is not
superior in right of payment to the Securities.
"Shelf Registration Statement" has the meaning specified in Section 10.11.
"Significant Subsidiary" means, with respect to any Person, a Subsidiary of
such Person that would constitute a "significant subsidiary" as such term is
defined under Rule 1-02 of Regulation S-X under the Securities Act and the
Exchange Act.
"Special Record Date" for the payment of any Defaulted Interest means a
date fixed by the Company pursuant to Section 3.7.
"Stated Maturity", when used with respect to any Security or any
installment of interest thereon, means the date specified in such Security as
the fixed date on which the principal of such Security or such installment of
interest is due and payable.
"Subsidiary" means a corporation more than 50% of the outstanding voting
stock of which is owned, directly or indirectly, by the Company or by one or
more other Subsidiaries, or by the Company and one or more other Subsidiaries.
For the purposes of this definition, "voting stock" means stock or other similar
interests in the corporation which ordinarily has or have voting power for the
election of directors, or persons performing similar functions, whether at all
times or only so long as no senior class of stock or other interests has or have
such voting power by reason of any contingency.
"Successor Security" of any particular Security means every Security issued
after, and evidencing all or a portion of the same debt as that evidenced by,
such particular Security; and, for the purposes of this definition, any Security
authenticated and delivered under Section 3.6 in exchange for or in lieu of a
mutilated, destroyed, lost or stolen Security shall be deemed to evidence the
same debt as the mutilated, destroyed, lost or stolen Security.
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"Surrender Certificate" means a certificate substantially in the form set
forth in Annex C.
"Trading Day" means (i) if the Common Stock is quoted on the Nasdaq
National Market or any other system of automated dissemination of quotations of
securities prices, days on which trades may be effected through such system,
(ii) if the Common Stock is listed or admitted for trading on any national or
regional securities exchange, days on which such national or regional securities
exchange is open for business, or (iii) if the Common Stock is not listed on a
national or regional securities exchange or quoted on the Nasdaq National Market
or any other system of automated dissemination of quotation of securities
prices, days on which the Common Stock is traded regular way in the over-the-
counter market and for which a closing bid and a closing asked price for the
Common Stock are available.
"Trust Indenture Act" means the Trust Indenture Act of 1939, and the rules
and regulations thereunder, as in force at the date as of which this instrument
was executed, provided, however, that in the event the Trust Indenture Act of
1939 is amended after such date, "Trust Indenture Act" means, to the extent
required by any such amendment, the Trust Indenture Act of 1939, and the rules
and regulations thereunder, as so amended.
"Trustee" means the Person named as the "Trustee" in the first paragraph of
this instrument until a successor Trustee shall have become such pursuant to the
applicable provisions of this Indenture, and thereafter "Trustee" shall mean
such successor Trustee.
"United States" means the United States of America (including the States
and the District of Columbia), its territories, its possessions and other areas
subject to its jurisdiction (its "possessions" including Puerto Rico, the U.S.
Virgin Islands, Guam, American Samoa, Wake Island and the Northern Mariana
Islands).
"Unrestricted Securities Certificate" means a certificate substantially in
the form set forth in Annex B.
SECTION 1.2 Compliance Certificates And Opinions.
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Upon any application or request by the Company to the Trustee to take any
action under any provision of this Indenture, the Company shall furnish to the
Trustee an Officers' Certificate stating that all conditions precedent, if any,
provided for in this Indenture relating to the proposed action have been
complied with and an Opinion of Counsel stating that in the opinion of such
counsel all such conditions precedent, if any, have been complied with, except
that in the case of any such application or request as to which the furnishing
of such documents is specifically required by any provision of this Indenture
relating to such particular application or request, no additional certificate or
opinion need be furnished.
Every certificate or opinion with respect to compliance with a condition or
covenant provided for in this Indenture (including certificates provided for in
Section 10.8) shall include:
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(1) a statement that each individual signing such certificate or opinion
has read such covenant or condition and the definitions herein relating thereto;
(2) a brief statement as to the nature and scope of the examination or
investigation upon which the statements or opinions contained in such
certificate or opinion are based;
(3) a statement that, in the opinion of such individual, he has made such
examination or investigation as is necessary to enable him to express an
informed opinion as to whether or not such covenant or condition has been
complied with; and
(4) a statement as to whether, in the opinion of each such individual,
such condition or covenant has been complied with.
SECTION 1.3 Form of Documents Delivered to the Trustee.
------------------------------------------
In any case where several matters are required to be certified by, or
covered by an opinion of, any specified Person, it is not necessary that all
such matters be certified by, or covered by the opinion of, only one such
Person, or that they be so certified or covered by only one document, but one
such Person may certify or give an opinion with respect to some matters and one
or more other such Persons as to other matters, and any such Person may certify
or give an opinion as to such matters in one or several documents.
Any certificate or opinion of an officer of the Company may be based,
insofar as it relates to legal matters, upon a certificate or opinion of, or
representations by, counsel, unless such officer knows, or in the exercise of
reasonable care should know, that the certificate or opinion or representations
with respect to the matters upon which such certificate or opinion is based are
erroneous. Any such certificate or opinion of counsel may be based, insofar as
it relates to factual matters, upon a certificate or opinion of, or
representations by, an officer or officers of the Company or any other Person
stating that the information with respect to such factual matters is in the
possession of the Company or such other Person, unless such counsel knows, or in
the exercise of reasonable care should know, that the certificate or opinion or
representations with respect to such matters are erroneous.
Where any Person is required to make, give or execute two or more
applications, requests, consents, certificates, statements, opinions or other
instruments under this Indenture, they may, but need not, be consolidated and
form one instrument.
SECTION 1.4 Acts of Holders of Securities.
-----------------------------
(1) Any request, demand, authorization, direction, notice, consent, waiver
or other action provided or permitted by this Indenture to be given or taken by
Holders of Securities may be embodied in and evidenced by (A) one or more
instruments of substantially similar tenor signed by such Holders in person or
by an agent or proxy duly appointed in writing by such Holders or (B) the record
of Holders of Securities voting in favor thereof, either in person or by proxies
duly appointed in writing, at any meeting of Holders of Securities duly called
and held in accordance with the
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provisions of Article IX. Such action shall become effective when such
instrument or instruments or record is delivered to the Trustee and, where it is
hereby expressly required, to the Company. The Trustee shall promptly deliver to
the Company copies of all such instruments and records delivered to the Trustee.
Such instrument or instruments and records (and the action embodied therein and
evidenced thereby) are herein sometimes referred to as the "Act" of the Holders
of Securities signing such instrument or instruments and so voting at such
meeting. Proof of execution of any such instrument or of a writing appointing
any such agent or proxy, or of the holding by any Person of a Security, shall be
sufficient for any purpose of this Indenture and (subject to Section 6.1)
conclusive in favor of the Trustee and the Company if made in the manner
provided in this Section. The record of any meeting of Holders of Securities
shall be proved in the manner provided in Section 9.6.
(2) The fact and date of the execution by any Person of any such
instrument or writing may be proved by the affidavit of a witness of such
execution or by a certificate of a notary public or other officer authorized by
law to take acknowledgments of deeds, certifying that the individual signing
such instrument or writing acknowledged to him the execution thereof. Where such
execution is by a signer acting in a capacity other than his individual
capacity, such certificate or affidavit shall also constitute sufficient proof
of his authority.
(3) The principal amount and serial number of any Security held by any
Person, and the date of his holding the same, shall be proved by the Security
Register.
(4) The fact and date of execution of any such instrument or writing and
the authority of the Person executing the same may also be proved in any other
manner which the Trustee deems sufficient; and the Trustee may in any instance
require further proof with respect to any of the matters referred to in this
Section 1.4.
(5) The Company may set any day as the record date for the purpose of
determining the Holders entitled to give or take any request, demand,
authorization, direction, notice, consent, waiver or other action, or to vote on
any action, authorized or permitted by this Indenture to be given or taken by
Holders. Promptly and in any case not later than ten days after setting a record
date, the Company shall notify the Trustee and the Holders of such record date.
If not set by the Company prior to the first solicitation of a Holder made by
any Person in respect of any such action, or, in the case of any such vote,
prior to such vote, the record date for any such action or vote shall be the
30th day (or, if later, the date of the most recent list of Holders required to
be provided pursuant to Section 15.1) prior to such first solicitation or vote,
as the case may be. With regard to any record date, the Holders on such date (or
their duly appointed agents or proxies), and only such Persons, shall be
entitled to give or take, or vote on, the relevant action, whether or not such
Holders remain Holders after such record date. Notwithstanding the foregoing,
the Company shall not set a record date for, and the provisions of this
paragraph shall not apply with respect to, any notice, declaration or direction
referred to in the next paragraph.
Upon receipt by the Trustee from any Holder of (i) any notice of default or
breach referred to in Section 5.1(4), if such default or breach has occurred and
is continuing and the Trustee shall not have given such a notice to the Company,
(ii) any declaration of acceleration referred to in Section 5.2, if an Event of
Default has occurred and is continuing and the Trustee shall not have given such
a
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declaration to the Company, or (iii) any direction referred to in Section 5.12,
if the Trustee shall not have taken the action specified in such direction,
then, with respect to clauses (ii) and (iii), a record date shall automatically
and without any action by the Company or the Trustee be set for determining the
Holders entitled to join in such declaration or direction, which record date
shall be the close of business on the tenth day (or, if such day is not a
Business Day, the first Business Day thereafter) following the day on which the
Trustee receives such declaration or direction, and, with respect to clause (i),
the Trustee may set any day as a record date for the purpose of determining the
Holders entitled to join in such notice of default. Promptly after such receipt
by the Trustee of any such declaration or direction referred to in clause (ii)
or (iii), and promptly after setting any record date with respect to clause (i),
and as soon as practicable thereafter, the Trustee shall notify the Company and
the Holders of any such record date so fixed. The Holders on such record date
(or their duly appointed agents or proxies), and only such Persons, shall be
entitled to join in such notice, declaration or direction, whether or not such
Holders remain Holders after such record date; provided that, unless such
notice, declaration or direction shall have become effective by virtue of
Holders of the requisite principal amount of Securities on such record date (or
their duly appointed agents or proxies) having joined therein on or prior to the
90th day after such record date, such notice, declaration or direction shall
automatically and without any action by any Person be canceled and of no further
effect. Nothing in this paragraph shall be construed to prevent a Holder (or a
duly appointed agent or proxy thereof) from giving, before or after the
expiration of such 90-day period, a notice, declaration or direction contrary to
or different from, or, after the expiration of such period, identical to, the
notice, declaration or direction to which such record date relates, in which
event a new record date in respect thereof shall be set pursuant to this
paragraph. In addition, nothing in this paragraph shall be construed to render
ineffective any notice, declaration or direction of the type referred to in this
paragraph given at any time to the Trustee and the Company by Holders (or their
duly appointed agents or proxies) of the requisite principal amount of
Securities on the date such notice, declaration or direction is so given.
(6) Except as provided in Sections 5.12 and 5.13, any request, demand,
authorization, direction, notice, consent, election, waiver or other Act of the
Holder of any Security shall bind every future Holder of the same Security and
the Holder of every Security issued upon the registration of transfer thereof or
in exchange therefor or in lieu thereof in respect of anything done, omitted or
suffered to be done by the Trustee or the Company in reliance thereon, whether
or not notation of such action is made upon such Security.
(7) The provisions of this Section 1.4 are subject to the provisions of
Section 9.5.
SECTION 1.5 Notices, Etc to the Trustee and Company.
---------------------------------------
Any request, demand, authorization, direction, notice, consent, election,
waiver or other Act of Holders of Securities or other document provided or
permitted by this Indenture to be made upon, given or furnished to, or filed
with,
(1) the Trustee by any Holder of Securities or by the Company shall be
sufficient for every purpose hereunder if made, given, furnished or filed in
writing to or with a Responsible Officer of the Trustee and received at its
Corporate Trust Office, Attention: Corporate Trust
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Administration (RATIONAL SOFTWARE CORPORATION, 5% Convertible Subordinated Notes
due February 1, 2007).
(2) the Company by the Trustee or by any Holder of Securities shall be
sufficient for every purpose hereunder (unless otherwise herein expressly
provided) if in writing, mailed, first-class postage prepaid, or telecopied and
confirmed by mail, first-class postage prepaid, or delivered by hand or
overnight courier, addressed to the Company at 18880 Homestead Road, Cupertino,
CA 95014, Attention: Chief Financial Officer, or at any other address
previously furnished in writing to the Trustee by the Company.
SECTION 1.6 Notice to Holders of Securities; Waiver.
---------------------------------------
Except as otherwise expressly provided herein, where this Indenture
provides for notice to Holders of Securities of any event, such notice shall be
sufficiently given to Holders if in writing and mailed, first-class postage
prepaid or delivered by an overnight delivery service, to each Holder of a
Security affected by such event, at the address of such Holder as it appears in
the Security Register, not earlier than the earliest date and not later than the
latest date prescribed for the giving of such notice.
Neither the failure to mail such notice, nor any defect in any notice so
mailed, to any particular Holder of a Security shall affect the sufficiency of
such notice with respect to other Holders of Securities. In case by reason of
the suspension of regular mail service or by reason of any other cause it shall
be impracticable to give such notice by mail, then such notification to Holders
of Securities as shall be made with the approval of the Trustee, which approval
shall not be unreasonably withheld, shall constitute a sufficient notification
to such Holders for every purpose hereunder.
Such notice shall be deemed to have been given when such notice is mailed.
Where this Indenture provides for notice in any manner, such notice may be
waived in writing by the Person entitled to receive such notice, either before
or after the event, and such waiver shall be the equivalent of such notice.
Waivers of notice by Holders of Securities shall be filed with the Trustee, but
such filing shall not be a condition precedent to the validity of any action
taken in reliance upon such waiver.
SECTION 1.7 Effect of Headings and Table of Contents.
----------------------------------------
The Article and Section headings herein and the Table of Contents are for
convenience only and shall not affect the construction hereof.
SECTION 1.8 Successors and Assigns.
----------------------
All covenants and agreements in this Indenture by the Company shall bind
its successors and assigns, whether so expressed or not.
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SECTION 1.9 Separability Clause.
-------------------
In case any provision in this Indenture or the Securities shall be invalid,
illegal or unenforceable, the validity, legality and enforceability of the
remaining provisions shall not in any way be affected or impaired thereby.
SECTION 1.10 Benefits of Indenture.
---------------------
Except as provided in the next sentence, nothing in this Indenture or in
the Securities, express or implied, shall give to any Person, other than the
parties hereto and their successors assigns hereunder and the Holders of
Securities, any benefit or legal or equitable right, remedy or claim under this
Indenture. The provisions of Article XIII are intended to be for the benefit of,
and shall be enforceable directly by, the holders of Senior Debt.
SECTION 1.11 Governing Law.
-------------
THIS INDENTURE AND THE SECURITIES SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, THE UNITED STATES OF AMERICA,
WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAWS.
SECTION 1.12 Legal Holidays.
--------------
In any case where any Interest Payment Date, Redemption Date, Repurchase
Date or Stated Maturity of any Security or the last day on which a Holder of a
Security has a right to convert his Security shall not be a Business Day at a
Place of Payment or Place of Conversion, as the case may be, then
(notwithstanding any other provision of this Indenture or of the Securities)
payment of principal of, premium, if any, or interest on, or the payment of the
Redemption Price or Repurchase Price (whether the same is payable in cash or in
shares of Common Stock in the case of the Repurchase Price) with respect to, or
delivery for conversion of, such Security need not be made at such Place of
Payment or Place of Conversion, as the case may be, on or by such day, but may
be made on or by the next succeeding Business Day at such Place of Payment or
Place of Conversion, as the case may be, with the same force and effect as if
made on the Interest Payment Date, Redemption Date or Repurchase Date, or at
the Stated Maturity or by such last day for conversion; provided, however, that
in the case that payment is made on such succeeding Business Day, no interest
shall accrue on the amount so payable for the period from and after such
Interest Payment Date, Redemption Date, Repurchase Date, Stated Maturity or last
day for conversion, as the case may be.
SECTION 1.13 Conflict With Trust Indenture Act.
---------------------------------
If any provision hereof limits, qualifies or conflicts with a provision of
the Trust Indenture Act that is required under such Act to be a part of and
govern this Indenture, the latter provision shall control. If any provision of
this Indenture modifies or excludes any provision of the Trust Indenture Act
that may be so modified or excluded, the latter provision shall be deemed to
apply to this
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Indenture as so modified or to be excluded, as the case may be. Until such time
as this Indenture shall be qualified under the Trust Indenture Act, this
Indenture, the Company and the Trustee shall be deemed for all purposes hereof
to be subject to and governed by the Trust Indenture Act to the same extent as
would be the case if this Indenture were so qualified on the date hereof.
ARTICLE II
SECURITY FORMS
SECTION 2.1 Form Generally.
--------------
The Securities shall be in substantially the form set forth in this
Article, with such appropriate insertions, omissions, substitutions and other
variations as are required or permitted by this Indenture, and may have such
letters, numbers or other marks of identification and such legends or
endorsements placed thereon as may be required to comply with the rules of any
securities exchange, the Internal Revenue Code of 1986, as amended, and
regulations thereunder (the "Code"), or as may, consistent herewith, be
determined by the officers executing such Securities, as evidenced by their
execution thereof. All Securities shall be in fully registered form.
The Trustee's certificates of authentication shall be in substantially the
form set forth in Section 2.3.
Conversion notices shall be in substantially the form set forth in Section
2.4.
Repurchase notices shall be substantially in the form set forth in Section
2.2.
The Securities shall be printed, lithographed, typewritten or engraved or
produced by any combination of these methods or may be produced in any other
manner permitted by the rules of any automated quotation system or securities
exchange (including on steel engraved borders if so required by any securities
exchange upon which the Securities may be listed) on which the Securities may be
quoted or listed, as the case may be, all as determined by the officers
executing such Securities, as evidenced by their execution thereof.
Upon their original issuance, Securities issued as contemplated by the
Purchase Agreement to Qualified Institutional Buyers in reliance on Rule 144A
shall be issued in the form of one or more Global Securities in definitive,
fully registered form without interest coupons and bearing the Restricted
Securities Legend. Such Global Security shall be registered in the name of DTC,
as Depositary, or its nominee and deposited with the Trustee, as custodian for
DTC, for credit by DTC to the respective accounts of beneficial owners of the
Securities represented thereby (or such other accounts as they may direct). Such
Global Security, together with its Successor Securities which are Global
Securities, are collectively herein called the "Restricted Global Security".
SECTION 2.2 Form of Security.
----------------
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<PAGE>
[FORM OF FACE]
[THE FOLLOWING LEGEND SHALL APPEAR ON THE FACE OF EACH RESTRICTED SECURITY:
THIS SECURITY AND ANY COMMON STOCK ISSUABLE UPON THE CONVERSION OF THIS
SECURITY HAVE NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED IN
THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH
PURCHASER OF THIS SECURITY IS HEREBY NOTIFIED THAT THE SELLER OF THIS SECURITY
MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE
SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER.
THIS SECURITY AND ANY COMMON STOCK ISSUABLE UPON CONVERSION OF THIS
SECURITY MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT (A)
(I) TO A PERSON WHO THE TRANSFEROR REASONABLY BELIEVES IS A QUALIFIED
INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A UNDER THE SECURITIES ACT
ACQUIRING FOR ITS OWN ACCOUNT OR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER
IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (II) PURSUANT TO THE
EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144
THEREUNDER (IF AVAILABLE), (III) TO AN INSTITUTION THAT IS AN "ACCREDITED
INVESTOR" WITHIN THE MEANING OF RULE 501(A)(1), (2), (3) OR (7) OF REGULATION D
UNDER THE SECURITIES ACT PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE
SECURITIES ACT (IF AVAILABLE) OR (iv) PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT, AND (B) IN ACCORDANCE WITH ALL APPLICABLE
SECURITIES LAWS OF THE STATES OF THE UNITED STATES AND OTHER JURISDICTIONS.
THIS SECURITY, ANY SHARES OF COMMON STOCK ISSUABLE UPON ITS CONVERSION AND
ANY RELATED DOCUMENTATION MAY BE AMENDED OR SUPPLEMENTED FROM TIME TO TIME TO
MODIFY THE RESTRICTIONS ON RESALES AND OTHER TRANSFERS OF THIS SECURITY AND ANY
SUCH SHARES TO REFLECT ANY CHANGE IN APPLICABLE LAW OR REGULATION (OR THE
INTERPRETATION THEREOF) OR IN PRACTICES RELATING TO THE RESALE OR TRANSFER OF
RESTRICTED SECURITIES GENERALLY. THE HOLDER OF THIS SECURITY AND ANY SUCH
SHARES SHALL BE DEEMED BY THE ACCEPTANCE OF THIS SECURITY AND ANY SUCH SHARES TO
HAVE AGREED TO ANY SUCH AMENDMENT OR SUPPLEMENT.]
[THE FOLLOWING LEGEND SHALL APPEAR ON THE FACE OF EACH GLOBAL SECURITY:
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<PAGE>
THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE
HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF THE DEPOSITARY OR A
NOMINEE OF THE DEPOSITARY, WHICH MAY BE TREATED BY THE COMPANY, THE TRUSTEE AND
ANY AGENT THEREOF AS OWNER AND HOLDER OF THIS SECURITY FOR ALL PURPOSES.
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE COMPANY OR ITS
AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE
ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO
CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER
HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR SECURITIES IN
DEFINITIVE REGISTERED FORM IN THE LIMITED CIRCUMSTANCES REFERRED TO IN THE
INDENTURE, THIS GLOBAL SECURITY MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE
DEPOSITARY TO A NOMINEE OF THE DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO
THE DEPOSITARY OR ANOTHER NOMINEE OF THE DEPOSITARY OR BY THE DEPOSITARY OR ANY
SUCH NOMINEE TO A SUCCESSOR DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR
DEPOSITARY.]
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<PAGE>
RATIONAL SOFTWARE CORPORATION
5% CONVERTIBLE SUBORDINATED NOTE DUE FEBRUARY 1, 2007
No.__________ $____
____________
CUSIP NO.___________
RATIONAL SOFTWARE CORPORATION, a corporation duly organized and existing
under the laws of the State of Delaware (herein called the "Company", which term
includes any successor Person under the Indenture referred to on the reverse
hereof), for value received, hereby promises to pay to _________________, or
registered assigns, the principal sum of ________ United States Dollars
(U.S.$______ ) [if this Security is a Global Security, then insert -- (which
principal amount may from time to time be increased or decreased to such other
principal amounts (which, taken together with the principal amounts of all other
Outstanding Securities, shall not exceed $425,000,000 (or $500,000,000 if the
Over-allotment Option is exercised in full) by adjustments made on the records
of the Trustee hereinafter referred to in accordance with the Indenture)] on
February 1, 2007 and to pay interest thereon, from February 2, 2000, or from the
most recent Interest Payment Date (as defined below) to which interest has been
paid or duly provided for, semi-annually in arrears on February 1 and August 1
in each year (each, an "Interest Payment Date"), commencing August 1, 2000, at
the rate of 5% per annum, until the principal hereof is due, and at the rate of
5% per annum on any overdue principal and premium, if any, and, to the extent
permitted by law, on any overdue interest. The interest so payable, and
punctually paid or duly provided for, on any Interest Payment Date will, as
provided in the Indenture, be paid to the Person in whose name this Security (or
one or more Predecessor Securities) is registered at the close of business on
the Regular Record Date for such interest, which shall be the January 15 or July
15 (whether or not a Business Day), as the case may be, next preceding such
Interest Payment Date. Except as otherwise provided in the Indenture, any such
interest not so punctually paid or duly provided for will forthwith cease to be
payable to the Holder on such Regular Record Date and may either be paid to the
Person in whose name this Security (or one or more Predecessor Securities) is
registered at the close of business on a Special Record Date for the payment of
such Defaulted Interest to be fixed by the Company, notice whereof shall be
given to Holders of Securities not less than 10 days prior to the Special Record
Date, or be paid at any time in any other lawful manner not inconsistent with
the requirements of any automated quotation system or securities exchange on
which the Securities may be quoted or listed, and upon such notice as may be
required by such exchange, all as more fully provided in the Indenture. Payments
of principal shall be made upon the surrender of this Security at the option of
the Holder at the Corporate Trust Office of the Trustee, or at such other
office or agency of the Company as may be designated by it for such purpose in
the Borough of Manhattan, The City of New York, in such lawful monies of the
United States of America as at the time of payment shall be legal tender for the
payment of public and private debts, or at such other offices or agencies as the
Company may designate, by United States Dollar check drawn on, or wire transfer
to, a United States Dollar account (such a transfer to be made only to a
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Holder of an aggregate principal amount of Securities in excess of
U.S.$2,000,000 and only if such Holder shall have furnished wire instructions in
writing to the Trustee no later than 15 days prior to the relevant payment
date). Payment of interest on this Security may be made by United States Dollar
check mailed to the address of the Person entitled thereto as such address shall
appear in the Security Register, or, upon written application by the Holder to
the Security Registrar setting forth wire instructions not later than the
relevant Record Date, by transfer to a United States Dollar account (such a
transfer to be made only to a Holder of an aggregate principal amount of
Securities in excess of U.S. $2,000,000 and only if such Holder shall have
furnished wire instructions in writing to the Trustee no later than 15 days
prior to the relevant payment date).
Except as specifically provided herein and in the Indenture, the Company
shall not be required to make any payment with respect to any tax, assessment or
other governmental charge imposed by any government or any political subdivision
or taxing authority thereof or therein.
Reference is hereby made to the further provisions of this Security set
forth on the reverse hereof, which further provisions shall for all purposes
have the same effect as if set forth at this place.
Unless the certificate of authentication hereon has been executed by the
Trustee referred to on the reverse hereof or an Authenticating Agent by the
manual signature of one of their respective authorized signatories, this
Security shall not be entitled to any benefit under the Indenture or be valid or
obligatory for any purpose.
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<PAGE>
IN WITNESS WHEREOF, the Company has caused this Security to be duly executed.
RATIONAL SOFTWARE CORPORATION
By:___________________________________
Name:
Title:
Attest:
By:___________________________________
Name:
Title:
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the Securities referred to in the within-mentioned Indenture.
Dated:
STATE STREET BANK AND TRUST
COMPANY OF CALIFORNIA, N.A.,
as Trustee
By:___________________________________
Authorized Signatory
<PAGE>
[FORM OF REVERSE]
This Security is one of a duly authorized issue of securities of the
Company designated as its "5% Convertible Subordinated Notes due February 1,
2007" (herein called the "Securities"), limited in aggregate principal amount to
U.S. $425,000,000 (or $500,000,000 if the Over-allotment Option is exercised in
full), issued and to be issued under an Indenture, dated as of February 2, 2000
(herein called the "Indenture"), between the Company and State Street Bank and
Trust Company of California, N.A., as Trustee (herein called the "Trustee",
which term includes any successor trustee under the Indenture), to which
Indenture and all indentures supplemental thereto reference is hereby made for a
statement of the respective rights, limitations of rights, duties and immunities
thereunder of the Company, the Trustee, the holders of Senior Debt and the
Holders of the Securities and of the terms upon which the Securities are, and
are to be, authenticated and delivered. As provided in the Indenture and subject
to certain limitations therein set forth, Securities are exchangeable for a like
aggregate principal amount of Securities of any authorized denominations as
requested by the Holder surrendering the same upon surrender of the Security or
Securities to be exchanged, at the Corporate Trust Office of the Trustee. The
Trustee upon such surrender by the Holder will issue the new Securities in the
requested denominations.
No sinking fund is provided for the Securities. The Securities will not be
subject to redemption prior to February 5, 2003 and will be redeemable on and
after that date at the option of the Company, in whole or in part, upon not less
than 30 nor more than 60 days notice to the Holders prior to the Redemption Date
at the Redemption Prices (expressed as percentages of the principal amount) set
forth below.
The following table sets forth the Redemption Prices (expressed as
percentages of the principal amount) if such Security is redeemed during the 12-
month period beginning February 1 (February 5, 2003 through January 31, 2004 in
the case of the first such period):
YEAR REDEMPTION PRICE
---------- ----------------
2003 102.857%
2004 102.143
2005 101.429
2006 100.714
and thereafter at a Redemption Price equal to 100% of the principal amount,
together, in each case, with accrued interest to the Redemption Date; provided,
however, that interest installments on Securities whose Stated Maturity is on or
prior to such Redemption Date will be payable to the Holders of such Securities,
or one or more Predecessor Securities, of record at the close of business on the
relevant Record Dates referred to on the face hereof, all as provided in the
Indenture.
In the event of a redemption of the Securities, the Company will not be
required (a) to register the transfer or exchange of Securities for a period of
15 days immediately preceding the date
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<PAGE>
notice is given identifying the serial numbers of the Securities called for such
redemption or (b) to register the transfer or exchange of any Security, or
portion thereof, called for redemption.
In any case where the due date for the payment of the principal of,
premium, if any, interest, or Liquidated Damages on any Security or the last day
on which a Holder of a Security has a right to convert his Security shall be, at
any Place of Payment or Place of Conversion as the case may be, a day on which
banking institutions at such Place of Payment or Place of Conversion are
authorized or obligated by law or executive order to close, then payment of
principal, premium, if any, interest, or Liquidated Damages, or delivery for
conversion of such Security need not be made on or by such date at such place
but may be made on or by the next succeeding day at such place which is not a
day on which banking institutions are authorized or obligated by law or
executive order to close, with the same force and effect as if made on the date
for such payment or the date fixed for redemption or repurchase, or by such last
day for conversion, and no interest shall accrue on the amount so payable for
the period after such date.
Subject to and upon compliance with the provisions of the Indenture, the
Holder of this Security is entitled, at his option, at any time on or before the
close of business on the date of Maturity, or in case this Security or a portion
hereof is called for redemption or the Holder hereof has exercised his right to
require the Company to repurchase this Security or such portion hereof, then in
respect of this Security until and including, but (unless the Company defaults
in making the payment due upon redemption or repurchase, as the case may be) not
after, the close of business on the Redemption Date or the Repurchase Date, as
the case may be, to convert this Security (or any portion of the principal
amount hereof that is an integral multiple of U.S.$1,000, provided that the
unconverted portion of such principal amount is U.S.$1,000 or any integral
multiple of U.S.$1,000 in excess thereof) into fully paid and nonassessable
shares of Common Stock of the Company at an initial Conversion Rate of 13.9983
shares of Common Stock for each U.S.$1,000 principal amount of Securities (or at
the current adjusted Conversion Rate if an adjustment has been made as provided
in the Indenture) by surrender of this Security, duly endorsed or assigned to
the Company or in blank and, in case such surrender shall be made during the
period from the close of business on any Regular Record Date next preceding any
Interest Payment Date to the opening of business on such Interest Payment Date
(except if this Security or portion thereof has been called for redemption on a
Redemption Date or is repurchasable on a Repurchase Date occurring, in either
case, during such period and, as a result, the right to convert would terminate
in such period), also accompanied by payment in New York Clearing House or other
funds acceptable to the Company of an amount equal to the interest payable on
such Interest Payment Date on the principal amount of this Security then being
converted, and also the conversion notice hereon duly executed, to the Company
at the Corporate Trust Office of the Trustee, or at such other office or agency
of the Company, subject to any laws or regulations applicable thereto and
subject to the right of the Company to terminate the appointment of any
Conversion Agent (as defined below) as may be designated by it for such purpose
in the Borough of Manhattan, The City of New York, or at such other offices or
agencies as the Company may designate (each a "Conversion Agent"), provided,
further, that if this Security or portion hereof has been called for redemption
on a Redemption Date or is repurchasable on a Repurchase Date occurring, in
either case, during the period from the close of business on any Regular Record
Date next preceding any Interest Payment Date to the opening of business on such
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succeeding Interest Payment Date and is surrendered for conversion during such
period, then the Holder of this Security on such Regular Record Date will be
entitled to receive the interest accruing hereon from the Interest Payment Date
next preceding the date of such conversion to such succeeding Interest Payment
Date and the Holder of this Security who converts this Security or a portion
hereof during such period shall not be required to pay such interest upon
surrender of this Security for conversion. Subject to the provisions of the
preceding sentence and, in the case of a conversion after the close of business
on the Regular Record Date next preceding any Interest Payment Date and on or
before the close of business on such Interest Payment Date, to the right of the
Holder of this Security (or any Predecessor Security of record as of such
Regular Record Date) to receive the related installment of interest to the
extent and under the circumstances provided in the Indenture, no cash payment or
adjustment is to be made on conversion for interest accrued hereon from the
Interest Payment Date next preceding the day of conversion, or for dividends on
the Common Stock issued on conversion hereof. The Company shall thereafter
deliver to the Holder the fixed number of shares of Common Stock (together with
any cash adjustment, as provided in the Indenture) into which this Security is
convertible and such delivery will be deemed to satisfy the Company's obligation
to pay the principal amount of this Security. No fractions of shares or scrip
representing fractions of shares will be issued on conversion, but instead of
any fractional interest (calculated to the nearest 1/100th of a share) the
Company shall pay a cash adjustment as provided in the Indenture. The Conversion
Rate is subject to adjustment as provided in the Indenture. In addition, the
Indenture provides that in case of certain consolidations or mergers to which
the Company is a party (other than a consolidation or merger that does not
result in any reclassification, conversion, exchange or cancellation of the
Common Stock) or the conveyance, transfer, sale or lease of all or substantially
all of the property and assets of the Company, the Indenture shall be amended,
without the consent of any Holders of Securities, so that this Security, if then
Outstanding, will be convertible thereafter, during the period this Security
shall be convertible as specified above, only into the kind and amount of
securities, cash and other property receivable upon such consolidation, merger,
conveyance, transfer, sale or lease by a holder of the number of shares of
Common Stock of the Company into which this Security could have been converted
immediately prior to such consolidation, merger, conveyance, transfer, sale or
lease (assuming such holder of Common Stock is not a Constituent Person or an
Affiliate of a Constituent Person, failed to exercise any rights of election and
received per share the kind and amount received per share by a plurality of Non-
electing Shares. No adjustment in the Conversion Rate will be made until such
adjustment would require an increase or decrease of at least one percent of such
rate, provided that any adjustment that would otherwise be made will be carried
forward and taken into account in the computation of any subsequent adjustment.
If this Security is a Registrable Security (as defined in this Indenture),
then the Holder of this Security [if this security is a global security, then
insert -- (including any Person that has a beneficial interest in this
Security)] and the Common Stock of the Company issuable upon conversion hereof
is entitled to the benefits of a Registration Rights Agreement, dated as of
February 2, 2000, executed by the Company (the "Registration Rights Agreement").
Pursuant to the Registration Rights Agreement, the Company has agreed for the
benefit of the Holders from time to time of the Registrable Securities that it
will, at its expense, (a) within 90 days after the Issue Date file a shelf
registration statement (the "Shelf Registration Statement") with the Commission
with
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respect to resales of the Registrable Securities, (b) use all reasonable efforts
to cause such Shelf Registration Statement to be declared effective by the
Commission within 180 days after the Issue Date of the Securities, provided,
however, that the Company may, upon written notice to all the Holders, postpone
having the Shelf Registration Statement declared effective for a reasonable
period not to exceed 90 days if the Company possesses material non-public
information, the disclosure of which would have a material adverse effect on the
Company and its subsidiaries taken as a whole, and (c) use all reasonable
efforts to maintain such Shelf Registration Statement effective under the
Securities Act of 1933, as amended, until the second annual anniversary of the
date it is declared effective or such earlier date as is provided in the
Registration Rights Agreement (the "Effectiveness Period"). The Company will be
permitted to suspend the use of the prospectus which is part of the Shelf
Registration Statement during certain periods of time as provided in the
Registration Rights Agreement.
