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Proc-Type: 2001,MIC-CLEAR
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SECURITIES AND EXCHANGE COMMISSION |
WASHINGTON, D.C. 20549 |
FORM 10-K |
(Mark One) |
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[ Ö] |
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
For the fiscal year ended March 31, 2002
OR
[ ] |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF |
Commission file number 1-9247 |
Computer Associates International, Inc. |
(Exact name of registrant as specified in its charter) |
Delaware |
13-2857434 |
(State or other jurisdiction of |
(I.R.S. Employer Identification Number) |
One Computer Associates Plaza, Islandia, New York |
11749 |
(Address of principal executive offices) |
(Zip Code) |
(631) 342-6000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
|
|
|
(Title of Class) |
(Exchange on which registered) |
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Common Stock, par value $.10 per share |
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New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
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 period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes
Ö 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 the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III to this Form 10-K or any amendment to this Form 10-K. [
]State the aggregate market value of the voting stock held by non-affiliates of the Registrant:
The aggregate market value of the voting stock held by non-affiliates of the Registrant as of May 10, 2002 was $7,721,378,603 based on a total of 443,757,391 shares held by non-affiliates and the closing price on the New York Stock Exchange on that date which was $17.40
Number of shares of stock outstanding at May 10, 2002:
578,512,106 shares of Common Stock, par value $.10 per share.
Documents Incorporated by Reference:
Part III - Proxy Statement to be issued in conjunction with the Registrant's Annual Stockholders' Meeting.
This Annual Report on Form 10-K contains certain forward-looking statements and information relating to Computer Associates International, Inc. (the "Company," "Registrant" or "CA") that are based on the beliefs and assumptions made by the Company's management as well as information currently available to management. When used in this document, the words "anticipate," "believe," "estimate," "expect" and similar expressions, are intended to identify forward-looking statements. Such statements reflect the current views of the Company with respect to future events and are subject to certain risks, uncertainties and assumptions, some of which are described under "Management's Discussion and Analysis of Financial Condition and Results of Operations - Risk Factors." Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those des cribed herein as anticipated, believed, estimated or expected. The Company does not intend to update these forward-looking statements except as may be required by law.
PART I
Item 1. Business
(a) General Business Overview
The Company is a leading enterprise software company. The Company's world-class solutions address all aspects of Process Management, Information Management and Infrastructure Management. The Company offers solutions in six focus areas under seven brand names: Unicenter® for Enterprise Management, eTrust™ for Security, BrightStor™ for Storage, CleverPath™ for Portal and Business Intelligence, AllFusion™ for Application Life Cycle Management and Advantage™ and Jasmine® for Data Management and Application Development. With its portfolio of software products and a professional services organization dedicated to understanding the needs of its customers, the Company is committed to meeting the technology requirements of businesses in every sector of the economy. The Company serves organizations in more than 100 countries including more than 95% of th e Fortune 500®.
Built upon a common infrastructure, the Company's solutions are available for use on a variety of mainframe and distributed systems. Because of its independence from hardware manufacturers, the Company provides customers with integrated solutions that are platform-neutral.
The Company's products can be used on all major hardware platforms, operating systems and application development environments for enterprise computing. The operating environments include, among others, z/OS and OS/390 ("mainframe") from International Business Machines Corporation ("IBM"), Windows NT from Microsoft Corporation ("Microsoft"), UNIX, as provided by various hardware vendors such as Sun Microsystems, Inc. ("Sun"), Hewlett-Packard Company ("HP") and IBM, and most recently, the Linux operating system.
The Company maintains a philosophy of internally developing products, exemplified by its flagship product family Unicenter®, the industry standard for enterprise management software, coupled with the acquisition of key technology, the integration of the two, and the establishment of a network of strategic alliances with key business partners. The Company's service philosophy is marked by a commitment to the development of an internal service staff focused on supporting the Company's software solutions and long-standing alliances with leading service providers.
In fiscal year 2001, the Company announced its strategy to unlock shareholder value by spinning off or divesting technologies that have the potential to prosper on an independent basis. These actions will allow the Company to focus on its core technologies.
As the first step in this strategy, the Company formed the wholly owned subsidiary, iCan-SP, Inc. ("iCan"), in fiscal year 2001 to service the hosted software market. iCan's first product offering, the iCan Provider Suite™, is a fully integrated operational support system designed specifically for the service provider industry.
In fiscal year 2001, the Company also divested the former Sterling Software, Inc.'s Federal Systems Group, its government consulting division, to Northrop Grumman for approximately $150 million in cash. In furtherance of this strategy, in April 2002, the Company divested many of the assets comprising its interBiz™ division. The interBiz banking solutions were not sold as part of the divestiture.
In October 2000, the Company also announced a shift in its Business Model (the "new Business Model"), offering customers the flexibility and freedom to adapt to rapidly changing requirements while reducing the risks and costs associated with traditional software licensing models. Under the new Business Model, customers can determine the length and dollar value of their software licenses. For example, the new Business Model provides customers with the flexibility to subscribe to software under month-to-month licenses or choose cost certainty by committing to a longer-term arrangement. The new Business Model also permits customers to vary their software mix as their business and technology needs change. For example, customers can contract for the right to receive unspecified future software within designated product lines.
In March 2000, the Company acquired Sterling Software, Inc. ("Sterling") through an exchange of stock. Sterling's software solutions are used to create, control, automate and manage both traditional and enterprise systems. Sterling's portal technology provides access to data stored in corporate databases in the same way that Internet content portals provide access to the wealth of content on the Web. The acquisition was accounted for using the purchase method of accounting. See Note 2 of the Notes to Consolidated Financial Statements for additional information concerning acquisitions.
In May 1999, the Company acquired PLATINUM technology International, inc. ("PLATINUM") in a cash transaction. PLATINUM was engaged in the design, development, marketing and support of database tools and utilities, tools for enterprise management and data warehousing and provided a wide range of professional services. The acquisition was accounted for using the purchase method of accounting. See Note 2 of the Notes to Consolidated Financial Statements for additional information concerning acquisitions.
The Company was incorporated in Delaware in 1974 and commenced operations in 1976. In December 1981, the Company completed its initial public offering of Common Stock. The Company's Common Stock is traded on the New York Stock Exchange under the symbol "CA".
(b) Financial Information About Industry Segments
The Company's global business is principally in a single industry segment - the design, development, marketing, licensing and support of integrated computer software products operating on a diverse range of hardware platforms and operating systems.
See Note 4 of the Notes to Consolidated Financial Statements for financial data pertaining to the Company's geographic operations.
(c) Narrative Description of Business
Products
The Company offers a wide array of products under its seven brand names in three strategic categories and six focus areas - the Company's 3 x 6 Strategy. The strategic categories are Process Management, Information Management and Infrastructure Management. The six focus areas are Enterprise Management, Security, Storage, Portal and Business Intelligence, Application Life Cycle Management and Data Management and Application Development.
The Company's products manage the complex, heterogeneous systems upon which businesses depend. The Company's solutions enable customers to use the latest technologies while preserving their substantial investments in hardware, software and staff expertise. By employing a common infrastructure, the Company's developers create modular software designed to be continually and consistently improved. This pragmatic approach protects customers' investments by using scalar, evolutionary change rather than revolutionary disruption and waste.
The Company is a leading independent supplier of software solutions for IBM mainframes as well as for distributed platforms. For over 26 years, CA solutions have enabled the Company's customers to better manage the complex mainframe environment by providing them with the tools to measure and improve computer hardware and software performance and programmer productivity. The Company's solutions, including security, scheduling, storage, automation, performance and output management products, interface with the latest release of all major hardware suppliers to manage complex mainframe and distributed platform environments in an improved manner.
The Company's software architecture is specifically designed to assist customers' migration from a mainframe environment to distributed computing or to build new distributed systems. As the information technology landscape has changed, the Company's distributed solutions have been among the industry leaders.
The Company's solutions also benefit from cross-product features. For example, the benefits of the Company's security offerings have been incorporated into storage and portal solutions. Such sharing of technology provides customers with robust and complete solutions.
The Company recently announced an internal reorganization designed to align its business more closely with the interests of its customers. As part of the reorganization, five brand units were formed around the Company's brands - Unicenter, eTrust, BrightStor, CleverPath and AllFusion, and Advantage and Jasmine. Each brand unit will have dedicated development, marketing, product support and quality assurance teams. The reorganization does not affect the sales force and the Company expects that the vast majority of its customers will continue to be serviced by the same sales and sales support teams.