If (i) on or prior to 90 days following the Issue Date, a Shelf
Registration Statement has not been filed with the Commission, or (ii) on or
prior to the 180th day following the Issue Date, such Shelf Registration
Statement is not declared effective (each, a "Registration Default"), additional
interest ("Liquidated Damages") will accrue on this Restricted Security from and
including the day following such Registration Default to but excluding the day
on which such Registration Default has been cured. Liquidated Damages will be
paid semi-annually in arrears, with the first semi-annual payment due on the
first Interest Payment Date, as applicable, in respect of the Restricted
Securities following the date on which such Liquidated Damages begin to accrue,
and will accrue at a rate per annum equal to an additional one-quarter of one
percent (0.25%) of the principal amount of the Restricted Securities to and
including the 90th day following such Registration Default and at a rate per
annum equal to one-half of one percent (0.50%) thereof from and after the 91st
day following such Registration Default. Pursuant to the Registration Rights
Agreement, in the event that the Shelf Registration Statement ceases to be
effective (or the Holders of Registrable Securities are otherwise prevented or
restricted by the Company from effecting sales pursuant thereto) (an "Effective
Failure") during the Effectiveness Period for more than 45 days, whether or not
consecutive, during any 90-day period or for more than 90 days, whether or not
consecutive, during any 12-month period, then the interest rate borne by the
Restricted Securities shall increase by an additional one-half of one percent
(0.50%) per annum from the 46th day of the applicable 90-day period or the 91st
day of the applicable 12-month period until the earlier of (A) such time as the
Effective Failure is cured or (B) the Effectiveness Period expires.
Whenever in this Security there is a reference, in any context, to the
payment of the principal of, premium, if any, or interest on, or in respect of,
any Security, such mention shall be deemed to include mention of the payment of
Liquidated Damages payable as described in the preceding paragraph to the extent
that, in such context, Liquidated Damages are, were or would be payable in
respect of such Security and express mention of the payment of Liquidated
Damages (if applicable) in any provisions of this Security shall not be
construed as excluding Liquidated Damages in those provisions of this Security
where such express mention is not made.
[If this Security is a Registrable Security and the Holder of this Security
[if this security is a global security, then insert -- (including any Person
that has a beneficial interest in this Security)]
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<PAGE>
elects to sell this Security pursuant to the Shelf Registration Statement then,
by its acceptance hereof, such Holder of this Security agrees to be bound by the
terms of the Registration Rights Agreement relating to the Registrable
Securities which are the subject of such election.]
If a Change in Control occurs, the Holder of this Security, at the Holder's
option, shall have the right, in accordance with the provisions of the
Indenture, to require the Company to repurchase this Security (or any portion of
the principal amount hereof that is at least $1,000 or an integral multiple of
$1,000 in excess thereof, provided that the portion of the principal amount of
this Security to be Outstanding after such repurchase is at least equal to
U.S.$1,000) for cash at a Repurchase Price equal to 100% of the principal amount
thereof plus interest accrued to the Repurchase Date. At the option of the
Company, the Repurchase Price may be paid in cash or, subject to the conditions
provided in the Indenture, by delivery of shares of Common Stock having a fair
market value equal to the Repurchase Price. For purposes of this paragraph, the
fair market value of shares of Common Stock shall be determined by the Company
and shall be equal to 95% of the average of the Closing Prices Per Share for the
five consecutive Trading Days immediately preceding and including the third
Trading Day prior to the Repurchase Date. Whenever in this Security there is a
reference, in any context, to the principal of any Security as of any time, such
reference shall be deemed to include reference to the Repurchase Price payable
in respect of such Security to the extent that such Repurchase Price is, was or
would be so payable at such time, and express mention of the Repurchase Price in
any provision of this Security shall not be construed as excluding the
Repurchase Price so payable in those provisions of this Security when such
express mention is not made; provided, however, that, for the purposes of the
second succeeding paragraph, such reference shall be deemed to include reference
to the Repurchase Price only to the extent the Repurchase Price is payable in
cash.
[The following paragraph shall appear in each Global Security:
In the event of a deposit or withdrawal of an interest in this Security,
including an exchange, transfer, redemption, repurchase or conversion of this
Security in part only, the Trustee, as custodian of the Depositary, shall make
an adjustment on its records to reflect such deposit or withdrawal in accordance
with the Applicable Procedures.]
[The following paragraph shall appear in each Security that is not a Global
Security:
In the event of redemption, repurchase or conversion of this Security in
part only, a new Security or Securities for the unredeemed, unrepurchased or
unconverted portion hereof will be issued in the name of the Holder hereof.]
The indebtedness evidenced by this Security is, to the extent and in the
manner provided in the Indenture, subordinate and subject in right of payment
to the prior payment in full of all Senior Debt of the Company, and this
Security is issued subject to such provisions of the Indenture with respect
thereto. Each Holder of this Security, by accepting the same, (a) agrees to and
shall be bound by such provisions, (b) authorizes and directs the Trustee on his
behalf to take such action as may be necessary or appropriate to effectuate the
subordination so provided and (c) appoints the Trustee his attorney-in-fact for
any and all such purposes.
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If an Event of Default shall occur and be continuing, the principal of all
the Securities, together with accrued interest to the date of declaration, may
be declared due and payable in the manner and with the effect provided in the
Indenture. Upon payment (i) of the amount of principal so declared due and
payable, together with accrued interest to the date of declaration, and (ii) of
interest on any overdue principal and, to the extent permitted by applicable
law, overdue interest, all of the Company's obligations in respect of the
payment of the principal of and interest on the Securities shall terminate.
The Indenture permits, with certain exceptions as therein provided, the
amendment thereof and the modification of the rights and obligations of the
Company and the rights of the Holders of the Securities under the Indenture at
any time by the Company and the Trustee with either (a) the written consent of
the Holders of not less than a majority in principal amount of the Securities at
the time Outstanding, or (b) by the adoption of a resolution, at a meeting of
Holders of the Outstanding Securities at which a quorum is present, by the
Holders of at least 66-2/3% in aggregate principal amount of the Outstanding
Securities represented and entitled to vote at such meeting. The Indenture also
contains provisions permitting the Holders of specified percentages in principal
amount of the Securities at the time Outstanding, on behalf of the Holders of
all the Securities, to waive compliance by the Company with certain provisions
of the Indenture and certain past defaults under the Indenture and their
consequences. Any such consent or waiver by the Holder of this Security shall be
conclusive and binding upon such Holder and upon all future Holders of this
Security and of any Security issued in exchange therefore or in lieu hereof
whether or not notation of such consent or waiver is made upon this Security or
such other Security.
As provided in and subject to the provisions of the Indenture, the Holder
of this Security shall not have the right to institute any proceeding with
respect to the Indenture or for the appointment of a receiver or trustee or for
any other remedy thereunder, unless such Holder shall have previously given the
Trustee written notice of a continuing Event of Default, the Holders of not less
than 25% in principal amount of the Outstanding Securities shall have made
written request to the Trustee to institute proceedings in respect of such Event
of Default as Trustee and offered the Trustee reasonable indemnity and the
Trustee shall not have received from the Holders of a majority in principal
amount of the Securities Outstanding a direction inconsistent with such request,
and shall have failed to institute any such proceeding, for 60 days after
receipt of such notice, request and offer of indemnity. The foregoing shall not
apply to any suit instituted by the Holder of this Security for the enforcement
of any payment of principal hereof, premiums if any, or interest (including
Liquidated Damages) hereon on or after the respective due dates expressed herein
or for the enforcement of the right to convert this Security as provided in the
Indenture.
No reference herein to the Indenture and no provision of this Security or
of the Indenture shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the principal of, premium, if any, and
interest (including Liquidated Damages) on this Security at the times, places
and rate, and in the coin or currency, herein prescribed or to convert this
Security as provided in the Indenture.
-26-
<PAGE>
As provided in the Indenture and subject to certain limitations therein set
forth, the transfer of this Security is registrable on the Security Register
upon surrender of this Security for registration of transfer at the Corporate
Trust Office of the Trustee or at such other office or agency of the Company as
may be designated by it for such purpose in the Borough of Manhattan, The City
of New York (which shall initially be an office or agency of the Trustee), or at
such other offices or agencies as the Company may designate, duly endorsed by,
or accompanied by a written instrument of transfer in form satisfactory to the
Company and the Security Registrar duly executed by, the Holder thereof or his
attorney duly authorized in writing, and thereupon one or more new Securities,
of authorized denominations and for the same aggregate principal amount, will be
issued to the designated transferee or transferees by the Registrar. No service
charge shall be made for any such registration of transfer or exchange, but the
Company may require payment of a sum sufficient to recover any tax or other
governmental charge payable in connection therewith.
Prior to due presentation of a this Security for registration of transfer,
the Company, the Trustee and any agent of the Company or the Trustee may treat
the Person in whose name such Security is registered, as the owner thereof for
all purposes, whether or not such Security be overdue, and neither the Company,
the Trustee nor any such agent shall be affected by notice to the contrary.
No recourse for the payment of the principal (and premium, if any) or
interest on this Security and no recourse under or upon any obligation, covenant
or agreement of the Company in the Indenture or any indenture supplemental
thereto or in any Security, or because of the creation of any indebtedness
represented thereby, shall be had against any incorporator, stockholder,
employee, agent, officer or director or subsidiary, as such, past, present or
future, of the Company or of any successor corporation, either directly or
through the Company or any successor corporation, whether by virtue of any
constitution, statute or rule of law or by the enforcement of any assessment or
penalty or otherwise, all such liability being, by the acceptance hereof and as
part of consideration for the issue hereof, expressly waived and released.
THE INDENTURE AND THIS SECURITY SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, UNITED STATES OF AMERICA,
WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAWS.
All terms used in this Security which are defined in the Indenture shall
have the meanings assigned to them in the Indenture.
-27-
<PAGE>
ABBREVIATIONS
The following abbreviations, when used in the inscription of the face of
this Security, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C> <C> <C>
TEN COM as tenant in common UNIF GIFT MIN ACT ____ Custodian ____
TEN ENT as tenants by the entireties (Cust) (Cust) (Minor)
JT TEN as joint tenants with right of survivorship under Uniform Gifts to
and not as tenants in common Minors Act _______
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
-28-
<PAGE>
ELECTION OF HOLDER TO REQUIRE REPURCHASE
(1) Pursuant to Section 14.1 of the Indenture, the undersigned hereby
elects to have this Security repurchased by the Company.
(2) The undersigned hereby directs the Trustee or the Company to pay it or
______________ an amount in cash or, at the Company's election, Common Stock
valued as set forth in the Indenture, equal to 100% of the principal amount to
be repurchased (as set forth below), plus interest accrued to the Repurchase
Date, as provided in the Indenture.
Dated:
_______________________________________
_______________________________________
Signature(s)
Signature(s) must be guaranteed by an Eligible
Guarantor Institution with membership in an
approved signature guarantee program pursuant
to Rule 17Ad-15 under the Securities Exchange
Act of 1934.
_______________________________________
Signature Guaranteed
Principal amount to be repurchased (at least
U.S. $1,000 or an integral multiple of $1,000
in excess thereof): ___________________
Remaining principal amount following such
repurchase (not less than U.S. $1,000):
______________
NOTICE: The signature to the foregoing Election must correspond to the Name as
written upon the face of this Security in every particular, without alteration
or any change whatsoever.
SECTION 2.3 Form of Certificate of Authentication.
-------------------------------------
The Trustee's certificate of authentication shall be in substantially the
following form:
This is one of the Securities referred to in the within-mentioned
Indenture.
Dated: _______________
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<PAGE>
STATE STREET BANK AND TRUST COMPANY OF CALIFORNIA, N.A.
as Trustee
By:______________________
Authorized Signatory
SECTION 2.4 Form of Conversion Notice.
-------------------------
CONVERSION NOTICE
The undersigned Holder of this Security hereby irrevocably exercises the
option to convert this Security, or any portion of the principal amount hereof
(which is U.S.$1,000 or an integral multiple of U.S.$1,000 in excess thereof,
provided that the unconverted portion of such principal amount is U.S. $1,000 or
any integral multiple of U.S. $1,000 in excess thereof) below designated, into
shares of Common Stock in accordance with the terms of the Indenture referred to
in this Security, and directs that such shares, together with a check in payment
for any fractional share and any Securities representing any unconverted
principal amount hereof, be delivered to and be registered in the name of the
undersigned unless a different name has been indicated below. If shares of
Common Stock or Securities are to be registered in the name of a Person other
than the undersigned, (a) the undersigned will pay all transfer taxes payable
with respect thereto and (b) signature(s) must be guaranteed by an Eligible
Guarantor Institution with membership in an approved signature guarantee program
pursuant to Rule 17Ad-15 under the Securities Exchange Act of 1934. Any amount
required to be paid by the undersigned on account of interest accompanies this
Security.
Dated: ____________ __________________________________________________
Signature(s)
If shares or Securities are to be registered in the
name of a Person other than the Holder, please
print such Person's name and address:
____________________________________________
(Name)
____________________________________________
____________________________________________
(Address)
____________________________________________
Social Security or other Identification
Number, if any
-30-
<PAGE>
______________________________________
[Signature Guaranteed]
If only a portion of the Securities is to be converted, please indicate:
1. Principal amount to be converted: U.S. $ ___________
2. Principal amount and denomination of Securities
representing unconverted principal amount to be issued:
Amount: U.S. $___________ Denominations: U.S. $____________
(U.S.$1,000 or any integral multiple of U.S.$1,000 in excess thereof, provided
that the unconverted portion of such principal amount is U.S. $1,000 or any
integral multiple of U.S. $1,000 in excess thereof)
SECTION 2.5 Form of Assignment.
------------------
For value received ________________ hereby sell(s), assign(s) and
transfer(s) unto ________________ (Please insert social security or other
identifying number of assignee) the within Security, and hereby irrevocably
constitutes and appoints ____________________as attorney to transfer the said
Security on the books of the Company, with full power of substitution in the
premises.
Dated: _________ __________________________________________
_________________________________
Signature(s)
Signature(s) must be guaranteed by an
Eligible Guarantor Institution with
membership in an approved signature
guarantee program pursuant to Rule 17Ad - 15
under the Securities Exchange Act of 1934.
__________________________________
Signature Guaranteed
-31-
<PAGE>
ARTICLE III
THE SECURITIES
SECTION 3.1 Title and Terms.
---------------
The aggregate principal amount of Securities which may be authenticated and
delivered under this Indenture is limited to U.S. $425,000,000 (or $500,000,000
if the Over-allotment Option set forth in Section 2 of the Purchase Agreement is
exercised in full (the "Over-allotment Option")), except for Securities
authenticated and delivered pursuant to Section 3.4, 3.5, 3.6, 8.5, 12.2 or
14.3(5) in exchange for, or in lieu of, other Securities previously
authenticated and delivered under this Indenture.
The Securities shall be known and designated as the "5% Convertible
Subordinated Notes due February 1, 2007" of the Company. Their Stated Maturity
shall be February 1, 2007 and they shall bear interest on their principal amount
from February 2, 2000, payable semi-annually in arrears on February 1 and August
1 in each year, commencing August 1, 2000, at the rate of 5% per annum until the
principal thereof is due and at the rate of 5% per annum on any overdue
principal and, to the extent permitted by law, on any overdue interest;
provided, however, that payments shall only be made on a Business Day as
provided in Section 1.12.
The principal of, premium, if any, and interest on the Securities shall be
payable as provided in the form of Securities set forth in Section 2.2, and the
Repurchase Price, whether payable in cash or in shares of Common Stock, shall be
payable at such places as are identified in the Company Notice given pursuant to
Section 14.3 (any city in which any Paying Agent is located being herein called
a "Place of Payment").
The Registrable Securities are entitled to the benefits of a Registration
Rights Agreement as provided by Section 10.11 and in the form of Security set
forth in Section 2.2. The Securities are entitled to the payment of Liquidated
Damages as provided by Section 10.11.
The Securities shall be redeemable at the option of the Company at any time
on or after February 5, 2003, in whole or in part, subject to the conditions and
as otherwise provided in Article XI and in the form of Security set forth in
Section 2.2.
The Securities shall be convertible as provided in Article XII (any city in
which any Conversion Agent is located being herein called a "Place of
Conversion").
The Securities shall be subordinated in right of payment to Senior Debt of
the Company as provided in Article XIII.
The Securities shall be subject to repurchase by the Company at the option
of the Holders as provided in Article XIV.
SECTION 3.2 Denominations.
-------------
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<PAGE>
The Securities shall be issuable only in registered form, without coupons,
in denominations of U.S.$1,000 and integral multiples of U.S.$1,000 in excess
thereof.
SECTION 3.3 Execution, Authentication, Delivery and Dating.
----------------------------------------------
The Securities shall be executed on behalf of the Company by its Chairman
of the Board, its Vice Chairman of the Board, its Chief Executive Officer, its
President, one of its Executive Vice Presidents or one of its Vice Presidents,
and attested by its Chief Financial Officer, Secretary or one of its Assistant
Secretaries. Any such signature may be manual or facsimile.
Securities bearing the manual or facsimile signature of individuals who
were at any time the proper officers of the Company shall bind the Company,
notwithstanding that such individuals or any of them have ceased to hold such
offices prior to the authentication and delivery of such Securities or did not
hold such offices at the date of such Securities.
At any time and from time to time after the execution and delivery of this
Indenture, the Company may deliver Securities executed by the Company to the
Trustee or to its order for authentication, together with a Company Order for
the authentication and delivery of such Securities, and the Trustee in
accordance with such Company Order shall authenticate and make available for
delivery such Securities as in this Indenture provided.
Each Security shall be dated the date of its authentication.
No Security shall be entitled to any benefit under this Indenture or be
valid or obligatory for any purpose unless there appears on such Security a
certificate of authentication substantially in the form provided for herein
executed by the Trustee by manual signature of an authorized signatory, and such
certificate upon any Security shall be conclusive evidence, and the only
evidence, that such Security has been duly authenticated and delivered
hereunder.
SECTION 3.4 Global Securities; Non-global Securities; Book-entry Provisions.
---------------------------------------------------------------
(1) Global Securities
(i) Each Global Security authenticated under this Indenture shall
be registered in the name of the Depositary designated by the Company for such
Global Security or a nominee thereof and delivered to such Depositary or a
nominee thereof or custodian therefor, and each such Global Security shall
constitute a single Security for all purposes of this Indenture.
(ii) Except for exchanges of Global Securities for definitive, Non-
global Securities at the sole discretion of the Company, no Global Security may
be exchanged in whole or in part for Securities registered, and no transfer of a
Global Security in whole or in part may be registered, in the name of any Person
other than the Depositary for such Global Security or a nominee thereof unless
(A) such Depositary (i) has notified the Company that it is unwilling or unable
to continue as Depositary for such Global Security or (ii) has ceased to be a
clearing agency registered as such under the Exchange Act or announces an
intention permanently to cease business
-33-
<PAGE>
or does in fact do so or (B) there shall have occurred and be continuing an
Event of Default with respect to such Global Security. In such event, if a
successor Depositary for such Global Security is not appointed by the Company
within 90 days after the Company receives such notice or becomes aware of such
ineligibility, the Company will execute, and the Trustee, upon receipt of an
Officers' Certificate directing the authentication and delivery of Securities,
will authenticate and deliver, Securities, in any authorized denominations in an
aggregate principal amount equal to the principal amount of such Global Security
in exchange for such Global Security.
(iii) If any Global Security is to be exchanged for other Securities
or canceled in whole, it shall be surrendered by or on behalf of the Depositary
or its nominee to the Trustee, as Security Registrar, for exchange or
cancellation, as provided in this Article III. If any Global Security is to be
exchanged for other Securities or canceled in part, or if another Security is to
be exchanged in whole or in part for a beneficial interest in any Global
Security, in each case, as provided in Section 3.5, then either (A) such Global
Security shall be so surrendered for exchange or cancellation, as provided in
this Article III, or (B) the principal amount thereof shall be reduced or
increased by an amount equal to the portion thereof to be so exchanged or
canceled, or equal to the principal amount of such other Security to be so
exchanged for a beneficial interest therein, as the case may be, by means of an
appropriate adjustment made on the records of the Trustee, as Security
Registrar, whereupon the Trustee, in accordance with the Applicable Procedures,
shall instruct the Depositary or its authorized representative to make a
corresponding adjustment to its records. Upon any such surrender or adjustment
of a Global Security, the Trustee shall, subject to Section 3.5(3) and as
otherwise provided in this Article III, authenticate and deliver any Securities
issuable in exchange for such Global Security (or any portion thereof) to or
upon the order of, and registered in such names as may be directed by, the
Depositary or its authorized representative. Upon the request of the Trustee in
connection with the occurrence of any of the events specified in the preceding
paragraph, the Company shall promptly make available to the Trustee a reasonable
supply of Securities that are not in the form of Global Securities. The Trustee
shall be entitled to rely upon any order, direction or request of the Depositary
or its authorized representative which is given or made pursuant to this Article
III if such order, direction or request is given or made in accordance with the
Applicable Procedures.
(iv) Every Security authenticated and delivered upon registration of
transfer of, or in exchange for or in lieu of, a Global Security or any portion
thereof, whether pursuant to this Article III or otherwise, shall be
authenticated and delivered in the form of, and shall be, a registered Global
Security, unless such Security is registered in the name of a Person other than
the Depositary for such Global Security or a nominee thereof, in which case such
Security shall be authenticated and delivered in definitive, fully registered
form, without interest coupons.
(v) The Depositary or its nominee, as registered owner of a Global
Security, shall be the Holder of such Global Security for all purposes under the
Indenture and the Securities, and owners of beneficial interests in a Global
Security shall hold such interests pursuant to the Applicable Procedures.
Accordingly, any such owner's beneficial interest in a Global Security will be
shown only on, and the transfer of such interest shall be effected only through,
records maintained
-34-
<PAGE>
by the Depositary or its nominee or its Agent Members and such owners of
beneficial interests in a Global Security will not be considered the owners or
holders thereof.
(2) Non-global Securities. Securities issued upon the events described in
Section 3.4(l)(ii) shall be in definitive, fully registered form, without
interest coupons, and shall bear the Restricted Securities Legend if and as
required by this Indenture.
SECTION 3.5 Registration; Registration of Transfer and Exchange; Restrictions
-----------------------------------------------------------------
on Transfer.
- -----------
(1) The Company shall cause to be kept at the Corporate Trust Office of
the Trustee a register (the register maintained in such office referred to as
the "Security Register") in which, subject to such reasonable regulations as it
may prescribe, the Company shall provide for the registration of Securities and
of transfers of Securities. The Trustee is hereby appointed "Security Registrar"
for the purpose of registering Securities and transfers and exchanges of
Securities as herein provided.
Upon surrender for registration of transfer of any Security at an office or
agency of the Company designated pursuant to Section 10.2 for such purpose, the
Company shall execute, and the Trustee shall authenticate and deliver, in the
name of the designated transferee or transferees, one or more new Securities of
any authorized denominations and of a like aggregate principal amount and
bearing such restrictive legends as may be required by this Indenture.
At the option of the Holder, and subject to the other provisions of this
Section 3.5, Securities may be exchanged for other Securities of any authorized
denomination and of a like aggregate principal amount, upon surrender of the
Securities to be exchanged at any such office or agency. Whenever any Securities
are so surrendered for exchange, and subject to the other provisions of this
Section 3.5, the Company shall execute, and the Trustee shall authenticate and
deliver, the Securities which the Holder making the exchange is entitled to
receive. Every Security presented or surrendered for registration of transfer or
for exchange shall (if so required by the Company or the Security Registrar) be
duly endorsed, or be accompanied by a written instrument of transfer in form
satisfactory to the Company, the Trustee and the Security Registrar duly
executed, by the Holder thereof or his attorney duly authorized in writing.
All Securities issued upon any registration of transfer or exchange of
Securities shall be the valid obligations of the Company, evidencing the same
debt and entitled to the same benefits under this Indenture as the Securities
surrendered upon such registration of transfer or exchange.
No service charge shall be made to a Holder for any registration of
transfer or exchange of Securities except as provided in Section 3.6, but the
Company may require payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in connection with any registration of
transfer or exchange of Securities, other than exchanges pursuant to Section
3.4, 8.5, 12.2 or 14.3 (other than where the shares of Common Stock are to be
issued or delivered in a name other than that of the Holder of the Security) not
involving any transfer and other than any stamp and other duties, if any, which
may be imposed in connection with any such transfer or exchange by the United
States or any political subdivision thereof or therein, which shall be paid by
the Company.
-35-
<PAGE>
In the event of a redemption of the Securities, neither the Company nor the
Securities Registrar will be required (a) to register the transfer of or
exchange Securities for a period of 15 days immediately preceding the date
notice is given identifying the serial numbers of the Securities called for such
redemption or (b) to register the transfer of or exchange any Security, or
portion thereof, called for redemption.
(2) Certain Transfers and Exchanges. Notwithstanding any other provision
-------------------------------
of this Indenture or the Securities, transfers and exchanges of Securities and
beneficial interests in a Global Security of the kinds specified in this Section
3.5(2) shall be made only in accordance with this Section 3.5(2).
(i) Restricted Global Security to Restricted Non-global Security.
------------------------------------------------------------
In the event that Non-global Securities are to be issued pursuant to Section
3.4(1)(ii) in connection with any transfer of Securities, such transfer may be
effected only in accordance with the provisions of this Clause (2)(i) and
subject to the Applicable Procedures. Upon receipt by the Trustee, as Security
Registrar, of (A) a Company Order from the Company directing the Trustee, as
Security Registrar, to (x) authenticate and deliver one or more Securities of
the same aggregate principal amount as the beneficial interest in the Restricted
Global Security to be transferred, such instructions to contain the name or
names of the designated transferee or transferees, the authorized denomination
or denominations of the Securities to be so issued and appropriate delivery
instructions and (y) decrease the beneficial interest of a specified Agent
Member's account in a Restricted Global Security by a specified principal amount
not greater than the principal amount of such Restricted Global Security, and
(B) such other certifications, legal opinions or other information as the
Company or the Trustee may reasonably require to confirm that such transfer is
being made pursuant to an exemption from, or in a transaction not subject to,
the registration requirements of the Securities Act, then the Trustee, as
Security Registrar, shall decrease the principal amount of the Restricted Global
Security by the specified amount and authenticate and deliver Securities in
accordance with such instructions from the Company as provided in Section
3.4(1)(iii).
(ii) Restricted Non-global Security to Restricted Global Security.
------------------------------------------------------------
If the Holder of a Restricted Security (other than a Global Security) wishes at
any time to transfer all or any portion of such Restricted Security to a Person
who wishes to take delivery thereof in the form of a beneficial interest in the
Restricted Global Security, such transfer may be effected only in accordance
with the provisions of this Clause (2)(ii) and subject to the Applicable
Procedures. Upon receipt by the Trustee, as Security Registrar, of (A) such
Restricted Security as provided in Section 3.5(1) and instructions from the
Company directing that a beneficial interest in the Restricted Global Security
in a specified principal amount not greater than the principal amount of such
Security be credited to a specified Agent Member's account and (B) a Restricted
Securities Certificate, satisfactory to the Trustee and duly executed by such
Holder or his attorney duly authorized in writing, then the Trustee, as Security
Registrar, shall cancel such Restricted Security (and issue a new Restricted
Security in respect of any untransferred portion thereof) as provided in Section
3.5(1) and increase the principal amount of the Restricted Global Security by
the specified principal amount as provided in Section 3.4(1)(iii).
-36-
<PAGE>
(iii) Exchanges Between Global Security and Non-global Security. A
---------------------------------------------------------
beneficial interest in a Global Security may be exchanged for a Security that is
not a Global Security only as provided in Section 3.4 or only if such exchange
occurs in connection with a transfer effected in accordance with Clause 2(i)
above, provided that, if such interest is a beneficial interest in the
Restricted Global Security, then such interest shall be exchanged for a
Restricted Security (subject in each case to Section 3.5(3)). A Security that is
not a Global Security may be exchanged for a beneficial interest in a Global
Security only if such exchange occurs in connection with a transfer effected in
accordance with Clause (2)(ii) above.
(3) Securities Act Legends. All Securities issued pursuant to this
----------------------
Indenture, and all Successor Securities, shall bear the Restricted Securities
Legend, subject to the following:
(i) subject to the following Clauses of this Section 3.5(3), a
Security or any portion thereof which is exchanged, upon transfer or otherwise,
for a Global Security or any portion thereof shall bear the Restricted
Securities Legend borne by such Global Security for which the Security was
exchanged;
(ii) subject to the following Clauses of this Section 3.5(3), a new
Security which is not a Global Security and is issued in exchange for another
Security (including a Global Security) or any portion thereof, upon transfer or
otherwise, shall bear the Restricted Securities Legend borne by the Security for
which the new Security was exchanged;
(iii) any Securities which are sold or otherwise disposed of pursuant
to an effective registration statement under the Securities Act (including the
Shelf Registration Statement), together with their Successor Securities shall
not bear a Restricted Securities Legend; the Company shall inform the Trustee in
writing of the effective date of any such registration statement registering the
Securities under the Securities Act and shall notify the Trustee at any time
when prospectuses must be delivered with respect to Securities to be sold
pursuant to such registration statement. The Trustee shall not be liable for any
action taken or omitted to be taken by it in good faith in accordance with the
aforementioned registration statement;
(iv) at any time after the Securities may be freely transferred
without registration under the Securities Act or without being subject to
transfer restrictions pursuant to the Securities Act, a new Security which does
not bear a Restricted Securities Legend may be issued in exchange for or in lieu
of a Security (other than a Global Security) or any portion thereof which bears
such a legend if the Trustee has received an Unrestricted Securities
Certificate, satisfactory to the Trustee and duly executed by the Holder of such
Security bearing a Restricted Securities Legend or his attorney duly authorized
in writing, and after such date and receipt of such certificate, the Trustee
shall authenticate and deliver such new Security in exchange for or in lieu of
such other Security as provided in this Article III;
(v) a new Security which does not bear a Restricted Securities
Legend may be issued in exchange for or in lieu of a Security or any portion
thereof which bears such a legend if, in the Company's judgment, placing such a
legend upon such new Security is not necessary to ensure compliance with the
registration requirements of the Securities Act, and the Trustee, at the
direction
-37-
<PAGE>
of the Company, shall authenticate and deliver such a new Security as provided
in this Article III; and
(vi) notwithstanding the foregoing provisions of this Section
3.5(3), a Successor Security of a Security that does not bear a Restricted
Securities Legend shall not bear such legend unless the Company has reasonable
cause to believe that such Successor Security is a "restricted security" within
the meaning of Rule 144, in which case the Trustee, at the direction of the
Company, shall authenticate and deliver a new Security bearing a Restricted
Securities Legend in exchange for such Successor Security as provided in this
Article III.
(4) Any stock certificate representing shares of Common Stock issued upon
conversion of the Securities shall bear the Restricted Securities Legend borne
by such Securities, to the extent required by this Indenture, unless such shares
of Common Stock have been sold pursuant to a registration statement that has
been declared effective under the Securities Act (and which continues to be
effective at the time of such transfer) or sold pursuant to Rule 144(k) of the
Securities Act, or unless otherwise agreed by the Company in writing with
written notice thereof to the transfer agent for the Common Stock. With respect
to the transfer of shares of Common Stock issued upon conversion of the
Securities that are restricted hereunder, any deliveries of certificates, legal
opinions or other instruments that would be required to be made to the Security
Registrar in the case of a transfer of Securities, as described above, shall
instead be made to the transfer agent for the Common Stock.
(5) Neither the Trustee, the Paying Agent nor any of their agents shall
(i) have any duty to monitor compliance with or with respect to any federal or
state or other securities or tax laws or (ii) have any duty to obtain
documentation on any transfers or exchanges other than as specifically required
hereunder.
SECTION 3.6 Mutilated, Destroyed, Lost or Stolen Securities.
-----------------------------------------------
If any mutilated Security is surrendered to the Trustee, the Company shall
execute and the Trustee shall authenticate and deliver in exchange therefor a
new Security of like tenor and principal amount and bearing a number not
contemporaneously outstanding.
If there be delivered to the Company and to the Trustee:
(1) evidence to their satisfaction of the destruction, loss or theft of
any Security, and
(2) such security or indemnity as may be satisfactory to the Company and
the Trustee to save each of them and any agent of either of them harmless, then,
in the absence of actual notice to the Company or the Trustee that such Security
has been acquired by a bona fide purchaser, the Company shall execute and the
Trustee shall authenticate and deliver, in lieu of any such destroyed, lost or
stolen Security, a new Security of like tenor and principal amount and bearing a
number not contemporaneously outstanding.
-38-
<PAGE>
In case any such mutilated, destroyed, lost or stolen Security has become
or is about to become due and payable, the Company in its discretion, but
subject to any conversion rights, may, instead of issuing a new Security, pay
such Security, upon satisfaction of the conditions set forth in the preceding
paragraph.
Upon the issuance of any new Security under this Section 3.6, the Company
may require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto (other than any
stamp and other duties, if any, which may be imposed in connection therewith by
the United States or any political subdivision thereof or therein, which shall
be paid by the Company) and any other expenses (including the fees and expenses
of the Trustee) connected therewith.
Every new Security issued pursuant to this Section 3.6 in lieu of any
mutilated, destroyed, lost or stolen Security shall constitute an original
additional contractual obligation of the Company, whether or not the mutilated,
destroyed, lost or stolen Security shall be at any time enforceable by anyone,
and such new Security shall be entitled to all the benefits of this Indenture
equally and proportionately with any and all other Securities duly issued
hereunder.
The provisions of this Section 3.6 are exclusive and shall preclude (to the
extent lawful) all other rights and remedies of any Holder with respect to the
replacement or payment of mutilated, destroyed, lost or stolen Securities.
SECTION 3.7 Payment of Interest; Interest Rights Preserved.
----------------------------------------------
Interest on any Security which is payable, and is punctually paid or duly
provided for, on any Interest Payment Date shall be paid to the Person in whose
name that Security (or one or more Predecessor Securities) is registered at the
close of business on the Regular Record Date for such interest.
Any interest on any Security which is payable, but is not punctually paid
or duly provided for, on any Interest Payment Date (herein called "Defaulted
Interest") shall forthwith cease to be payable to the Holder on the relevant
Regular Record Date by virtue of having been such Holder, and such Defaulted
Interest may be paid by the Company, at its election in each case, as provided
in Clause (1) or (2) below:
(1) The Company may elect to make payment of any Defaulted Interest to the
Persons in whose names the Securities (or their respective Predecessor
Securities) are registered at the close of business on a Special Record Date for
the payment of such Defaulted Interest, which shall be fixed in the following
manner. The Company shall notify the Trustee in writing of the amount of
Defaulted Interest proposed to be paid on each Security, the date of the
proposed payment and the Special Record Date, and at the same time the Company
shall deposit with the Trustee an amount of money equal to the aggregate amount
proposed to be paid in respect of such Defaulted Interest or shall make
arrangements satisfactory to the Trustee for such deposit prior to the date of
the proposed payment, such money when deposited to be held in trust for the
benefit of the Persons entitled to such Defaulted Interest as in this Clause
provided. The Special Record Date for the payment of such
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Defaulted Interest shall be not more than 15 days and not less than 10 days
prior to the date of the proposed payment and not less than 10 days after the
receipt by the Trustee of the notice of the proposed payment. The Trustee, in
the name and at the expense of the Company, shall cause notice of the proposed
payment of such Defaulted Interest and the Special Record Date therefor to be
mailed, first-class postage prepaid, to each Holder at such Holder's address as
it appears in the Security Register, not less than 10 days prior to such Special
Record Date. Notice of the proposed payment of such Defaulted Interest and the
Special Record Date therefor having been so mailed, such Defaulted Interest
shall be paid to the Persons in whose names the Securities (or their respective
Predecessor Securities) are registered at the close of business on such Special
Record Date and shall no longer be payable pursuant to the following Clause (2).
(2) The Company may make payment of any Defaulted Interest in any other
lawful manner not inconsistent with the requirements of any securities exchange
on which the Securities may be listed, and upon such notice as may be required
by such exchange, if, after notice given by the Company to the Trustee of the
proposed payment pursuant to this Clause, such manner of payment shall be deemed
practicable by the Trustee.
Subject to the foregoing provisions of this Section and Section 3.5, each
Security delivered under this Indenture upon registration of transfer of or in
exchange for or in lieu of any other Security shall carry the rights to interest
accrued and unpaid, and to accrue, which were carried by such other Security.
Interest on any Security which is converted in accordance with Section 12.2
during a Record Date Period shall be payable in accordance with the provisions
of Section 12.2.
SECTION 3.8 Persons Deemed Owners.
---------------------
Prior to due presentment of a Security for registration of transfer, the
Company, the Trustee, any Paying Agent and any agent of the Company, the Trustee
or any Paying Agent may treat the Person in whose name such Security is
registered as the owner of such Security for the purpose of receiving payment of
principal of, premium, if any, and (subject to Section 3.7) interest on such
Security and for all other purposes whatsoever, whether or not such Security be
overdue, and neither the Company, the Trustee, any Paying Agent nor any agent of
the Company, the Trustee or any Paying Agent shall be affected by notice to the
contrary.
SECTION 3.9 Cancellation.
------------
All Securities surrendered for payment, redemption, repurchase,
registration of transfer or exchange or conversion shall, if surrendered to any
Person other than the Trustee, be delivered to the Trustee. All Securities so
delivered to the Trustee shall be canceled promptly by the Trustee (or its
agent). No Securities shall be authenticated in lieu of or in exchange for any
Securities canceled as provided in this Section 3.9. The Trustee shall dispose
of all canceled Securities in accordance with applicable law and its customary
practices in effect from time to time.
SECTION 3.10 Computation of Interest.
-----------------------
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Interest on the Securities (including any Liquidated Damages) shall be
computed on the basis of a 360-day year of twelve 30-day months.
SECTION 3.11 CUSIP Numbers.
-------------
The Company in issuing Securities may use "CUSIP" numbers (if then
generally in use) in addition to serial numbers; if so, the Trustee shall use
such CUSIP numbers in addition to serial numbers in notices of redemption and
repurchase as a convenience to Holders; provided that any such notice may state
that no representation is made as to the correctness of such CUSIP numbers
either as printed on the Securities or as contained in any notice of a
redemption or repurchase and that reliance may be placed only on the serial or
other identification numbers printed on the Securities, and any such redemption
or repurchase shall not be affected by any defect in or omission of such CUSIP
numbers.
ARTICLE IV
SATISFACTION AND DISCHARGE
SECTION 4.1 Satisfaction And Discharge of Indenture.
---------------------------------------
This Indenture shall upon Company Request cease to be of further effect
(except as to any surviving rights of conversion, or registration of transfer or
exchange, or replacement of Securities herein expressly provided for and any
right to receive Liquidated Damages as provided in Section 10.11 and in the form
of Securities set forth in Section 2.2 and the Company's obligations to the
Trustee pursuant to Section 6.7), and the Trustee, at the expense of the
Company, shall execute proper instruments in form and substance satisfactory to
the Trustee acknowledging satisfaction and discharge of this Indenture, when
(1) either
(i) all Securities theretofore authenticated and delivered (other
than (A) Securities which have been destroyed, lost or stolen and which have
been replaced or paid as provided in Section 3.6 and (B) Securities for whose
payment money has theretofore been deposited in trust or segregated and held in
trust by the Company and thereafter repaid to the Company or discharged from
such trust, as provided in Section 10.3) have been delivered to the Trustee for
cancellation; or
(ii) all such Securities not theretofore delivered to the Trustee or
its agent for cancellation (other than Securities referred to in clauses (A) and
(B) of clause (1)(i) above)
(a) have become due and payable, or
(b) will have become due and payable at their Stated Maturity
within one year, or
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(c) are to be called for redemption within one year under arrangements
satisfactory to the Trustee for the giving of notice of redemption by the
Trustee in the name, and at the expense, of the Company, and the Company, in the
case of clause (a), (b) or (c) above, has deposited or caused to be deposited
with the Trustee as trust funds (immediately available to the Holders in the
case of clause (a)) in trust for the purpose an amount in cash sufficient to pay
and discharge the entire indebtedness on such Securities not theretofore
delivered to the Trustee for cancellation, for principal, premium, if any, and
interest (including any Liquidated Damages) to the date of such deposit (in the
case of Securities which have become due and payable) or to the Stated Maturity
or Redemption Date, as the case may be;
(2) the Company has paid or caused to be paid all other sums payable
hereunder by the Company; and
(3) the Company has delivered to the Trustee an Officers' Certificate and
an Opinion of Counsel, each stating that all conditions precedent herein
provided for relating to the satisfaction and discharge of this Indenture have
been complied with.
Notwithstanding the satisfaction and discharge of this Indenture, the
obligations of the Company to the Trustee under Section 6.7, the obligations of
the Company to any Authenticating Agent under Section 6.12, the obligation of
the Company to pay Liquidated Damages, if money shall have been deposited with
the Trustee pursuant to clause (1)(ii) of this Section 4.1, the obligations of
the Trustee under Section 4.2 and the last paragraph of Section 10.3 and the
obligations of the Company and the Trustee under Section 3.5 and Article XII
shall survive. Funds held in trust pursuant to this Section are not subject to
the provisions of Article XIII.
SECTION 4.2 Application of Trust Money.
--------------------------
Subject to the provisions of the last paragraph of Section 10.3, all money
deposited with the Trustee pursuant to Section 4.1 and in accordance with the
provisions of Article XIII shall be held in trust for the sole benefit of the
Holders and not be subject to the subordination provisions of Article XIII, and
such monies shall be applied by the Trustee, in accordance with the provisions
of the Securities and this Indenture, to the payment, either directly or through
any Paying Agent, to the Persons entitled thereto, of the principal, premium, if
any, and interest for whose payment such money has been deposited with the
Trustee.
All moneys deposited with the Trustee pursuant to Section 4.1 (and held by
it or any Paying Agent) for the payment of Securities subsequently converted
shall be returned to the Company upon Company Request.
The Company shall pay and indemnify the Trustee against any tax, fee or
other charge imposed or assessed against all money deposited with the Trustee
pursuant to Section 4.1 (other than income taxes and franchise taxes incurred or
payable by the Trustee and such other taxes, fees or charges incurred or payable
by the Trustee that are not directly the result of the deposit of such money
with the Trustee).
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ARTICLE V
REMEDIES
SECTION 5.1 Events of Default.
-----------------
"Event of Default", wherever used herein, means any one of the following
events (whatever the reason for such Event of Default and whether it shall be
occasioned by the provisions of Article XIII or be voluntary or involuntary or
be effected by operation of law or pursuant to any judgment, decree or order of
any court or any order, rule or regulation of any administrative or governmental
body):
(1) default in the payment of the principal of or premium, if any, on any
Security at its Maturity, whether or not such payment is prohibited by the
subordination provisions of the Securities or of this Indenture; or
(2) default in the payment of any interest (including any Liquidated
Damages) upon any Security when it becomes due and payable, and continuance of
such default for a period of 30 days, whether or not such payment is prohibited
by the subordination provisions of the Securities or of this Indenture; or
(3) failure by the Company to give a Company Notice in accordance with
Section 14.3 whether or not such Company Notice is prohibited by the
subordination provisions of the Securities or the Indenture; or
(4) default in the performance, or breach, of any covenant or warranty of
the Company in this Indenture (other than a covenant or warranty a default in
the performance or breach of which is specifically dealt with elsewhere in this
Section), and continuance of such default or breach for a period of 60 days
after there has been given, by registered or certified mail, to the Company by
the Trustee or to the Company and the Trustee by the Holders of at least 25% in
principal amount of the Outstanding Securities a written notice specifying such
default or breach and requiring it to be remedied and stating that such notice
is a "Notice of Default" hereunder; or
(5) any indebtedness under any bonds, debentures, notes or other evidences
of indebtedness for money borrowed (or guarantee thereof) by the Company or any
Significant Subsidiary or under any mortgage, indenture or instrument under
which there may be issued or by which there may be secured or evidenced any
indebtedness for money borrowed by the Company or any Significant Subsidiary (an
"Instrument") with an aggregate principal amount in excess of U.S. $10,000,000,
whether such indebtedness now exists or shall hereafter be created, is not paid
at final maturity of any Instrument (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
there shall have been given, by registered or certified mail, to the Company by
the Trustee or to the Company and the Trustee by the Holders of at least 25% in
principal amount of the Outstanding Securities a written notice specifying such
default and requiring the Company to cause such indebtedness to be discharged or
cause such default to be cured or waived or such acceleration to be rescinded or
annulled and stating that such notice is a "Notice of Default" hereunder; or
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(6) the entry by a court having jurisdiction in the premises of (A) a
decree or order for relief in respect of the Company or any Significant
Subsidiary in an involuntary case or proceeding under any applicable Federal or
State bankruptcy, insolvency, reorganization or other similar law or (B) a
decree or order adjudging the Company or any Significant Subsidiary a bankrupt
or insolvent, or approving as properly filed a petition seeking reorganization,
arrangement, adjustment or composition of or in respect of the Company or any
Significant Subsidiary under any applicable Federal or State law, or appointing
a custodian, receiver, liquidator, assignee, trustee, sequestrator or other
similar official of the Company or any Significant Subsidiary or of any
substantial part of the property of either, or ordering the winding up or
liquidation of its affairs, and the continuance of any such decree or order for
relief or any such other decree or order unstayed and in effect for a period of
60 consecutive days; or
(7) the commencement by the Company or any Significant Subsidiary of a
voluntary case or proceeding under any applicable Federal or State bankruptcy,
insolvency, reorganization or other similar law or of any other case or
proceeding to be adjudicated a bankrupt or insolvent, or the consent by either
to the entry of a decree or order for relief in respect of the Company or any
Significant Subsidiary in an involuntary case or proceeding under any applicable
Federal or State bankruptcy, insolvency, reorganization or other similar law or
to the commencement of any bankruptcy or insolvency case or proceeding against
either, or the filing by either of a petition or answer or consent seeking
reorganization or similar relief under any applicable Federal or State law, or
the consent by either to the filing of such petition or to the appointment of or
taking possession by a custodian, receiver, liquidator, assignee, trustee,
sequestrator or other similar official of the Company or any Significant
Subsidiary or of any substantial part of the property of either, or the making
by either of an assignment for the benefit of creditors, or the admission by
either in writing of its inability to pay its debts generally as they become
due, or the taking of corporate action by the Company or any Significant
Subsidiary in furtherance of any such action.
SECTION 5.2 Acceleration of Maturity; Rescission and Annulment.
--------------------------------------------------
If an Event of Default (other than an Event of Default specified in Section
5.1(6) or 5.1(7) with respect to the Company) occurs and is continuing, then in
every such case the Trustee or the Holders of not less than 25% in principal
amount of the Outstanding Securities may, subject to the provisions of Article
XIII, declare the principal of all the Securities to be due and payable
immediately, by a notice in writing to the Company (and to the Trustee if given
by the Holders), and upon any such declaration such principal and all accrued
interest thereon shall become immediately due and payable. If an Event of
Default specified in Section 5.1(6) or 5.1(7) with respect to the Company
occurs, the principal of, and accrued interest on, all the Securities shall,
subject to the provisions of Article XIII, ipso facto become immediately due and
payable without any declaration or other Act of the Holders or any act on the
part of the Trustee.
At any time after such declaration of acceleration has been made and before
a judgment or decree for payment of the money due has been obtained by the
Trustee as hereinafter in this Article V provided, the Holders of a majority in
principal amount of the Outstanding Securities, by written
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notice to the Company and the Trustee, may, on behalf of all Holders, rescind
and annul such declaration and its consequences if:
(1) the Company has paid or deposited with the Trustee a sum sufficient to
pay
(i) all overdue interest on all Securities,
(ii) the principal of and premium, if any, on any Securities which
have become due otherwise than by such declaration of acceleration and any
interest thereon at the rate borne by the Securities,
(iii) to the extent permitted by applicable law, interest upon overdue
interest at a rate of 5% per annum, and
(iv) all sums paid or advanced by the Trustee hereunder and the
reasonable compensation, expenses, disbursements and advances of the Trustee,
its agents and counsel;
(2) all Events of Default, other than the nonpayment of the principal of
and any premium and interest on, Securities which have become due solely by such
declaration of acceleration, have been cured or waived as provided in Section
5.13; and
(3) such rescission and annulment would not conflict with any judgment or
decree issued in appropriate judicial proceedings regarding the payment by the
Trustee to the Holders of the amounts referred to in 5.2(1).
No rescission or annulment referred to above shall affect any subsequent
default or impair any right consequent thereon.
SECTION 5.3 Collection of Indebtedness and Suits for Enforcement by Trustee.
---------------------------------------------------------------
The Company covenants that if:
(1) default is made in the payment of any interest (including any
Liquidated Damages) on any Security when it becomes due and payable and such
default continues for a period of 30 days, or
(2) default is made in the payment of the principal of or premium, if any,
on any Security at the Maturity thereof,
the Company will, upon demand of the Trustee but subject to the provisions of
Article XIII pay to it, for the benefit of the Holders of such Securities the
whole amount then due and payable on such Securities for principal and interest
(including any Liquidated Damages) and interest on any overdue principal and
premium, if any, and, to the extent permitted by applicable law, on any overdue
interest (including any Liquidated Damages), at a rate of 5% per annum, and in
addition thereto, such further amount as shall be sufficient to cover the
reasonable costs and expenses of collection, including the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
and counsel.
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If the Company fails to pay such amounts forthwith upon such demand, the
Trustee, in its own name and as trustee of an express trust, may institute a
judicial proceeding for the collection of the sums so due and unpaid, may
prosecute such proceeding to judgment or final decree and may enforce the same
against the Company or any other obligor upon the Securities and collect the
moneys adjudged or decreed to be payable in the manner provided by law out of
the property of the Company or any other obligor upon the Securities, wherever
situated.
If an Event of Default occurs and is continuing, the Trustee may in its
discretion proceed to protect and enforce its rights and the rights of the
Holders of Securities by such appropriate judicial proceedings as the Trustee
shall deem most effectual to protect and enforce any such rights, whether for
the specific enforcement of any covenant or agreement in this Indenture or in
aid of the exercise of any power granted herein, or to enforce any other proper
remedy.
SECTION 5.4 Trustee May File Proofs of Claim.
--------------------------------
In case of the pendency of any receivership, insolvency, liquidation,
bankruptcy, reorganization, arrangement, adjustment, composition or other
judicial proceeding relative to the Company or any other obligor upon the
Securities or the property of the Company or of such other obligor or the
creditors of either, the Trustee (irrespective of whether the principal of, and
any interest on, the Securities shall then be due and payable as therein
expressed or by declaration or otherwise and irrespective of whether the Trustee
shall have made any demand on the Company for the payment of overdue principal
or interest) shall be entitled and empowered, by intervention in such proceeding
or otherwise,
(1) to file and prove a claim for the whole amount of principal, premium,
if any, and interest owing and unpaid in respect of the Securities and take such
other actions, including participating as a member, voting or otherwise, of any
official committee of creditors appointed in such matter, and to file such other
papers or documents, in each of the foregoing cases, as may be necessary or
advisable in order to have the claims of the Trustee (including any claim for
the reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel) and of the Holders of Securities allowed in
such judicial proceeding, and
(2) to collect and receive any moneys or other property payable or
deliverable on any such claim and to distribute the same; and any custodian,
receiver, assignee, trustee, liquidator, sequestrator or other similar official
in any such judicial proceeding is hereby authorized by each Holder of
Securities to make such payments to the Trustee and, in the event that the
Trustee shall consent to the making of such payments directly to the Holders of
Securities to pay to the Trustee any amount due to it for the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
and counsel and any other amounts due the Trustee under Section 6.7.
Nothing herein contained shall be deemed to authorize the Trustee to
authorize or consent to or accept or adopt on behalf of any Holder of a Security
any plan of reorganization, arrangement, adjustment or composition affecting the
Securities or the rights of any Holder thereof or to authorize the Trustee to
vote in respect of the claim of any Holder of a Security in any such proceeding;
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provided, however, that the Trustee may, on behalf of such Holders, vote for the
election of a trustee in bankruptcy or similar official.
SECTION 5.5 Trustee May Enforce Claims Without Possession of Securities.
-----------------------------------------------------------
All rights of action and claims under this Indenture or the Securities may
be prosecuted and enforced by the Trustee without the possession of any of the
Securities or the production thereof in any proceeding relating thereto, and any
such proceeding instituted by the Trustee shall be brought in its own name as
trustee of an express trust, and any recovery of judgment shall, after provision
for the payment of the reasonable compensation, expenses, disbursements and
advances of the Trustee, its agents and counsel, be for the ratable benefit of
the Holders of the Securities in respect of which judgment has been recovered.
SECTION 5.6 Application of Money Collected.
------------------------------
Subject to Article XIII, any money collected by the Trustee pursuant to
this Article V shall be applied in the following order, at the date or dates
fixed by the Trustee and, in case of the distribution of such money on account
of principal, premium, if any, or interest, upon presentation of the Securities
and the notation thereon of the payment if only partially paid and upon
surrender thereof if fully paid:
FIRST: To the payment of all amounts due the Trustee under Section 6.7;
SECOND: To the payment of the amounts then due and unpaid for principal of,
premium, if any, or interest (including Liquidated Damages, if any) on, the
Securities in respect of which or for the benefit of which such money has been
collected, ratably, without preference or priority of any kind, according to the
amounts due and payable on such Securities for principal, premium, if any, and
interest (including Liquidated Damages, if any), respectively;
THIRD: To such other Person or Persons, if any, to the extent entitled
thereto; and
FOURTH: Any remaining amounts shall be repaid to the Company.
SECTION 5.7 Limitation on Suits.
-------------------
No Holder of any Security shall have any right to institute any proceeding,
judicial or otherwise, with respect to this Indenture, or for the appointment of
a receiver or trustee, or for any other remedy hereunder, unless:
(1) such Holder has previously given written notice to the Trustee of a
continuing Event of Default;
(2) the Holders of not less than 25% in principal amount of the Outstanding
Securities shall have made written request to the Trustee to institute
proceedings in respect of such Event of Default in its own name as Trustee
hereunder;
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(3) such Holder or Holders have offered to the Trustee, and if requested,
shall have provided, reasonable indemnity against the costs, expenses and
liabilities to be incurred in compliance with such request;
(4) the Trustee for 60 days after its receipt of such notice, request and
offer of indemnity (or if requested, receipt of indemnity) has failed to
institute any such proceeding; and
(5) no direction inconsistent with such written request has been given to
the Trustee during such 60 day period by the Holders of a majority in principal
amount of the Outstanding Securities, it being understood and intended that no
one or more of such Holders shall have any right in any manner whatever by
virtue of, or by availing of, any provision of this Indenture to affect, disturb
or prejudice the rights of any other of such Holders, or to obtain or seek to
obtain priority or preference over any other of such Holders or to enforce any
right under this Indenture, except in the manner herein provided and for the
equal and ratable benefit of all such Holders.
SECTION 5.8 Unconditional Right of Holders to Receive Principal, Premium and
----------------------------------------------------------------
Interest and to Convert.
- -----------------------
Notwithstanding any other provision in this Indenture, but subject to the
provisions of Article XIII, the Holder of any Security shall have the right,
which is absolute and unconditional, to receive payment of the principal of,
premium, if any, and (subject to Section 3.7) interest (including Liquidated
Damages, if any) on such Security on the respective Stated Maturities expressed
in such Security (or, in the case of redemption or repurchase, on the Redemption
Date or Repurchase Date, as the case may be), and to convert such Security in
accordance with Article XII, and to institute suit for the enforcement of any
such payment and right to convert, and such rights shall not be impaired without
the consent of such Holder.
SECTION 5.9 Restoration of Rights and Remedies.
----------------------------------
If the Trustee or any Holder of a Security has instituted any proceeding to
enforce any right or remedy under this Indenture and such proceeding has been
discontinued or abandoned for any reason, or has been determined adversely to
the Trustee or to such Holder, then and in every such case, subject to any
determination in such proceeding, the Company, the Trustee and the Holders of
Securities shall be restored severally and respectively to their former
positions hereunder and thereafter all rights and remedies of the Trustee and
such Holders shall continue as though no such proceeding had been instituted.
SECTION 5.10 Rights and Remedies Cumulative.
------------------------------
Except as otherwise provided with respect to the replacement or payment of
mutilated, destroyed, lost or stolen Securities in the last paragraph of Section
3.6, no right or remedy herein conferred upon or reserved to the Trustee or to
the Holders of Securities is intended to be exclusive of any other right or
remedy, and every right and remedy shall, to the extent permitted by law, be
cumulative and in addition to every other right and remedy given hereunder or
now or hereafter
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existing at law or in equity or otherwise. The assertion or employment of any
right or remedy hereunder, or otherwise, shall not prevent the concurrent
assertion or employment of any other appropriate right or remedy.
SECTION 5.11 Delay or Omission Not Waiver.
----------------------------
No delay or omission of the Trustee or of any Holder of any Security to
exercise any right or remedy accruing upon any Event of Default shall impair any
such right or remedy or constitute a waiver of any such Event of Default or any
acquiescence therein. Every right and remedy given by this Article V or by law
to the Trustee or to the Holders of Securities may be exercised from time to
time, and as often as may be deemed expedient, by the Trustee or (subject to the
limitations contained in this Indenture) by the Holders of Securities as the
case may be.
SECTION 5.12 Control by Holders of Securities.
--------------------------------
Subject to Section 6.3, the Holders of a majority in principal amount of
the Outstanding Securities shall 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, provided that
(1) such direction shall not be in conflict with any rule of law or with
this Indenture, and
(2) the Trustee may take any other action deemed proper by the Trustee
which is not inconsistent with such direction, and
(3) the Trustee need not take any action which might involve it in personal
liability or be unjustly prejudicial to the Holders of Securities not
consenting.
SECTION 5.13 Waiver of Past Defaults.
-----------------------
The Holders, either (i) through the written consent of not less than a
majority in principal amount of the Outstanding Securities or (ii) by the
adoption of a resolution, at a meeting of Holders of the Outstanding Securities
at which a quorum is present, by the Holders of at least 66-2/3% in principal
amount of the Outstanding Securities represented at such meeting, may on behalf
of the Holders of all the Securities waive any past default hereunder and its
consequences, except a default (A) in the payment of the principal of, premium,
if any, or interest (including Liquidated Damages) on any Security, or (B) in
respect of a covenant or provision hereof which under Article VIII cannot be
modified or amended without the consent of the Holder of each Outstanding
Security affected.
Upon any such waiver, such default shall cease to exist, and any Event of
Default arising therefrom shall be deemed to have been cured, for every purpose
of this Indenture; but no such waiver shall extend to any subsequent or other
default or impair any right consequent thereon.
SECTION 5.14 Undertaking for Costs.
---------------------
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All parties to this Indenture agree, and each Holder of any Security by his
acceptance thereof shall be deemed to have agreed, that any court may in its
discretion require, in any suit for the enforcement of any right or remedy under
this Indenture, or any suit against the Trustee for any action taken, suffered
or omitted by it as Trustee, the filing by any party litigant in such suit of an
undertaking to pay the costs of such suit, and that such court may in its
discretion assess reasonable costs, including reasonable attorneys' fees,
against any party litigant in such suit, having due regard to the merits and
good faith of the claims or defenses made by such party litigant; but the
provisions of this Section 5.14 shall not apply to any suit instituted by the
Company, to any suit instituted by the Trustee, to any suit instituted by any
Holder, or group of Holders, holding in the aggregate more than 10% in principal
amount of the Outstanding Securities, or to any suit instituted by any Holder of
any Security for the enforcement of the payment of the principal of, premium, if
any, or interest on any Security on or after the respective Stated Maturity or
Maturities expressed in such Security (or, in the case of redemption or
repurchase, on or after the Redemption Date or Repurchase Date, as the case may
be) or for the enforcement of the right to convert any Security in accordance
with Article XII.
SECTION 5.15 Waiver of Stay, Usury or Extension Laws.
---------------------------------------
The Company covenants (to the extent that it may lawfully do so) that it
will not at any time insist upon, or plead, or in any manner whatsoever claim or
take the benefit or advantage of, any stay, usury or extension law wherever
enacted, now or at any time hereafter in force, which may affect the covenants
or the performance of this Indenture; and the Company (to the extent that it may
lawfully do so) hereby expressly waives all benefit or advantage of any such law
and covenants that it will not hinder, delay or impede by reason of such law the
execution of any power herein granted to the Trustee, but will suffer and permit
the execution of every such power as though no such law had been enacted.
ARTICLE VI
THE TRUSTEE
SECTION 6.1 Certain Duties and Responsibilities.
-----------------------------------
(1) Except during the continuance of an Event of Default,
(i) the Trustee undertakes to perform such duties and only such
duties as are specifically set forth in this Indenture, and no implied covenants
or obligations shall be read into this Indenture against the Trustee; and
(ii) in the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the correctness of the
opinions expressed therein, upon certificates or opinions furnished to the
Trustee and conforming to the requirements of this Indenture, but in the case of
any such certificates or opinions which by any provision hereof are specifically
required to be furnished to the Trustee, the Trustee shall be under a duty to
examine the same to determine whether or not they conform to the requirements of
this Indenture, but not to verify the contents thereof.
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(2) In case an Event of Default has occurred and is continuing, the
Trustee shall exercise such of the rights and powers vested in it by this
Indenture, and use the same degree of care and skill in their exercise, as a
prudent man would exercise or use under the circumstances in the conduct of his
own affairs.
(3) No provision of this Indenture shall be construed to relieve the
Trustee from liability for its own negligent action, its own negligent failure
to act, or its own willful misconduct, except that
(i) this paragraph (3) shall not be construed to limit the effect
of paragraph (1) of this Section;
(ii) the Trustee shall not be liable for any error of judgment made
in good faith by a Responsible Officer, unless it shall be proved that the
Trustee was negligent in ascertaining the pertinent facts;
(iii) the Trustee shall not be liable with respect to any action
taken or omitted to be taken by it in good faith in accordance with the
direction of the Holders of a majority in principal amount of the Outstanding
Securities relating to the time, method and place of conducting any proceeding
for any remedy available to the Trustee, or exercising any trust or power
conferred upon the Trustee, under this Indenture; and
(iv) no provision of this Indenture shall require the Trustee to
expend or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder, or in the exercise of any of its
rights or powers, if it shall have reasonable grounds for believing that
repayment of such funds or adequate indemnity against such risk or liability is
not reasonably assured to it.
(4) Whether or not therein expressly so provided, every provision of this
Indenture relating to the conduct or affecting the liability of or affording
protection to the Trustee shall be subject to the provisions of this Section.
SECTION 6.2 Notice of Defaults.
------------------
Within 90 days after the occurrence of any default hereunder as to which
the Trustee has received written notice, the Trustee shall give to all Holders
of Securities, in the manner provided in Section 1.6, notice of such default,
unless such default shall have been cured or waived; provided, however, that,
except in the case of a default in the payment of the principal of, premium, if
any, or interest on any Security the Trustee shall be protected in withholding
such notice if and so long as the board of directors, the executive committee or
a trust committee of directors or Responsible Officers of the Trustee in good
faith determines that the withholding of such notice is in the interest of the
Holders; and provided, further, that in the case of any default of the character
specified in Section 5.1(4), no such notice to Holders of Securities shall be
given until at least 60 days after the occurrence thereof or, if applicable, the
cure period specified therein. For the purpose of this Section,
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the term "default" means any event which is, or after notice or lapse of time or
both would become, an Event of Default.
SECTION 6.3 Certain Rights of Trustee.
-------------------------
Subject to the provisions of Section 6.1:
(1) the Trustee may rely, and shall be protected in acting or refraining
from acting, upon any resolution, Officers' Certificate, other certificate,
statement, instrument, opinion, report, notice, request, direction, consent,
order, bond, debenture, note, coupon, other evidence of indebtedness or other
paper or document (collectively, the "Documents") believed by it to be genuine
and to have been signed or presented by the proper party or parties, and the
Trustee need not investigate any fact or matter stated in such Documents;
(2) any request or direction of the Company mentioned herein shall be
sufficiently evidenced by a Company Request or Company Order and any resolution
of the Board of Directors shall be sufficiently evidenced by a Board Resolution;
(3) whenever in the administration of this Indenture the Trustee shall
deem it desirable that a matter be proved or established prior to taking,
suffering or omitting any action hereunder, the Trustee (unless other evidence
be the one specifically prescribed) may, in the absence of bad faith on its
part, request and rely upon an Officers' Certificate or Opinion of Counsel;
(4) the Trustee may consult with counsel of its selection and the advice
of such counsel or any Opinion of Counsel shall be full and complete
authorization and protection in respect of any action taken, suffered or omitted
by it hereunder in good faith and in reliance thereon;
(5) the Trustee shall be under no obligation to exercise any of the rights
or powers vested in it by this Indenture at the request or direction of any of
the Holders of Securities pursuant to this Indenture, unless such Holders shall
have offered, and, if requested by the Trustee, delivered, to the Trustee
reasonable security or indemnity against the costs, expenses and liabilities
which might be incurred by it in compliance with such request or direction;
(6) the Trustee shall not be bound to make any investigation into the
facts or matters stated in any resolution, certificate, statement, instrument,
opinion, report, notice, request, direction, consent, order, bond, debenture,
note, coupon, other evidence of indebtedness or other paper or document, but the
Trustee may make such further inquiry or investigation into such facts or
matters as it may see fit, and, if the Trustee shall determine to make such
further inquiry or investigation, it shall be entitled to examine the books,
records and premises of the Company, personally or by agent or attorney; and
(7) the Trustee may execute any of the trusts or powers hereunder or
perform any duties hereunder either directly or by or through agents or
attorneys and the Trustee shall not be responsible for any misconduct or
negligence on the part of any agent or attorney appointed with due care by it
hereunder.
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SECTION 6.4 Not Responsible for Recitals or Issuance of Securities.
------------------------------------------------------
The recitals contained herein and in the Securities (except the Trustee's
certificates of authentication) shall be taken as the statements of the Company,
and the Trustee assumes no responsibility for their correctness. The Trustee
makes no representations as to the validity or sufficiency of this Indenture, of
the Securities or of the Common Stock issuable upon the conversion of the
Securities. The Trustee shall not be accountable for the use or application by
the Company of Securities or the proceeds thereof.
SECTION 6.5 May Hold Securities, Act as Trustee under Other Indentures.
----------------------------------------------------------
The Trustee, any Authenticating Agent, any Paying Agent, any Conversion
Agent or any other agent of the Company or the Trustee, in its individual or any
other capacity, may become the owner or pledgee of Securities and may otherwise
deal with the Company with the same rights it would have if it were not Trustee,
Authenticating Agent, Paying Agent, Conversion Agent or such other agent.
The Trustee may become and act as trustee under other indentures under
which other securities, or certificates of interest or participation in other
securities, of the Company are outstanding in the same manner as if it were not
Trustee hereunder.
SECTION 6.6 Money Held in Trust.
-------------------
Money held by the Trustee in trust hereunder need not be segregated from
other funds except to the extent required by law. The Trustee shall be under no
liability for interest on any money received by it hereunder except as otherwise
agreed in writing with the Company.
SECTION 6.7 Compensation and Reimbursement.
------------------------------
The Company agrees
(1) to pay to the Trustee from time to time such reasonable compensation
as the Company and the Trustee shall from time to time agree in writing for its
acceptance of this Indenture and for all services rendered by it hereunder
(which compensation shall not be limited by any provision of law in regard to
the compensation of a trustee of an express trust);
(2) except as otherwise expressly provided herein, to reimburse the
Trustee upon its request for all reasonable expenses, disbursements and advances
incurred or made by the Trustee (including costs and expenses of enforcing this
Indenture and defending itself against any claim (whether asserted by the
Company, any Holder of Securities or any other Person) or liability in
connection with the exercise of any of its powers or duties hereunder) in
accordance with any provision of this Indenture (including the reasonable
compensation and the expenses and disbursements of its agents and counsel),
except any such expense, disbursement or advance as may be attributable to its
negligence or bad faith; and
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(3) to indemnify the Trustee (and its directors, officers, employees and
agents) for, and to hold it harmless against, any loss, liability or expense
incurred without negligence or bad faith on its part, arising out of or in
connection with the acceptance or administration of this trust, including the
reasonable costs, expenses and reasonable attorneys' fees of defending itself
against any claim or liability in connection with the exercise or performance of
any of its powers or duties hereunder.
When the Trustee incurs expenses or renders services in connection with an
Event of Default specified in Section 5.1(6) or Section 5.1(7), the expenses
(including the reasonable charges of its counsel) and the compensation for the
services are intended to constitute expenses of the administration under any
applicable Federal or state bankruptcy, insolvency or other similar law.
The provisions of this Section shall survive the termination of this
Indenture or the earlier resignation or removal of the Trustee.
SECTION 6.8 Corporate Trustee Required; Eligibility.
---------------------------------------
There shall at all times be a Trustee hereunder which shall be a Person
that is eligible pursuant to the Trust Indenture Act to act as such, having (or
being part of a holding company group with) a combined capital and surplus of at
least U.S. $50,000,000, subject to supervision or examination by federal or
state authority, and in good standing. The Trustee or an Affiliate of the
Trustee shall maintain an established place of business in the Borough of
Manhattan, The City of New York. If such corporation publishes reports of
condition at least annually, pursuant to law or to the requirements of said
supervising or examining authority, then for the purposes of this Section, the
combined capital and surplus of such corporation shall be deemed to be its
combined capital and surplus as set forth in its most recent report of condition
so published. If at any time the Trustee shall cease to be eligible in
accordance with the provisions of this Section, it shall resign immediately in
the manner and with the effect hereinafter specified in this Article and a
successor shall be appointed pursuant to Section 6.9.
SECTION 6.9 Resignation and Removal; Appointment of Successor.
-------------------------------------------------
(1) No resignation or removal of the Trustee and no appointment of a
successor Trustee pursuant to this Article shall become effective until the
acceptance of appointment by the successor Trustee in accordance with the
applicable requirements of Section 6.10.
(2) The Trustee may resign at any time by giving written notice thereof to
the Company. If the instrument of acceptance by a successor Trustee required by
Section 6.10 shall not have been delivered to the Trustee within 30 days after
the giving of such notice of resignation, the resigning Trustee may petition any
court of competent jurisdiction for the appointment of a successor Trustee.
(3) The Trustee may be removed at any time by an Act of the Holders of a
majority in principal amount of the Outstanding Securities, delivered to the
Trustee and the Company. If the instrument of acceptance by a successor Trustee
required by Section 6.10 shall not have been delivered to the Trustee within 30
days after the giving of such notice of removal, the removed Trustee may
petition any court of competent jurisdiction for the appointment of a successor
Trustee.
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(4) If at any time:
(i) the Trustee shall cease to be eligible under Section 6.8 and
shall fail to resign after written request therefor by the Company or by any
Holder of a Security who has been a bona fide Holder of a Security for at least
six months, or
(ii) the Trustee shall become incapable of acting or shall be
adjudged a bankrupt or insolvent or a receiver of the Trustee or of its property
shall be appointed or any public officer shall take charge or control of the
Trustee or of its property or affairs for the purpose of rehabilitation,
conservation or liquidation,
then, in any such case (i) the Company by a Board Resolution may remove the
Trustee, or (ii) subject to Section 5.14, any Holder of a Security who has been
a bona fide Holder of a Security for at least six months may, on behalf of
himself and all others similarly situated, petition any court of competent
jurisdiction for the removal of the Trustee and the appointment of a successor
Trustee.
(5) If the Trustee shall resign, be removed or become incapable of acting,
or if a vacancy shall occur in the office of Trustee for any cause, the Company,
by a Board Resolution, shall promptly appoint a successor Trustee and shall
comply with the applicable requirements of this Section and Section 6.10. If,
within one year after such resignation, removal or incapability, or the
occurrence of such vacancy, a successor Trustee shall be appointed by Act of the
Holders of a majority in principal amount of the Outstanding Securities
delivered to the Company and the retiring Trustee, the successor Trustee so
appointed shall, forthwith upon its acceptance of such appointment in accordance
with the applicable requirements of Section 6.10, become the successor Trustee
and supersede the successor Trustee appointed by the Company. If no successor
Trustee shall have been so appointed by the Company or the Holders of Securities
and accepted appointment in the manner required by this Section and Section
6.10, any Holder of a Security who has been a bona fide Holder of a Security for
at least six months may, on behalf of himself and all others similarly situated,
petition any court of competent jurisdiction for the appointment of a successor
Trustee.
(6) The Company shall give notice of each resignation and each removal of
the Trustee and each appointment of a successor Trustee to all Holders of
Securities in the manner provided in Section 1.6. Each notice shall include the
name of the successor Trustee and the address of its Corporate Trust Office.
SECTION 6.10 Acceptance of Appointment by Successor.
--------------------------------------
Every successor Trustee appointed hereunder shall execute, acknowledge and
deliver to the Company and to the retiring Trustee an instrument accepting such
appointment, and thereupon the resignation or removal of the retiring Trustee
shall become effective and such successor Trustee, without any further act, deed
or conveyance, shall become vested with all the rights, powers, trusts and
duties of the retiring Trustee; but, on the request of the Company or the
successor Trustee, such retiring Trustee shall, upon payment of its charges,
execute and deliver an instrument transferring to such successor Trustee all the
rights, powers and trusts of the retiring Trustee and shall duly assign,
transfer and deliver to such successor Trustee all property and money held by
such retiring Trustee
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hereunder. Upon request of any such successor Trustee, the Company shall execute
any and all instruments for more fully and certainly vesting in and confirming
to such successor Trustee all such rights, powers and trusts.