The Company's Three Strategic Categories
Process Management
The Company's Process Management solutions monitor and manage critical business processes. True process management requires two levels of integration: integration of an enterprise's existing back-end systems with its new web-based systems and business-to-business ("B2B") integration between an enterprise and its partners, suppliers and service providers. The Company's application development, deployment and integration tools, such as its Advantage family of solutions, are integrated, open-standards-based and designed to assist customers in managing critical business processes.
Information Management
The Company's unified information management solutions deliver Application Life Cycle Management, Data Management and Application Development and unique Portal and Business Intelligence capabilities. The Company provides the optimal business platform, enabling comprehensive integration of business processes, applications, databases, partner systems and data. The Company's innovative portal solution consolidates many sources of information and provides the ability to personalize it for a customer's needs. The Company's predictive analysis technology adds the ability to predict business outcomes by analyzing both historical and current session data. By presenting customers with the information in which they are most likely to be interested, this solution increases overall satisfaction with personalized service to ensure customer loyalty and drives sales through cross-selling and up-selling techniques. The Compan y believes that these solutions provide a competitive advantage, enabling customers to find new prospects and business opportunities. From powerful Application Life Cycle Management to Portal and Business Intelligence, the Company's information management solutions enable historical and real-time data access, analysis and dissemination for processing transactions across the extended enterprise.
Infrastructure Management
Infrastructure is the cornerstone of any business. Every resource - from traditional IT to wireless and other pervasive computing devices - must be managed in a cohesive, integrated fashion to deliver uninterrupted availability and support. Building upon the strength of its core competency, the Company offers a complete set of industry-proven, highly scalable infrastructure solutions. These solutions range from the comprehensive end-to-end management capabilities of Unicenter to solutions that meet specific needs such as security and storage.
The Company's Six Focus Areas
The six focus areas within the Company's strategic categories are: Enterprise Management, Security, Storage, Portal and Business Intelligence, Application Life Cycle Development and Data Management and Application Development.
Enterprise Management: Unicenter
®The Company's Unicenter family of solutions provides true cross-platform enterprise management solutions that address the major challenges facing today's IT professionals including network and systems management, automated operations, IT resource management, database management, web infrastructure management and application management.
Unicenter has become the industry standard for enterprise management software. The Company's Unicenter family enables IT professionals to manage dynamic, complex and heterogeneous infrastructures from a centralized perspective. Furthermore, Unicenter helps organizations understand and assess their IT investment by linking the availability and performance of all aspects of the infrastructure, including databases, web servers, applications and more, with business policies and objectives. Finally, Unicenter leverages a unique, modular yet integrated architecture that enables customers to solve their IT challenges at their own pace and grows as the customer's needs evolve. This design, together with innovative visualization, predictive and automation technologies, delivers powerful management and scalability to companies of all sizes.
In the past 12 months, the Company has released a number of solutions including Unicenter® Wireless Network Management, Unicenter® Management for WebSphere, Unicenter® Management for WebLogic, Unicenter® Mobile Device Management and Unicenter® Service Level Management. This is part of the Company's ongoing commitment to extend the power of Unicenter to new platforms, new devices and emerging infrastructure elements.
The Company also offers a complete line of enterprise management solutions for the mainframe environment. The Company's leading management solutions include Job Management: (Unicenter® CA-7® and Unicenter® CA-11™, Unicenter® CA-Scheduler®, Unicenter® CA-Jobtrac®); Output Management: (Unicenter® CA-View®, Unicenter® CA-Deliver™, Unicenter® CA-Dispatch™, Unicenter® CA-Spool™); Automation: (Unicenter® CA-OPS/MVS®, Unicenter® CA-MIM™); and Performance Management and Accounting: (Unicenter® NeuMICS®, Unicenter® CA-JARS®, Unicenter® CA-SYSVIEW®/E). These products provide highly scalable, fault-tolerant and fully integrated management solutions for the mainframe environment.
Security: e
Trust™Securing today's business environment has become more complex as the enterprise now includes Internet-driven global networks and eCommerce operations. The Internet has opened the door to millions of end users, exposing websites, valuable corporate information, mission-critical business applications and consumers' private information to more risk than ever before. Key challenges for enterprises today are managing multiple security technologies needed to protect against these new threats. The Company's enterprise solutions address these issues, providing a critical element to any customer's business initiative: end-to-end security infrastructure.
Through its eTrust brand, the Company delivers solutions to manage the security of any computing environment. The eTrust security family of products protects environments from malicious attacks, on platforms ranging from mainframe to web and business applications. eTrust solutions provide comprehensive end-to-end security through antivirus, content inspection, intrusion detection/vulnerability assessment, log consolidation user provisioning, secure user access and access control technologies, among others. Solutions included are eTrust™ Access Control, eTrust™ Admin, eTrust™ Antivirus, eTrust™ Audit, eTrust™ Policy Compliance, eTrust™ Single Sign-On, eTrust™ PKI, eTrust™ CA-ACF2® Security and eTrust™ CA-Top Secret® Security. The Company's securi ty solutions offer immediate value to its customers by delivering an enterprise-wide view of security, which can automate the process of applying business-driven security policies across heterogeneous systems. As a result, the Company believes its customers have better risk management and a lower total cost of ownership from security solutions that work together and extend to other Company solutions as well as third-party products.
The Company recently announced a new enterprise security solution called eTrust™ 20/20. eTrust 20/20 will deliver a new line of defense against potential attacks, theft, corporate espionage and policy violations. This patent pending technology will provide visual insight into both physical and IT security events, thus allowing security managers to pinpoint even the most subtle security indicators in large, complex work environments. eTrust 20/20 will visually highlight abnormal events and trends and give security managers a more comprehensive tool for analyzing and reviewing meaningful information from large amounts of data collected from both physical and IT security systems.
Storage: BrightStor
™The Company's BrightStor platform-neutral storage management solutions integrate today's disparate offerings from across the industry and provide the solid infrastructure for end-to-end storage management, operations and Best Practices. As an integrated family of products, BrightStor helps customers protect and manage data, from an application perspective, across all major platforms and storage architectures. The Company offers BrightStor solutions such as BrightStor™ Portal, BrightStor™ Storage Resource Manager and BrightStor™ ARCserve® Backup.
BrightStor Portal provides a single point of management, integrating storage functions across the enterprise. It is the first in an emerging class of next generation storage management capabilities known as Enterprise Storage Automation. The result is a flexible, scalable platform that simplifies management of storage resources across heterogeneous protocols and multi-vendor hardware.
The Company also offers BrightStor Storage Resource Manager (BrightStor SRM), which provides centralized management of storage resources. This cross-platform solution analyzes, manages, reports, schedules and automates networked storage resources across distributed and centralized environments in the enterprise.
The Company also provides a full line of mainframe storage management products that are leaders in the areas of automated tape management: (BrightStor™ CA-1® and the BrightStor™ CA-Dynam® family); DASD management: (BrightStor™ CA-Disk™, BrightStor™ CA-ASM2®, BrightStor™ CA-Allocate™); and storage resource management: (BrightStor™ CA-Vantage™, BrightStor™ CA-ASTEX®).
Portal and Business Intelligence: CleverPath
™Helping customers collaborate, deliver high customer service and make intelligent decisions requires the ability to determine relevant information based on the vast amounts of available data. The Company's CleverPath family includes unified Portal and Business Intelligence solutions that deliver portal, knowledge management, predictive analysis and visualization capabilities. The CleverPath™ Portal presents information in a personalized environment, integrating and delivering information in a format suited to individual preferences. Predictive analysis adds intelligence to help customers identify new opportunities. Visualization capabilities can differentiate a customer from its competition by presenting information in novel and attractive ways. It enables customers to understand vast amounts of data in a single glance, using images, sound and animation.
In the past 12 months, the Company has delivered new releases of CleverPath™ Predictive Analysis Server, CleverPath™ Aion® Business Rules Expert, three new releases of CleverPath™ Portal and an initial release of a new product, CleverPath™ Enterprise Content Manager (CleverPath ECM). In addition to delivering support for a broad range of new and emerging standards, these new releases also integrate with web services. This allows solutions to be deployed to virtually any wireless or mobile device, included in hundreds of downloadable portlets that ensure integration with today's most popular applications and address the growing need to store, manage, control, and access digital assets across the enterprise.