No successor Trustee shall accept its appointment unless at the time of
such acceptance such successor Trustee shall be eligible under this Article.
SECTION 6.11 Merger, Conversion, Consolidation or Succession to Business.
-----------------------------------------------------------
Any corporation into which the Trustee may be merged or converted or with
which it may be consolidated, or any corporation resulting from any merger,
conversion or consolidation to which the Trustee shall be a party, or any
corporation succeeding to all or substantially all of the corporate trust
business of the Trustee (including the trust created by this Indenture), shall
be the successor of the Trustee hereunder, provided such corporation shall be
otherwise eligible under this Article, without the execution or filing of any
paper or any further act on the part of any of the parties hereto. In case any
Securities shall have been authenticated, but not delivered, by the Trustee then
in office, any successor by merger, conversion or consolidation to such
authenticating Trustee may adopt such authentication and deliver the Securities
so authenticated with the same effect as if such successor Trustee had itself
authenticated such Securities.
SECTION 6.12 Authenticating Agents.
---------------------
The Trustee may, with the consent of the Company, appoint an Authenticating
Agent or Agents acceptable to the Company with respect to the Securities which
shall be authorized to act on behalf of the Trustee to authenticate Securities
issued upon exchange or substitution pursuant to this Indenture.
Securities authenticated by an Authenticating Agent shall be entitled to
the benefits of this Indenture and shall be valid and obligatory for all
purposes as if authenticated by the Trustee hereunder, and every reference in
this Indenture to the authentication and delivery of Securities by the Trustee
or the Trustee's certificate of authentication shall be deemed to include
authentication and delivery on behalf of the Trustee by an Authenticating Agent
and a certificate of authentication executed on behalf of the Trustee by an
Authenticating Agent. Each Authenticating Agent shall be subject to acceptance
by the Company and shall at all times be a corporation organized and doing
business under the laws of the United States of America, any State thereof or
the District of Columbia, authorized under such laws to act as Authenticating
Agent and subject to supervision or examination by government or other fiscal
authority. If at any time an Authenticating Agent shall cease to be eligible in
accordance with the provisions of this Section 6.12, such Authenticating Agent
shall resign immediately in the manner and with the effect specified in this
Section 6.12.
Any corporation into which an Authenticating Agent may be merged or
converted or with which it may be consolidated, or any corporation resulting
from any merger, conversion or consolidation to which such Authenticating Agent
shall be a party, or any corporation succeeding to the corporate agency or
corporate trust business of an Authenticating Agent, shall continue to be an
Authenticating Agent, provided such corporation shall be otherwise eligible
under this Section 6.12,
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without the execution or filing of any paper or any further act on the part of
the Trustee or the Authenticating Agent.
An Authenticating Agent may resign at any time by giving written notice
thereof to the Trustee and to the Company. The Trustee may at any time terminate
the agency of an Authenticating Agent by giving written notice thereof to such
Authenticating Agent and to the Company. Upon receiving such a notice of
resignation or upon such a termination, or in case at any time such
Authenticating Agent shall cease to be eligible in accordance with the
provisions of this Section 6.12, the Trustee may appoint a successor
Authenticating Agent which shall be subject to acceptance by the Company. Any
successor Authenticating Agent upon acceptance of its appointment hereunder
shall become vested with all the rights, powers and duties of its predecessor
hereunder, with like effect as if originally named as an Authenticating Agent.
No successor Authenticating Agent shall be appointed unless eligible under the
provisions of this Section 6.12.
The Company agrees to pay to each Authenticating Agent from time to time
reasonable compensation for its services under this Section 6.12.
If an Authenticating Agent is appointed with respect to the Securities
pursuant to this Section 6.12, the Securities may have endorsed thereon, in
addition to or in lieu of the Trustee's certification of authentication, an
alternative certificate of authentication in the following form:
This is one of the Securities referred to in the within-mentioned
Indenture.
STATE STREET BANK AND TRUST
COMPANY OF CALIFORNIA, N.A.
as Trustee
By:
________________________________
As Authenticating Agent
By:
________________________________
Authorized Signatory
SECTION 6.13 Disqualification; Conflicting Interests.
---------------------------------------
If the Trustee has or shall acquire a conflicting interest within the
meaning of the Trust Indenture Act, the Trustee shall either eliminate such
interest or resign, to the extent and in the manner provided by, and subject to
the provisions of, the Trust Indenture Act and this Indenture.
SECTION 6.14 Preferential Collection of Claims Against Company.
-------------------------------------------------
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If and when the Trustee shall be or become a creditor of the Company (or
any other obligor upon the Securities), the Trustee shall be subject to the
provisions of the Trust Indenture Act regarding the collection of claims against
the Company (or any such other obligor).
ARTICLE VII
CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE
SECTION 7.1 Company May Consolidate, Etc,. Only on Certain Terms.
------------------------------
The Company shall not consolidate with or merge into any other Person or
convey, transfer or lease all its properties and assets substantially as an
entirety to any Person, and the Company shall not permit any Person to
consolidate with or merge into the Company or convey, transfer, sell or lease
such Person's properties and assets substantially as an entirety to the Company
unless:
(1) the Person formed by such consolidation or into or with which the
Company is merged or the Person to which the properties and assets of the
Company are so conveyed, transferred, sold or leased shall be a corporation,
limited liability company, partnership or trust organized and validly existing
under the laws of the United States of America, any State thereof or the
District of Columbia and, if other than the Company, shall expressly assume, by
an indenture supplemental hereto, executed and delivered to the Trustee, in form
satisfactory to the Trustee, the due and punctual payment of the principal of,
premium, if any, and interest (including Liquidated Damages, if any) on all of
the Securities as applicable, and the performance or observance of every
covenant of this Indenture on the part of the Company to be performed or
observed and shall have provided for conversion rights in accordance with
Article XII;
(2) immediately after giving effect to such transaction, no Event of
Default, and no event that after notice or lapse of time or both, would become
an Event of Default, shall have occurred and be continuing; and
(3) the Company has delivered to the Trustee an Officers' Certificate and
an Opinion of Counsel, each stating that such consolidation, merger, conveyance,
transfer or lease and, if a supplemental indenture is required in connection
with such transaction, such supplemental indenture comply with this Article and
that all conditions precedent herein provided for relating to such transaction
have been complied with, together with any documents required under Section 8.3.
SECTION 7.2 Successor Substituted.
---------------------
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Upon any consolidation of the Company with, or merger of the Company into
any other Person or any conveyance, transfer or lease of all or substantially
all the properties and assets of the Company in accordance with Section 7.1, the
successor Person formed by such consolidation or into or with which the Company
is merged or to which such conveyance, transfer or lease is made shall succeed
to, and be substituted for, and may exercise every right and power of, the
Company under this Indenture with the same effect as if such successor Person
had been named as the Company herein, and thereafter, except in the case of a
lease, the predecessor Person shall be relieved of all obligations and covenants
under this Indenture and the Securities.
ARTICLE VIII
SUPPLEMENTAL INDENTURES
SECTION 8.1 Supplemental Indentures Without Consent of Holders of Securities.
----------------------------------------------------------------
Without the consent of any Holders of Securities the Company, when
authorized by a Board Resolution, and the Trustee, at any time and from time to
time, may enter into one or more indentures supplemental hereto for any of the
following purposes:
(1) to evidence the succession of another Person to the Company and the
assumption by any such successor of the covenants and obligations of the Company
herein and in the Securities as permitted by Article VII of this Indenture; or
(2) to add to the covenants of the Company for the benefit of the Holders
of Securities or to surrender any right or power herein conferred upon the
Company; or
(3) to secure the Securities; or
(4) to make provision with respect to the conversion rights of Holders of
Securities pursuant to Section 12.11 or to make provision with respect to the
repurchase rights of Holders of Securities pursuant to Section 14.5; or
(5) to make any changes or modifications to this Indenture necessary in
connection with the registration of any Registrable Securities under the
Securities Act as contemplated by Section 10.11, provided such action pursuant
to this clause (5) shall not adversely affect the interests of the Holders of
Securities; or
(6) to comply with the requirements of the Trust Indenture Act or the
rules and regulations of the Commission thereunder in order to effect or
maintain the qualification of this Indenture under the Trust Indenture Act, as
contemplated by this Indenture or otherwise; or
(7) to evidence and provide for the acceptance of appointment hereunder by
a successor Trustee; or
(8) subject to Section 13.12, to make any change in Article XIII that
would limit or terminate the benefits available to any holder of Senior Debt
under such Article; or
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(9) to cure any ambiguity, to correct or supplement any provision herein
which may be inconsistent with any other provision herein or which is otherwise
defective, or to make any other provisions with respect to matters or questions
arising under this Indenture as the Company and the Trustee may deem necessary
or desirable, provided such action pursuant to this clause (9) shall not
adversely affect the interests of the Holders of Securities in any material
respect.
Upon Company Request, accompanied by a Board Resolution authorizing the
execution of any such supplemental indenture, and subject to and upon receipt by
the Trustee of the documents described in Section 8.3 hereof, the Trustee shall
join with the Company in the execution of any supplemental indenture authorized
or permitted by the terms of this Indenture and to make any further appropriate
agreements and stipulations which may be therein contained.
SECTION 8.2 Supplemental Indentures with Consent of Holders of Securities.
-------------------------------------------------------------
With either (i) the written consent of the Holders of not less than a
majority in principal amount of the Outstanding Securities, by the Act of said
Holders delivered to the Company and the Trustee, or (ii) by the adoption of a
resolution, at a meeting of Holders of the Outstanding Securities at which a
quorum is present, by the Holders of at least 66-2/3% in principal amount of the
Outstanding Securities represented at such meeting, the Company, when authorized
by a Board Resolution, and the Trustee may enter into an indenture or indentures
supplemental hereto for the purpose of adding any provisions to or changing in
any manner or eliminating any of the provisions of this Indenture or of
modifying in any manner the rights of the Holders of Securities under this
Indenture; provided, however, that no such supplemental indenture shall, without
the consent or affirmative vote of the Holder of each Outstanding Security
affected thereby,
(1) change the Stated Maturity of the principal of, or any installment of
interest on, any Security, or reduce the principal amount of, or the premium, if
any, or the rate of interest payable thereon, or reduce the amount payable upon
a redemption or mandatory repurchase, or change the place or currency of payment
of the principal of, premium, if any, or interest on any Security (including any
payment of Liquidated Damages or Redemption Price or Repurchase Price in respect
of such Security) or impair the right to institute suit for the enforcement of
any payment in respect of any Security on or after the Stated Maturity thereof
(or, in the case of redemption or any repurchase, on or after the Redemption
Date or Repurchase Date, as the case may be) or, except as permitted by Section
12.11, adversely affect the right of Holders to convert any Security as provided
in Article XII, or modify the provisions of this Indenture with respect to the
subordination of the Securities in a manner adverse to the Holders; or
(2) reduce the requirements of Section 9.4 for quorum or voting, or reduce
the percentage in principal amount of the Outstanding Securities the consent of
whose Holders is required for any such supplemental indenture or the consent of
whose Holders is required for any waiver (of compliance with certain provisions
of this Indenture or certain defaults hereunder and their consequences) provided
for in this Indenture; or
(3) modify the obligation of the Company to maintain an office or agency
in the Borough of Manhattan, The City of New York, pursuant to Section 10.2; or
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(4) modify any of the provisions of this Section or Section 5.13 or 10.12,
except to increase any percentage contained herein or therein or to provide that
certain other provisions of this Indenture cannot be modified or waived without
the consent of the Holder of each Outstanding Security affected thereby; or
(5) modify the provisions of Article XIV in a manner adverse to the
Holders; or
(6) modify any of the provisions of Section 10.9.
It shall not be necessary for any Act of Holders of Securities under this
Section to approve the particular form of any proposed supplemental indenture,
but it shall be sufficient if such Act shall approve the substance thereof.
SECTION 8.3 Execution of Supplemental Indentures.
------------------------------------
In executing, or accepting the additional trusts created by, any
supplemental indenture permitted by this Article or the modifications thereby of
the trusts created by this Indenture, the Trustee shall be entitled to receive,
and (subject to Sections 6.1 and 6.3) shall be fully protected in relying upon,
an Opinion of Counsel stating that the execution of such supplemental indenture
is authorized or permitted by this Indenture, and that such supplemental
indenture has been duly authorized, executed and delivered by the Company and
constitutes a valid and legally binding obligation of the Company enforceable
against the Company in accordance with its terms. The Trustee may, but shall not
be obligated to, enter into any such supplemental indenture which affects the
Trustee's own rights, duties or immunities under this Indenture or otherwise.
SECTION 8.4 Effect of Supplemental Indentures.
---------------------------------
Upon the execution of any supplemental indenture under this Article, this
Indenture shall be modified in accordance therewith, and such supplemental
indenture shall form a part of this Indenture for all purposes; and every Holder
of Securities theretofore or thereafter authenticated and delivered hereunder
appertaining thereto shall be bound thereby.
SECTION 8.5 Reference in Securities to Supplemental Indentures.
--------------------------------------------------
Securities authenticated and delivered after the execution of any
supplemental indenture pursuant to this Article may, and shall if required by
the Trustee, bear a notation in form approved by the Trustee as to any matter
provided for in such supplemental indenture. If the Company shall so determine,
new Securities so modified as to conform, in the opinion of the Company and the
Trustee, to any such supplemental indenture may be prepared and executed by the
Company and authenticated and delivered by the Trustee in exchange for
Outstanding Securities.
SECTION 8.6 Notice of Supplemental Indentures.
---------------------------------
Promptly after the execution by the Company and the Trustee of any
supplemental indenture pursuant to the provisions of Section 8.2, the Company
shall give notice to all Holders of Securities
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of such fact, setting forth in general terms the substance of such supplemental
indenture, in the manner provided in Section 1.6. Any failure of the Company to
give such notice, or any defect therein, shall not in any way impair or affect
the validity of any such supplemental indenture.
ARTICLE IX
MEETINGS OF HOLDERS OF SECURITIES
SECTION 9.1 Purposes for Which Meetings May Be Called.
-----------------------------------------
A meeting of Holders of Securities may be called at any time and from time
to time pursuant to this Article to make, give or take any request, demand,
authorization, direction, notice, consent, waiver or other action provided by
this Indenture to be made, given or taken by Holders of Securities.
SECTION 9.2 Call, Notice and Place of Meetings.
----------------------------------
(1) The Trustee may at any time call a meeting of Holders of Securities
for any purpose specified in Section 9.1, to be held at such time and at such
place in the Borough of Manhattan, The City of New York, as the Trustee shall
determine. Notice of every meeting of Holders of Securities, setting forth the
time and the place of such meeting and in general terms the action proposed to
be taken at such meeting, shall be given, in the manner provided in Section 1.6,
not less than 21 nor more than 180 days prior to the date fixed for the meeting.
(2) In case at any time the Company, pursuant to a Board Resolution, or
the Holders of at least 10% in principal amount of the Outstanding Securities
shall have requested the Trustee to call a meeting of the Holders of Securities
for any purpose specified in Section 9.1, by written request setting forth in
reasonable detail the action proposed to be taken at the meeting, and the
Trustee shall not have mailed the notice of such meeting within 21 days after
receipt of such request or shall not thereafter proceed to cause the meeting to
be held as provided herein, then the Company or the Holders of Securities in the
amount specified, as the case may be, may determine the time and the place in
the Borough of Manhattan, The City of New York, for such meeting and may call
such meeting for such purposes by giving notice thereof as provided in paragraph
(1) of this Section.
SECTION 9.3 Persons Entitled to Vote at Meetings.
------------------------------------
To be entitled to vote at any meeting of Holders of Securities, a Person
shall be (i) a Holder of one or more Outstanding Securities, or (ii) a Person
appointed by an instrument in writing as proxy for a Holder or Holders of one or
more Outstanding Securities by such Holder or Holders. The only Persons who
shall be entitled to be present or to speak at any meeting of Holders shall be
the Persons entitled to vote at such meeting and their counsel, any
representatives of the Trustee and its counsel and any representatives of the
Company and its counsel.
SECTION 9.4 Quorum; Action.
--------------
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The Persons entitled to vote a majority in principal amount of the
Outstanding Securities shall constitute a quorum. In the absence of a quorum
within 30 minutes of the time appointed for any such meeting, the meeting shall,
if convened at the request of Holders of Securities, be dissolved. In any other
case, the meeting may be adjourned for a period of not less than 10 days as
determined by the chairman of the meeting prior to the adjournment of such
meeting. In the absence of a quorum at any such adjourned meeting, such
adjourned meeting may be further adjourned for a period not less than 10 days as
determined by the chairman of the meeting prior to the adjournment of such
adjourned meeting (subject to repeated applications of this sentence). Notice of
the reconvening of any adjourned meeting shall be given as provided in Section
9.2(1), except that such notice need be given only once not less than five days
prior to the date on which the meeting is scheduled to be reconvened. Notice of
the reconvening of an adjourned meeting shall state expressly the percentage of
the principal amount of the Outstanding Securities which shall constitute a
quorum.
Subject to the foregoing, at the reconvening of any meeting adjourned for a
lack of a quorum, the Persons entitled to vote 25% in principal amount of the
Outstanding Securities at the time shall constitute a quorum for the taking of
any action set forth in the notice of the original meeting.
At a meeting or an adjourned meeting duly reconvened and at which a quorum
is present as aforesaid, any resolution and all matters (except as limited by
the proviso to Section 8.2 and except to the extent Section 10.12 requires a
different vote) shall be effectively passed and decided if passed or decided by
the lesser of (i) the Holders of not less than a majority in principal amount of
Outstanding Securities and (ii) the Persons entitled to vote not less than
66-2/3% in principal amount of Outstanding Securities represented and entitled
to vote at such meeting.
Any resolution passed or decisions taken at any meeting of Holders of
Securities duly held in accordance with this Section shall be binding on all the
Holders of Securities whether or not present or represented at the meeting. The
Trustee shall, in the name and at the expense of the Company, notify all the
Holders of Securities of any such resolutions or decisions pursuant to Section
1.6.
SECTION 9.5 Determination of Voting Rights; Conduct and Adjournment of Meetings.
-------------------------------------------------------------------
(1) Notwithstanding any other provisions of this Indenture, the Trustee
may make such reasonable regulations as it may deem advisable for any meeting of
Holders of Securities in regard to proof of the holding of Securities and of the
appointment of proxies and in regard to the appointment and duties of inspectors
of votes, the submission and examination of proxies, certificates and other
evidence of the right to vote, and such other matters concerning the conduct of
the meeting as it shall deem appropriate. Except as otherwise permitted or
required by any such regulations, the holding of Securities shall be proved in
the manner specified in Section 1.4 and the appointment of any proxy shall be
proved in the manner specified in Section 1.4 or by having the signature of the
Person executing the proxy guaranteed by any bank, broker or other eligible
institution participating in a recognized medallion signature guarantee program.
(2) The Trustee shall, by an instrument in writing, appoint a temporary
chairman (which may be the Trustee) of the meeting, unless the meeting shall
have been called by the Company or by
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Holders of Securities as provided in Section 9.2(1), in which case the Company
or the Holders of Securities calling the meeting, as the case may be, shall in
like manner appoint a temporary chairman. A permanent chairman and a permanent
secretary of the meeting shall be elected by vote of the Persons entitled to
vote a majority in principal amount of the Outstanding Securities represented at
the meeting.
(3) At any meeting, each Holder of a Security or proxy shall be entitled
to one vote for each U.S. $1,000 principal amount of Securities held or
represented by him; provided, however, that no vote shall be cast or counted at
any meeting in respect of any Security challenged as not Outstanding and ruled
by the chairman of the meeting to be not Outstanding. The chairman of the
meeting shall have no right to vote, except as a Holder of a Security or proxy.
(4) Any meeting of Holders of Securities duly called pursuant to Section
9.2 at which a quorum is present may be adjourned from time to time by Persons
entitled to vote a majority in principal amount of the Outstanding Securities
represented at the meeting, and the meeting may be held as so adjourned without
further notice.
SECTION 9.6 Counting Votes and Recording Action of Meetings.
-----------------------------------------------
The vote upon any resolution submitted to any meeting of Holders of
Securities shall be by written ballots on which shall be subscribed the
signatures of the Holders of Securities or of their representatives by proxy and
the principal amounts at Stated Maturity and serial numbers of the Outstanding
Securities held or represented by them. The permanent chairman of the meeting
shall appoint two inspectors of votes who shall count all votes cast at the
meeting for or against any resolution and who shall make and file with the
secretary of the meeting their verified written reports in duplicate of all
votes cast at the meeting. A record, at least in duplicate, of the proceedings
of each meeting of Holders of Securities shall be prepared by the secretary of
the meeting and there shall be attached to said record the original reports of
the inspectors of votes on any vote by ballot taken thereat and affidavits by
one or more Persons having knowledge of the facts setting forth a copy of the
notice of the meeting and showing that said notice was given as provided in
Section 9.2 and, if applicable, Section 9.4. Each copy shall be signed and
verified by the affidavits of the permanent chairman and secretary of the
meeting and one such copy shall be delivered to the Company and another to the
Trustee to be preserved by the Trustee, the latter to have attached thereto the
ballots voted at the meeting. Any record so signed and verified shall be
conclusive evidence of the matters therein stated.
ARTICLE X
COVENANTS
SECTION 10.1 Payment of Principal, Premium and Interest.
------------------------------------------
The Company covenants and agrees that it will duly and punctually pay the
principal of and premium, if any, and interest (including Liquidated Damages, if
any) on the Securities in accordance with the terms of the Securities and this
Indenture. The Company will deposit or cause to be deposited with the Trustee,
no later than the opening of business on the date of the Stated Maturity
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of any Security or no later than the opening of business on the due date for any
installment of interest, all payments so due, which payments shall be in
immediately available funds on the date of such Stated Maturity or due date, as
the case may be.
SECTION 10.2 Maintenance of Offices or Agencies.
----------------------------------
The Company will maintain in the Borough of Manhattan, The City of New
York, an office or agency where the Securities may be surrendered for
registration of transfer or exchange or for presentation for payment or for
conversion, redemption or repurchase and where notices and demands to or upon
the Company in respect of the Securities and this Indenture may be served. The
Company will give prompt written notice to the Trustee of the location, and any
change in the location, of such office or agency not designated or appointed by
the Trustee. If at any time the Company shall fail to maintain any such required
office or agency or shall fail to furnish the Trustee with the address thereof,
such presentations, surrenders, notices and demands may be made or served at the
Corporate Trust Office or the office or agency of the Trustee in the Borough of
Manhattan, The City of New York.
The Company may at any time and from time to time vary or terminate the
appointment of any such agent or appoint any additional agents for any or all of
such purposes; provided, however, that until all of the Securities have been
delivered to the Trustee for cancellation, or moneys sufficient to pay the
principal of, premium, if any, and interest on the Securities have been made
available for payment and either paid or returned to the Company pursuant to the
provisions of Section 10.3, the Company will maintain in the Borough of
Manhattan, The City of New York, an office or agency where Securities may be
presented or surrendered for payment and conversion, which shall initially be
State Street Bank and Trust Company, N.A., an Affiliate of the Trustee, where
Securities may be surrendered for registration of transfer or exchange and where
notices and demands to or upon the Company in respect of the Securities and this
Indenture may be served. The Company will give prompt written notice to the
Trustee, and notice to the Holders in accordance with Section 1.6, of the
appointment or termination of any such agents and of the location and any change
in the location of any such office or agency.
The Company hereby initially designates the Trustee as Paying Agent,
Security Registrar and Conversion Agent, and each of the Corporate Trust Office
of the Trustee and the office or agency of the Trustee in the Borough of
Manhattan, The City of New York, located at 61 Broadway, 15th Floor, New York,
New York 10006 attention: Corporate Trust Administration (RATIONAL SOFTWARE
CORPORATION 5% Convertible Subordinated Notes due February 1, 2007) as one such
office or agency of the Company for each of the aforesaid purposes.
SECTION 10.3 Money for Security Payments to Be Held in Trust.
-----------------------------------------------
If the Company shall act as its own Paying Agent, it will, on or before
each due date of the principal of, premium, if any, or interest on any of the
Securities, segregate and hold in trust for the benefit of the Persons entitled
thereto a sum sufficient to pay the principal, premium, if any, or interest so
becoming due until such sums shall be paid to such Persons or otherwise disposed
of as herein provided and the Company will promptly notify the Trustee of its
action or failure so to act.
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Whenever the Company shall have one or more Paying Agents, it will, no
later than the opening of business on each due date of the principal of,
premium, if any, or interest on any Securities, deposit with the Trustee a sum
in funds immediately payable on the payment date sufficient to pay the
principal, premium, if any, or interest so becoming due, such sum to be held for
the benefit of the Persons entitled to such principal, premium, if any, or
interest, and (unless such Paying Agent is the Trustee) the Company will
promptly notify the Trustee of any failure so to act.
The Company will cause each Paying Agent other than the Trustee to execute
and deliver to the Trustee an instrument in which such Paying Agent shall agree
with the Trustee, subject to the provisions of this Section, that such Paying
Agent will:
(1) hold all sums held by it for the payment of the principal of, premium,
if any, or interest on Securities for the benefit of the Persons entitled
thereto until such sums shall be paid to such Persons or otherwise disposed of
as herein provided;
(2) give the Trustee notice of any default by the Company (or any other
obligor upon the Securities) in the making of any payment of principal, premium,
if any, or interest; and
(3) at any time during the continuance of any such default, upon the
written request of the Trustee, forthwith pay to the Trustee all sums so held by
such Paying Agent.
The Company may at any time, for the purpose of obtaining the satisfaction
and discharge of this Indenture or for any other purpose, pay, or by Company
Order direct any Paying Agent to pay, to the Trustee all sums held in trust by
the Company or such Paying Agent, such sums to be held by the Trustee upon the
same trusts as those upon which such sums were held by the Company or such
Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such
Paying Agent shall be released from all further liability with respect to such
money.
Any money deposited with the Trustee or any Paying Agent, or then held by
the Company, in trust for the payment of the principal of, premium, if any, or
interest on any Security and remaining unclaimed for two years after such
principal, premium, if any, or interest has become due and payable shall be paid
to the Company on Company Request, or (if then held by the Company) shall be
discharged from such trust; and the Holder of such Security shall thereafter, as
an unsecured general creditor, look only to the Company for payment thereof, and
all liability of the Trustee or such Paying Agent with respect to such trust
money, and all liability of the Company as trustee thereof, shall thereupon
cease.
SECTION 10.4 Existence.
---------
Subject to Article VII, the Company will do or cause to be done all things
necessary to preserve and keep in full force and effect its existence, rights
(charter and statutory) and franchises; provided, however, that the Company
shall not be required to preserve any such right or franchise if the Company
shall determine that the preservation thereof is no longer desirable in the
conduct of the business of the Company and that the loss thereof is not
disadvantageous in any material respect to the Holders.
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SECTION 10.5 Maintenance of Properties.
-------------------------
The Company will cause all properties used or useful in the conduct of its
business or the business of any Significant Subsidiary to be maintained and kept
in good condition, repair and working order and supplied with all necessary
equipment and will cause to be made all necessary repairs, renewals,
replacements, betterments and improvements thereof, all as in the judgment of
the Company may be necessary so that the business carried on in connection
therewith may be properly and advantageously conducted at all times; provided,
however, that nothing in this Section shall prevent the Company from
discontinuing the operation or maintenance of any of such properties if such
discontinuance is, in the judgment of the Company, desirable in the conduct of
its business or the business of any Significant Subsidiary and not
disadvantageous in any material respect to the Holders.
SECTION 10.6 Payment of Taxes and Other Claims.
---------------------------------
The Company will pay or discharge, or cause to be paid or discharged,
before the same may become delinquent, (i) all taxes, assessments and
governmental charges levied or imposed upon the Company or any Significant
Subsidiary or upon the income, profits or property of the Company or any
Significant Subsidiary, (ii) all claims for labor, materials and supplies which,
if unpaid, might by law become a lien or charge upon the property of the Company
or any Significant Subsidiary, and (iii) all stamps and other duties, if any,
which may be imposed by the United States or any political subdivision thereof
or therein in connection with the issuance, transfer, exchange or conversion of
any Securities or with respect to this Indenture; provided, however, that, in
the case of clauses (i) and (ii), the Company shall not be required to pay or
discharge or cause to be paid or discharged any such tax, assessment, charge or
claim (A) if the failure to do so will not, in the aggregate, have a material
adverse impact on the Company, or (B) if the amount, applicability or validity
is being contested in good faith by appropriate proceedings.
SECTION 10.7 Registration and Listing.
------------------------
The Company (i) will effect all registrations with, and obtain all
approvals by, all governmental authorities that may be necessary under any
United States Federal or state law (including the Securities Act, the Exchange
Act and state securities and Blue Sky laws) before the shares of Common Stock
issuable upon conversion of Securities are issued and delivered, and qualified
or listed as contemplated by clause (ii) (it being understood that the Company
shall not be required to register the Securities under the Securities Act,
except pursuant to the Registration Rights Agreement referred to in Section
10.11); and (ii) will qualify the shares of Common Stock required to be issued
and delivered upon conversion of Securities, prior to such issuance or delivery,
for quotation on the Nasdaq National Market or, if the Common Stock is not then
quoted on the Nasdaq National Market, list the Common Stock on each national
securities exchange or quotation system on which outstanding Common Stock is
listed or quoted at the time of such delivery.
Nothing in this Section will limit the application of Section 10.11.
SECTION 10.8 Statement by Officers as to Default.
-----------------------------------
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The Company shall deliver to the Trustee, within 120 days after the end of
each fiscal year of the Company ending after the date hereof, an Officers'
Certificate, stating whether or not to the best knowledge of the signers thereof
the Company is in default in the performance and observance of any of the terms,
provisions and conditions of this Indenture (without regard to any period of
grace or requirement of notice provided hereunder) and, if the Company shall be
in default, specifying all such defaults and the nature and status thereof of
which they may have knowledge.
The Company will deliver to the Trustee, forthwith upon becoming aware of
any default or any Event of Default under the Indenture, an Officers'
Certificate specifying with particularity such default or Event of Default and
further stating what action the Company has taken, is taking or proposes to take
with respect thereto. For the purpose of this Section, the term "default" means
any event which is, or after notice or lapse of time or both would become, an
Event of Default.
Any notice required to be given under this Section 10.8 shall be delivered
to the Trustee at its Corporate Trust Office.
SECTION 10.9 Delivery of Certain Information.
-------------------------------
At any time when the Company is not subject to Section 13 or 15(d) of the
Exchange Act, upon the request of a Holder of a Restricted Security or the
holder of shares of Common Stock issued upon conversion thereof, the Company
will promptly furnish or cause to be furnished Rule 144A Information (as defined
below) to such Holder of Restricted Securities or such holder of shares of
Common Stock issued upon conversion of Restricted Securities, or to a
prospective purchaser of any such security designated by any such Holder or
holder, as the case may be, to the extent required to permit compliance by such
Holder or holder with Rule 144A under the Securities Act (or any successor
provision thereto) in connection with the resale of any such security; provided,
however, that the Company shall not be required to furnish such information in
connection with any request made on or after the date which is two years from
the later of (i) the date such a security (or any such predecessor security) was
last acquired from the Company or (ii) the date such a security (or any such
predecessor security) was last acquired from an "affiliate" of the Company
within the meaning of Rule 144 under the Securities Act (or any successor
provision thereto). "Rule 144A Information" shall be such information as is
specified pursuant to Rule 144A(d)(4) under the Securities Act (or any successor
provision thereto).
SECTION 10.10 Resale of Certain Securities.
----------------------------
During the period beginning on the last date of original issuance of the
Securities and ending on the date that is two years from such date (or such
shortened period under Rule 144(k) under the Securities Act or any successor
rule), the Company will not, and will not permit any of its subsidiaries or
other "affiliates" (as defined under Rule 144 under the Securities Act or any
successor provision thereto) to, resell (i) any Securities which constitute
"restricted securities" under Rule 144 or (ii) any securities into which the
Securities have been converted under this Indenture which constitute "restricted
securities" under Rule 144, that in either case have been reacquired by any of
them. The Trustee shall have no responsibility in respect of the Company's
performance of its agreement in the preceding sentence.
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SECTION 10.11 Registration Rights.
-------------------
The Company agrees that the Holders from time to time of Registrable
Securities (as defined below) are entitled to the benefits of a Registration
Rights Agreement, dated as of February 2, 2000 (the "Registration Rights
Agreement"), executed by the Company. Pursuant to the Registration Rights
Agreement, the Company has agreed for the benefit of the holders from time to
time of the Registrable Securities that it will, at its expense, (i) within 90
calendar days after the Issue Date (as defined below) of the Securities, file a
shelf registration statement (the "Shelf Registration Statement") with the
Commission with respect to resales of the Registrable Securities, (ii) use all
reasonable efforts to cause such Shelf Registration Statement to be declared
effective by the Commission within 180 calendar days after the Issue Date of the
Securities, provided, however that the Company may, upon written notice to all
the Holders, postpone having the Shelf Registration Statement declared effective
if the Company possesses material non-public information, the disclosure of
which would have a material adverse effect on the Company and its subsidiaries
taken as a whole and (iii) use all reasonable efforts to maintain such Shelf
Registration Statement effective under the Securities Act until the second
annual anniversary of the date it is declared effective or such earlier date as
is provided in the Registration Rights Agreement (the "Effectiveness Period").
The Company will be permitted to suspend the use of the prospectus which is a
part of the Shelf Registration Statement during certain periods of time as
provided in the Registration Rights Agreement.
If (i) on or prior to 90 calendar days following the Issue Date of the
Securities, a Shelf Registration Statement has not been filed with the
Commission, or (ii) on or prior to the 180th calendar day following the Issue
Date of the Securities, such Shelf Registration Statement is not declared
effective (each, a "Registration Default"), additional interest ("Liquidated
Damages") will accrue on the Restricted Securities from and including the day
following such Registration Default to but excluding the day on which such
Registration Default has been cured. Liquidated Damages will be paid
semi-annually in arrears, with the first semi-annual payment due on the first
Interest Payment Date, as applicable, in respect of the Restricted Securities
following the date on which such Liquidated Damages begin to accrue, and will
accrue at a rate per annum equal to an additional one-quarter of one percent
(0.25%) of the principal amount of the Restricted Securities to and including
the 90th calendar day following such Registration Default and at a rate per
annum equal to one-half of one percent (0.50%) thereof from and after the 91st
calendar day following such Registration Default. Pursuant to the Registration
Rights Agreement, in the event that the Shelf Registration Statement ceases to
be effective (or the Holders of Registrable Securities are otherwise prevented
or restricted by the Company from effecting sales pursuant thereto) (an
"Effective Failure") during the Effectiveness Period for more than 45 days,
whether or not consecutive, during any 90-day period or for more than 90 days,
whether or not consecutive, during any 12-month period, then the interest rate
borne by the Restricted Securities shall increase by an additional one-half of
one percent (0.50%) per annum from the 46th day of the applicable 90-day period
or the 91st calendar day of the applicable 12-month period until the earlier of
(A) such time as the Effective Failure is cured or (B) the Effectiveness Period
expires.
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Whenever in this Indenture there is mentioned, in any context, the payment
of the principal of, premium, if any, or interest on, or in respect of, any
Security, such mention shall be deemed to include mention of the payment of
Liquidated Damages provided for in this Section to the extent that, in such
context, Liquidated Damages are, were or would be payable in respect thereof
pursuant to the provisions of this Section and express mention of the payment of
Liquidated Damages (if applicable) in any provisions hereof shall not be
construed as excluding Liquidated Damages in those provisions hereof where such
express mention is not made.
For the purposes of the Registration Rights Agreement, "Registrable
Securities" means all or any portion of the Restricted Securities issued from
time to time under this Indenture and the shares of Common Stock issuable upon
conversion or repurchase of such Restricted Securities, except any such
Restricted Security or share of Common Stock issuable upon conversion or
repurchase thereof which (i) has been effectively registered under the
Securities Act and sold in a manner contemplated by the Shelf Registration
Statement, (ii) has been transferred in compliance with Rule 144 under the
Securities Act (or any successor provision thereto) or is transferable pursuant
to paragraph (k) of such Rule 144 (or any successor provision thereto) or (iii)
otherwise has been transferred and a new Security or share of Common Stock not
subject to transfer restrictions under the Securities Act has been delivered by
or on behalf of the Company in accordance with Section 3.5 of this Indenture.
If a Security, or the shares of Common Stock issuable upon conversion of a
Security, is a Registrable Security, and the Holder thereof elects to sell such
Registrable Security pursuant to the Shelf Registration Statement then, by its
acceptance thereof, the Holder of such Registrable Security will have agreed to
be bound by the terms of the Registration Rights Agreement relating to the
Registrable Securities which are the subject of such election.
For the purposes of the Registration Rights Agreement, the term "Holder"
includes any Person that has a beneficial interest in any Restricted Global
Security or any beneficial interest in a global security representing shares of
Common Stock issuable upon conversion of a Security.
If Liquidated Damages are payable under the Registration Rights Agreement,
the Company shall deliver to the Trustee a certificate to that effect stating
(i) the amount of Liquidated Damages that is payable and (ii) the date on which
Liquidated Damages are payable. Unless and until a Responsible Officer of the
Trustee receives at the Corporate Trust Office such a certificate, the Trustee
may assume without inquiry that no Liquidated Damages are payable. If Liquidated
Damages have been paid by the Company directly to the persons entitled to them,
the Company shall deliver to the Trustee a certificate setting forth the
particulars of such payment.
SECTION 10.12 Waiver of Certain Covenants.
---------------------------
The Company may omit in any particular instance to comply with any covenant
or condition set forth in Sections 10.4 (other than with respect to the
existence of the Company (subject to Article VII)), 10.5 and 10. 6, inclusive
(other than a covenant or condition which under Article VIII cannot be modified
or amended without the consent of the Holder of each Outstanding Security
affected), if before the time for such compliance the Holders shall, through the
written consent of, or the adoption of a resolution at a meeting of Holders of
the Outstanding Securities at which a quorum is
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present by, not less than a majority in principal amount of the Outstanding
Securities, either waive such compliance in such instance or generally waive
compliance with such covenant or condition, but no such waiver shall extend to
or affect such covenant or condition except to the extent so expressly waived,
and, until such waiver shall become effective, the obligations of the Company
and the duties of the Trustee or any Paying or Conversion Agent in respect of
any such covenant or condition shall remain in full force and effect.
ARTICLE XI
REDEMPTION OF SECURITIES
SECTION 11.1 Right of Redemption.
-------------------
The Securities may be redeemed in accordance with the provisions of the
form of Securities set forth in Section 2.2.
SECTION 11.2 Applicability of Article.
------------------------
Redemption of Securities at the election of the Company or otherwise, as
permitted or required by any provision of the Securities or this Indenture,
shall be made in accordance with such provision and this Article XI.
SECTION 11.3 Election to Redeem; Notice to Trustee.
-------------------------------------
The election of the Company to redeem any Securities shall be evidenced by
a Board Resolution. In case of any redemption at the election of the Company of
any of the Securities, the Company shall, at least 45 days prior to the
Redemption Date fixed by the Company (unless a shorter notice shall be
satisfactory to the Trustee), notify the Trustee in writing of such Redemption
Date.
SECTION 11.4 Selection by Trustee of Securities to Be Redeemed.
-------------------------------------------------
If less than all the Securities are to be redeemed, the particular
Securities to be redeemed shall be selected by the Trustee within five Business
Days after it receives the notice described in 11.3, from the Outstanding
Securities not previously called for redemption, by lot or by such other method
as the Trustee may deem fair and appropriate.
If any Security selected for partial redemption is converted in part before
termination of the conversion right with respect to the portion of the Security
so selected, the converted portion of such Security shall be deemed (so far as
may be) to be the portion selected for redemption. Securities which have been
converted during a selection of Securities to be redeemed may be treated by the
Trustee as Outstanding for the purpose of such selection. The Trustee shall
promptly notify the Company and each Security Registrar in writing of the
securities selected for redemption and, in the case of any Securities selected
for partial redemption, the principal amount thereof to be redeemed.
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For all purposes of this Indenture, unless the context otherwise requires,
all provisions relating to the redemption of Securities shall relate, in the
case of any Securities redeemed or to be redeemed only in part, to the portion
of the principal amount of such Securities which has been or is to be redeemed.
SECTION 11.5 Notice of Redemption.
--------------------
Notice of redemption shall be given in the manner provided in Section 1.6
to the Holders of Securities to be redeemed not less than 30 nor more than 60
days prior to the Redemption Date, and such notice shall be irrevocable.
All notices of redemption shall state:
(1) the Redemption Date,
(2) the Redemption Price, and accrued interest (including Liquidated
Damages, if any), if any, to the Redemption Date,
(3) if less than all Outstanding Securities are to be redeemed, the
aggregate principal amount of Securities to be redeemed and the aggregate
principal amount of Securities which will be outstanding after such partial
redemption,
(4) that on the Redemption Date the Redemption Price, and accrued interest
(including Liquidated Damages, if any), if any, to the Redemption Date, will
become due and payable upon each such Security to be redeemed, and that interest
thereon shall cease to accrue on and after said date,
(5) the Conversion Rate, the date on which the right to convert the
Securities to be redeemed will terminate and the places where such Securities
may be surrendered for conversion, and
(6) the place or places where such Securities are to be surrendered for
payment of the Redemption Price and accrued interest (including Liquidated
Damages, if any), if any, to the Redemption Date.
In case of a partial redemption, the notice shall specify the serial and
CUSIP numbers (if any) and the portions thereof called for redemption and that
transfers and exchanges may occur on or prior to the Redemption Date.
Notice of redemption of Securities to be redeemed at the election of the
Company shall be given by the Company or, at the Company's written request, by
the Trustee in the name of and at the expense of the Company. Notice of
redemption of Securities to be redeemed at the election of the Company received
by the Trustee shall be given by the Trustee to each Paying Agent in the name of
and at the expense of the Company.
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SECTION 11.6 Deposit of Redemption Price.
---------------------------
On or prior to the Redemption Date, the Company shall deposit with the
Trustee (or, if the Company is acting as its own Paying Agent, segregate and
hold in trust as provided in Section 10.3) an amount of money (which shall be in
immediately available funds on such Redemption Date) sufficient to pay the
Redemption Price of, and (except if the Redemption Date shall be an Interest
Payment Date) accrued interest (including Liquidated Damages, if any) to the
Redemption Date on, all the Securities which are to be redeemed on that date
other than any Securities called for redemption on that date which have been
converted prior to the date of such deposit.
If any Security called for redemption is converted, any money deposited
with the Trustee or so segregated and held in trust for the redemption of such
Security shall (subject to any right of the Holder of such Security or any
Predecessor Security to receive interest as provided in the last paragraph of
Section 3.7) be paid to the Company on Company Request or, if then held by the
Company, shall be discharged from such trust.
SECTION 11.6 Securities Payable on Redemption Date.
-------------------------------------
Notice of redemption having been given as aforesaid, the Securities so to
be redeemed shall, on the Redemption Date, become due and payable at the
Redemption Price therein specified and from and after such date (unless the
Company shall default in the payment of the Redemption Price, including accrued
interest) such Securities shall cease to bear interest. Upon surrender of any
Security for redemption in accordance with said notice such Security shall be
paid by the Company at the Redemption Price together with accrued and unpaid
interest (including Liquidated Damages, if any) to the Redemption Date;
provided, however, that installments of interest on Securities whose Stated
Maturity is on or prior to the Redemption Date shall be payable to the Holders
of such Securities, or one or more Predecessor Securities, registered as such on
the relevant Record Date according to their terms and the provisions of Section
3.7.
If any Security called for redemption shall not be so paid upon surrender
thereof for redemption, the principal amount of, premium, if any, and, to the
extent permitted by applicable law, accrued interest on such Security shall,
until paid, bear interest from the Redemption Date at a rate of 5% per annum and
such Security shall remain convertible until the Redemption Price of such
Security (or portion thereof, as the case may be) shall have been paid or duly
provided for.
Any Security which is to be redeemed only in part shall be surrendered at
the Corporate Trust Office or an office or agency of the Company designated for
that purpose pursuant to Section 10.2 (with, if the Company or the Trustee so
requires, due endorsement by, or a written instrument of transfer in form
satisfactory to the Company and the Trustee duly executed by, the Holder thereof
or his attorney duly authorized in writing), and the Company shall execute, and
the Trustee shall authenticate and make available for delivery to the Holder of
such Security without service charge, a new Security or Securities, of any
authorized denomination as requested by such Holder, in aggregate principal
amount equal to and in exchange for the unredeemed portion of the principal of
the Security so surrendered.
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SECTION 11.8 Conversion Arrangement on Call for Redemption.
---------------------------------------------
In connection with any redemption of Securities, the Company may arrange
for the purchase and conversion of any Securities by an agreement with one or
more investment bankers or other purchasers (the "Purchasers") to purchase such
securities by paying to the Trustee in trust for the Holders, on or before the
Redemption Date, an amount not less than the applicable Redemption Price,
together with interest accrued to the Redemption Date, of such Securities.
Notwithstanding anything to the contrary contained in this Article XI, the
obligation of the Company to pay the Redemption Price, together with interest
accrued to the Redemption Date, shall be deemed to be satisfied and discharged
to the extent such amount is so paid by such Purchasers. If such an agreement is
entered into (a copy of which shall be filed with the Trustee prior to the close
of business on the Business Day immediately prior to the Redemption Date), any
Securities called for redemption that are not duly surrendered for conversion by
the Holders thereof may, at the option of the Company, be deemed, to the fullest
extent permitted by law, and consistent with any agreement or agreements with
such Purchasers, to be acquired by such Purchasers from such Holders and
(notwithstanding anything to the contrary contained in Article XII) surrendered
by such Purchasers for conversion, all as of immediately prior to the close of
business on the Redemption Date (and the right to convert any such Securities
shall be extended through such time), subject to payment of the above amount as
aforesaid. At the direction of the Company, the Trustee shall hold and dispose
of any such amount paid to it by the Purchasers to the Holders in the same
manner as it would monies deposited with it by the Company for the redemption of
Securities. Without the Trustee's prior written consent, no arrangement between
the Company and such Purchasers for the purchase and conversion of any
Securities shall increase or otherwise affect any of the powers, duties,
responsibilities or obligations of the Trustee as set forth in this Indenture,
and the Company agrees to indemnify the Trustee from, and hold it harmless
against, any loss, liability or expense arising out of or in connection with any
such arrangement for the purchase and conversion of any Securities between the
Company and such Purchasers, including the costs and expenses, including
reasonable legal fees, incurred by the Trustee in the defense of any claim or
liability arising out of or in connection with the exercise or performance of
any of its powers, duties, responsibilities or obligations under this Indenture.
ARTICLE XII
CONVERSION OF SECURITIES
SECTION 12.1 Conversion Privilege and Conversion Rate.
----------------------------------------
Subject to and upon compliance with the provisions of this Article, at the
option of the Holder thereof, any Security may be converted into fully paid and
nonassessable shares (calculated as to each conversion to the nearest 1/100th of
a share) of Common Stock of the Company at the Conversion Rate, determined as
hereinafter provided, in effect at the time of conversion. Such conversion right
shall commence on the initial issuance date of the Securities and expire at the
close of business on the date of Maturity, subject, in the case of conversion of
any Global Security, to any Applicable Procedures. In case a Security or portion
thereof is called for redemption at the election of the Company or the Holder
thereof exercises his right to require the Company to repurchase the
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Security, such conversion right in respect of the Security, or portion thereof
so called, shall expire at the close of business on the Redemption Date or the
Repurchase Date, as the case may be, unless the Company defaults in making the
payment due upon redemption or repurchase, as the case may be (in each case
subject as aforesaid to any Applicable Procedures with respect to any Global
Security).
The rate at which shares of Common Stock shall be delivered upon conversion
(herein called the "Conversion Rate") shall be initially 13.9983 shares of
Common Stock for each U.S.$1,000 principal amount of Securities. The Conversion
Rate shall be adjusted in certain instances as provided in this Article XII.
SECTION 12.1 Exercise of Conversion Priviledg.
--------------------------------
In order to exercise the conversion privilege, the Holder of any Security
to be converted shall surrender such Security, duly endorsed in blank, at any
office or agency of the Company maintained for that purpose pursuant to Section
10.2, accompanied by a duly signed conversion notice substantially in the form
set forth in Section 2.4 stating that the Holder elects to convert such Security
or, if less than the entire principal amount thereof is to be converted, the
portion thereof to be converted. Each Security surrendered for conversion (in
whole or in part) during the Record Date Period shall (except in the case of any
Security or portion thereof which has been called for redemption on a Redemption
Date, or is repurchasable on a Repurchase Date, occurring, in either case,
within such Record Date Period and, as a result, the right to convert would
terminate in such period) be accompanied by payment in New York Clearing House
funds or other funds acceptable to the Company of an amount equal to the
interest payable on such Interest Payment Date on the principal amount of such
Security (or part thereof, as the case may be) being surrendered for conversion.
The interest so payable on such Interest Payment Date with respect to any
Security (or portion thereof, if applicable) which is surrendered for conversion
during the Record Date Period shall be paid to the Holder of such Security as of
such Regular Record Date in an amount equal to the interest that would have been
payable on such Security if such Security had been converted as of the close of
business on such Interest Payment Date. Interest payable in respect of any
Security surrendered for conversion on or after an Interest Payment Date shall
be paid to the Holder of such Security as of the next preceding Regular Record
Date, notwithstanding the exercise of the right of conversion. Except as
provided in this paragraph and subject to the last paragraph of Section 3.7, no
cash payment or adjustment shall be made upon any conversion on account of any
interest accrued from the Interest Payment Date next preceding the conversion
date, in respect of any Security (or part thereof, as the case may be)
surrendered for conversion, or on account of any dividends on the Common Stock
issued upon conversion. The Company's delivery to the Holder of the number of
shares of Common Stock (and cash in lieu of fractions thereof, as provided in
this Indenture) into which a Security is convertible will be deemed to satisfy
the Company's obligation to pay the principal amount of the Security.
Securities shall be deemed to have been converted immediately prior to the
close of business on the day of surrender of such Securities for conversion in
accordance with the foregoing provisions, and at such time the rights of the
Holders of such Securities as Holders shall cease, and the Person or Persons
entitled to receive the Common Stock issuable upon conversion shall be
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treated for all purposes as the record holder or holders of such Common Stock at
such time. As promptly as practicable on or after the conversion date, the
Company shall issue and deliver to the Trustee, for delivery to the Holder, a
certificate or certificates for the number of full shares of Common Stock
issuable upon conversion, together with payment in lieu of any fraction of a
share, as provided in Section 12.3.
All shares of Common Stock delivered upon such conversion of Restricted
Securities shall bear restrictive legends substantially in the form of the
legends required to be set forth on the Restricted Securities pursuant to
Section 3.5 and shall be subject to the restrictions on transfer provided in
such legends. Neither the Trustee nor any agent maintained for the purpose of
such conversion shall have any responsibility for the inclusion or content of
any such restrictive legends on such Common Stock; provided, however, that the
Trustee or any agent maintained for the purpose of such conversion shall have
provided, to the Company or to the Company's transfer agent for such Common
Stock, prior to or concurrently with a request to the Company to deliver such
Common Stock, written notice that the Securities delivered for conversion are
Restricted Securities.
In the case of any Security which is converted in part only, upon such
conversion the Company shall execute and the Trustee shall authenticate and
deliver to the Holder thereof, at the expense of the Company, a new Security or
Securities of authorized denominations in an aggregate principal amount equal to
the unconverted portion of the principal amount of such Security. A Security may
be converted in part, but only if the principal amount of such Security to be
converted is any integral multiple of U.S. $1,000 and the principal amount of
such security to remain Outstanding after such conversion is equal to U.S.
$1,000 or any integral multiple of $1,000 in excess thereof.
If shares of Common Stock to be issued upon conversion of a Restricted
Security, or Securities to be issued upon conversion of a Restricted Security in
part only, are to be registered in a name other than that of the beneficial
owner of such Restricted Security, then such Holder must deliver to the
Conversion Agent a Surrender Certificate, dated the date of surrender of such
Restricted Security and signed by such beneficial owner, as to compliance with
the restrictions on transfer applicable to such Restricted Security. Neither the
Trustee nor any Conversion Agent, Registrar or Transfer Agent shall be required
to register in a name other than that of the beneficial owner, shares of Common
Stock or Securities issued upon conversion of any such Restricted Security not
so accompanied by a properly completed Surrender Certificate.
SECTION 12.3 Fractions of Shares.
-------------------
No fractional shares of Common Stock shall be issued upon conversion of any
Security or Securities. If more than one Security shall be surrendered for
conversion at one time by the same Holder, the number of full shares which shall
be issuable upon conversion thereof shall be computed on the basis of the
aggregate principal amount of the Securities (or specified portions thereof) so
surrendered. Instead of any fractional share of Common Stock which would
otherwise be issuable upon conversion of any Security or Securities (or
specified portions thereof), the Company shall calculate and pay a cash
adjustment in respect of such fraction (calculated to the nearest 1/100th of a
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share) in an amount equal to the same fraction of the Closing Price Per Share at
the close of business on the day of conversion.
SECTION 12.4 Adjustment of Conversion Rate.
-----------------------------
The Conversion Rate shall be subject to adjustments from time to time as
follows:
(1) In case the Company shall pay or make a dividend or other
distribution on shares of any class of capital stock payable in shares of Common
Stock, the Conversion Rate in effect at the opening of business on the day
following the date fixed for the determination of shareholders entitled to
receive such dividend or other distribution shall be increased by dividing such
Conversion Rate by a fraction of which the numerator shall be the number of
shares of Common Stock outstanding at the close of business on the date fixed
for such determination and the denominator shall be the sum of such number of
shares and the total number of shares constituting such dividend or other
distribution, such increase to become effective immediately after the opening of
business on the day following the date fixed for such determination. If, after
any such date fixed for determination, any dividend or distribution is not in
fact paid, the Conversion Rate shall be immediately readjusted, effective as of
the date the Board of Directors determines not to pay such dividend or
distribution, to the Conversion Rate that would have been in effect if such
determination date had not been fixed. For the purposes of this paragraph (1),
the number of shares of Common Stock at any time outstanding shall not include
shares held in the treasury of the Company but shall include shares issuable in
respect of scrip certificates issued in lieu of fractions of shares of Common
Stock. The Company will not pay any dividend or make any distribution on shares
of Common Stock held in the treasury of the Company.
(2) In case the Company shall issue rights, options or warrants to all
holders of its Common Stock entitling them to subscribe for or purchase shares
of Common Stock at a price per share less than the current market price per
share (determined as provided in paragraph (8) of this Section 12.4) of the
Common Stock on the date fixed for the determination of stockholders entitled to
receive such rights, options or warrants (other than any rights, options or
warrants that by their terms will also be issued to any Holder upon conversion
of a Security into shares of Common Stock without any action required by the
Company or any other Person), the Conversion Rate in effect at the opening of
business on the day following the date fixed for such determination shall be
increased by dividing such Conversion Rate by a fraction of which the numerator
shall be the number of shares of Common Stock outstanding at the close of
business on the date fixed for such determination plus the number of shares of
Common Stock which the aggregate of the offering price of the total number of
shares of Common Stock so offered for subscription or purchase would purchase at
such current market price and the denominator shall be the number of shares of
Common Stock outstanding at the close of business on the date fixed for such
determination plus the number of shares of Common Stock so offered for
subscription or purchase, such increase to become effective immediately after
the opening of business on the day following the date fixed for such
determination. If, after any such date fixed for determination, any such rights,
options or warrants are not in fact issued, or are not exercised prior to the
expiration thereof, the Conversion Rate shall be immediately readjusted,
effective as of the date such rights, options or warrants expire, or the date
the Board of Directors
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determines not to issue such rights, options or warrants, to the Conversion Rate
that would have been in effect if the unexercised rights, options or warrants
had never been granted or such determination date had not been fixed, as the
case may be. For the purposes of this paragraph (2), the number of shares of
Common Stock at any time outstanding shall not include shares held in the
treasury of the Company but shall include shares issuable in respect of scrip
certificates issued in lieu of fractions of shares of Common Stock. The Company
will not issue any rights, options or warrants in respect of shares of Common
Stock held in the treasury of the Company.
(3) In case outstanding shares of Common Stock shall be subdivided into a
greater number of shares of Common Stock, the Conversion Rate in effect at the
opening of business on the day following the day upon which such subdivision
becomes effective shall be proportionately increased, and, conversely, in case
outstanding shares of Common Stock shall be combined into a smaller number of
shares of Common Stock, the Conversion Rate in effect at the opening of business
on the day following the day upon which such subdivision or combination becomes
effective shall be proportionately reduced, such increase or reduction, as the
case may be, to become effective immediately after the opening of business on
the day following the day upon which such subdivision or combination becomes
effective.
(4) In case the Company shall, by dividend or otherwise, distribute to all
holders of its Common Stock evidences of its indebtedness, shares of any class
of capital stock or other property (including cash or assets or securities, but
excluding (i) any rights, options or warrants referred to in paragraph (2) of
this Section, (ii) any dividend or distribution paid exclusively in cash, (iii)
any dividend or distribution referred to in paragraph (1) of this Section and
(iv) mergers or consolidations to which Section 12.11 applies), the Conversion
Rate shall be adjusted so that the same shall equal the rate determined by
dividing the Conversion Rate in effect immediately prior to the close of
business on the date fixed for the determination of stockholders entitled to
receive such distribution by a fraction of which the numerator shall be the
current market price per share (determined as provided in paragraph (8) of this
Section 12.4) of the Common Stock on the date fixed for such determination less
the then fair market value (as determined by the Board of directors, whose
determination shall be conclusive and described in a Board Resolution filed with
the Trustee) of the portion of the assets, shares or evidences of indebtedness
so distributed applicable to one share of Common Stock and the denominator shall
be such current market price per share of the Common Stock, such adjustment to
become effective immediately prior to the opening of business on the day
following the date fixed for the determination of stockholders entitled to
receive such distribution. If after any such date fixed for determination, any
such distribution is not in fact made, the Conversion Rate shall be immediately
readjusted, effective as of the date of the Board of Directors determines not to
make such distribution, to the Conversion Rate that would have been in effect if
such determination date had not been fixed.
(5) In case the Company shall, by dividend or otherwise, distribute to
all holders of its Common Stock cash (excluding any cash that is distributed as
part of a distribution referred to in paragraph (4) of this Section or cash
distributed upon a merger or consolidation to which Section 12.11 applies) in an
aggregate amount that, combined together with (I) the aggregate amount of any
other all-cash distributions to all holders of its Common Stock made exclusively
in cash within the
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365-day period preceding the date of payment of such distribution and in respect
of which no adjustment pursuant to this paragraph (5) has been made and (II) the
aggregate of any cash plus the fair market value (as determined by the Board of
Directors, whose determination shall be conclusive and described in a Board
Resolution) of consideration payable in respect of any tender offer by the
Company or any of its Subsidiaries for all or any portion of the Common Stock
concluded within the 365-day period preceding the date of payment of such
distribution and in respect of which no adjustment pursuant to paragraph (6) of
this Section 12.4 has been made (the "combined cash and tender amount") exceeds
10% of the product of the current market price per share (determined as provided
in paragraph (8) of this Section 12.4) of the Common Stock on the date for the
determination of holders of shares of Common Stock entitled to receive such
distribution times the number of shares of Common Stock outstanding on such date
(the "aggregate current market price"), then, and in each such case, immediately
after the close of business on such date for determination, the Conversion Rate
shall be adjusted so that the same shall equal the rate determined by dividing
the Conversion Rate in effect immediately prior to the close of business on the
date fixed for determination of the stockholders entitled to receive such
distribution by a fraction (i) the numerator of which shall be equal to the
current market price per share (determined as provided in paragraph (8) of this
Section) of the Common Stock on the date fixed for such determination less an
amount equal to the quotient of (x) the excess of such combined cash and tender
amount over such aggregate current market price divided by (y) the number of
shares of Common Stock outstanding on such date for determination and (ii) the
denominator of which shall be equal to the current market price per share
(determined as provided in paragraph (8) of this Section 12.4) of the Common
Stock on such date fixed for determination.
(6) In case a tender offer made by the Company or any Subsidiary for all
or any portion of the Common Stock shall expire and such tender offer (as
amended upon the expiration thereof) shall require the payment to stockholders
(based on the acceptance (up to any maximum specified in the terms of the tender
offer) of Purchased Shares (as defined below)) of an aggregate consideration
having a fair market value (as determined by the Board of Directors, whose
determination shall be conclusive and described in a Board Resolution) that
combined together with (I) the aggregate of the cash plus the fair market value
(as determined by the Board of Directors, whose determination shall be
conclusive and described in a Board Resolution), as of the expiration of such
tender offer, of consideration payable in respect of any other tender offer by
the Company or any Subsidiary for all or any portion of the Common Stock
expiring within the 365-day period preceding the expiration of such tender offer
and in respect of which no adjustment pursuant to this paragraph (6) has been
made and (II) the aggregate amount of any cash distributions to all holders of
the Common Stock within 365-day period preceding the expiration of such tender
offer and in respect of which no adjustment pursuant to paragraph (5) of this
Section has been made (the "combined tender and cash amount") exceeds 10% of the
product of the current market price per share of the Common Stock (determined as
provided in paragraph (8) of this Section 12.4) as of the last time (the
"Expiration Time") tenders could have been made pursuant to such tender offer
(as it may be amended) times the number of shares of Common Stock outstanding
(including any tendered shares) as of the Expiration Time, then, and in each
such case immediately prior to the opening of business on the day after the date
of the Expiration Time, the Conversion Rate shall be adjusted so that the same
shall equal the rate determined by dividing the Conversion Rate immediately
prior to close of business on the date of the
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Expiration Time by a fraction (i) the numerator of which shall be equal to (A)
the product of (I) the current market price per share of the Common Stock
(determined as provided in paragraph (8) of this Section 12.4) on the date of
the Expiration Time multiplied by (II) the number of shares of Common Stock
outstanding (including any tendered shares) on the Expiration Time less (B) the
combined tender and cash amount, and (ii) the denominator of which shall be
equal to the product of (A) the current market price per share of the Common
Stock (determined as provided in paragraph (8) of this Section 12.4) as of the
Expiration Time multiplied by (B) the number of shares of Common Stock
outstanding (including any tendered shares) as of the Expiration Time less the
number of all shares validly tendered and not withdrawn as of the Expiration
Time (the shares deemed so accepted up to any such maximum, being referred to as
the "Purchased Shares").
(7) The reclassification of Common Stock into securities other than
Common Stock (other than any reclassification upon a consolidation or merger to
which Section 12.11 applies) shall be deemed to involve (a) a distribution of
such securities other than Common Stock to all holders of Common Stock (and the
effective date of such reclassification shall be deemed to be "the date fixed
for the determination of stockholders entitled to receive such distribution" and
"the date fixed for such determination" within the meaning of paragraph (4) of
this Section), and (b) a subdivision or combination, as the case may be, of the
number of shares of Common Stock outstanding immediately prior to such
reclassification into the number of shares of Common Stock outstanding
immediately thereafter (and the effective date of such reclassification shall be
deemed to be "the day upon which such subdivision becomes effective" or "the day
upon which such combination becomes effective", as the case may be, and "the day
upon which such subdivision or combination becomes effective" within the meaning
of paragraph (3) of this Section 12.4).
(8) For the purpose of any computation under paragraphs (2), (4), (5)
or (6) of this Section 12.4, the current market price per share of Common Stock
on any date shall be calculated by the Company and be the average of the daily
Closing Prices Per Share for the five consecutive Trading Days selected by the
Company commencing not more than 10 Trading Days before, and ending not later
than the earlier of the day in question and the day before the "ex" date with
respect to the issuance or distribution requiring such computation. For purposes
of this paragraph, the term "'ex' date", when used with respect to any issuance
or distribution, means the first date on which the Common Stock trades regular
way in the applicable securities market or on the applicable securities exchange
without the right to receive such issuance or distribution.
(9) No adjustment in the Conversion Rate shall be required unless such
adjustment (plus any adjustments not previously made by reason of this paragraph
(9)) would require an increase or decrease of at least one percent in such rate;
provided, however, that any adjustments which by reason of this paragraph (9)
are not required to be made shall be carried forward and taken into account in
any subsequent adjustment. All calculations under this Article shall be made to
the nearest cent or to the nearest one-hundredth of a share, as the case may be.
(10) The Company may make such increases in the Conversion Rate, for
the remaining term of the Securities or any shorter term, in addition to those
required by paragraphs (1), (2), (3), (4), (5) and (6) of this Section 12.4, as
it considers to be advisable in order to avoid or diminish any
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income tax to any holders of shares of Common Stock resulting from any dividend
or distribution of stock or issuance of rights or warrants to purchase or
subscribe for stock or from any event treated as such for income tax purposes.
The Company shall have the power to resolve any ambiguity or correct any error
in this paragraph (10) and its actions in so doing shall, absent manifest error,
be final and conclusive.
(11) Notwithstanding the foregoing provisions of this Section, no
adjustment of the Conversion Rate shall be required to be made (a) upon the
issuance of shares of Common Stock pursuant to any present or future plan for
the reinvestment of dividends or (b) because of a tender or exchange offer of
the character described in Rule 13e-4(h)(5) under the Exchange Act or any
successor rule thereto.
(12) To the extent permitted by applicable law, the Company from time
to time may increase the Conversion Rate by any amount for any period of time if
the period is at least twenty (20) days, the increase is irrevocable during such
period, and the Board of Directors shall have made a determination that such
increase would be in the best interests of the Company, which determination
shall be conclusive; provided, however, that no such increase shall be taken
into account for purposes of determining whether the Closing Price Per Share of
the Common Stock equals or exceeds 105% of the Conversion Price in connection
with an event which would otherwise be a Change of Control pursuant to Section
14.4. Whenever the Conversion Rate is increased pursuant to the preceding
sentence, the Company shall give notice of the increase to the Holders in the
manner provided in Section 1.6 at least fifteen (15) days prior to the date the
increased Conversion Rate takes effect, and such notice shall state the
increased Conversion Rate and the period during which it will be in effect.
SECTION 12.5 Notice of Adjustments of Conversion Rate.
----------------------------------------
Whenever the Conversion Rate is adjusted as herein provided:
(1) the Company shall compute the adjusted Conversion Rate in
accordance with Section 12.4 and shall prepare a certificate signed by the Chief
Financial Officer of the Company setting forth the adjusted Conversion Rate and
showing in reasonable detail the facts upon which such adjustment is based, and
such certificate shall promptly be filed with the Trustee and with each
Conversion Agent; and
(2) upon each such adjustment, a notice stating that the Conversion
Rate has been adjusted and setting forth the adjusted Conversion Rate shall be
required, and as soon as practicable after it is required, such notice shall be
provided by the Company to all Holders in accordance with Section 1.6.
Neither the Trustee nor any Conversion Agent shall be under any duty or
responsibility with respect to any such certificate or the information and
calculations contained therein, except to exhibit the same to any Holder of
Securities desiring inspection thereof at its office during normal business
hours, and shall not be deemed to have knowledge of any adjustment in the
Conversion Rate unless and until a
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Responsible Officer of the Trustee shall have received such a certificate. Until
a Responsible Officer of the Trustee receives such a certificate, the Trustee
and each Conversion Agent may assume without inquiry that the last Conversion
Rate of which the Trustee has knowledge of remains in effect.
SECTION 12.6 Notice of Certain Corporate Action.
----------------------------------
In case:
(1) the Company shall declare a dividend (or any other distribution) on
its Common Stock payable (i) otherwise than exclusively in cash or (ii)
exclusively in cash in an amount that would require any adjustment pursuant to
Section 12.4; or
(2) the Company shall authorize the granting to all or substantially
all of the holders of its Common Stock of rights, options or warrants to
subscribe for or purchase any shares of capital stock of any class or of any
other rights; or
(3) of any reclassification of the Common Stock, or of any
consolidation, merger or share exchange to which the Company is a party and for
which approval of any stockholders of the Company is required, or of the
conveyance, sale, transfer or lease of all or substantially all of the assets of
the Company; or
(4) of the voluntary or involuntary dissolution, liquidation or winding
up of the Company; then the Company shall cause to be filed at each office or
agency maintained for the purpose of conversion of Securities pursuant to
Section 10.2, and shall cause to be provided to all Holders in accordance with
Section 1.6, at least 20 days (or 10 days in any case specified in clause (1) or
(2) above) prior to the applicable record or effective date hereinafter
specified, a notice stating (x) the date on which a record is to be taken for
the purpose of such dividend, distribution, rights, options or warrants, or, if
a record is not to be taken, the date as of which the holders of Common Stock of
record to be entitled to such dividend, distribution, rights, options or
warrants are to be determined or (y) the date on which such reclassification,
consolidation, merger, conveyance, transfer, sale, lease, dissolution,
liquidation or winding up is expected to become effective, and the date as of
which it is expected that holders of Common Stock of record shall be entitled to
exchange their shares of Common Stock for securities, cash or other property
deliverable upon such reclassification, consolidation, merger, conveyance,
transfer, sale, lease, dissolution, liquidation or winding up. Neither the
failure to give such notice or the notice referred to in the following paragraph
nor any defect therein shall affect the legality or validity of the proceedings
described in clauses (1) through (4) of this Section 12.6. If at the time the
Trustee shall not be the conversion agent, a copy of such notice shall also
forthwith be filed by the Company with the Trustee.
The Company shall cause to be filed at the Corporate Trust Office and
each office or agency maintained for the purpose of conversion of Securities
pursuant to Section 10.2, and shall cause to be provided to all Holders in
accordance with Section 1.6, notice of any tender offer by the Company or any
Subsidiary for all or any portion of the Common Stock at or about the time that
such notice of tender offer is provided to the public generally.
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SECTION 12.7 Company to Reserve Common Stock.
-------------------------------
The Company shall at all times reserve and keep available, free from
preemptive rights, out of its authorized but unissued Common Stock, for the
purpose of effecting the conversion of Securities, the full number of shares of
Common Stock then issuable upon the conversion of all Outstanding Securities.
SECTION 12.8 Taxes on Conversions.
--------------------
Except as provided in the next sentence, the Company will pay any and all
taxes and duties that may be payable in respect of the issue or delivery of
shares of Common Stock on conversion of Securities pursuant hereto. The Company
shall not, however, be required to pay any tax or duty which may be payable in
respect of any transfer involved in the issue and delivery of shares of Common
Stock in a name other than that of the Holder of the Security or Securities to
be converted, and no such issue or delivery shall be made unless and until the
Person requesting such issue has paid to the Company the amount of any such tax
or duty, or has established to the satisfaction of the Company that such tax or
duty has been paid.
SECTION 12.9 Covenant as to Common Stock.
---------------------------
The Company agrees that all shares of Common Stock which may be delivered
upon conversion of Securities, upon such delivery, will have been duly
authorized and validly issued and will be fully paid and nonassessable and,
except as provided in Section 12.8, the Company will pay all taxes, liens and
charges with respect to the issue thereof.
SECTION 12.10 Cancellation of Converted Securities.
------------------------------------
All Securities delivered for conversion shall be delivered to the Trustee
or its agent to be canceled by or at the direction of the Trustee, which shall
dispose of the same as provided in Section 3.9.
SECTION 12.11 Provision in Case of Consolidation, Merger or Sale of Assets.
------------------------------------------------------------
In case of any consolidation or merger of the Company with or into any
other Person, any merger of another Person with or into the Company (other than
a merger which does not result in any reclassification, conversion, exchange or
cancellation of outstanding shares of Common Stock of the Company) or any
conveyance, sale, transfer or lease of all or substantially all of the assets of
the Company, the Person formed by such consolidation or resulting from such
merger or which acquires such assets, as the case may be, shall execute and
deliver to the Trustee a supplemental indenture providing that the Holder of
each Security then Outstanding shall have the right thereafter, during the
period such Security shall be convertible as specified in Section 12.1, to
convert such Security only into the kind and amount of securities, cash and
other property receivable upon such consolidation, merger, conveyance, sale,
transfer or lease by a holder of the number of shares of Common Stock of the
Company into which such Security might have been converted immediately prior to
such consolidation, merger, conveyance, sale, transfer or lease, assuming such
holder of
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Common Stock of the Company (i) is not (A) a Person with which the
Company consolidated or merged with or into or which merged into or with the
Company or to which such conveyance, sale, transfer or lease was made, as the
case may be (a "Constituent Person"), or (B) an Affiliate of a Constituent
Person and (ii) failed to exercise his rights of election, if any, as to the
kind or amount of securities, cash and other property receivable upon such
consolidation, merger, conveyance, sale, transfer or lease (provided that if the
kind or amount of securities, cash and other property receivable upon such
consolidation, merger, conveyance, sale, transfer, or lease is not the same for
each share of Common Stock of the Company held immediately prior to such
consolidation, merger, conveyance, sale, transfer or lease by others than a
Constituent Person or an Affiliate thereof and in respect of which such rights
of election shall not have been exercised ("Non-electing Share"), then for the
purpose of this Section 12.11 the kind and amount of securities, cash and other
property receivable upon such consolidation, merger, conveyance, sale, transfer
or lease by the holders of each Non-electing Share shall be deemed to be the
kind and amount so receivable per share by a plurality of the Non-electing
Shares). Such supplemental indenture shall provide for adjustments which, for
events subsequent to the effective date of such supplemental indenture, shall be
as nearly equivalent as may be practicable to the adjustments provided for in
this Article. The above provisions of this Section 12.11 shall similarly apply
to successive consolidations, mergers, conveyances, sales, transfers or leases.