Application Life Cycle Management: AllFusion
™The Company offers AllFusion, a family of comprehensive solutions for end-to-end application life cycle management that enables customers to control the costs of developing, maintaining and managing business applications across the enterprise. Three integrated suites address the needs of modern application development. These suites are the: AllFusionÔ Modeling Suite, AllFusionÔ Change Management Suite and AllFusionÔ Process Management Suite.
AllFusion Modeling Suite simplifies and accelerates the complex aspects of analyzing, designing and implementing applications and business processes and includes the data modeling solution AllFusion™ ERwin® Data Modeler (formerly known as ERwin®). AllFusion Change Management Suite provides a single, integrated point of control for streamlining and coordinating software change processes throughout the IT environment and throughout the entire application life cycle. It includes a comprehensive solution for change and configuration management of distributed environments, AllFusion™ Harvest Change Manager (formerly known as CCC®/Harvest), as well as mainframe-based development control AllFusion™ Endevor® Change Manager (formerly known as Endevor®). AllFusion Process Management Suite delivers an integra ted, complete business process and project management solution and includes AllFusion Process Library (formerly known as Process Continuum
™: Process Library™) which serves as the enterprise repository of hundreds of industry Best Practices.The Company's life cycle management solutions enable companies to model, develop, deploy, test and manage change for applications enterprise-wide. They are designed to help customers increase staff productivity and shorten development cycle times while ensuring that application designs accurately fulfill business requirements.
Data Management and Application Development: Advantage
™ and Jasmine®eBusiness models depend on reliable and flexible business processes that must be integrated both within and across organizational boundaries through the use of enterprise application integration (EAI) and business-to-business integration (B2BI) technologies. The applications driving these business processes require dependable, reliable and accurate data. With the Advantage family of solutions, the Company offers application development, enterprise reporting and industrial-strength databases as well as the services necessary to rapidly integrate applications, databases and business partner systems, and transport and messaging services via XML (eXtensible Markup Language), which allows applications to communicate and share data over the Internet, regardless of operating system, device or programming language. The Company's application development, deployment and integration tools are integrated and open-standard s-based, covering platforms from mainframes to wireless devices.
The Company's Advantage family of application development solutions offer a comprehensive range of design, creation and delivery options to meet customers' business needs. These solutions support an extensive range of environments, from high-end enterprise servers such as mainframes and UNIX to midrange computing environments such as Windows 2000, Netfinity and AS/400 and offer the latest wireless, Java and Enterprise JavaBean ("EJB") development environments. The Advantage family of solutions include the following cross-platform technologies: database management systems, application development tools, application integration and data transformation tools.
Also included in this focus area is Jasmine, the Company's brand of object-oriented solutions. Jasmine provides an object database for efficient storage and management of complex content such as XML documents and multimedia, business application objects and the complex interrelationships between them.
CA Common Services™
Within each focus area, the Company's solutions are integrated, platform-neutral, open-standards-compliant, scalable and extensible. Because they leverage CA Common Services, these solutions provide simplified, streamlined sharing of data and information across heterogeneous environments. They include integrated services for building and deploying robust, safe, manageable, scalable and reliable applications (such as messaging, compression, naming, cache management, publish/subscribe and transaction management) as well as shared management functions and technologies (for example, EnterpriseDiscovery™, calendar and event management). CA Common Services enable the Company's solutions to be deployed standalone, or to interoperate with one another, giving customers the freedom to choose the solution or combination of solutions they need today with assurances that they will work together. CA Common Services al so extend to third-party solutions, allowing organizations to leverage existing investments. The Company's portal technology integrates with each of its other solutions, providing a common web-based user interface and advanced visualization. Organizations benefit from this commonality across the Company's solutions through simplified configuration, management and reduced training costs. The openness and extensibility via CA Common Services give customers the flexibility to leverage their existing technologies and adopt new ones as their businesses evolve.
Professional Services
Historically, the Company's professional services organization has been responsible for providing a broad spectrum of services ranging from education and training to consulting, implementation and comprehensive outsourcing. During fiscal year 2001, the Company refocused its services operations specifically on engagements involving the Company's products. Therefore, the Company no longer offers services related to non-CA products and is phasing out non-CA product service engagements such as staff augmentations. Such non-CA product services typically have lower margins and do not support the Company's overall product initiatives. Focusing on CA product-related services improves the deployment speed of the Company's solutions, which the Company believes will lead to universal satisfaction and greater follow-on sales.
Sales and Marketing
The Company distributes, markets and supports its products on a worldwide basis through its own employees and a network of independent value-added resellers ("VARs"), distributors and dealers. The Company has approximately 5,700 sales and sales support personnel, including the pre-sales and the customer relations organization, engaged in promoting the licensing of the Company's products.
The Company's worldwide sales organization is aligned geographically. Each geographic territory offers the complete spectrum of CA solutions within the Company's 3 x 6 Strategy. A separate Strategic Accounts Group within each territory provides additional services to large customers, including facilities managers. Facilities managers deliver data processing services using the Company's products, to those companies that prefer to outsource their computing processing operations.
The Company also operates through branches and subsidiaries located in 45 foreign countries. Each of these organizations has sales executives who market all or most of the Company's products in their respective territory. Approximately 38% of the Company's revenue in fiscal year 2002 was derived from operations outside the United States. In addition, the Company's products are marketed by independent distributors in those limited areas of the world where it does not have a direct presence. Revenue from independent distributors accounted for less than 1% of the Company's fiscal year 2002 revenue.
Under certain circumstances, the Company will engage, on a non-exclusive basis, customers and other third parties as resellers of certain of the Company's products. The Company also actively encourages VARs to market the Company's products. VARs often bundle the Company's products with specialized consulting services to provide customers with a complete solution. Such VARs generally service a particular market or sector and provide enhanced user-specific solutions.
During the past several years, the Company has formed a number of key strategic alliances with leading technology providers throughout Asia. By aligning with local technology providers in a particular geographic area, these joint ventures offer additional avenues through which the Company's technology and software solutions can be introduced to the IT community. Many of these joint ventures are in the early stages of operations.
The Company's marketing groups produce all of the user documentation for the Company's products, as well as promotional brochures, advertising and other business solicitation materials. These groups perform all phases of creative development and production, including writing the requisite materials, editing, typesetting, photocompositions and printing. Pursuant to the Company's recently announced reorganization, each brand unit will have its own marketing team.
Licensing
The Company does not sell or transfer title to its products to its customers. The products are licensed on a "right-to-use" basis pursuant to license agreements. Such licenses generally require that the customer use the product only for its internal purposes at its own computer installation. In addition, the Company offers license agreements to facility managers, which enable them to use the Company's software in conjunction with their outsourcing business.
The Company also offers licenses for products and groups of products based on the size of an enterprise's computing power as measured in MIPS (millions of instructions per second). Under this option, the customer is free to reallocate hardware or modify user configurations without incremental costs. Similar licensing alternatives are available for the Company's client/server UNIX-based software products. The non-mainframe (distributed) Unicenter family of products is licensed on a tiered server basis. Distributed programs may also be licensed on a server basis or on a specified instance basis (such as the number of users). Products sold through third-party VARs, distributors and dealers are generally subject to distribution agreements and end-user "shrink-wrap" licenses.
Under its standard form of license agreement, the Company warrants that its products will perform in accordance with specifications published in the product documentation.
Prior to the introduction of the new Business Model, the Company offered several types of software licenses. Under those license forms, hereinafter referred to as the "old Business Model," the customer agreed to pay a fixed license fee for the use of the software and either an annual usage and maintenance fee or an annual optional maintenance fee for as long as the customer elected to continue to receive maintenance services. If maintenance was elected throughout the license term, the maintenance fees typically approximated 20% of the aggregate license and maintenance fees. Where applicable, payment of the maintenance fee entitled the customer to receive technical support for the product, as well as the right to receive all enhancements and improvements (excluding features subject to a separate charge) to the product developed by the Company during the period covered. A significant number of the Company's cust omers elected to license the Company's products under a variety of installment payment options. These options primarily incorporated license fees and optional maintenance fees into annual or monthly payments ranging from one to ten years.
On October 25, 2000, the Company announced the new Business Model that allows customers to vary their software mix as their business needs change, providing customers with the freedom to use a variety of software products during the license period and providing unspecified future deliverables as a component of the contract. The terms of these new arrangements are structured such that product revenue is generally recognized ratably over the term of the license, which generally ranges from one to five years. Customers benefit from these new arrangements by finding more flexibility in licensing the Company's software products, gaining an improved, cost-effective way of doing business, mapping the growth of their technology to the growth of their business and allowing their costs to be more predictable. The Company believes the new Business Model provides a more simple, flexible and cost-effective way to do busine ss by allowing customers to leverage their software budgets to meet their challenges while reducing the risks and costs associated with traditional software licensing.
By recognizing license revenue on a ratable basis rather than on an up-front one-time basis, the new Business Model also is intended to improve the visibility and predictability of the Company's revenue streams. For this reason, the introduction of the new Business Model has impacted the Company's reported revenue. Under the new Business Model, deferred subscription revenue is recorded at the time of sale for the value of license revenue that has not been reported as revenue. This amount is amortized into revenue over the remaining term of the arrangement.
A contract entered into in connection with the new Business Model will result in less immediate up-front revenue than under the old Business Model, although the total amount of revenue recognized over the life of the contract will be the same. Since this differs from the way the Company previously recognized revenue and since the Company's customers typically enter into multi-year contracts, the Company's reported revenue has declined from historical levels. As the Company continues to build deferred subscription revenue, a contractually committed source of future revenue, a more significant portion of the Company's revenue will be earned from contracts booked in earlier periods under the new Business Model.
While the new Business Model causes the Company to change the way it recognizes revenue, it does not necessarily change the Company's overall expected cash generated from operations, since customers are expected to continue to pay fees over the contract period. In addition, costs continue to be recorded in the same fashion as under the Company's old Business Model.
To assist investors in evaluating the Company's financial performance, in addition to reported results, the Company has provided pro forma revenue and operating earnings (excluding acquisition amortization and special items) for the current and prior year. These pro forma results assist in the comparison of the Company's performance this year versus the prior year. The Company constructed its pro forma financial statements by analyzing the historical revenue data from the Company and from recent acquisitions - Sterling and PLATINUM - and presenting the revenue and operating earnings performance (excluding acquisition amortization and special items) as if the Company had always operated under the new Business Model. This included the calculation of an average contract life for the Company's, as well as Sterling's and PLATINUM's, up-front license revenue and amortizing such revenue over the average contract life . Costs are consistently recorded from reported to pro forma results. These pro forma measures may not be comparable to similarly titled measures reported by other companies.
Competition and Risks
Current and potential stockholders should consider carefully the risk factors described in Item 7. "Management's Discussion and Analysis of Financial Conditions and Results of Operations" below. Any of these factors, or others, many of which are beyond the Company's control, could negatively affect revenue, profitability or cash flow in the future.
Proprietary Rights
The products of the Company are treated as trade secrets, which contain confidential information. The Company relies on its contractual agreements with customers as well as its own security systems and confidentiality procedures for protection. In addition to obtaining patent protection for new technology, the Company protects its products, their documentation and other written materials under copyright law. The Company also obtains trademark protection for its various product names. The Company periodically receives notices from third parties claiming infringement by the Company's products of third-party proprietary rights. The Company expects that its software will be subject to such claims more frequently as the number of products and competitors in the Company's industry grows and the functionality of products overlap. Such claims could result in litigation, which could be costly and/or result in licensing arrangements on unfavorable terms to the Company, including the payment of royalties to third parties. The Company's business could be adversely affected by such litigation and licensing arrangements and by any inability on its part to develop substitute technology.
Customers
No individual customer accounted for a material portion of the Company's revenue during any of the past three fiscal years. Since the majority of the Company's software is used with relatively expensive computer hardware, most of its revenue is derived from companies that have the resources to make substantial commitments to data processing and computer installations. The majority of the world's major companies use one or more of the Company's software products, including more than 95% of the Fortune 500. The Company's software products are generally used in a broad range of industries, businesses and applications. The Company's customers include manufacturers, financial services providers, banks, insurance companies, educational institutions, hospitals and government agencies.
Product Development
To date, the Company has been able to adapt its products to the rapid changes in the computer industry and, as described more fully herein, the Company believes that it will be able to do so in the future. Computer software vendors must also continually ensure that their products are compatible with the newest generations of computer hardware equipment and meet the needs of customers in the ever-changing marketplace. Accordingly, the Company has the policy of continually enhancing, improving, adapting and adding new features to its products, as well as developing additional products. The Company expects that it will continue to be able to enhance its products to be compatible with the latest hardware offerings. This depends in part on the continued cooperation of hardware equipment manufacturers who provide technical interface information to the Company. There is no assurance this information will continue to be provided voluntarily.
The Company offers facilities (referred to as "eSupport") for many of its software products whereby problem diagnosis, program fixes and access to the Company's customer support databases and other information sources are provided online between the customer's installation and the support facilities of the Company. These services have contributed to the Company's ability to provide maintenance more efficiently.
Product development is primarily performed at the Company's facilities in San Diego, California; Maitland, Florida; Lisle, Illinois; Framingham, Massachusetts; Mount Laurel, New Jersey; Princeton, New Jersey; Islandia, New York; Cincinnati, Ohio; Pittsburgh, Pennsylvania; Plano, Texas and Herndon, Virginia. The Company also performs product development in Sydney, Australia; Vienna, Austria; Brussels, Belgium; Vancouver, Canada; Ditton Park, England; Paris, France; Darmstadt, Germany; Tel Aviv, Israel; and Milan, Italy. For fiscal years ended March 31, 2002, 2001 and 2000, product development and enhancements charged to operations were $678 million, $695 million and $568 million, respectively. In fiscal years 2002, 2001 and 2000, the Company capitalized $53 million, $49 million and $36 million, respectively, of internally developed software costs. Pursuant to the Company's recently announced reorganization, eac h of the Company's brand units will have its own product development group.
Certain products of the Company were acquired from other companies and individuals. The Company continues to seek synergistic companies, products and partnerships. The purchase price of acquired products (such as purchased software) is capitalized and amortized over the useful life of such products over a period not exceeding seven years.
Employees
As of March 31, 2002, the Company had approximately 16,600 employees. Of this total, approximately 2,700 were located at its headquarters facility in Islandia, New York, approximately 7,000 were located at other offices in the United States, and approximately 6,900 were located at its offices in foreign countries. Of the total employees, approximately 4,700 were engaged in product development efforts, 2,300 were part of the professional services organization and 5,700 were engaged in sales and support functions including the pre-sales and the customer relations organization. The Company believes its employee relations are excellent.
(d) Financial Information About Geographic Areas
See Note 4 of the Notes to Consolidated Financial Statements for financial data pertaining to the Company's geographic operations.
Item 2. Properties
The principal properties of the Company are geographically distributed to meet sales and operating requirements. All of the properties of the Company are generally considered to be both suitable and adequate to meet current operating requirements.
The Company leases approximately 140 office facilities throughout the United States. The Company has approximately 170 office facilities outside the United States. Expiration dates on material lease obligations extend to 2023.
The Company owns an 850,000 square foot Corporate Headquarters in Islandia, New York, as well as various office facilities in the United States ranging from 1,000 to 250,000 square feet. The Company owns two office facilities in Germany totaling approximately 120,000 square feet, one office facility in Italy with approximately 140,000 square feet and a 250,000 square foot European Headquarters in the United Kingdom.
The Company owns various computer, telecommunications and electronic equipment. It also leases mainframe and distributed computers at the Company's facilities in Islandia, New York and Lisle, Illinois. This equipment is used for the Company's internal product development, for technical support efforts and for administrative purposes. The Company considers its computer and other equipment to be adequate for its needs. See Note 7 of the Notes to Consolidated Financial Statements for information concerning lease obligations.
Item 3. Legal Proceedings
The Company, Charles B. Wang, Sanjay Kumar and Russell M. Artzt are defendants in a number of shareholder class action lawsuits, the first of which was filed July 23, 1998, alleging that a class consisting of all persons who purchased the Company's stock during the period January 20, 1998 until July 22, 1998 were harmed by misleading statements, representations and omissions regarding the Company's future financial performance. These cases, which seek monetary damages in an unspecified amount, have been consolidated into a single action (the "Shareholder Action") in the United States District Court for the Eastern District of New York ("NY Federal Court"). The NY Federal Court denied the defendants' motion to dismiss the Shareholder Action, and the parties currently are engaged in discovery. Although the ultimate outcome and liability, if any, cannot be determined, management, after consultation and rev iew with counsel, believes that the facts do not support the plaintiffs' claims in the Shareholder Action and that the Company and its officers and directors have meritorious defenses. In the opinion of management, resolution of this litigation is not expected to have a material adverse effect on the financial position of the Company. In the event of an unfavorable resolution of this matter, however, the Company's earnings and cash flows in one or more periods could be materially adversely affected.