Notice of the execution of such a supplemental indenture shall be given by the
Company to the Holder of each Security as provided in Section 1.6 promptly upon
such execution.
Neither the Trustee nor any Conversion Agent shall be under any
responsibility to determine the correctness of any provisions contained in any
such supplemental indenture relating either to the kind or amount of shares of
stock or other securities or property or cash receivable by Holders of
Securities upon the conversion of their Securities after any such consolidation,
merger, conveyance, transfer, sale or lease or to any such adjustment, but may
accept as conclusive evidence of the correctness of any such provisions, and
shall be protected in relying upon, an Opinion of Counsel with respect thereto,
which the Company shall cause to be furnished to the Trustee upon request.
SECTION 12.12 Rights Issued in Respect of Common Stock.
----------------------------------------
Rights or warrants distributed by the Company to all holders of Common
Stock entitling the holders thereof to subscribe for or purchase shares of the
Company's capital stock (either initially or under certain circumstances), which
rights or warrants, until the occurrence of a specified event or events
("Trigger Event"):
(i) are deemed to be transferred with such shares of Common
Stock,
(ii) are not exercisable, and
(iii) are also issued in respect of future issuances of Common
Stock
shall not be deemed distributed for purposes of Section 12.4(2) until the
occurrence of the earliest Trigger Event. In addition, in the event of any
distribution of rights or warrants, or any Trigger Event with respect thereto,
that shall have resulted in an adjustment to the Conversion Rate under
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Section 12.4(2), (1) in the case of any such rights or warrants which shall all
have been redeemed or repurchased without exercise by any holders thereof, the
Conversion Rate shall be readjusted upon such final redemption or repurchase to
give effect to such distribution or Trigger Event, as the case may be, as though
it were a cash distribution, equal to the per share redemption or repurchase
price received by a holder of Common Stock with respect to such rights or
warrants (assuming such holder had retained such rights or warrants), made to
all holders of Common Stock as of the date of such redemption or repurchase, and
(2) in the case of any such rights or warrants all of which shall have expired
without exercise by any holder thereof, the Conversion Price shall be readjusted
as if such issuance had not occurred.
SECTION 12.13 Responsibility of Trustee for Conversion Provisions.
---------------------------------------------------
The Trustee, subject to the provisions of Section 6.1, and any Conversion
Agent shall not at any time be under any duty or responsibility to any Holder of
Securities to determine whether any facts exist which may require any adjustment
of the Conversion Rate, or with respect to the nature or extent of any such
adjustment when made, or with respect to the method employed, herein or in any
supplemental indenture provided to be employed, in making the same, or whether a
supplemental indenture need be entered into. Neither the Trustee, subject to the
provisions of Section 6.1, nor any Conversion Agent shall be accountable with
respect to the validity or value (or the kind or amount) of any Common Stock, or
of any other securities or property or cash, which may at any time be issued or
delivered upon the conversion of any Security; and it or they do not make any
representation with respect thereto. Neither the Trustee, subject to the
provisions of Section 6.1, nor any Conversion Agent shall be responsible for any
failure of the Company to make or calculate any cash payment or to issue,
transfer or deliver any shares of Common Stock or share certificates or other
securities or property or cash upon the surrender of any Security for the
purpose of conversion; and the Trustee, subject to the provisions of Section
6.1, and any Conversion Agent shall not be responsible for any failure of the
Company to comply with any of the covenants of the Company contained in this
Article.
ARTICLE XIII
SUBORDINATION OF SECURITIES
SECTION 13.1 Securities Subordinate to Senior Debt.
-------------------------------------
The Company covenants and agrees, and each Holder of a Security, by its
acceptance thereof, likewise covenants and agrees, that, to the extent and in
the manner hereinafter set forth in this Article (subject to the provisions of
Article IV), the indebtedness represented by the Securities and the payment of
the principal of, or premium, if any, or interest (including Liquidated Damages,
if any) on, each and all of the Securities (including, but not limited to, the
Redemption Price with respect to the Securities to be called for redemption in
accordance with Article XI or the Repurchase Price with respect to Securities
submitted for repurchase in accordance with Article XIV), are hereby expressly
made subordinate and subject in right of payment to the prior payment in full of
all Senior Debt.
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SECTION 13.2 No Payment in Certain Circumstances, Payment over of Proceeds
-------------------------------------------------------------
upon Dissolution, Etc.
- ---------------------
No payment shall be made with respect to the principal of, or premium, if
any, or interest (including Liquidated Damages, if any) on the Securities
(including, but not limited to, the Redemption Price with respect to the
Securities to be called for redemption in accordance with Article XI or the
Repurchase Price with respect to Securities submitted for repurchase in
accordance with Article XIV), except payments and distributions made by the
Trustee as permitted by Section 13.9, if:
(i) a default in the payment of principal, premium, if any, or
interest (including a default under any repurchase or redemption obligation) or
other amounts with respect to any Senior Debt occurs and is continuing (or, in
the case of Senior Debt for which there is a period of grace, in the event of
such a default that continues beyond the period of grace, if any, specified in
the instrument or lease evidencing such Senior Debt) unless and until such
default shall have been cured or waived or shall have ceased to exist; or
(ii) any other event of default occurs and is continuing with respect
to Designated Senior Debt that then permits holders of such Designated Senior
Debt to accelerate its maturity and the Trustee receives a notice of the default
(a "Payment Blockage Notice") from a Representative or holder of Designated
Senior Debt or the Company.
If the Trustee receives any Payment Blockage Notice pursuant to clause (ii)
above, no subsequent Payment Blockage Notice shall be effective for purposes of
this Section unless and until (A) at least 365 days shall have elapsed since the
initial effectiveness of the immediately prior Payment Blockage Notice, and (B)
all scheduled payments of principal, premium, if any, and interest on the
Securities that have come due have been paid in full in cash. No nonpayment
default that existed or was continuing on the date of delivery of any Payment
Blockage Notice to the Trustee shall be, or be made, the basis for a subsequent
Payment Blockage Notice.
The Company may and shall resume payments on and distributions in respect
of the Securities upon the earlier of:
(1) in the case of a default referred to in clause (i) above, the date
upon which the default is cured or waived or ceases to exist, or
(2) in the case of a default referred to in clause (ii) above, the date
upon which the default is cured or waived or ceases to exist or 179 days pass
after notice is received if the maturity of such Designated Senior Debt has not
been accelerated, unless this Article XIII otherwise prohibits the payment or
distribution at the time of such payment or distribution.
In the event of (a) any insolvency or bankruptcy case or proceeding, or any
receivership, liquidation, reorganization or other similar case or proceeding in
connection therewith, relative to the Company or to its creditors, as such, or
to its assets, or (b) any liquidation, dissolution or other
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winding up of the Company, whether voluntary or involuntary and whether or not
involving insolvency or bankruptcy, or (c) any assignment for the benefit of
creditors or any other marshaling of assets and liabilities of the Company, then
and in any such event the holders of Senior Debt shall be entitled to receive
payment in full of all amounts due or to become due on or in respect of all
Senior Debt in cash before the Holders of the Securities are entitled to receive
any payment on account of principal of (or premium, if any) or interest
(including any Liquidated Damages) on the Securities or on account of the
purchase, redemption or other acquisition of Securities, and to that end the
holders of Senior Debt shall be entitled to receive, for application to the
payment thereof, any payment or distribution of any kind or character, whether
in cash, property or securities, which may be payable or deliverable in respect
of the Securities in any such case, proceeding, dissolution, liquidation or
other winding up or event.
In the event that, notwithstanding the foregoing provisions of this
Section, the Trustee or the Holder of any Security shall have received any
payment or distribution of assets of the Company of any kind or character,
whether in cash, securities or other property, before all Senior Debt is paid in
full, and if such fact shall, at or prior to the time of such payment or
distribution, have been made known to the Trustee or, as the case may be, such
Holder, then and in such event such payment or distribution shall be paid over
or delivered forthwith to the trustee in bankruptcy, receiver, liquidating
trustee, custodian, assignee, agent or other Person making payment or
distribution of assets of the Company for application to the payment of all
Senior Debt remaining unpaid, to the extent necessary to pay all Senior Debt in
full, after giving effect to any concurrent payment or distribution to or for
the holders of Senior Debt.
For purposes of this Article only, the words "cash, securities or other
property" shall not be deemed to include shares of capital stock of the Company
as reorganized or readjusted, or securities of the Company or any other
corporation provided for by a plan of reorganization or readjustment, which
shares of stock or securities are subordinated in right of payment to all then
outstanding Senior Debt to substantially the same extent as, or to a greater
extent than, the Securities are so subordinated as provided in this Article. The
consolidation of the Company with, or the merger of the Company into, another
Person or the liquidation or dissolution of the Company following the conveyance
or transfer of its properties and assets substantially as an entirety to another
Person upon the terms and conditions set forth in Article VII shall not be
deemed a dissolution, winding up, liquidation, reorganization, assignment for
the benefit of creditors or marshaling of assets and liabilities of the Company
for the purposes of this Section if the Person formed by such consolidation or
into which the Company is merged or which acquires by conveyance or transfer
such properties and assets substantially as an entirety, as the case may be,
shall, as a part of such consolidation, merger, conveyance or transfer, comply
with the conditions set forth in Article VII.
In the event that, notwithstanding the foregoing, the Company shall make
any payment to the Trustee or the Holder of any Security prohibited by the
foregoing provisions of this Section, and if such fact shall, at or prior to the
time of such payment, have been made known to the Trustee or, as the case may
be, such Holder, then and in such event such payment shall be paid over and
delivered forthwith to the Company, in the case of the Trustee, or the Trustee,
in the case of such Holder.
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SECTION 13.3 Prior Payment to Senior Debt upon Acceleration of Securities.
------------------------------------------------------------
In the event of the acceleration of the Securities because of an Event of
Default, no payment or distribution shall be made to the Trustee or any holder
of Securities in respect of the principal of, premium, if any, or interest
(including Liquidated Damages, if any) on the Securities (including, but not
limited to, the Redemption Price with respect to the Securities called for
redemption in accordance with Article XI or the Repurchase Price with respect to
the Securities submitted for repurchase in accordance with Article XIV), except
payments and distributions made by the Trustee as permitted by Section 13.9,
until all Senior Debt has been paid in full in cash or other payment
satisfactory to the holders of Senior Debt or such acceleration is rescinded in
accordance with the terms of this Indenture. If payment of the Securities is
accelerated because of an Event of Default, the Company shall promptly notify
holders of Senior Debt of the acceleration.
SECTION 13.4 Payment Permitted If No Default.
-------------------------------
Nothing contained in this Article or elsewhere in this Indenture or in any
of the Securities shall prevent (a) the Company, at any time except during the
pendency of any case, proceeding, dissolution, liquidation or other winding up,
assignment for the benefit of creditors or other marshaling of assets and
liabilities of the Company referred to in Section 13.2, or during the
circumstances referred to in the first paragraph of Section 13.2, or under the
conditions described in Section 13.3, from making payments at any time of
principal of (and premium, if any) or interest on the Securities, or (b) the
application by the Trustee of any money deposited with it hereunder to the
payment of or on account of the principal of (and premium, if any) or interest
on the Securities or the retention of such payment by the Holders, if, at the
time of such application by the Trustee, it did not have knowledge that such
payment would have been prohibited by the provisions of this Article.
SECTION 13.5 Subrogation to Rights of Holders Of Senior Debt.
-----------------------------------------------
Subject to the payment in full of all Senior Debt, the Holders of the
Securities shall be subrogated to the extent of the payments or distributions
made to the holders of such Senior Debt pursuant to the provisions of this
Article to the rights of the holders of such Senior Debt to receive payments and
distributions of cash, property and securities applicable to the Senior Debt
until the principal of (and premium, if any) and interest on the Securities
shall be paid in full. For purposes of such subrogation, no payments or
distributions to the holders of the Senior Debt of any cash, property or
securities to which the Holders of the Securities or the Trustee would be
entitled except for the provisions of this Article, and no payments over
pursuant to the provisions of this Article to the holders of Senior Debt by
Holders of the Securities or the Trustee, shall, as among the Company, its
creditors other than holders of Senior Debt and the Holders of the Securities,
be deemed to be a payment or distribution by the Company to or on account of the
Senior Debt.
SECTION 13.6 Provisions Solely to Define Relative Rights.
-------------------------------------------
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The provisions of this Article are and are intended solely for the purpose
of defining the relative rights of the Holders of the Securities on the one hand
and the holders of Senior Debt on the other hand. Nothing contained in this
Article or elsewhere in this Indenture or in the Securities is intended to or
shall (i) impair, as among the Company, its creditors other than holders of
Senior Debt and the Holders of the Securities, the obligation of the Company,
which is absolute and unconditional, to pay to the Holders of the Securities the
principal of (and premium, if any) and interest (including Liquidated Damages,
if any) on the Securities as and when the same shall become due and payable in
accordance with their terms; or (ii) affect the relative rights against the
Company of the Holders of the Securities and creditors of the Company other than
the holders of Senior Debt; or (iii) prevent the Trustee or the Holder of any
Security from exercising all remedies otherwise permitted by applicable law upon
default under this Indenture, subject to the rights, if any, under this Article
of the holders of Senior Debt to receive cash, property and securities otherwise
payable or deliverable to the Trustee or such Holder.
SECTION 13.7 Trustee to Effectuate Subordination.
-----------------------------------
Each Holder of a Security by its acceptance thereof authorizes and directs
the Trustee on its behalf to take such action as may be necessary or appropriate
to effectuate the subordination provided in this Article and appoints the
Trustee its attorney-in-fact for any and all such purposes.
SECTION 13.8 No Waiver of Subordination Provisions.
-------------------------------------
No right of any present or future holder of any Senior Debt to enforce
subordination as herein provided shall at any time in any way be prejudiced or
impaired by any act or failure to act on the part of the Company, or by any
non-compliance by the Company with the terms, provisions and covenants of this
Indenture, regardless of any knowledge thereof any such holder may have or be
otherwise charged with.
Without in any way limiting the generality of the foregoing paragraph, the
holders of Senior Debt may, at any time and from time to time, without the
consent of or notice to the Trustee or the Holders of the Securities, without
incurring responsibility to the Holders of the Securities and without impairing
or releasing the subordination provided in this Article or the obligations
hereunder of the Holders of the Securities to the holders of Senior Debt, do any
one or more of the following: (i) change the manner, place or terms of payment
or extend the time of payment of, or renew or alter, Senior Debt, or otherwise
amend or supplement in any manner Senior Debt or any instrument evidencing the
same or any agreement under which Senior Debt is outstanding; (ii) sell,
exchange, release or otherwise deal with any property pledged, mortgaged or
otherwise securing Senior Debt; (iii) release any Person liable in any manner
for the collection of Senior Debt; and (iv) exercise or refrain from exercising
any rights against the Company and any other Person.
SECTION 13.9 Notice to Trustee.
-----------------
The Company shall give prompt written notice to the Trustee of any fact
known to the Company which would prohibit the making of any payment to or by the
Trustee in respect of the Securities. Notwithstanding the provisions of this
Article or any other provision of this Indenture, the
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Trustee shall not be charged with knowledge of the existence of any facts which
would prohibit the making of any payment to or by the Trustee in respect of the
Securities, unless and until a Responsible Officer of the Trustee shall have
received written notice thereof from the Company or a Representative or a holder
of Senior Debt (including, without limitation, a holder of Designated Senior
Debt) and, prior to the receipt of any such written notice, the Trustee, subject
to the provisions of Section 6.1, shall be entitled in all respects to assume
that no such facts exist; provided, however, that if the Trustee shall not have
received the notice provided for in this Section 13.9 at least two Business Days
prior to the date upon which by the terms hereof any money may become payable
for any purpose (including, without limitation, the payment of the principal of
(and premium, if any) or interest (including Liquidated Damages, if any) on any
Security), then, anything herein contained to the contrary notwithstanding, the
Trustee shall have full power and authority to receive such money and to apply
the same to the purpose for which such money was received and shall not be
affected by any notice to the contrary which may be received by it within one
Business Day prior to such date.
Notwithstanding anything in this Article XIII to the contrary, nothing
shall prevent any payment by the Trustee to the Holders of monies deposited with
it pursuant to Section 4.1, and any such payment shall not be subject to the
provisions of Section 13.2 or 13.3.
Subject to the provisions of Section 6.1, the Trustee shall be entitled to
rely on the delivery to it of a written notice by a Person representing himself
to be a Representative or a holder of Senior Debt (including, without
limitation, a holder of Designated Senior Debt) to establish that such notice
has been given by a Representative or a holder of Senior Debt (including,
without limitation, a holder of Designated Senior Debt). In the event that the
Trustee determines in good faith that further evidence is required with respect
to the right of any Person as a holder of Senior Debt to participate in any
payment or distribution pursuant to this Article, the Trustee may request such
Person to furnish evidence to the reasonable satisfaction of the Trustee as to
the amount of Senior Debt held by such Person, the extent to which such Person
is entitled to participate in such payment or distribution and any other facts
pertinent to the rights of such Person under this Article, and if such evidence
is not furnished, the Trustee may defer any payment to such Person pending
judicial determination as to the right of such Person to receive such payment.
SECTION 13.10 Reliance on Judicial Order or Certificate of Liquidation Agent.
--------------------------------------------------------------
Upon any payment or distribution of assets of the Company referred to in
this Article, the Trustee, subject to the provisions of Section 6.1, and the
Holders of the Securities shall be entitled to rely upon any order or decree
entered by any court of competent jurisdiction in which such insolvency,
bankruptcy, receivership, liquidation, reorganization, dissolution, winding up
or similar case or proceeding is pending, or a certificate of the trustee in
bankruptcy, receiver, liquidating trustee, custodian, assignee for the benefit
of creditors, agent or other Person making such payment or distribution,
delivered to the Trustee or to the Holders of Securities, for the purpose of
ascertaining the Persons entitled to participate in such payment or
distribution, the holders of the Senior Debt and other indebtedness of the
Company, the amount thereof or payable thereon, the amount or amounts paid or
distributed thereon and all other facts pertinent thereto or to this Article.
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SECTION 13.11 Trustee Not Fiduciary for holders of Senior Debt.
------------------------------------------------
The Trustee shall not be deemed to owe any fiduciary duty to the holders of
Senior Debt and shall not be liable to any such holders if it shall in good
faith mistakenly pay over or distribute to Holders of Securities or to the
Company or to any other Person cash, property or securities to which any holders
of Senior Debt shall be entitled by virtue of this Article or otherwise.
SECTION 13.12 Reliance by Holders of Senior Debt on Subordination Provisions.
--------------------------------------------------------------
Each Holder by accepting a Security acknowledges and agrees that the
foregoing subordination provisions are, and are intended to be, an inducement
and a consideration to each holder of any Senior Debt, whether such Senior Debt
was created or acquired before or after the issuance of the Securities, to
acquire and continue to hold, or to continue to hold, such Senior Debt and such
holder of Senior Debt shall be deemed conclusively to have relied on such
subordination provisions in acquiring and continuing to hold, or in continuing
to hold, such Senior Debt, and no amendment or modification of the provisions
contained herein shall diminish the rights of such holders of Senior Debt unless
such holders shall have agreed in writing thereto.
SECTION 13.13 Rights of Trustee as Holder of Senior Debt; Preservations of
------------------------------------------------------------
Trustee's Rights.
- ----------------
The Trustee in its individual capacity shall be entitled to all the rights
set forth in this Article with respect to any Senior Debt which may at any time
be held by it, to the same extent as any other holder of Senior Debt, and
nothing in this Indenture shall deprive the Trustee of any of its rights as such
holder.
Nothing in this Article shall apply to claims of, or payments to, the
Trustee under or pursuant to Section 6.7.
SECTION 13.14 Article Applicable to Paying Agents.
-----------------------------------
In case at any time any Paying Agent other than the Trustee shall have been
appointed by the Company and be then acting hereunder, the term "Trustee" as
used in this Article shall in such case (unless the context otherwise requires)
be construed as extending to and including such Paying Agent within its meaning
as fully for all intents and purposes as if such Paying Agent were named in this
Article in addition to or in place of the Trustee; provided, however, that
Section 13.13 shall not apply to the Company or any Affiliate of the Company if
it or such Affiliate acts as Paying Agent.
SECTION 13.15 Certain Conversions and Repurchases Deemed Payment.
--------------------------------------------------
For the purposes of this Article only, (i) the issuance and delivery of
junior securities upon conversion of Securities in accordance with Article XII
or upon the repurchase of Securities in
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accordance with Article XIV shall not be deemed to constitute a payment or
distribution on account of the principal of or premium or interest (including
Liquidated Damages, if any) on Securities or on account of the purchase or other
acquisition of Securities, and (ii) the payment, issuance or delivery of cash
(except in satisfaction of fractional shares pursuant to Section 12.3 or
14.3(7)), property or securities (other than junior securities) upon conversion
of a Security shall be deemed to constitute payment on account of the principal
of such Security. For the purposes of this Section, the term "junior securities"
means (a) shares of any stock of any class of the Company and securities into
which the Securities are convertible pursuant to Article XII and (b) securities
of the Company which are subordinated in right of payment to all Senior Debt
which may be outstanding at the time of issuance or delivery of such securities
to substantially the same extent as, or to a greater extent than, the Securities
are so subordinated as provided in this Article. Nothing contained in this
Article or elsewhere in this Indenture or in the Securities is intended to or
shall impair, as among the Company, its creditors other than holders of Senior
Debt and the Holders of the Securities, the right, which is absolute and
unconditional, of the Holder of any Security to convert such Security in
accordance with Article XII or to exchange such Security for Common Stock in
accordance with Article XIV if the Company elects to satisfy the obligations
under Article XIV by the delivery of Common Stock.
ARTICLE XIV
REPURCHASE OF SECURITIES AT THE OPTION OF THE
HOLDER UPON A CHANGE IN CONTROL
SECTION 14.1 Right to Require Repurchase.
---------------------------
In the event that a Change in Control (as hereinafter defined) shall occur,
then each Holder shall have the right, at the Holder's option, but subject to
the provisions of Section 14.2, to require the Company to repurchase, and upon
the exercise of such right the Company shall repurchase, all of such Holder's
Securities not theretofore called for redemption, or any portion of the
principal amount thereof that is equal to U.S. $1,000 or any integral multiple
of U.S. $1,000 in excess thereof (provided that no single Security may be
repurchased in part unless the portion of the principal amount of such Security
to be Outstanding after such repurchase is equal to U.S. $1,000 or integral
multiples of U.S. $1,000 in excess thereof), on the date (the "Repurchase Date")
that is 45 days after the date of the Company Notice (as defined in Section
14.3) at a purchase price equal to 100% of the principal amount of the
Securities to be repurchased plus interest accrued to the Repurchase Date (the
"Repurchase Price"); provided, however, that installments of interest on
Securities whose Stated Maturity is on or prior to the Repurchase Date shall be
payable to the Holders of such Securities, or one or more Predecessor
Securities, registered as such on the relevant Record Date according to their
terms and the provisions of Section 3.7. Such right to require the repurchase of
the Securities shall not continue after a discharge of the Company from its
obligations with respect to the Securities in accordance with Article IV, unless
a Change in Control shall have occurred prior to such discharge. At the option
of the Company, the Repurchase Price may be paid in cash or, subject to the
fulfillment by the Company of the conditions set forth Section 14.2, by delivery
of shares of Common Stock having a fair market value equal to the Repurchase
Price. Whenever in this Indenture (including Sections 2.2, 3.1, 5.1(1) and 5.8)
there is a reference, in any context, to the principal of any Security as of any
time, such reference shall be deemed to include reference to the
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Repurchase Price payable in respect of such Security to the extent that such
Repurchase Price is, was or would be so payable at such time, and express
mention of the Repurchase Price in any provision of this Indenture shall not be
construed as excluding the Repurchase Price in those provisions of this
Indenture when such express mention is not made; provided, however, that for the
purposes of Article XIII such reference shall be deemed to include reference to
the Repurchase Price only to the extent the Repurchase Price is payable in cash.
SECTION 14.2 Conditions to the Company's Election to Pay the Repurchase Price
----------------------------------------------------------------
in Common Stock.
- ---------------
The Company may elect to pay the Repurchase Price by delivery of shares of
Common Stock pursuant to Section 14.1 if and only if the following conditions
shall have been satisfied:
(1) The shares of Common Stock deliverable in payment of the Repurchase
Price shall have a fair market value as of the Repurchase Date of not less than
the Repurchase Price. For purposes of Section 14.1 and this Section 14.2, the
fair market value of shares of Common Stock shall be determined by the Company
and shall be equal to 95% of the average of the Closing Prices Per Share of the
Common Stock for the five consecutive Trading Days immediately preceding and
including the third Trading Day prior to the Repurchase Date;
(2) The Repurchase Price shall be paid only in cash in the event any
shares of Common Stock to be issued upon repurchase of Securities hereunder (i)
require registration under any federal securities law before such shares may be
freely transferable without being subject to any transfer restrictions under the
Securities Act upon repurchase and if such registration is not completed or does
not become effective prior to the Repurchase Date, and/or (ii) require
registration with or approval of any governmental authority under any state law
or any other federal law before such shares may be validly issued or delivered
upon repurchase and if such registration is not completed or does not become
effective or such approval is not obtained prior to the Repurchase Date;
(3) Payment of the Repurchase Price may not be made in Common Stock unless
such stock is, or shall have been, approved for quotation on the Nasdaq National
Market or listed on a national securities exchange, in either case, prior to the
Repurchase Date; and
(4) All shares of Common Stock which may be issued upon repurchase of
Securities will be issued out of the Company's authorized but unissued Common
Stock and, will upon issue, be duly and validly issued and fully paid and non-
assessable and free of any preemptive or similar rights.
If all of the conditions set forth in this Section 14.2 are not satisfied
in accordance with the terms thereof, the Repurchase Price shall be paid by the
Company only in cash.
SECTION 14.3 Notices; Method of Exercising Repurchase Right, Etc.
---------------------------------------------------
(1) Unless the Company shall have theretofore called for redemption all
of the Outstanding Securities, on or before the 30th day after the occurrence of
a Change in Control, the
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Company or, at the request and expense of the Company on or before the 15th day
after such occurrence, the Trustee, shall give to all Holders of Securities, in
the manner provided in Section 1.6, notice (the "Company Notice") of the
occurrence of the Change of Control and of the repurchase right set forth herein
arising as a result thereof. The Company shall also deliver a copy of such
notice of a repurchase right to the Trustee.
Each notice of a repurchase right shall state:
(i) the Repurchase Date,
(ii) the date by which the repurchase right must be exercised,
(iii) the Repurchase Price, and whether the Repurchase Price
shall be paid by the Company in cash or by delivery of shares of Common Stock,
(iv) a description of the procedure which a Holder must follow
to exercise a repurchase right, and the place or places where such Securities
are to be surrendered for payment of the Repurchase Price and accrued interest
(including Liquidated Damages, if any), if any to the Repurchase Date,
(v) that on the Repurchase Date the Repurchase Price, and
accrued interest (including liquidated Damages, if any), if any to the
Repurchase Date, will become due and payable upon each such Security designated
by the Holder to be repurchased, and that interest thereon shall cease to accrue
on and after said date,
(vi) the Conversion Rate then in effect, the date on which the
right to convert the principal amount of the Securities to be repurchased will
terminate and the place or places where such Securities may be surrendered for
conversion, and
(vii) the place or places that the Security certificate with the
Election of Holder to Require Repurchase as specified in Section 2.2 shall be
delivered, and if the Security is a Restricted Securities Certificate the place
or places that the Surrender Certificate required by Section 14.3(9) shall be
delivered.
No failure of the Company to give the foregoing notices or defect therein
shall limit any Holder' s right to exercise a repurchase right or affect the
validity of the proceedings for the repurchase of Securities.
If any of the foregoing provisions or other provisions of this Article XIV
are inconsistent with applicable law, such law shall govern.
(2) To exercise a repurchase right, a Holder shall deliver to the Trustee
on or before the 30th day after the date of the Company Notice (i) irrevocable
written notice of the Holder's exercise of such right, which notice shall set
forth the name of the Holder, the principal amount of the Securities to be
repurchased (and, if any Security is to repurchased in part, the serial number
thereof,
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the portion of the principal amount thereof to be repurchased and the name of
the Person in which the portion thereof to remain Outstanding after such
repurchase is to be registered) and a statement that an election to exercise the
repurchase right is being made thereby, and, in the event that the Repurchase
Price shall be paid in shares of Common Stock, the name or names (with
addresses) in which the certificate or certificates for shares of Common Stock
shall be issued, and (ii) the Securities with respect to which the repurchase
right is being exercised. Such written notice shall be irrevocable, except that
the right of the Holder to convert the Securities with respect to which the
repurchase right is being exercised shall continue until the close of business
on the Repurchase Date.
(3) In the event a repurchase right shall be exercised in accordance
with the terms hereof, the Company shall pay or cause to be paid to the Trustee
the Repurchase Price in cash or shares of Common Stock, as provided above, for
payment to the Holder on the Repurchase Date or, if shares of Common Stock are
to be paid, as promptly after the Repurchase Date as practicable, together with
accrued and unpaid interest to the Repurchase Date payable with respect to the
Securities as to which the repurchase right has been exercised; provided,
however, that installments of interest that mature on or prior to the Repurchase
Date shall be payable in cash to the Holders of such Securities, or one or more
Predecessor Securities, registered as such at the close of business on the
relevant Regular Record Date.
(4) If any Security (or portion thereof) surrendered for repurchase shall
not be so paid on the Repurchase Date, the principal amount of such Security (or
portion thereof, as the case may be) shall, until paid, bear interest to the
extent permitted by applicable law from the Repurchase Date at the rate of 5%
per annum, and each Security shall remain convertible into Common Stock until
the principal of such Security (or portion thereof, as the case may be) shall
have been paid or duly provided for.
(5) Any Security which is to be repurchased only in part shall be
surrendered to the Trustee (with, if the Company or the Trustee so requires, due
endorsement by, or a written instrument of transfer in form satisfactory to the
Company and the Trustee duly executed by, the Holder thereof or his attorney
duly authorized in writing), and the Company shall execute, and the Trustee
shall authenticate and make available for delivery to the Holder of such
Security without service charge, a new Security or Securities, containing
identical terms and conditions, each in an authorized denomination in aggregate
principal amount equal to and in exchange for the unrepurchased portion of the
principal of the Security so surrendered.
(6) Any issuance of shares of Common Stock in respect of the Repurchase
Price shall be deemed to have been effected immediately prior to the close of
business on the Repurchase Date and the Person or Persons in whose name or names
any certificate or certificates for shares of Common Stock shall be issuable
upon such repurchase shall be deemed to have become on the Repurchase Date the
holder or holders of record of the shares represented thereby; provided,
however, that any surrender for repurchase on a date when the stock transfer
books of the Company shall be closed shall constitute the Person or Persons in
whose name or names the certificate or certificates for such shares are to be
issued as the record holder or holders thereof for all purposes at the opening
of business on the next succeeding day on which such stock transfer books are
open. No payment or
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adjustment shall be made for dividends or distributions on any Common Stock
issued upon repurchase of any Security declared prior to the Repurchase Date.
(7) No fractions of shares shall be issued upon repurchase of Securities.
If more than one Security shall be repurchased from the same Holder and the
Repurchase Price shall be payable in shares of Common Stock, the number of full
shares which shall be issuable upon such repurchase shall be computed on the
basis of the aggregate principal amount of the Securities so repurchased.
Instead of any fractional share of Common Stock which would otherwise be
issuable on the repurchase of any Security or Securities, the Company will
deliver to the applicable Holder its check for the current market value of such
fractional share. The current market value of a fraction of a share is
determined by multiplying the current market price of a full share by the
fraction, and rounding the result to the nearest cent. For purposes of this
Section, the current market price of a share of Common Stock is the Closing
Price Per Share of the Common Stock on the Trading Day immediately preceding the
Repurchase Date.
(8) Any issuance and delivery of certificates for shares of Common Stock
on repurchase of Securities shall be made without charge to the Holder of
Securities being repurchased for such certificates or for any tax or duty in
respect of the issuance or delivery of such certificates or the securities
represented thereby; provided, however, that the Company shall not be required
to pay any tax or duty which may be payable in respect of (i) income of the
Holder or (ii) any transfer involved in the issuance or delivery of certificates
for shares of Common Stock in a name other than that of the Holder of the
Securities being repurchased, and no such issuance or delivery shall be made
unless and until the Person requesting such issuance or delivery has paid to the
Company the amount of any such tax or duty or has established, to the
satisfaction of the Company, that such tax or duty has been paid.
(9) If shares of Common Stock to be delivered upon repurchase of a
Security are to be registered in a name other than that of the beneficial owner
of such Security, then such Holder must deliver to the Trustee a Surrender
Certificate, dated the date of surrender of such Restricted Security and signed
by such beneficial owner, as to compliance with the restrictions on transfer
applicable to such Restricted Security. Neither the Trustee nor any Registrar or
Transfer Agent or other agents shall be required to register in a name other
than that of the beneficial owner shares of Common Stock issued upon repurchase
of any such Restricted Security not so accompanied by a properly completed
Surrender Certificate.
(10) All Securities delivered for repurchase shall be delivered to the
Trustee to be canceled at the direction of the Trustee, which shall dispose of
the same as provided in Section 3.9.
SECTION 14.4 Certian Definitions.
-------------------
For purposes of this Article XIV,
(1) the term "beneficial owner" shall be determined in accordance with
Rule 13d 3, as in effect on the date of the original execution of this
Indenture, promulgated by the Commission pursuant to the Exchange Act;
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(2) a "Change in Control" shall be deemed to have occurred at the time,
after the original issuance of the Securities, of:
(i) the acquisition by any Person (including any syndicate or group
deemed to be a "person" under Section 13(d)(3) of the Exchange Act) of
beneficial ownership, directly or indirectly, through a purchase, merger or
other acquisition transaction or series of transactions, of shares of capital
stock of the Company entitling such person to exercise 50% or more of the total
voting power of all shares of capital stock of the Company entitled to vote
generally in the elections of directors, other than any such acquisition by the
Company, any subsidiary of the Company or any employee benefit plan of the
Company; or
(ii) any consolidation of the Company with, or merger of the Company
into, any other Person, any merger of another Person into the Company, or any
conveyance, sale, transfer or lease of all or substantially all of the assets of
the Company to another Person (other than (a) any such transaction (x) which
does not result in any reclassification, conversion, exchange or cancellation of
outstanding shares of capital stock of the Company and (y) pursuant to which the
holders of the 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 the
jurisdiction of incorporation of the Company and results in a reclassification,
conversion or exchange of outstanding shares of Common Stock into solely shares
of common stock); provided, however, that a Change in Control shall not be
deemed to have occurred if (I) the Closing Price Per Share of the 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 under
clause (i) above) or the period of 10 consecutive Trading Days ending
immediately before the Change in Control (in the case of a Change in Control
under clause (ii) above) shall equal or exceed 105% of the Conversion Price of
the Securities in effect on each such Trading Day or (II) 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 (i) and/or clause (ii)
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.
(3) the term "Conversion Price" shall equal U.S.$1,000 divided by the
Conversion Rate (rounded to the nearest cent); and
(4) for purposes of Section 14.4(2)(i), the term "person" shall include
any syndicate or group which would be deemed to be a "person" under Section
13(d)(3) of the Exchange Act, as in effect on the date of the original execution
of this Indenture.
SECTION 14.5 Consolidated, Merger, Etc.
-------------------------
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In the case of any merger, consolidation, conveyance, sale, transfer or
lease of all or substantially all of the assets of the Company to which Section
12.11 applies, in which the Common Stock of the Company is changed or exchanged
as a result into the right to receive shares of stock and other securities or
property or assets (including cash) which includes shares of Common Stock of the
Company or common stock of another Person that are, or upon issuance will be,
traded on a United States national securities exchange or approved for trading
on an established automated over-the-counter trading market in the United States
and such shares constitute at the time such change or exchange becomes effective
in excess of 50% of the aggregate fair market value of such shares of stock and
other securities, property and assets (including cash) (as determined by the
Company, which determination shall be conclusive and binding), then the Person
formed by such consolidation or resulting from such merger or combination or
which acquires the properties or assets (including cash) of the Company, as the
case may be, shall execute and deliver to the Trustee a supplemental indenture
(which shall comply with the Trust Indenture Act as in force at the date of
execution of such supplemental indenture) modifying the provisions of this
Indenture relating to the right of Holders to cause the Company to repurchase
the Securities following a Change in Control, including without limitation the
applicable provisions of this Article XIV and the definitions of the Common
Stock and Change in Control, as appropriate, and such other related definitions
set forth herein as determined in good faith by the Company (which determination
shall be conclusive and binding), to make such provisions apply in the event of
a subsequent Change in Control to the common stock and the issuer thereof if
different from the Company and Common Stock of the Company (in lieu of the
Company and the Common Stock of the Company).
ARTICLE XV
HOLDERS LISTS AND REPORTS BY TRUSTEE AND COMPANY; NON-RECOURSE
SECTION 15.1 Company to Furnish Trustee Names and Addresses of Holders.
---------------------------------------------------------
The Company will furnish or cause to be furnished to the Trustee:
(1) semi annually, not more than 15 days after the Regular Record Date,
a list, in such form as the Trustee may reasonably require, of the names and
addresses of the Holders of Securities as of such Regular Record Date, and
(2) at such other times as the Trustee may reasonably request in writing,
within 30 days after the receipt by the Company of any such request, a list of
similar form and content as of a date not more than 15 days prior to the time
such list is furnished;
provided, however, that no such list need be furnished so long as the
Trustee is acting as Security Registrar.
SECTION 15.2 Preservation of Information.
---------------------------
(1) The Trustee shall preserve, in as current a form as is reasonably
practicable, the names and addresses of Holders contained in the most recent
list furnished to the Trustee as provided in Section 15.1 and the names and
addresses of Holders received by the Trustee in its capacity as
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Security Registrar. The Trustee may destroy any list, if any, furnished to it as
provided in Section 15.1 upon receipt of a new list so furnished.
(2) After this Indenture has been qualified under the Trust Indenture
Act, the rights of Holders to communicate with other Holders with respect to
their rights under this Indenture or under the Securities, and the corresponding
rights ,and duties of the Trustee, shall be as provided by the Trust Indenture
Act.
(3) Every Holder of Securities, by receiving and holding the same, agrees
with the Company and the Trustee that neither the Company nor the Trustee nor
any agent of either of them shall be held accountable by reason of any
disclosure of information as to names and addresses of Holders made pursuant to
the Trust Indenture Act.
SECTION 15.3 Reserved.
--------
SECTION 15.4 Reports by Trustee.
------------------
(1) After this Indenture has been qualified under the Trust Indenture
Act, the Trustee shall transmit to Holders such reports concerning the Trustee
and its actions under this Indenture as may be required pursuant to the Trust
Indenture Act at the times and in the manner provided pursuant thereto.
(2) After this Indenture has been qualified under the Trust Indenture
Act, a copy of each such report shall, at the time of such transmission to
Holders, be filed by the Trustee with each stock exchange upon which the
Securities are listed, with the Commission and with the Company. The Company
will notify the Trustee when the Securities are listed on any stock exchange.
SECTION 15.5 Reports by Company.
------------------
After this Indenture has been qualified under the Trust Indenture Act, the
Company shall file with the Trustee and the Commission, and transmit to Holders,
such information, documents and other reports, and such summaries thereof, as
may be required pursuant to the Trust Indenture Act at the times and in the
manner provided pursuant to such Act; provided that any such information,
documents or reports required to be filed with the Commission pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934 shall be filed with
the Trustee within 15 days after the same is so required to be filed with the
Commission.
ARTICLE XVI
IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS
SECTION 16.1 Indenture and Securities Solely Corporate Obligations.
-----------------------------------------------------
No recourse for the payment of the principal of or premium, if any, or
interest on any Security and no recourse under or upon any obligation, covenant
or agreement of the Company in this Indenture or in any supplemental indenture
or in any Security, or because of the creation of any
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indebtedness represented thereby, shall be had against any incorporator,
stockholder, employee, agent, officer, or director or subsidiary, as such, past,
present or future, of the Company or of any successor corporation, whether by
virtue of any constitution, statute or rule of law, or by the enforcement of any
assessment or penalty or otherwise; it being expressly understood that all such
liability is hereby waived and released as a condition of, and as a
consideration for, the execution of this Indenture and the issue of the
Securities.
This instrument may be executed in any number of counterparts, each of
which so executed shall be deemed to be an original, but all such counterparts
shall together constitute but one and the same instrument.
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IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be
duly executed all as of the day and year first above written.
RATIONAL SOFTWARE CORPORATION
By:_______________________________
Name:
Title:
STATE STREET BANK AND TRUST COMPANY
OF CALIFORNIA, N.A.,
as Trustee
By:_______________________________
Name:
Title:
<PAGE>
ANNEX A -- Form of Restricted Securities Certificate
RESTRICTED SECURITIES CERTIFICATE (For transfers pursuant to Section
3.5(2)(ii) and (iii) of the Indenture)
State Street Bank and Trust Company of California, N.A.
Corporate Trust Department
633 West 5th Street - 12th Floor
Los Angeles, CA 90071
Re: 5% CONVERTIBLE SUBORDINATED NOTES DUE FEBRUARY 1, 2007 OF RATIONAL
SOFTWARE CORPORATION (THE "SECURITIES")
Reference is made to the Indenture, dated as of February 2, 2000 (the
"Indenture"), from Rational Software Corporation (the "Company") to State Street
Bank and Trust Company of California, N.A., as Trustee. Terms used herein and
defined in the Indenture or Rule 144 under the U.S. Securities Act of 1933 (the
"Securities Act") are used herein as so defined.
This certificate relates to U.S. $________ principal amount of
Securities, which are evidenced by the following certificate(s) (the "Specified
Securities"):
CUSIP No. [_____________]
CERTIFICATE No(s). ________
The person in whose name this certificate is executed below (the
"Undersigned") hereby certifies that either (i) it is the sole beneficial owner
of the Specified Securities or (ii) it is acting on behalf of all the beneficial
owners of the Specified Securities and is duly authorized by them to do so. Such
beneficial owner or owners are referred to herein collectively as the "Owner".
If the Specified Securities are represented by a Global Security, they are held
through the Depositary or an Agent Member in the name of the Undersigned, as or
on behalf of the Owner. If the Specified Securities are not represented by a
Global Security, they are registered in the name of the Undersigned, as or on
behalf of the Owner.
The Owner has requested that the Specified Securities be transferred
to a person (the "Transferee") who will take delivery in the form of a
Restricted Security. In connection with such transfer, the Owner hereby
certifies that, unless such transfer is being effected pursuant to an effective
registration statement under the Securities Act, it is being effected in
accordance with Rule 144A, to a institutional "accredited investor" within the
meaning of Rule 501(A)(1), (2), (3) or (7), or pursuant to another exemption
from registration under the Securities Act (if available) or Rule 144 under the
Securities Act and all applicable securities laws of the states of the United
States and other jurisdictions. Accordingly, the Owner hereby further certifies
as:
<PAGE>
(1) RULE 144A TRANSFERS. If the transfer is being effected in accordance
with Rule 144A:
(A) the Specified Securities are being transferred to a person that
the Owner and any person acting on its behalf reasonably believe is a "qualified
institutional buyer" within the meaning of Rule 144A, acquiring for its own
account or for the account of a qualified institutional buyer; and
(B) the Owner and any person acting on its behalf have taken
reasonable steps to ensure that the Transferee is aware that the Owner may be
relying on Rule 144A in connection with the transfer; and
(2) RULE 144 TRANSFERS. If the transfer is being effected pursuant to Rule
144:
(A) the transfer is occurring after a holding period of at least one
year (computed in accordance with paragraph (d) of Rule 144) has elapsed since
the date the Specified Securities were acquired from the Company or from an
affiliate (as such term is defined in Rule 144) of the Company, whichever is
later, and is being effected in accordance with the applicable amount, manner of
sale and notice requirements of paragraphs (e), (f) and (h) of Rule 144; or
(B) the transfer is occurring after a period of at least two years
has elapsed since the date the Specified Securities were acquired from the
Company or from an affiliate (as such term is defined in Rule 144) of the
Company, whichever is later, and the Owner is not, and during the preceding
three months has not been, an affiliate of the Company.
(3) INSTITUTIONAL ACCREDITED INVESTORS. If the transfer is to an
institutional investor that is an accredited investor within the meaning of Rule
501(A)(1), (2), (3) or (7) of Regulation D under the Securities Act, a signed
letter containing certain representations and agreements relating to the
restrictions on transfer of the Securities and, if such transfer is for less
than an aggregate principal amount of $250,000, an opinion of counsel acceptable
to the Company if requested by the Company, that the transfer is exempt from
registration, must be supplied to the Trustee prior to such transfer.
(4) TRANSFERS PURSUANT TO OTHER SECURITY ACT EXEMPTIONS. If the transfer
is being effected pursuant to a Security Act Exemption other than ones set forth
in (1) through (3) above, there shall be delivered to the Company an opinion of
counsel with respect to such holders.
This certificate and the statements contained herein are made for your
benefit and the benefit of the Company and the Initial Purchasers.
Dated: ___________
Print the name of the Undersigned, as such term is defined in the
second paragraph of this certificate.)
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<PAGE>
By:_______________________________
Name:_____________________________
Title:____________________________
(If the Undersigned is a corporation, partnership or fiduciary, the title of the
person signing on behalf of the Undersigned must be stated.)
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<PAGE>
ANNEX B -- Form of Unrestricted Securities Certificate
UNRESTRICTED SECURITIES CERTIFICATE
(For removal of Restricted Securities Legend pursuant to Section 3.5(3))
State Street Bank and Trust Company of California, N.A.
Corporate Trust Department
633 West 5th Street - 12th Floor
Los Angeles, CA 90071
RE: 5% CONVERTIBLE SUBORDINATED NOTES DUE FEBRUARY 1, 2007 OF RATIONAL
SOFTWARE CORPORATION (THE "SECURITIES")
Reference is made to the Indenture, dated as of February 2, 2000
(the "Indenture"), from Rational Software Corporation (the "Company") to State
Street Bank and Trust Company of California, N.A., as Trustee. Terms used herein
and defined in the Indenture or in Rule 144 under the U.S. Securities Act of
1933 (the "Securities Act") are used herein as so defined.
This certificate relates to U.S.$_______________ principal amount
of Securities, which are evidenced by the following certificate(s) (the
"Specified Securities"):
CUSIP No. [_________]
CERTIFICATE No(s). _________________
The person in whose name this certificate is executed below (the
"Undersigned") hereby certifies that either (i) it is the sole beneficial owner
of the Specified Securities or (ii) it is acting on behalf of all the beneficial
owners of the Specified Securities and is duly authorized by them to do so. Such
beneficial owner or owners are referred to herein collectively as the "Owner".
If the Specified Securities are represented by a Global Security, they are held
through the Depositary or an Agent Member in the name of the Undersigned, as or
on behalf of the Owner. If the Specified Securities are not represented by a
Global Security, they are registered in the name of the Undersigned, as or on
behalf of the Owner.
The Owner has requested that the Specified Securities be exchanged
for Securities bearing no Restricted Securities Legend pursuant to Section
3.5(3) of the Indenture. In connection with such exchange, the Owner hereby
certifies that the exchange is occurring after a period of at least two years
has elapsed since the date the Specified Securities were acquired from the
Company or from an "affiliate" (as such term is defined in Rule 144) of the
Company, whichever is later, and the Owner is not, and during the preceding
three months has not been, an affiliate of the
<PAGE>
Company. The Owner also acknowledges that any future transfers of the Specified
Securities must comply with all applicable securities laws of the states of the
United States and other jurisdictions.
This certificate and the statements contained herein are made for your
benefit and the benefit of the Company and the Initial Purchasers.
Dated: ______________
(Print the name of the Undersigned, as such term is defined in the second
paragraph of this certificate.)
By:_______________________________
Name:_____________________________
Title:____________________________
(If the Undersigned is a corporation, partnership or fiduciary, the title of the
person signing on behalf of the Undersigned must be stated.)
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<PAGE>
ANNEX C -- Form of Surrender Certificate
In connection with the certification contemplated by Section 12.2 or
14.3(9) relating to compliance with certain restrictions relating to transfers
of Restricted Securities, such certification shall be provided substantially in
the form of the following certificate, with only such changes thereto as shall
be approved by the Company and Goldman, Sachs & Co.:
CERTIFICATE
RATIONAL SOFTWARE CORPORATION
5% CONVERTIBLE NOTES DUE FEBRUARY 1, 2007
This is to certify that as of the date hereof with respect to U.S.
$______ principal amount of the above-captioned securities surrendered on the
date hereof (the "Surrendered Securities") for registration of transfer, or for
conversion or repurchase where the securities issuable upon such conversion or
repurchase are to be registered in a name other than that of the undersigned
Holder (each such transaction being a "transfer"), the undersigned Holder (as
defined in the Indenture) certifies that the transfer of Surrendered Securities
associated with such transfer complies with the restrictive legend set forth on
the face of the Surrendered Securities for the reason checked below:
_________ The transfer of the Surrendered Securities complies with Rule
144A under the Securities Act; or
_________ The transfer of the Surrendered Securities complies with Rule
144 under the United States Securities Act of 1933, as amended
(the "Securities Act"); or
_________ The transfer of the Surrendered Securities has been made to an
institution that is an "accredited investor" within the meaning
of Rule 501(a)(1), (2), (3) or (7) under the Securities Act in a
transaction exempt from the registration requirements of the
Securities Act and a signed letter containing certain
representations and agreements relating to restrictions on
transfer of the Securities (and if such transfer is for an
aggregate principal amount less than $250,000, an opinion of
counsel acceptable to the Company if requested by the Company,
that such transfer is exempt from registration; or
_________ The transfer of the Surrendered Securities has been made pursuant
to an exemption from registration under the Securities Act and an
opinion of counsel has been delivered to the Company with respect
to such transfer.
[to come]
[Name of Holder]
Dated:____________________________
*To be dated the date of surrender
-2-
<PAGE>
EXHIBIT 4.4
____________________________________
RATIONAL SOFTWARE CORPORATION
ISSUER
TO
STATE STREET BANK AND TRUST COMPANY OF CALIFORNIA, N.A.,
TRUSTEE
__________________
INDENTURE
Dated as of February 2, 2000
___________________
5% CONVERTIBLE SUBORDINATED NOTES DUE FEBRUARY 1, 2007
_______________________________________
<PAGE>
Rational Software Corporation
5% Convertible Subordinated Notes due February 1, 2007
Registration Rights Agreement
-----------------------------
February 2, 2000
Goldman, Sachs & Co.,
Credit Suisse First Boston Corporation
Chase Securities Inc.
c/o Goldman, Sachs & Co.
85 Broad Street
New York, New York 10004
Ladies and Gentlemen:
Rational Software Corporation, a Delaware corporation (the "Company"),
proposes to issue and sell to the Purchasers (as defined herein) upon the terms
set forth in the Purchase Agreement (as defined herein) its 5% Convertible
Subordinated Notes due February 1, 2007 (the "Securities"). As an inducement to
the Purchasers to enter into the Purchase Agreement and in satisfaction of a
condition to the obligations of the Purchasers thereunder, the Company agrees
with the Purchasers for the benefit of Holders (as defined herein) from time to
time of the Registrable Securities (as defined herein) as follows:
1. Definitions.
(a) Capitalized terms used herein without definition shall have the
meanings ascribed to them in the Purchase Agreement. As used in this Agreement,
the following defined terms shall have the following meanings:
"Act" or "Securities Act" means the United States Securities Act of 1933,
as amended.
"Affiliate" of any specified person means any other person which, directly
or indirectly, is in control of, is controlled by, or is under common control
with such specified person. For purposes of this definition, control of a
person means the power, direct or indirect, to direct or cause the direction of
the management and policies of such person whether by contract or otherwise; and
the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"Closing Date" means the First Time of Delivery as defined in the Purchase
Agreement.
<PAGE>
"Commission" means the United States Securities and Exchange Commission, or
any other federal agency at the time administering the Exchange Act or the
Securities Act, whichever is the relevant statute for the particular purpose.
"Common Stock" means the Company's common stock, par value $0.01 per share.
"DTC" means The Depository Trust Company.
"Effectiveness Period" has the meaning assigned thereto in Section 2(b)(i)
hereof.
"Effective Time" means the date on which the Commission declares the Shelf
Registration Statement effective or on which the Shelf Registration Statement
otherwise becomes effective.
"Electing Holder" has the meaning assigned thereto in Section 3(a)(3)
hereof.
"Exchange Act" means the United States Securities Exchange Act of 1934, as
amended.
"Holder" means, any person that is the record owner of Registrable
Securities (and includes any person that has a beneficial interest in any
Registrable Security in book-entry form).
"Indenture" means the Indenture, dated as of February 2, 2000, between the
Company and State Street Bank and Trust Company of California N.A., as amended
and supplemented from time to time in accordance with its terms.
"Managing Underwriters" means the investment banker or investment bankers
and manager or managers that shall administer an underwritten offering, if any,
conducted pursuant to Section 7 hereof.
"NASD Rules" means the Rules of the National Association of Securities
Dealers, Inc., as amended from time to time.
"Notice and Questionnaire" means a Notice of Registration Statement and
Selling Securityholder Questionnaire substantially in the form of Exhibit A
hereto.
The term "person" means an individual, partnership, corporation, trust or
unincorporated organization, or a government or agency or political subdivision
thereof.
"Prospectus" means the prospectus (including, without limitation, any
preliminary prospectus, any final prospectus and any prospectus that discloses
information previously omitted from a prospectus filed as part of an effective
registration statement in reliance upon Rule 430A under the Act) included in the
Shelf Registration Statement, as amended or supplemented by any prospectus
supplement with respect to the terms of the offering of any portion of the
Registrable Securities covered by the Shelf Registration Statement and by all
other amendments and supplements to such prospectus, including all material
incorporated by
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<PAGE>
reference in such prospectus and all documents filed after the date of such
prospectus by the Company under the Exchange Act and incorporated by reference
therein.
"Purchase Agreement" means the purchase agreement, dated as of January 27,
2000, between the Purchasers and the Company relating to the Securities.
"Purchasers" means the Purchasers named in Schedule I to the Purchase
Agreement.
"Registrable Securities" means all or any portion of the Securities issued
from time to time under the Indenture in registered form and the shares of
Common Stock issuable upon conversion of such Securities; provided, however,
-------- -------
that a security ceases to be a Registrable Security when it is no longer a
Restricted Security.
"Restricted Security" means any Security or share of Common Stock issuable
upon conversion thereof except any such Security or share of Common Stock which
(i) has been effectively registered under the Securities Act and sold in a
manner contemplated by the Shelf Registration Statement, (ii) has been
transferred in compliance with Rule 144 under the Securities Act (or any
successor provision thereto) or is transferable pursuant to paragraph (k) of
such Rule 144 (or any successor provision thereto), (iii) has been sold in
compliance with Regulation S under the Securities Act (or any successor thereto)
and does not constitute the unsold allotment of a distributor within the meaning
of Regulation S under the Securities Act, or (iv) has otherwise been transferred
and a new Security or share of Common Stock not subject to transfer restrictions
under the Securities Act has been delivered by or on behalf of the Company in
accordance with Section 3.3 of the Indenture.
"Rules and Regulations" means the published rules and regulations of the
Commission promulgated under the Securities Act or the Exchange Act, as in
effect at any relevant time.
"Shelf Registration" means a registration effected pursuant to Section 2
hereof.
"Shelf Registration Statement" means a "shelf" registration statement filed
under the Securities Act providing for the registration of, and the sale on a
continuous or delayed basis by the Holders of, all of the Registrable Securities
pursuant to Rule 415 under the Securities Act and/or any similar rule that may
be adopted by the Commission, filed by the Company pursuant to the provisions of
Section 2 of this Agreement, including the Prospectus contained therein, any
amendments and supplements to such registration statement, including post-
effective amendments, and all exhibits and all material incorporated by
reference in such registration statement.
"Trust Indenture Act" means the Trust Indenture Act of 1939, or any
successor thereto, and the rules, regulations and forms promulgated thereunder,
as the same shall be amended from time to time.
The term "underwriter" means any underwriter of Registrable Securities in
connection with an offering thereof under a Shelf Registration Statement.
3
<PAGE>
(b) Wherever there is a reference in this Agreement to a percentage of the
"principal amount" of Registrable Securities or to a percentage of Registrable
Securities, Common Stock shall be treated as representing the principal amount
of Securities which was surrendered for conversion or exchange in order to
receive such number of shares of Common Stock.
2. Shelf Registration.
(a) The Company shall, no later than 90 calendar days following the
Closing Date, file with the Commission a Shelf Registration Statement relating
to the offer and sale of the Registrable Securities by the Holders from time to
time in accordance with the methods of distribution elected by such Holders and
set forth in such Shelf Registration Statement and, thereafter, shall use its
reasonable efforts to cause such Shelf Registration Statement to be declared
effective under the Act no later than 180 calendar days following the Closing
Date; provided, however, that the Company may, upon written notice to all
Holders, postpone having the Shelf Registration Statement declared effective for
a reasonable period not to exceed 90 days if the Company possesses material non-
public information, the disclosure of which would have a material adverse effect
on the Company and its subsidiaries taken as a whole; provided, further,
however, that no Holder shall be entitled to be named as a selling
securityholder in the Shelf Registration Statement or to use the Prospectus
forming a part thereof for resales of Registrable Securities unless such Holder
is an Electing Holder.
(b) The Company shall use its best efforts:
(i) To keep the Shelf Registration Statement continuously effective
in order to permit the Prospectus forming part thereof to be usable by
Electing Holders, subject to Section 3(d)(v), until the earliest of (1) the
sale of all Registrable Securities registered under the Shelf Registration
Statement; (2) the expiration of the period referred to in Rule 144(k) of
the Act with respect to all Registrable Securities held by Electing Holders
that are not Affiliates of the Company; and (3) two years from the date
(the "Effective Date") the Securities are issued (such period being
referred to herein as the "Effectiveness Period");
(ii) After the Effective Time of the Shelf Registration Statement,
promptly upon the request of any Holder of Registrable Securities that is
not then an Electing Holder, to take any action reasonably necessary to
enable such Holder to use the Prospectus forming a part thereof for resales
of Registrable Securities, including, without limitation, any action
necessary to identify such Holder as a selling securityholder in the Shelf
Registration Statement; provided, however, that nothing in this
subparagraph shall relieve such Holder of the obligation to return a
completed and signed Notice and Questionnaire to the Company in accordance
with Section 3(a)(ii) hereof; and
(iii) If at any time the Securities, pursuant to Article XII of the
Indenture, are convertible into securities other than Common Stock, the
Company shall, or shall cause any successor under the Indenture to, cause
such securities to be included in the Shelf
4
<PAGE>
Registration Statement no later than the date on which the Securities may
then be convertible into such securities.
The Company shall be deemed not to have used its reasonable efforts to keep the
Shelf Registration Statement effective during the requisite period if the
Company voluntarily takes any action that would result in Holders of Registrable
Securities covered thereby not being able to offer and sell any of such
Registrable Securities during that period, unless such action is required by
applicable law and the Company thereafter promptly complies with the
requirements of paragraph 3(j) below.
(c) The Company may suspend the use of the Prospectus for a period not to
exceed 45 days in any 90-day period or an aggregate of 90 days in any 12-month
period if the Board of Directors of the Company shall have determined in good
faith that because of valid business reasons (not including avoidance of the
Company's obligations hereunder), including the acquisition or divestiture of
assets, pending corporate developments and similar events, it is in the best
interests of the Company to suspend such use, and prior to suspending such use
the Company provides the Holders with written notice of such suspension, which
notice need not specify the nature of the event giving rise to such suspension.
3. Registration Procedures. In connection with the Shelf Registration
Statement, the following provisions shall apply:
(a) (i) Not less than 30 calendar days prior to the time the Company
intends in good faith to have the Shelf Registration Statement declared
effective, the Company shall mail the Notice and Questionnaire to the Holders of
Registrable Securities. No Holder shall be entitled to be named as a selling
securityholder in the Shelf Registration Statement as of the Effective Time, and
no Holder shall be entitled to use the Prospectus forming a part thereof for
resales of Registrable Securities at any time, unless such Holder has returned a
completed and signed Notice and Questionnaire to the Company by the deadline for
response set forth therein; provided, however, Holders of Registrable Securities
shall have at least 28 calendar days from the date on which the Notice and
Questionnaire is first mailed to such Holders to return a completed and signed
Notice and Questionnaire to the Company.
(ii) After the Effective Time of the Shelf Registration Statement, the
Company shall, upon the request of any Holder of Registrable Securities
that is not then an Electing Holder, promptly send a Notice and
Questionnaire to such Holder. The Company shall not be required to take
any action to name such Holder as a selling securityholder in the Shelf
Registration Statement or to enable such Holder to use the Prospectus
forming a part thereof for resales of Registrable Securities until such
Holder has returned a completed and signed Notice and Questionnaire to the
Company.
(iii) The term "Electing Holder" shall mean any Holder of Registrable
Securities that has returned a completed and signed Notice and
Questionnaire to the Company in accordance with Section 3(a)(i) or 3(a)(ii)
hereof.
5
<PAGE>
(b) The Company shall furnish to each Holder who has made an election
pursuant to Section 3(a)(i), prior to the Effective Time, a copy of the Shelf
Registration Statement initially filed with the Commission, and shall furnish to
such Holders, prior to the filing thereof with the Commission, copies of each
amendment thereto and each amendment or supplement, if any, to the Prospectus
included therein, and shall use its reasonable efforts to reflect in each such
document, at the Effective Time or when so filed with the Commission, as the
case may be, such comments as such Holders and their respective counsel
reasonably may propose.
(c) The Company shall promptly take such action as may be necessary so
that (i) each of the Shelf Registration Statement and any amendment thereto and
the Prospectus forming part thereof and any amendment or supplement thereto (and
each report or other document incorporated therein by reference in each case)
complies in all material respects with the Securities Act and the Exchange Act
and the respective rules and regulations thereunder, (ii) each of the Shelf
Registration Statement and any amendment thereto does not, when it becomes
effective, contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading and (iii) each of the Prospectus forming part of the
Shelf Registration Statement, and any amendment or supplement to such
Prospectus, does not during the Effectiveness Period include an untrue statement
of a material fact or omit to state a material fact necessary in order to make
the statements therein, in the light of the circumstances under which they were
made, not misleading.
(d) The Company shall promptly advise each Electing Holder, and shall
confirm such advice in writing if so requested by any such Holder:
(i) when a Shelf Registration Statement and any amendment thereto
has been filed with the Commission and when a Shelf Registration Statement
or any post-effective amendment thereto has become effective, in each case
making a public announcement thereof by release made to Reuters Economic
Services and Bloomberg Business News;
(ii) of any request by the Commission for amendments or supplements
to the Shelf Registration Statement or the Prospectus included therein or
for additional information.
(iii) of the issuance by the Commission of any stop order suspending
the effectiveness of the Shelf Registration Statement or the initiation of
any proceedings for such purpose;
(iv) of the receipt by the Company of any notification with respect to
the suspension of the qualification of the securities included in the Shelf
Registration Statement for sale in any jurisdiction or the initiation of
any proceeding for such purpose; and
(v) of the happening of any event or the existence of any state of
facts that requires
6
<PAGE>
the making of any changes in the Shelf Registration Statement or the
Prospectus included therein so that, as of such date, such Shelf
Registration Statement and Prospectus do not contain an untrue statement of
a material fact and do not omit to state a material fact required to be
stated therein or necessary to make the statements therein (in the case of
the Prospectus, in light of the circumstances under which they were made)
not misleading (which advice shall be accompanied by an instruction to such
Holders to suspend the use of the Prospectus until the requisite changes
have been made).
(e) The Company shall use its best efforts to prevent the issuance, and if
issued to obtain the withdrawal, of any order suspending the effectiveness of
the Shelf Registration Statement at the earliest possible time.
(f) The Company shall furnish to each Electing Holder, without charge, at
least one copy of the Shelf Registration Statement and all post-effective
amendments thereto, including financial statements and schedules, and, if such
Holder so requests in writing, all reports, other documents and exhibits that
are filed with or incorporated by reference in the Shelf Registration Statement.
(g) The Company shall, during the Effectiveness Period, deliver to each
Electing Holder, without charge, as many copies of the Prospectus (including
each preliminary Prospectus) included in the Shelf Registration Statement and
any amendment or supplement thereto as such Electing Holder may reasonably
request; and the Company consents (except during the continuance of any event
described in Section 3(d)(v) above) to the use of the Prospectus and any
amendment or supplement thereto by each of the Electing Holders in connection
with the offering and sale of the Registrable Securities covered by the
Prospectus and any amendment or supplement thereto during the Effectiveness
Period.
(h) Prior to any offering of Registrable Securities pursuant to the Shelf
Registration Statement, the Company shall (i) register or qualify or cooperate
with the Electing Holders and their respective counsel in connection with the
registration or qualification of such Registrable Securities for offer and sale
under the securities or "blue sky" laws of such jurisdictions within the United
States as any Electing Holder may reasonably request, (ii) keep such
registrations or qualifications in effect and comply with such laws so as to
permit the continuance of offers and sales in such jurisdictions for so long as
may be necessary to enable any Electing Holder or underwriter, if any, to
complete its distribution of Registrable Securities pursuant to the Shelf
Registration Statement, and (iii) take any and all other actions necessary or
advisable to enable the disposition in such jurisdictions of such Registrable
Securities; provided, however, that in no event shall the Company be obligated
to (A) qualify as a foreign corporation or as a dealer in securities in any
jurisdiction where it would not otherwise be required to so qualify but for this
Section 3(h) or (B) file any general consent to service of process in any
jurisdiction where it is not as of the date hereof so subject.
(i) Unless any Registrable Securities shall be in book-entry only form, the
Company shall cooperate with the Electing Holders to facilitate the timely
preparation and delivery of certificates representing Registrable Securities to
be sold pursuant to the Shelf Registration
7
<PAGE>
Statement, which certificates, if so required by any securities exchange upon
which any Registrable Securities are listed, shall be penned, lithographed or
engraved, or produced by any combination of such methods, on steel engraved
borders, and which certificates shall be free of any restrictive legends and in
such permitted denominations and registered in such names as Electing Holders
may request in connection with the sale of Registrable Securities pursuant to
the Shelf Registration Statement.
(j) Upon the occurrence of any fact or event contemplated by paragraph
3(d)(v) above, the Company shall promptly prepare a post-effective amendment to
any Shelf Registration Statement or an amendment or supplement to the related
Prospectus or file any other required document so that, as thereafter delivered
to purchasers of the Registrable Securities included therein, the Prospectus
will not include an untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading. If the Company
notifies the Electing Holders of the occurrence of any event contemplated by
paragraph 3(d)(v) above, the Electing Holder shall suspend the use of the
Prospectus until the requisite changes to the Prospectus have been made.
(k) Not later than the Effective Time of the Shelf Registration Statement,
the Company shall provide a CUSIP number for the Registrable Securities that are
debt securities.
(l) The Company shall use its best efforts to comply with all applicable
Rules and Regulations, and to make generally available to its securityholders as
soon as practicable, but in any event not later than eighteen months after (i)
the effective date (as defined in Rule 158(c) under the Securities Act) of the
Shelf Registration Statement, (ii) the effective date of each post-effective
amendment to the Shelf Registration Statement, and (iii) the date of each filing
by the Company with the Commission of an Annual Report on Form 10-K that is
incorporated by reference in the Shelf Registration Statement, an earning
statement of the Company and its subsidiaries complying with Section 11(a) of
the Securities Act and the rules and regulations of the Commission thereunder
(including, at the option of the Company, Rule 158).
(m) Not later than the Effective Time of the Shelf Registration Statement,
the Company shall cause the Indenture to be qualified under the Trust Indenture
Act; in connection with such qualification, the Company shall cooperate with the
Trustee under the Indenture and the Holders (as defined in the Indenture) to
effect such changes to the Indenture as may be required for such Indenture to be
so qualified in accordance with the terms of the Trust Indenture Act; and the
Company shall execute, and shall use all reasonable efforts to cause the Trustee
to execute, all documents that may be required to effect such changes and all
other forms and documents required to be filed with the Commission to enable
such Indenture to be so qualified in a timely manner. In the event that any
such amendment or modification referred to in this Section 3(m) involves the
appointment of a new trustee under the Indenture, the Company shall appoint a
new trustee thereunder pursuant to the applicable provisions of the Indenture.
(n) In the event of an underwritten offering conducted pursuant to Section
6 hereof, the Company shall, if requested, promptly include or incorporate in a
Prospectus supplement or
8
<PAGE>
post-effective amendment to the Shelf Registration Statement such information as
the Managing Underwriters reasonably agree should be included therein and to
which the Company does not reasonably object and shall make all required filings
of such Prospectus supplement or post-effective amendment as soon as practicable
after it is notified of the matters to be included or incorporated in such
Prospectus supplement or post-effective amendment.
(o) The Company shall enter into such customary agreements (including an
underwriting agreement in customary form in the event of an underwritten
offering conducted pursuant to Section 6 hereof) and take all other appropriate
action in order to expedite and facilitate the registration and disposition of
the Registrable Securities, and in connection therewith, if an underwriting
agreement is entered into, cause the same to contain indemnification provisions
and procedures substantially identical to those set forth in Section 5 hereof
with respect to all parties to be indemnified pursuant to Section 5 hereof.
(p) The Company shall:
(i)(A) make reasonably available for inspection by Electing Holders,
any underwriter participating in any disposition pursuant to the Shelf
Registration Statement, and any attorney, accountant or other agent
retained by such Holders or any such underwriter all relevant financial and
other records, pertinent corporate documents and properties of the Company
and its subsidiaries, and (B) cause the Company's officers, directors and
employees to supply all information reasonably requested by such Holders or
any such underwriter, attorney, accountant or agent in connection with the
Shelf Registration Statement, in each case, as is customary for similar due
diligence examinations; provided, however, that all records, information
and documents that are designated in writing by the Company, in good faith,
as confidential shall be kept confidential by such Holders and any such
underwriter, attorney, accountant or agent, unless such disclosure is made
in connection with a court proceeding or required by law, or such records,
information or documents become available to the public generally or
through a third party without an accompanying obligation of
confidentiality; and provided further that, if the foregoing inspection and
information gathering would otherwise disrupt the Company's conduct of its
business, such inspection and information gathering shall, to the greatest
extent possible, be coordinated on behalf of the Electing Holders and the
other parties entitled thereto by one counsel designated by and on behalf
of Electing Holders and other parties; in the event that any Holder,
underwriter, attorney, accountant or agent is required to disclose
confidential information of the Company by law or in a court proceeding,
such Holder, underwriter, attorney, accountant or agent will provide the
Company with notice of such disclosure requirement and copies of the
information to be disclosed, if possible, and will cooperate with the
Company, to the extent reasonably practicable, to limit such disclosure;
(ii) in connection with any underwritten offering conducted pursuant
to Section 6 hereof, make such representations and warranties to the
Holders participating in such underwritten offering and to the Managing
Underwriters, in form, substance and scope as are customarily made by the
Company to underwriters in primary underwritten
9
<PAGE>
offerings of equity and convertible debt securities and covering matters
including, but not limited to, those set forth in the Purchase Agreement;
(iii) in connection with any underwritten offering conducted pursuant
to Section 6 hereof, obtain opinions of counsel to the Company (which
counsel and opinions (in form, scope and substance) shall be reasonably
satisfactory to the Managing Underwriters) addressed to each Holder
participating in such underwritten offering and the underwriters, covering
such matters as are customarily covered in opinions requested in primary
underwritten offerings of equity and convertible debt securities and such
other matters as may be reasonably requested by such Holders and
underwriters (it being agreed that the matters to be covered by such
opinions shall include, without limitation, as of the date of the opinion
and as of the Effective Time of the Shelf Registration Statement or most
recent post-effective amendment thereto, as the case may be, the absence
from the Shelf Registration Statement and the Prospectus, including the
documents incorporated by reference therein, of an untrue statement of a
material fact or the omission of a material fact required to be stated
therein or necessary to make the statements therein not misleading;
(iv) in connection with any underwritten offering conducted pursuant
to Section 6 hereof, obtain "cold comfort" letters and updates thereof from
the independent public accountants of the Company (and, if necessary, from
the independent public accountants of any subsidiary of the Company or of
any business acquired by the Company for which financial statements and
financial data are, or are required to be, included in the Shelf
Registration Statement), addressed to each Holder participating in such
underwritten offering (if such Holder has provided such letter,
representations or documentation, if any, required for such cold comfort
letter to be so addressed) and the underwriters, in customary form and
covering matters of the type customarily covered in "cold comfort" letters
in connection with primary underwritten offerings;
(v) in connection with any underwritten offering conducted pursuant
to Section 6 hereof, deliver such documents and certificates as may be
reasonably requested by any Holders participating in such underwritten
offering and the Managing Underwriters, if any, including, without
limitation, certificates to evidence compliance with Section 3(j) hereof
and with any conditions contained in the underwriting agreement or other
agreements entered into by the Company.