In addition, three derivative actions, the first of which was filed on July 30, 1998, alleging misleading statements and omissions similar to those alleged in the Shareholder Action were brought in the NY Federal Court on behalf of the Company against a majority of the Directors who were serving on the Company's board at that time. Another derivative action on behalf of the Company, alleging that the Company issued 14.25 million more shares than were authorized under the 1995 Key Employee Stock Ownership Plan (the "1995 Stock Plan"), was filed in the NY Federal Court. These derivative actions were consolidated into a single action (the "Derivative Action") in the NY Federal Court. Lastly, a derivative action on behalf of the Company was filed in the Chancery Court in Delaware (the "Delaware Action") on September 15, 1998 alleging that 9.5 million more shares were issued to the three 1995 Stock Plan participant s than were authorized under the 1995 Stock Plan. The Derivative Action and the Delaware Action have been settled and both actions have been dismissed. Under the terms of the settlement the 1995 Stock Plan participants returned 4.5 million shares of Computer Associates stock to the Company. In the first quarter of fiscal year 2001, the Company recorded a $184 million gain in conjunction with the settlement.
On September 28, 2001, the United States Department of Justice filed a lawsuit alleging that the Company and PLATINUM had violated Federal antitrust laws, including alleged violation of the waiting period under the Hart-Scott-Rodino Act, in connection with the Company's acquisition of PLATINUM in May 1999. On April 23, 2002, the Company reached a settlement with the Department of Justice pursuant to which the Company will not admit any wrongdoing and will pay the government $638,000. The settlement is expected to become final after a public comment period of 60 days from the filing of the settlement order.
Since February 2002, the Company has been cooperating with a joint inquiry by the United States Attorney's Office for the Eastern District of New York and the staff of the Northeast Regional Office of the Securities and Exchange Commission concerning certain of the Company's accounting practices. The investigation appears generally to be focusing on issues relating to the Company's historical revenue recognition policies and practices. The Company has produced documents and information in response to a request for the voluntary production of documents, and understands that third parties have received subpoenas from the SEC for documents issued pursuant to a formal order of investigation. Such an order gives the SEC staff authority to issue subpoenas and take testimony, though the Company understands that the issuance of such an order does not reflect any finding or determination that any violation of law has o ccurred. The Company intends to continue to cooperate fully with the inquiry. At this point, the Company cannot predict the scope or outcome of the inquiry, which may include the institution of administrative, civil injunctive or criminal proceedings, the imposition of fines and penalties, or other remedies and sanctions. The Company also cannot predict what impact, if any, the inquiry may have on the Company's results of operations or financial condition.
In February and March 2002, a number of shareholder lawsuits were filed in the U.S. District Court for the Eastern District of New York against the Company and Messrs. Wang, Kumar and Ira H. Zar, the Company's Chief Financial Officer. The lawsuits allege, among other things, that the Company made misleading statements of material fact or omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading. Each of the named individual plaintiffs seeks to represent a class consisting of purchasers of the Company's common stock and call options and sellers of put options for the period May 28, 1999 through February 25, 2002. Class action status has not yet been certified in this litigation. In April 2002, a derivative suit against all the Directors of the Company except Mr. Jay W. Lorsch and Mr. Walter P. Schuetze was filed in th e Chancery Court in Delaware alleging breach of their fiduciary duties resulting in damages to the Company of an unspecified amount. This derivative suit is based on essentially the same allegations as those contained in the February and March 2002 shareholder lawsuits. The Company believes that the facts do not support the claims in these lawsuits and the Company and its officers and directors have meritorious defenses and intend to contest the lawsuits vigorously. In the opinion of management, resolution of this litigation is not expected to have a material adverse effect on the financial position of the Company. In the event of an unfavorable resolution of this matter, however, the Company's earnings and cash flows in one or more periods could be materially adversely affected.
The Company, various subsidiaries and certain current and former officers have been named as defendants in other various claims and lawsuits arising in the normal course of business. The Company believes that it has meritorious defenses in connection with such claims and lawsuits and intends to vigorously contest each of them. In the opinion of the Company's management, the results of these other claims and lawsuits, either individually or in the aggregate, are not expected to have a material effect on the Company's results of operations, financial position or cash flows.
Item 4. Submission of Matters to Vote of Security Holders
None.
Executive Officers of the Registrant
The name, age, present position and business experience of all executive officers of the Company as of May 14, 2002 are listed below:
Name |
Age |
Position |
Charles B. Wang (1)Sanjay Kumar(1) Russell M. Artzt(1) Gary Quinn Stephen Richards Ira H. Zar Michael A. McElroy Steven M. Woghin Mary Stravinskas |
57 |
Chairman of the Board of Directors |
(1) Member of the Executive Committee.
Mr. Wang has been Chairman of the Board since April 1980 and a Director since June 1976. Mr. Wang previously served as Chief Executive Officer from June 1976 to August 2000.
Mr. Kumar joined the Company with the acquisition of UCCEL in August 1987. He was named Chief Executive Officer in August 2000, and has been President and a Director since January 1994. Mr. Kumar has previously served as Chief Operating Officer from January 1994 to August 2000; as Executive Vice President - Operations from January 1993 to December 1993; and Senior Vice President - Planning from April 1989 to December 1992.
Mr. Artzt has been with the Company since June 1976. He has been an Executive Vice President since April 1987 and a Director of the Company since November 1980.
Mr. Quinn has been an Executive Vice President - Sales Support since April 2000. He was an Executive Vice President - Global Information and Administrative Services since April 1998, having previously been a Senior Vice President - Global Information Services since April 1996. He previously served in various management positions within the marketing and technical organizations. He joined the Company in December 1985.
Mr. Richards has been an Executive Vice President since February 2000. He was Senior Vice President - Sales since April 1998, having previously been the Senior Vice President - Pacific Region since 1995. He joined the Company in May 1988.
Mr. Zar has been Chief Financial Officer since June 1998. He was named Executive Vice President in April 1999, having previously been a Senior Vice President - Finance since April 1994 and Treasurer from April 1994 to October 1997. Mr. Zar joined the Company in June 1982.
Mr. McElroy was elected Secretary of the Company effective January 1997. He was named Senior Vice President in 1999, having previously been a Vice President - Legal since 1989. He joined the Company in February 1988 and served as Secretary from April 1988 through April 1991.
Mr. Woghin has been General Counsel since February 1995. He was named Senior Vice President at the same time, having previously been a Vice President - Legal since 1993. He joined the Company in March 1992.
Ms. Stravinskas was elected Treasurer effective May 2001. She was named Vice President in 1999, having previously been an Assistant Vice President and a manager of various functions within the finance organization. She joined the Company in February 1986.
The officers are appointed annually and serve at the discretion of the Board of Directors.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock is listed on the New York Stock Exchange. The following table sets forth, for the quarters indicated, the quarterly high and low closing prices on the New York Stock Exchange.
Fiscal Year 2002 |
Fiscal Year 2001 |
|||
High |
Low |
High |
Low |
|
Fourth Quarter |
$38.34 |
$15.98 |
$37.50 |
$18.69 |
On March 28, 2002, the last trading day of the month, the closing price for the Company's Common Stock on the New York Stock Exchange was $21.89. The Company currently has approximately 9,000 record stockholders.
The Company has paid cash dividends in July and January of each year since July 1990 and intends to continue that policy. The Company paid a semi-annual dividend of $.04 per share in the fiscal years ended March 31, 2002 and 2001.
In March 2002, the Company issued $660 million of 5% Convertible Senior Notes due 2007 (the "Notes"). The Notes were issued to Banc of America Securities LLC and Salomon Smith Barney Inc., along with a syndicate of initial purchasers pursuant to a private placement under Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act") and subsequently resold to Qualified Institutional Buyers in reliance on Rule 144A and Regulation S of the Securities Act. The initial purchasers received a discount of 2.5% and the net proceeds to the Company were $644 million before deducting expenses payable by the Company of less than $1 million.
The Notes are senior unsecured indebtedness and rank equally with all existing and future senior unsecured indebtedness. The holders of the Notes may convert all or some of their Notes to common stock at any time on or prior to March 14, 2007 at a conversion price of $24.34 per share. The initial conversion rate is 41.0846 shares per $1,000 principal amount of the Notes and is subject to adjustment under certain circumstances. The Company may redeem the Notes at any time after March 21, 2005 at prices declining to par, and holders of the Notes have the rights to require the Company to repurchase their Notes at par upon the occurrence of certain fundamental changes.
The Company intends to file a registration statement with respect to the Notes and the common stock issuable upon conversion of the Notes.
Item 6. Selected Financial Data
The information set forth below should be read in conjunction with Item 7. "Management's Discussion and Analysis of Financial Condition and Result of Operations" and the financial statements and related notes included elsewhere in this Annual Report on Form 10-K.
Year Ended March 31, |
|||||||||||||||||||||
STATEMENT OF OPERATIONS DATA |
2002 (1) |
2001 (2) |
2000 (3)(4) |
1999 (5) |
1998 (6) |
||||||||||||||||
(in millions, except per share amounts) |
|||||||||||||||||||||
Revenue (7)Net (loss) income - - Basic (loss) earnings per share(8) - - Diluted (loss) earnings per share(8) Dividends declared per common share(8) |
$ |
2,964 |
|
$ |
4,190 |
|
$ |
6,094 |
|
$ |
4,649 |
|
$ |
4,186 |
|
March 31, |
|||||||||||||||||||||
BALANCE SHEET AND OTHER DATA |
2002 |
2001 |
2000 |
1999 |
1998 |
||||||||||||||||
(in millions) |
|||||||||||||||||||||
Cash provided by operating activities |
$ |
1,251 |
|
$ |
1,383 |
|
$ |
1,566 |
|
$ |
1,267 |
|
$ |
1,040 |
|
(1) |
Includes an after-tax charge of $49 million related to an impairment of assets sold in April 2002. |
(2) |
Includes an after-tax gain of $115 million related to the 1995 Stock Plan and an after-tax charge of $19 million related to the bankruptcy filing of Inacom Corporation. |
(3) |
Includes after-tax in-process research and development ("IPR&D") charges of $645 million related to the acquisition of PLATINUM in May 1999 and $150 million related to the acquisition of Sterling in March 2000. See Note 2 of the Notes to Consolidated Financial Statements for additional information. |
(4) |
Includes an after-tax charge of $32 million related to CHS Electronics, Inc. |
(5) |
Includes an after-tax charge of $675 million related to the 1995 Stock Plan. |
(6) |
Includes an after-tax charge of $21 million related to the Company's unsuccessful tender offer for Computer Sciences Corporation. |
(7) |
Adjusted to reflect prior period reclassifications. See Note 1 of the Consolidated Financial Statements for additional information. |
(8) |
Adjusted to reflect a three-for-two stock split effective November 5, 1997. |
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") contains certain forward-looking statements and information relating to the Company that are based on the beliefs and assumptions made by the Company's management as well as information currently available to management. When used in this document, the words "anticipate," "believe," "estimate," "expect" and similar expressions, are intended to identify forward-looking statements. Such statements reflect the current views of the Company with respect to future events and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated or expected. The Company does not intend to update these forward-lookin g statements except as may be required by law.
Critical Accounting Policies and Business Practices
Note 1 to the Consolidated Financial Statements contains a summary of the significant accounting policies that are used by the Company. Many of these accounting policies require the use of estimates. Critical accounting estimates, which are both important to the portrayal of the Company's financial condition and which require complex, subjective judgments, are as follows:
Basis of Revenue Recognition
In October 2000, the Company announced a shift to its new Business Model, offering customers the flexibility and freedom to adapt to rapidly changing enterprise requirements while reducing the risks and costs associated with traditional software licensing models. Under the new Business Model, customers can determine the length and dollar value of their software licenses. The new Business Model provides customers with the flexibility to subscribe to software under month-to-month licenses or choose cost certainty by committing to a longer-term arrangement. The new Business Model also permits customers to vary their software mix as their business and technology needs change, including the right to receive unspecified future software within designated product lines. The Company believes the new Business Model improves the visibility and predictability of the Company's revenue streams by recognizing license revenue on a ratable basis rather than on an up-front one-time basis as the Company did prior to the quarter ended December 31, 2000.
The terms of these new arrangements are structured such that product revenue is generally recognized ratably over the term of the license on a monthly basis which has impacted the Company's reported revenue on a Generally Accepted Accounting Principles ("GAAP") basis. The portion of the license arrangement that is not recognized as revenue creates deferred subscription revenue which will be recognized as revenue over the remaining term of the arrangement.
Prior to the introduction of the new Business Model, maintenance revenue was bundled for a portion of the term of the license arrangement. Under these arrangements, the maintenance, which was based on optional annual renewal rates stated in the arrangement, initially was deferred and subsequently amortized into revenue over the initial contractual term of the arrangement. Maintenance renewals have been recognized ratably over the term of the renewal arrangement. For arrangements executed under the new Business Model, maintenance is bundled for the entire term of the license arrangement. Under these arrangements, maintenance revenue is recognized ratably as subscription revenue over the term of the license arrangement, along with the license fee, commencing upon delivery of the currently available software products.
Financing fees result from the initial discounting to present value of product sales with extended payment terms under the Company's old Business Model and the subsequent increase of receivables to the amount due and payable by customers. Financing fees will continue to decrease as they are amortized over the arrangement term.
Accounts Receivable
As detailed in the table included in Note 5 to the Consolidated Financial Statements, at March 31, 2002, net accounts receivable, after accounting for unearned revenue and the allowance for doubtful accounts, is $3.391 billion.
The Company maintains an allowance for doubtful accounts relating to the portion of the accounts receivable that has been recognized as revenue, which the Company does not expect to collect. The Company performs a quarterly analysis to determine the appropriate allowance for doubtful accounts. This analysis includes various analytical procedures and a review of factors, including specific individual balances selected from a cross-section of the accounts that comprise total accounts receivable, the Company's history of collections of long-term contracts, as well as the overall economic environment. The Company's ability to collect its accounts receivable is dependent upon a number of factors including the performance of its products, customer satisfaction with ongoing services, financial condition of customers and general economic conditions. Changes to these factors will influence the amount of the required al lowance.
The Company expects the allowance for doubtful accounts to continue to decline as net installment accounts receivable under the old Business Model are billed and collected over the remaining life.
Deferred Tax Assets
The Company has recognized for financial statement purposes a portion of the tax benefits connected with losses related to operations. This recognition assumes that the Company will be able to generate sufficient future taxable income so that the carryforward of these losses will be realized. The factors that the Company considers in assessing the likelihood of realization include the forecast of future taxable income and available tax planning strategies that could be implemented to realize the deferred tax assets. Deferred tax assets are primarily made up of acquisition liabilities, such as duplicate facility, employee severance and other costs, and foreign net operating losses ("NOLs"). The NOLs generally expire between 2003 and 2013. A valuation allowance was established in the year ended March 31, 2002 for certain foreign deferred tax assets the Company believes may not be realized. Adjustments to the val uation allowance may be made in the future if it is determined that the amount of NOLs realized is greater or less than the amount recorded.
Valuation of Intangibles
Goodwill represents the excess of the aggregate purchase price over the fair value of the net assets acquired by the Company in purchase business combinations. The Company has historically amortized goodwill using the straight-line method based on an estimated useful life of 10 to 20 years. In July 2001, the FASB issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), which provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives not be amortized, but rather be tested at least annually for impairment. The Company adopted SFAS 142 effective April 1, 2002. Upon adoption, the Company stopped the amortization of goodwill with an estimated net carrying value of approximately $4.483 billion at March 31, 2002. The Company is having an independent valuation analysis completed and does not anticipate any material transitional impairment; however, future impairment reviews may result in periodic write-downs as a result of changes in the valuation analysis. The valuation is based upon the Company's forecast of operating results for the entity that has recorded goodwill, as well as estimates of fair value of the entity and its tangible and intangible assets.