(q) The Company will use its reasonable efforts to cause the Common Stock
issuable upon conversion of the Securities to be listed for quotation on the
National Association of Securities Dealers Automated Quotations National Market
System or other stock exchange or trading system on which the Common Stock
primarily trades on or prior to the Effective Time of the Shelf Registration
Statement hereunder.
(r) In the event that any broker-dealer registered under the Exchange Act
shall be an "affiliate" (as defined in Rule 2720(b)(1) of the NASD Rules (or any
successor provision thereto)) of the Company or has a "conflict of interest" (as
defined in Rule 2720(b)(7) of the NASD Rules (or any successor provision
thereto)) and such broker-dealer shall underwrite,
10
<PAGE>
participate as a member of an underwriting syndicate or selling group or assist
in the distribution of any Registrable Securities covered by the Shelf
Registration Statement, whether as a Holder of such Registrable Securities or as
an underwriter, a placement or sales agent or a broker or dealer in respect
thereof, or otherwise, the Company shall assist such broker-dealer in complying
with the requirements of the NASD Rules, including, without limitation, by (A)
engaging a "qualified independent underwriter" (as defined in Rule 2720(b)(15)
of the NASD Rules (or any successor provision thereto)) to participate in the
preparation of the registration statement relating to such Registrable
Securities, to exercise usual standards of due diligence in respect thereto and
to recommend the public offering price of such Registrable Securities, (B)
indemnifying such qualified independent underwriter to the extent of the
indemnification of underwriters provided in Section 5 hereof, and (C) providing
such information to such broker-dealer as may be required in order for such
broker-dealer to comply with the requirements of the NASD Rules.
(s) The Company shall use its best efforts to take all other steps
necessary to effect the registration, offering and sale of the Registrable
Securities covered by the Shelf Registration Statement contemplated hereby.
4. Registration Expenses. Except as otherwise provided in Section 3, the
Company shall bear all fees and expenses incurred in connection with the
performance of its obligations under Sections 2 and 3 hereof and shall bear or
reimburse the Electing Holders for the reasonable fees and disbursements of a
single counsel selected by a plurality of all Electing Holders who own an
aggregate of not less than 25% of the Registrable Securities covered by the
Shelf Registration Statement to act as counsel therefore in connection
therewith. Each Electing Holder shall pay all underwriting discounts and
commissions and transfer taxes, if any, relating to the sale or disposition of
such Electing Holder's Registrable Securities pursuant to the Shelf Registration
Statement.
5. Indemnification and Contribution.
(a) Indemnification by the Company. Upon the registration of the
Registrable Securities pursuant to Section 2 hereof, the Company shall indemnify
and hold harmless each Electing Holder and each underwriter, selling agent or
other securities professional, if any, which facilitates the disposition of
Registrable Securities, and each of their respective officers and directors and
each person who controls such Electing Holder, underwriter, selling agent or
other securities professional within the meaning of Section 15 of the Securities
Act or Section 20 of the Exchange Act (each such person being sometimes referred
to as an "Indemnified Person") against any losses, claims, damages or
liabilities, joint or several, to which such Indemnified Person may become
subject under the Securities Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon an untrue statement or alleged untrue statement of a material fact
contained in any Shelf Registration Statement under which such Registrable
Securities are to be registered under the Securities Act, or any Prospectus
contained therein or furnished by the Company to any Indemnified Person, or any
amendment or supplement thereto, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, and the
Company hereby
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agrees to reimburse such Indemnified Person for any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such action or claim as such expenses are incurred; provided, however, that the
Company shall not be liable to any such Indemnified Person in any such case to
the extent that any such loss, claim, damage or liability arises out of or is
based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in such Shelf Registration Statement or Prospectus, or
amendment or supplement, in reliance upon and in conformity with written
information furnished to the Company by such Indemnified Person expressly for
use therein.
(b) Indemnification by the Holders and any Agents and Underwriters. Each
Electing Holder agrees, as a consequence of the inclusion of any of such
Holder's Registrable Securities in such Shelf Registration Statement, and each
underwriter, selling agent or other securities professional, if any, which
facilitates the disposition of Registrable Securities shall agree, as a
consequence of facilitating such disposition of Registrable Securities,
severally and not jointly, to (i) indemnify and hold harmless the Company, its
directors, officers who sign any Shelf Registration Statement and each person,
if any, who controls the Company within the meaning of either Section 15 of the
Securities Act or Section 20 of the Exchange Act, against any losses, claims,
damages or liabilities to which the Company or such other persons may become
subject, under the Securities Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon an untrue statement or alleged untrue statement of a material fact
contained in such Shelf Registration Statement or Prospectus, or any amendment
or supplement, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in reliance upon and in
conformity with written information furnished to the Company by such Holder,
underwriter, selling agent or other securities professional expressly for use
therein, and (ii) reimburse the Company for any legal or other expenses
reasonably incurred by the Company in connection with investigating or defending
any such action or claim as such expenses are incurred.
(c) Notices of Claims, Etc. Promptly after receipt by an indemnified party
under subsection (a) or (b) above of notice of the commencement of any action,
such indemnified party shall, if a claim in respect thereof is to be made
against an indemnifying party under this Section 5, notify such indemnifying
party in writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
any indemnified party otherwise than under this Section 5. In case any such
action shall be brought against any indemnified party and it shall notify an
indemnifying party of the commencement thereof, such indemnifying party shall be
entitled to participate therein and, to the extent that it shall wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party (who shall not,
except with the consent of the indemnified party, be counsel to the indemnifying
party), and, after notice from the indemnifying party to such indemnified party
of its election so to assume the defense thereof, such indemnifying party shall
not be liable to such indemnified party under this Section 5 for any legal
expenses of other counsel or any other expenses, in each case
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subsequently incurred by such indemnified party, in connection with the defense
thereof other than reasonable costs of investigation. No indemnifying party
shall, without the written consent of the indemnified party, effect the
settlement or compromise of, or consent to the entry of any judgment with
respect to, any pending or threatened action or claim in respect of which
indemnification or contribution may be sought hereunder (whether or not the
indemnified party is an actual or potential party to such action or claim)
unless such settlement, compromise or judgment (i) includes an unconditional
release of the indemnified party from all liability arising out of such action
or claim and (ii) does not include a statement as to, or an admission of, fault,
culpability or a failure to act, by or on behalf of any indemnified party.
(d) Contribution. If the indemnification provided for in this Section 5 is
unavailable to or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities (or
actions in respect thereof) in such proportion as is appropriate to reflect the
relative fault of the indemnifying party and the indemnified party in connection
with the statements or omissions which resulted in such losses, claims, damages
or liabilities (or actions in respect thereof), as well as any other relevant
equitable considerations. The relative fault of such indemnifying party and
indemnified party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or omission or
alleged omission to state a material fact relates to information supplied by
such indemnifying party or by such indemnified party, and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission. The parties hereto agree that it would not be just
and equitable if contribution pursuant to this Section 5(d) were determined by
pro rata allocation (even if the Electing Holders or any underwriters, selling
agents or other securities professionals or all of them were treated as one
entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to in this Section 5(d).
The amount paid or payable by an indemnified party as a result of the losses,
claims, damages or liabilities (or actions in respect thereof) referred to above
shall be deemed to include any legal or other fees or expenses reasonably
incurred by such indemnified party in connection with investigating or defending
any such action or claim. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The obligations of the Electing Holders and any
underwriters, selling agents or other securities professionals in this Section
5(d) to contribute shall be several in proportion to the percentage of principal
amount of Registrable Securities registered or underwritten, as the case may be,
by them and not joint.
(e) Notwithstanding any other provision of this Section 5, in no event will
any (i) Electing Holder be required to undertake liability to any person under
this Section 5 for any amounts in excess of the dollar amount of the proceeds to
be received by such Holder from the sale of such Holder's Registrable Securities
(after deducting any fees, discounts and commissions applicable thereto)
pursuant to any Shelf Registration Statement under which such Registrable
Securities are to be registered under the Securities Act and (ii) underwriter,
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selling agent or other securities professional be required to undertake
liability to any person hereunder for any amounts in excess of the discount,
commission or other compensation payable to such underwriter, selling agent or
other securities professional with respect to the Registrable Securities
underwritten by it and distributed to the public.
(f) The obligations of the Company under this Section 5 shall be in
addition to any liability which the Company may otherwise have to any
Indemnified Person and the obligations of any Indemnified Person under this
Section 5 shall be in addition to any liability which such Indemnified Person
may otherwise have to the Company. The remedies provided in this Section 5 are
not exclusive and shall not limit any rights or remedies which may otherwise be
available to an indemnified party at law or in equity.
6. Underwritten Offering. Any Holder of Registrable Securities who
desires to do so may sell Registrable Securities (in whole or in part) in an
underwritten offering; provided that (i) the Electing Holders of at least 33-
1/3% in aggregate principal amount of the Registrable Securities then covered by
the Shelf Registration Statement shall request such an offering and (ii) at
least such aggregate principal amount of such Registrable Securities shall be
included in such offering; and provided further that the Company shall not be
obligated to cooperate with more than one underwritten offering during the
Effectiveness Period. Upon receipt of such a request, the Company shall provide
all Holders of Registrable Securities written notice of the request, which
notice shall inform such Holders that they have the opportunity to participate
in the offering. In any such underwritten offering, the investment banker or
bankers and manager or managers that will administer the offering will be
selected by, and the underwriting arrangements with respect thereto (including
the size of the offering) will be approved by, the holders of a majority of the
Registrable Securities to be included in such offering; provided, however, that
such investment bankers and managers and underwriting arrangements must be
reasonably satisfactory to the Company. No Holder may participate in any
underwritten offering contemplated hereby unless (a) such Holder agrees to sell
such Holder's Registrable Securities to be included in the underwritten offering
in accordance with any approved underwriting arrangements, (b) such Holder
completes and executes all reasonable questionnaires, powers of attorney,
indemnities, underwriting agreements, lock-up letters and other documents
required under the terms of such approved underwriting arrangements, and (c) if
such Holder is not then an Electing Holder, such Holder returns a completed and
signed Notice and Questionnaire to the Company in accordance with Section
3(a)(2) hereof within a reasonable amount of time before such underwritten
offering. The Holders participating in any underwritten offering shall be
responsible for any underwriting discounts and commissions and fees and, subject
to Section 4 hereof, expenses of their own counsel. The Company shall pay all
expenses customarily borne by issuers, including but not limited to filing fees,
the fees and disbursements of its counsel and independent public accountants and
any printing expenses incurred in connection with such underwritten offering.
Notwithstanding the foregoing or the provisions of Section 3(n) hereof, upon
receipt of a request from the Managing Underwriter or a representative of
holders of a majority of the Registrable Securities to be included in an
underwritten offering to prepare and file an amendment or supplement to the
Shelf Registration Statement and Prospectus in connection with an underwritten
offering, the Company may delay the filing of any such amendment or supplement
for up to 90 days if the Board of Directors of
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the Company shall have determined in good faith that the Company has a bona fide
business reason for such delay.
7. Liquidated Damages.
(a) Pursuant to Section 2(a) hereof, the Company may, upon written notice
to all the Holders, postpone having the Shelf Registration Statement declared
effective for a reasonable period not to exceed 90 days if the Company possesses
material non-public information, the disclosure of which would have a material
adverse effect on the Company and its subsidiaries taken as a whole.
Notwithstanding any such postponement, if (i) on or prior to the 90th day
following the Closing Date, a Shelf Registration Statement has not been filed
with the Commission or (ii) on or prior to the 180th day following the Closing
Date, such Shelf Registration Statement is not declared effective by the
Commission (each, a "Registration Default"), the Company shall be required to
pay liquidated damages ("Liquidated Damages"), from and including the day
following such Registration Default until such Shelf Registration Statement is
either so filed or so filed and subsequently declared effective, as applicable,
at a rate per annum equal to an additional one-quarter of one percent (0.25%) of
the principal amount of Registrable Securities, to and including the 90th day
following such Registration Default and one-half of one percent (0.5%) thereof
from and after the 91st day following such Registration Default.
(b) In the event that the Shelf Registration Statement ceases to be
effective (or the Holders of Registrable Securities are otherwise prevented or
restricted by the Company from effecting sales pursuant thereto) (an "Effective
Failure") for more than 45 days, whether or not consecutive, in any 90-day
period, or more than 90 days, whether or not consecutive, during any 12-month
period, then the Company shall pay Liquidated Damages at a rate per annum equal
to an additional one-half of one percent (0.5%) from the 46th day of the
applicable 90-day period or the 91st day of the applicable 12-month period, as
the case may be, that such Shelf Registration Statement ceases to be effective
(or the Holders of Registrable Securities are otherwise prevented or restricted
by the Company from effecting sales pursuant thereto) until the earlier of (i)
the time the Shelf Registration Statement again becomes effective or the Holders
of Registrable Securities are again able to make sales under the Shelf
Registration Statement or (2) the time the Effectiveness Period expires. For the
purpose of determining an Effective Failure, days on which the Company has been
obligated to pay Liquidated Damages in accordance with the foregoing in respect
of a prior Effective Failure within the applicable 90-day or 12-month period, as
the case may be, shall not be included.
(c) In the event the Company fails to file a post-effective amendment to
the Shelf Registration Statement, or the post-effective amendment is not
declared effective, within the periods required by Section 3, the Company shall
pay Liquidated Damages at a rate per annum equal to an additional one-half of
one percent (0.5%) from and including the date of such Registration Default
until such time as such Registration Default is cured.
(d) Any amounts to be paid as Liquidated Damages pursuant to paragraphs
(a), (b) or (c) of this Section 7 shall be paid semi-annually in arrears, with
the first semi-annual payment due on the first Interest Payment Date (as defined
in the Indenture), as applicable, following the
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<PAGE>
date of such Registration Default. Such Liquidated Damages will accrue (1) in
respect of the Securities at the rates set forth in paragraphs (a), (b) or (c)
of this Section 7, as applicable, on the principal amount of the Securities and
(2) in respect of the Common Stock issued upon conversion of the Securities, at
the rates set forth in paragraphs (a), (b) or (c) of this Section 7, as
applicable, applied to the Conversion Price (as defined in the Indenture) at
that time.
(e) Except as provided in Section 8(b) hereof, the Liquidated Damages as
set forth in this Section 7 shall be the exclusive monetary remedy available to
the Holders of Registrable Securities for such Registration Default or Effective
Failure. In no event shall the Company be required to pay Liquidated Damages in
excess of the applicable maximum amount of one-half of one percent (0.5%) set
forth above, regardless of whether one or multiple Registration Defaults exist.
8. Miscellaneous.
(a) Other Registration Rights. The Company may grant registration rights
that would permit any Person that is a third party the right to piggy-back on
any Shelf Registration Statement, provided that if the Managing Underwriter of
any underwritten offering conducted pursuant to Section 6 hereof notifies the
Company and the Electing Holders that the total amount of securities which the
Electing Holders and the holders of such piggy-back rights intend to include in
any Shelf Registration Statement is so large as to materially threaten the
success of such offering (including the price at which such securities can be
sold), then the amount, number or kind of securities to be offered for the
account of holders of such piggy-back rights will be reduced to the extent
necessary to reduce the total amount of securities to be included in such
offering to the amount, number and kind recommended by the Managing Underwriter
prior to any reduction in the amount of Registrable Securities to be included in
such Shelf Registration Statement.
(b) Specific Performance. The parties hereto acknowledge that there would
be no adequate remedy at law if the Company fails to perform any of its
obligations hereunder and that the Purchasers and the Holders from time to time
may be irreparably harmed by any such failure, and accordingly agree that the
Purchasers and such Holders, in addition to any other remedy to which they may
be entitled at law or in equity and without limiting the remedies available to
the Electing Holders under Section 7 hereof, shall be entitled to compel
specific performance of the obligations of the Company under this Registration
Rights Agreement in accordance with the terms and conditions of this
Registration Rights Agreement, in any court of the United States or any State
thereof having jurisdiction.
(c) Amendments and Waivers. This Agreement, including this Section 8(c),
may be amended, and waivers or consents to departures from the provisions hereof
may be given, only by a written instrument duly executed by the Company and the
holders of a majority in aggregate principal amount of Registrable Securities
then outstanding. Each Holder of Registrable Securities outstanding at the time
of any such amendment, waiver or consent or thereafter shall be bound by any
amendment, waiver or consent effected pursuant to this
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<PAGE>
Section 8(c), whether or not any notice, writing or marking indicating such
amendment, waiver or consent appears on the Registrable Securities or is
delivered to such Holder.
(d) Notices. All notices and other communications provided for or
permitted hereunder shall be given as provided in the Indenture.
(e) Parties in Interest. The parties to this Agreement intend that all
Holders of Registrable Securities shall be entitled to receive the benefits of
this Agreement and that any Electing Holder shall be bound by the terms and
provisions of this Agreement by reason of such election with respect to the
Registrable Securities which are included in a Shelf Registration Statement.
All the terms and provisions of this Agreement shall be binding upon, shall
inure to the benefit of and shall be enforceable by the respective successors
and assigns of the parties hereto and any Holder from time to time of the
Registrable Securities to the aforesaid extent. In the event that any
transferee of any Holder of Registrable Securities shall acquire Registrable
Securities, in any manner, whether by gift, bequest, purchase, operation of law
or otherwise, such transferee shall, without any further writing or action of
any kind, be entitled to receive the benefits of and, if an Electing Holder, be
conclusively deemed to have agreed to be bound by and to perform all of the
terms and provisions of this Agreement to the aforesaid extent.
(f) Counterparts. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(g) Headings. The headings in this agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
(h) Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York.
(i) Severability. In the event that any one or more of the provisions
contained herein, or the application thereof in any circumstances, is held
invalid, illegal or unenforceable in any respect for any reason, the validity,
legality and enforceability of any such provision in every other respect and of
the remaining provisions hereof shall not be in any way impaired or affected
thereby, it being intended that all of the rights and privileges of the parties
hereto shall be enforceable to the fullest extent permitted by law.
(j) Survival. The respective indemnities, agreements, representations,
warranties and other provisions set forth in this Agreement or made pursuant
hereto shall remain in full force and effect, regardless of any investigation
(or any statement as to the results thereof) made by or on behalf of any
Electing Holder, any director, officer or partner of such Holder, any agent or
underwriter, any director, officer or partner of such agent or underwriter, or
any controlling person of any of the foregoing, and shall survive the transfer
and registration of the Registrable Securities of such Holder.
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Please confirm that the foregoing correctly sets forth the agreement
between the Company and you.
Very truly yours,
Rational Software Corporation
By: ____________________________
Name:
Title:
Accepted as of the date hereof:
Goldman, Sachs & Co.
Credit Suisse First Boston Corporation
Chase Securities Inc.
By: _________________________________
(Goldman, Sachs & Co.)
On behalf of each of the Purchasers
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Exhibit A
Rational Software Corporation
Notice of Registration Statement
and
Selling Securityholder Questionnaire
(Date)
Rational Software Corporation (the "Company") has filed or intends
shortly to file with the United States Securities and Exchange Commission (the
"Commission") a preliminary registration statement on Form S-3 (the "Shelf
Registration Statement") for the registration and resale under the United
States Securities Act of 1933, as amended (the "Securities Act"), of the
Company's 5% Convertible Subordinated Notes due February 1, 2007 (CUSIP No.
75409PAA1) (the "Notes"), and Common Stock issuable upon conversion thereof,
in accordance with the terms of the Registration Rights Agreement, dated as of
February 2, 2000 (the "Registration Rights Agreement") between the Company and
the purchasers named therein (the "Purchasers"). A copy of the Registration
Rights Agreement is attached hereto. All capitalized terms not otherwise defined
herein shall have the meanings ascribed thereto in the Registration Rights
Agreement.
In order to have Registrable Securities included in the Shelf Registration
Statement (or a supplement or amendment thereto), this Notice of Registration
Statement and Selling Securityholder Questionnaire ("Notice and
Questionnaire") must be completed, executed and delivered to the Company at the
address set forth herein for receipt ON OR BEFORE [insert date that is 30 days
from the Notice date] (the "Questionnaire Deadline"). Unless the Company
otherwise consents, beneficial owners of the Registrable Securities who do not
complete, execute and return this Notice and Questionnaire by such date (i) will
not be named as selling securityholders in the Shelf Registration Statement (or
a supplement or amendment thereto) and related Prospectus and (ii) may not sell
their Registrable Securities pursuant thereto. Beneficial owners of Registrable
Securities not having returned a Notice and Questionnaire by the Questionnaire
Deadline may, however, receive another Notice and Questionnaire from the Company
upon request. Following its receipt of a completed and signed Notice and
Questionnaire in return, the Company will promptly include the Registrable
Securities covered thereby in the Shelf Registration Statement.
Certain legal consequences arise from being named as a selling
securityholder in the Shelf Registration Statement and related Prospectus.
Accordingly, holders and beneficial owners of Registrable Securities are advised
to consult their own securities law counsel regarding the consequences of being
named or not being named as a selling securityholder in the Shelf Registration
Statement and related Prospectus.
The term "Registrable Securities" is defined in the Registration Rights
Agreement to mean all or any portion of the Notes issued under the Trust
Indenture and the Common Stock issuable upon conversion of such Notes, provided,
however, that a security ceases to be a Registrable Security when it is no
longer a Restricted Security.
The term "Restricted Security" is defined in the Registration Rights
Agreement to mean any
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Note or Common Stock issuable upon conversion thereof except any such Note or
Common Stock which (i) has been registered pursuant to an effective registration
statement under the Securities Act and sold in a manner contemplated by the
Shelf Registration Statement, (ii) has been transferred in compliance with Rule
144 under the Securities Act (or any successor provision thereto) or is
transferable pursuant to paragraph (k) of such Rule 144 (or any successor
provision thereto) or (iii) has otherwise been transferred and a new Note or
share of Common Stock not subject to transfer restrictions under the Securities
Act has been delivered by or on behalf of the Company in accordance with the
Indenture.
ELECTION
The undersigned holder (the "Selling Securityholder") of Registrable
Securities hereby elects to include in the Shelf Registration Statement the
Registrable Securities beneficially owned by it and listed below in item (3)
(unless otherwise specified under Item 3). The undersigned, by signing and
returning this Notice and Questionnaire, agrees to be bound with respect to such
Registrable Securities by the terms and conditions of this Notice and
Questionnaire and the Registration Rights Agreement, including, without
limitation, Section 5 of the Registration Rights Agreement, as if the
undersigned Selling Securityholder were an original party thereto.
Upon any sale of Registrable Securities pursuant to the Shelf Registration
Statement, the Selling Securityholder will be required to deliver to the Company
and the Trustee the Notice of Transfer (completed and signed) set forth in
Exhibit 1 attached to this Notice and Questionnaire and hereby undertakes to do
so.
The Selling Securityholder hereby provides the following information to the
Company and represents and warrants that such information is accurate and
complete:
QUESTIONNAIRE
(1) (a) Full Legal Name of Selling Securityholder:
(b) Full Legal Name of Registered Holder (if not the same as in (a) above)
of Registrable Securities Listed in (3) Below:
(c) Full Legal Name of DTC Participant (if applicable and if not the same
as (b) above) Through Which Registrable Securities Listed in (3) Below
are Held:
(2) Address for Notices to Selling Securityholder:
Telephone:
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Fax:
Contact:
(3) Beneficial Ownership of Registrable Securities:
Except as set forth below, the undersigned Selling Securityholder does not
beneficially own any Notes or Common Stock previously issued upon
conversion, repurchase or redemption of any Note.
Principal amount of Notes beneficially owned:
Number of shares of Common Stock beneficially owned and issued to date upon
conversion, repurchase or redemption of Notes (if any):
Principal amount of Notes which the undersigned wishes to be included in
the Shelf Registration statement:
Number of shares of Common Stock (if any) issued upon conversion,
repurchase or redemption of Registrable Securities which are to be included
in the Shelf Registration Statement:
(4) Other shares of Common Stock or other Notes of the Company owned by the
Selling Securityholder:
Except as set forth below, and under item (3) above, the undersigned
Selling Securityholder is not the beneficial or registered owner of any
shares of Common Stock or any other securities of the Company.
State any exceptions here:
(5) Relationships with the Company:
Except as set forth below, neither the Selling Securityholder nor any of
its affiliates, officers, directors or principal equity holders (5% or
more) has held any position or office or has had any other material
relationship with the Company (or its predecessors or affiliates) during
the past three years.
State any exceptions here:
(6) Plan of Distribution:
Except as set forth below, the undersigned Selling Securityholder intends
to distribute the Registrable Securities listed above in Item (3) only as
follows (if at all): Such Registrable Securities may be sold from time to
time directly by the undersigned Selling Securityholder
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<PAGE>
or, alternatively, through underwriters, broker-dealers or agents. Such
Registrable Securities may be sold in one or more transactions at fixed
prices, at prevailing market prices at the time of sale, at varying prices
determined at the time of sale, or at negotiated prices. Such sales may be
effected in transactions (which may involve crosses or block transactions)
(i) on any national securities exchanges or U.S. inter-dealer quotation
system of a registered national securities association on which the
Registrable Securities may be listed or quoted at the time of sale, (ii) in
the over-the-counter market, (iii) in transactions otherwise than on such
exchanges or services or in the over-the-counter market, or (iv) through
the writing of options. In connection with sales of the Registrable
Securities or otherwise, the Selling Securityholder may enter into hedging
transactions with broker-dealers, which may in turn engage in short sales
of the Registrable Securities in the course of hedging the positions they
assume. The Selling Securityholder may also sell Registrable Securities
short and deliver Registrable Securities to close out such short positions,
or loan or pledge Registrable Securities to broker-dealers that in turn may
sell such securities.
State any exceptions here:
Note: In no event may such method(s) of distribution take the form of an
underwritten offering of the Registrable Securities without the prior agreement
of the Company.
By signing below, the Selling Securityholder acknowledges that it
understands its obligation to comply, and agrees that it will comply, with the
prospectus delivery and other provisions of the Securities Act and Exchange Act
and the respective rules and regulations thereunder, particularly Regulation M.
In the event that the Selling Securityholder transfers all or any portion
of the Registrable Securities listed in Item (3) above after the date on which
such information is provided to the Company, the Selling Securityholder agrees
to notify the transferee(s) at the time of the transfer of its rights and
obligations under this Notice and Questionnaire and the Registration Rights
Agreement.
By signing below, the Selling Securityholder consents to the disclosure of
the information contained herein in its answers to Items (1) through (6) above
and the inclusion of such information in the Shelf Registration Statement and
related Prospectus. The Selling Securityholder understands that such information
will be relied upon by the Company in connection with the preparation of the
Shelf Registration Statement and related Prospectus.
In accordance with the Selling Securityholder's obligation under the
Registration Rights Agreement to provide such information as may be required by
law for inclusion in the Shelf Registration Statement, the Selling
Securityholder agrees to promptly notify the Company of any inaccuracies or
changes in the information provided herein which may occur subsequent to the
date hereof at any time while the Shelf Registration Statement remains in
effect. All notices hereunder and pursuant to the Registration Rights Agreement
shall be made in writing by hand delivery, first-class mail, or air courier
guaranteeing overnight delivery as follows:
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To the Company:
Rational Software Corporation
18880 Homestead Road,
Cupertino, CA 95014-0721
Attention: Senior Director--Investor Relations
Once this Notice and Questionnaire is executed by the Selling
Securityholder and received by the Company, the terms of this Notice and
Questionnaire, and the representations and warranties contained herein, shall be
binding on, shall inure to the benefit of and shall be enforceable by the
respective successors, heirs, personal representatives, and assigns of the
Company and the Selling Securityholder with respect to the Registrable
Securities beneficially owned by such Selling Securityholder and listed in Item
(3) above. This Agreement shall be governed in all respects by the laws of the
State of New York.
IN WITNESS WHEREOF, the undersigned, by authority duly given, has caused
this Notice and Questionnaire to be executed and delivered either in person or
by its duly authorized agent.
Dated:
Selling Securityholder
(Print/type full legal name of beneficial owner
of Registrable Securities)
By:
Name:
Title:
PLEASE RETURN THE COMPLETED AND EXECUTED NOTICE AND QUESTIONNAIRE FOR
RECEIPT ON OR BEFORE (DEADLINE FOR RESPONSE) TO THE COMPANY AT:
Rational Software Corporation
18880 Homestead Road,
Cupertino, CA 95014-0721
Attention: Senior Director--Investor Relations
23
<PAGE>
Exhibit B
NOTICE TO TRANSFER PURSUANT TO REGISTRATION STATEMENT
Rational Software Corporation
18880 Homestead Road,
Cupertino, CA 95014-0721
Attention: Senior Director--Investor Relations
Re: Rational Software Corporation
5% Convertible Subordinated Notes
due February 1, 2007 (the "Notes")
Dear Sirs:
Please be advised that has transferred $ aggregate principal
amount of the above-referenced Notes or shares of the Company's Common Stock,
issued on conversion, repurchase or redemption of Notes, pursuant to the
Registration Statement on Form S-3 (File No. - ) filed by the Company.
We hereby certify that the prospectus delivery requirements, if any, of the
Securities Act of 1933, as amended, have been satisfied with respect to the
transfer described above and that the above-named beneficial owner of the Notes
or Common Stock is named as a selling securityholder in the Prospectus dated
______, 2000 or in amendments or supplements thereto, and that the aggregate
principal amount of the Notes or number of shares of Common Stock transferred
are [a portion of] the Notes or Common Stock listed in such Prospectus as
amended or supplemented opposite such owner's name.
Very truly yours,
(Name)
By:
(Authorized Signature)
_ Dated:
24
<PAGE>
EXHIBIT 21.01
LIST OF WHOLLY OWNED SUBSIDIARIES
RATIONAL SOFTWARE CORPORATION
<TABLE>
<CAPTION>
NAME JURISDICTION OF INCORPORATION
- -------------------------------------- -----------------------
<S> <C>
Rational Software Holdings Corp. Delaware
Rational Software Technology Corp. Delaware
Rational Software SPC Corp. Delaware
Rational International California
Rational Software Canada Co. Canada
ObjecTime, Ltd. Canada
Rational Software Corporation Ltd. United Kingdom
Rational Software SARL France
Rational Software GmbH Germany
Rational Software Holdings B.V. Netherlands
Rational Software Benelux B.V. Netherlands
Rational Software International B.V. Netherlands
Rational Software Belgium Belgium
Rational Software Nordic A.B. Sweden
Rational Software Finland Oy Finland
Rational Software Norway AS Norway
Rational Software Denmark A/S Denmark
Rational Software Schweiz GmbH Switzerland
Rational Software s.r.l. Italy
Rational Software GmbH Austria
Rational Software Israel Ltd. Israel
Rational Software Pty Ltd. Australia
Rational Software Pte Ltd. Singapore
Rational Software Korea Ltd. Korea
Rational Software Corp. Pvt. Ltd. India
</TABLE>
53
<PAGE>
<TABLE>
<S> <C>
Rational Software New Zealand Limited New Zealand
Rational Software Greater China Ltd. Hong Kong
Nihon Rational K.K. Japan
Rational Software Do Brasil Ltda. Brazil
Rational Software S.A. de C.V. Mexico
</TABLE>
54
<PAGE>
EXHIBIT 23.01
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We have audited the consolidated financial statements of Rational Software
Corporation as of March 31, 2000 and 1999, and for each of the three years in
the period ended March 31, 1999, and have issued our report thereon dated
April 18, 2000 (included elsewhere in the Annual Report on Form 10-K). Our
audits also included the financial statement schedule of Rational Software
Corporation listed in Item 14(a). This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
We also consent to the incorporation by reference in the Registration
Statements (Form S-8 No. 33-77382, No. 33-85906, No. 33-97044, No. 333-15015,
No. 333-15007, No. 333-21563, No. 333-22687, No. 333-25815, No. 333-31505, No.
333-32991, No. 333-39455, No. 333-39569, No. 333-45393, No. 333-52017, No.
333-60579, 333-70989, 333-84655, 333-89089 and 333-94819) pertaining to the
Rational 1983 Incentive Stock Option Plan, Verdix Corporation 1983 Incentive
Stock Option Plan, Verdix Corporation 1986 Stock Option Plan, Rational 1993
Stock Option Plan, Rational Software Corporation 1994 Stock Option Plan,
Rational Software 1994 Employee Stock Purchase Plan, Requisite, Inc., 1994
Stock Option Plan, SQA 1995 Stock Plan, SQA 1995 Employee Stock Purchase Plan,
SQA 1995 Non-Employee Director Stock Option Plan, SQA 1990 Incentive and
Nonqualified Stock Option Plan, Rational Software Corporation 1997 Stock Plan,
Performance Awareness Corporation 1997 Stock Plan, Rational Software
Corporation 1997 Supplemental Stock Plan, Pure Atria 1995 Stock Plan, Pure
Software, Inc., 1992 Stock Option/Stock Issuance Plan, Atria Software, Inc.
1994 Stock Plan, Atria Software, Inc., 1994 Non-Employee Director Stock Option
Plan, Atria Software, Inc., 1990 Stock Option Plan, Integrity QA Software,
Inc., 1995 Stock Option Plan, Performix, Inc., 1991 Stock Option Plan,
Qualtrak 1994 Stock Option Plan, Vigor Technology, Inc., 1996 Stock Option
Plan, 1998 Indian Stock Option Plan and Rational Software Corporation 1997
Stock Option Plan, 1998 Employee Stock Purchase Plan, Directors Stock Option
Plan, 1998 Stock Plan, Rational Software Corporation 1997 Stock Plan, 1998
Employee Stock Purchase Plan (1997), ObjecTime Limited Canadian Stock Option
Plan (1997), ObjecTime Limited 1998 U.S. Stock Option Plan, ObjecTime 1998
Canadian Stock Option Plan of our report dated April 14, 1999, with respect to
the consolidated financial statements included herein and our report included
in the preceding paragraph with respect to the financial statement schedule
included in this annual report (Form 10-K) of Rational Software Corporation.
/s/ Ernst & Young LLP
Palo Alto, California
April 28, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-1-1999
<PERIOD-END> MAR-31-2000
<CASH> 413,230
<SECURITIES> 493,081
<RECEIVABLES> 152,077
<ALLOWANCES> 3,259
<INVENTORY> 0
<CURRENT-ASSETS> 1,075,184
<PP&E> 116,332
<DEPRECIATION> 63,892
<TOTAL-ASSETS> 1,225,776
<CURRENT-LIABILITIES> 243,326
<BONDS> 500,000
0
0
<COMMON> 996
<OTHER-SE> 455,311
<TOTAL-LIABILITY-AND-EQUITY> 1,225,776
<SALES> 354,497
<TOTAL-REVENUES> 572,190
<CGS> 27,297
<TOTAL-COSTS> 86,904
<OTHER-EXPENSES> 377,148
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (12,857)
<INCOME-PRETAX> 120,995
<INCOME-TAX> 36,765
<INCOME-CONTINUING> 84,230
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 85,314
<EPS-BASIC> 0.97
<EPS-DILUTED> 0.89
</TABLE>