The carrying values of purchased software products and other intangible assets are reviewed on a regular basis for the existence of facts or circumstances, both internally and externally, that may suggest impairment, which includes an assessment of the net realizable value of capitalized software costs as of the balance sheet date. If an impairment is determined to exist, any related impairment loss is calculated based on net realizable value for capitalized software and fair value for all other intangibles.
Results of Operations
The Company distributes and markets its software solutions directly to the end user as well as to distribution partners, resellers or VARs. The Company derives revenues from the following sources: license fees - the licensing of the Company's solutions on a right-to-use basis; maintenance fees - the providing of post-contract customer support and enhancements; and service fees - the providing of professional services such as implementation, consulting and education services. The timing and amount of fees recognized as revenue during a period are determined by the nature of the contractual provisions, such as the term of the arrangement, included in the arrangements with customers. In fiscal year 2002, the average contract life approximated three-and-a-half years, with a Company goal of further reducing it to three years.
Prior to December 2000, the Company's software license arrangements included contractual provisions that resulted in the recognition of license fee revenue up-front, upon delivery of the attributable software products, assuming the three other prerequisite criteria to recognize revenue were met pursuant to the provisions of AICPA Statement of Position ("SOP") No. 97-2, "Software Revenue Recognition," as amended by SOP No. 98-4 and SOP No. 98-9 - the arrangement fee was fixed or determinable, collectibility of the fee was probable and persuasive evidence of an arrangement existed. Beginning in December 2000, the Company's software license arrangements have included contractual provisions that, among other things, allow the customer to receive unspecified future software products within designated product lines. Under these arrangements, the Company begins to recognize revenue ratably over the term of the licens e arrangement after meeting the four revenue recognition criteria as noted above. As was the case prior to December 2000, maintenance is recognized ratably over the contract term and professional service fees are generally recognized as the services are performed. The new Business Model improves the visibility of the Company's revenue streams since license fees are recognized ratably, rather than on an up-front one-time basis. To enhance comparability, during the transition to the new Business Model, the Company has supplemented the MD&A with pro forma financial information for the current and prior fiscal year.
Fiscal Year 2002
Total revenue for the fiscal year ended March 31, 2002 decreased 29%, or $1.226 billion, over fiscal year 2001. Excluding an approximately $90 million decline attributable to unfavorable changes in foreign exchange rate movements with the U.S. dollar, revenue decreased $1.136 billion to $3.054 billion. The decrease was primarily due to the Company's transition to the new Business Model during the third quarter of fiscal year 2001, which resulted in a decrease in up-front license fees compared to the prior year period, partially offset by new subscription revenue. In addition, apprehension toward capital spending by the Company's existing and potential customers due to weaker conditions in the overall economy and the technology industry also impacted fiscal year 2002 revenue. The Company does not expect an improvement in capital spending by customers until there is an improvement in economic and industry condit ions. During fiscal year 2001, approximately $1.429 billion was recognized as revenue up-front at contract signing under the Company's old Business Model and was included in the "Software fees and other" line item on the accompanying Consolidated Statements of Operations in fiscal year 2001. The total revenue decrease is also attributable to a decline in professional services revenue of $222 million. Although the transition to the new Business Model and weaker economic conditions contributed to the revenue decrease, quantification of the impact these components had on such decrease is not readily determinable.
The Company's new Business Model will improve the visibility of the Company's revenue streams since license fees will be recognized ratably, rather than on an up-front one-time basis. To enhance comparability at the outset of the transition to the new Business Model, the Company has supplemented the MD&A with pro forma financial information for the current and prior fiscal year.
For the fiscal year ended March 31, 2002, subscription revenue totaled $827 million, an increase of $768 million over the prior fiscal year. These fees represent the ratable revenue recognized on contracts executed under the new Business Model. The increase is a result of the execution of these types of contracts for all of fiscal year 2002, whereas these contracts were only executed in the third and fourth quarters of fiscal year 2001.
Software fees and other decreased $1.449 billion, or 77%, from the comparable prior year period due to the transition to license arrangements under the new Business Model, in which revenue is recognized ratably and is included as "Subscription revenue" on the accompanying Consolidated Statements of Operations, compared with recognizing revenue up-front at contract signing as was the case through the beginning of the third quarter of fiscal year 2001. The remaining items that comprise software fees and other are primarily revenue associated with sales to distributors, resellers and VARs, which are generally recognized when the reseller, distributor or VAR sells the software products to its customers.
In fiscal year 2002, maintenance revenue decreased 12%, or $129 million, from the prior year. The decrease is primarily attributable to agreements executed under the new Business Model which include maintenance revenue that is bundled with license revenue and, together, the maintenance and license revenue are recognized ratably over the term of the arrangement and included as a component of subscription revenue. Maintenance revenue will continue to decrease as deferred maintenance revenue under the Company's old Business Model is amortized over the contract term, partially offset by new maintenance revenue earned from customers who elect to continue to receive optional maintenance at the expiration of the original contract term of their agreements.
For the fiscal year ended March 31, 2002, financing fees decreased 30%, or $194 million, from the prior year. Financing fees result from the initial discounting to present value of product sales with extended payment terms under the Company's old Business Model and the subsequent increase of receivables to the amount due and payable by customers. The decrease was due to the discontinuance of the offering of contracts which were recorded under the old Business Model. Financing fees will continue to decrease as they are amortized over the contract life.
In fiscal year 2002, professional services revenue decreased 42%, or $222 million, from the prior year, primarily as a result of the Company's shift in focus to professional services engagements that are centered around the Company's products. The decrease is also attributable to the Company's divestiture in October 2000 of Sterling's Federal Systems Group ("FSG"), a provider of professional services to governmental agencies, which contributed approximately $94 million to professional services revenue in fiscal year 2001.
Revenue in the United States represented 62% of overall revenue for fiscal year 2002, as compared to 65% for fiscal year 2001. Consistent with and for the same reasons as the overall decrease in revenue, international revenue decreased $343 million, or 23%, in fiscal year 2002 as compared with fiscal year 2001.
Price changes did not have a material impact in fiscal year 2002 or in fiscal year 2001.
Cost of professional services consists primarily of personnel related costs to provide professional services and training to customers. Cost of professional services decreased $180 million, or 39%, due primarily to a reduction in professional services revenue and related personnel from fiscal year 2001 to fiscal year 2002, including the divesture of FSG, which contributed approximately $84 million of such expenses in the prior year.
In fiscal year 2002, selling, general and administrative ("SG&A") expenses decreased 16%, or $330 million, from the prior year to $1.790 billion. The decrease was largely attributable to the Company's emphasis on overall cost control measures, including personnel related costs such as reduced travel expenses in connection with a reduction in the Company's headcount of approximately 3,000 employees over the prior fiscal year period. Excluding a charge related to an impairment of assets sold in April 2002 of approximately $59 million in fiscal year 2002 and a charge associated with the bankruptcy of Inacom Corporation of approximately $31 million in fiscal year 2001, SG&A decreased 17%, or $358 million.
Product development and enhancement expenses consists primarily of personnel costs, which decreased $17 million, or 2%, for fiscal year 2002 compared with the prior fiscal year. The decrease was a result of general cost containment primarily related to personnel costs. The Company continued its focus on product development and enhancements, with an emphasis on adapting and enhancing products within the Company's six focus areas, particularly for the distributed processing and IBM's z/OS environments, as well as a broadening of the Company's enterprise product offerings.
Commissions and royalty expense decreased $33 million, or 11%, over the prior fiscal year. Commissions and royalty expense as a percentage of revenue increased due to the lower revenue achievement associated with the Company's transition to the new Business Model without an associated change in the overall sales compensation. The decrease in commissions and royalty expense was principally the result of a decline in contract bookings associated with the weaker economic environment for information technology spending.
Depreciation and amortization of goodwill and other intangibles expense in fiscal year 2002 decreased $9 million over the prior year. Amortization of capitalized software costs in fiscal year 2002 decreased $5 million over the prior year. The decrease of depreciation and amortization of goodwill and capitalized software costs was a result of scheduled reductions in the amortization of intangible assets associated with past acquisitions. SFAS 142 will have the effect of substantially reducing the Company's amortization of goodwill and intangibles commencing April 1, 2002.
Net interest expense decreased $117 million compared with the prior year, consisting of a $58 million reduction due to a decrease in the average variable interest rate and a $59 million reduction due to a decrease in average debt outstanding.
The pre-tax loss of $1.385 billion for fiscal year 2002 exceeds the fiscal year 2001 loss by $719 million. Excluding the $59 million asset impairment charge, the pre-tax loss would have been $1.326 billion, compared with pre-tax loss of $819 million in fiscal year 2001, excluding a special gain of $184 million related to the settlement of the 1995 Stock Plan litigation and a special charge of $31 million related to the bankruptcy filing of Inacom Corporation. Net loss for the year ended March 31, 2002 was $1.102 billion, compared to a net loss of $591 million for fiscal year 2001. Fiscal 2002 net loss, excluding the after-tax aforementioned impairment charge, was $1.053 billion, an increased loss of $366 million over the prior year's net loss, exclusive of the 2001 aforementioned special items. The Company's consolidated effective tax rate, excluding acquisition amortization, was 28.4% and 37.5% for the fiscal years ended March 31, 2002 and 2001, respectively.
Fiscal Year 2001
Total revenue for the fiscal year ended March 31, 2001 decreased 31%, or $1.904 billion, over fiscal year 2000. Excluding an approximately $140 million decline attributable to unfavorable changes in foreign exchange rate movements with the U.S. dollar, revenue decreased $1.764 billion to $4.330 billion. Total revenue was unfavorably impacted in the second half of the fiscal year due to the introduction of the new Business Model whereby license fee revenue for such arrangements is now recognized ratably over the contract term. Additionally, the Company experienced weakness in the first half of the fiscal year as a result of customers deferring purchases ahead of an IBM hardware cycle. Although weaker economic conditions and the transition to the new Business Model contributed to the revenue decrease, quantification of the impact these components had on such decrease is not readily determinable.
For the fiscal year ended March 31, 2001, subscription revenue totaled $59 million. These fees represent the ratable revenue recognized on contracts executed under the new Business Model. The remainder of the license and maintenance fees payable on such license arrangements will amortize into revenue over the respective license arrangement's term.
Software fees and other decreased $2.298 billion, or 55%, from the comparable prior year period due to the transition to license arrangements under the new Business Model. For the fiscal year ended March 31, 2001, the Company recorded $1.429 billion under the old Business Model. The remaining items that comprise software fees and other is primarily revenue associated with sales to distributors, resellers and VARs in which revenue is generally recognized when the reseller, distributor or VAR sells the software products to its customers.
In fiscal year 2001, maintenance revenue increased 24%, or $210 million, to $1.087 billion from the prior year primarily as a result of acquired companies' products, partially offset by a decrease associated with revenue recorded since the introduction of the new Business Model. Maintenance will continue to decrease as deferred maintenance under the old Business Model is amortized over the contract term.
For the fiscal year ended March 31, 2001, financing fees increased 21%, or $109 million, to $638 million from the prior year, as a result of an increase in installment-based licenses and the associated non-current receivables prior to the introduction of the new Business Model. Under the old Business Model, financing fees result from the initial discounting to present value of product sales with extended payment terms and the subsequent increase to receivables to the amount due and payable by customers. This accretion of financing fees on the unpaid receivables due in future years represent financing fees.
In fiscal year 2001, professional services increased 3%, or $16 million, to $525 million from the prior year, as a result of the acquisition of Sterling in March 2000, partially offset by the Company's refocusing of its service operations on engagements involving the Company's products. Such refocusing has unfavorably impacted professional services revenue. Reflecting the strategy to focus the professional services organization on the deployment of CA solutions, the Company divested FSG in the third quarter of fiscal year 2001.
Revenue in the United States represented 65% of overall revenue for fiscal year 2001, as compared to 66% for fiscal year 2000. Consistent with the overall decrease in revenue, international revenue decreased $594 million, or 29%, in fiscal year 2001 as compared with fiscal year 2000.
Price changes did not have a material impact in fiscal year 2001 or in fiscal year 2000.
Cost of professional services, which consists primarily of personnel-related costs to provide professional services and training to customers, increased $17 million, or 4%, which is similar to the increase in professional services revenue from fiscal year 2000 to fiscal year 2001.
In fiscal year 2001, SG&A, excluding the charge associated with the bankruptcy of Inacom Corporation of approximately $31 million, increased 48% from the prior year to $2.089 billion, exclusive of the charge of approximately $50 million in fiscal year 2000 associated with the write-off of the Company's investment in CHS Electronics, Inc. ("CHS"). The increase was largely attributable to the Company's higher fixed expense structure, principally the result of added personnel and related costs from the acquisition of Sterling, as well as increased spending on marketing associated with a new comprehensive advertising campaign and an increase in provision expense for accounts receivable as a result of the difficult economic climate.
Product development and enhancement expenses increased $127 million, or 22%, for fiscal year 2001 compared with the prior year. There was continued emphasis on adapting and enhancing products for the distributed processing environment as well as the broadening of the Company's enterprise product offerings, and additional expenses related to development efforts of products obtained through the acquisition of Sterling.
Commissions and royalty expense increased $8 million, or 3%, over the prior year. Commissions and royalty expense as a percentage of revenue increased due to the lower revenue achievement associated with the Company's transition to the new Business Model without an associated change in the sales compensation structure which rewards sales personnel on the total arrangement.
Depreciation and amortization of goodwill and other intangibles expense in fiscal year 2001 increased $295 million over the prior year. Amortization of capitalized software costs in fiscal year 2001 increased $221 million over the prior year. The increase in depreciation and both amortization of goodwill and capitalized software costs was primarily due to the additional amortization of the cost of purchased intangibles associated with Sterling, marginally offset by the scheduled reductions in the amortization of costs associated with past acquisitions.
Net interest expense increased $5 million compared with the prior year. The increase consisted of a $12
million increase due to an increase in the average variable interest rate and a $7 million decrease due to a decrease in average debt outstanding.The pre-tax loss of $666 million for fiscal year 2001 represents a decrease of $2.256 billion, over fiscal year 2000. Excluding a special gain of $184 million related to the settlement of the 1995 Stock Plan litigation and a special charge of $31 million related to the bankruptcy filing of Inacom Corporation, the pre-tax loss would have been $819 million, compared with pre-tax income of $2.437 billion in fiscal year 2000, excluding special charges of $645 million and $150 million for in-process research and development ("IPR&D") relating to the acquisitions of PLATINUM and Sterling, respectively, and approximately $50 million related to the CHS write-off. Net loss for the year ended March 31, 2001 was $591 million, a decrease of $1.287 billion over fiscal year 2000. Fiscal 2001 net loss, excluding the after-tax aforementioned special items, was $687 million, a decrease of $2.210 billion over the prior year 's net income, exclusive of the aforementioned special charges. The Company's consolidated effective tax rate, excluding acquisition amortization and IPR&D charges, was 37.5% for both fiscal years 2001 and 2000.
Selected Quarterly Information
(in millions, except per share amounts)
2002 Quarterly Results |
June 30 |
Sept. 30 |
Dec. 31 |
Mar. 31 (1) |
Total |
||||||||||||||||
Revenue(3) |
$ |
712 |
|
$ |
733 |
|
$ |
747 |
|
$ |
772 |
|
$ |
2,964 |
|
2001 Quarterly Results |
June 30 (2) |
Sept. 30 |
Dec. 31 |
Mar. 31 |
Total |
||||||||||||||||
Revenue(3) |
$ |
1,134 |
|
$ |
1,544 |
|
$ |
782 |
|
$ |
730 |
|
$ |
4,190 |
|
(1) |
Includes an after-tax charge of $49 million related to an impairment of assets sold in April 2002. |
(2) |
Includes an after-tax charge of $19 million related to the bankruptcy of Inacom Corp. and an after-tax gain of $115 million related to the 1995 Stock Plan. |
(3) |
Adjusted to reflect prior period reclassifications. See Note 1 of the Consolidated Financial Statements for additional information. |
Pro Forma Results of Operations
To provide comparable financial results, management's discussion and analysis is supplemented with separate pro forma financial information. This pro forma information is presented in order to give effect to the purchase of PLATINUM and Sterling under the assumption that the Company, PLATINUM and Sterling operated under the new Business Model since their inception. Pro forma operating results are calculated by adjusting prior period revenue recorded under the old Business Model to revenue recognized on a ratable basis under the new Business Model, exclusive of acquisition amortization and special items. Reconciliations of GAAP results to pro forma operating results are provided below. While these results may not be indicative of operations had these acquisitions actually occurred on that date and had the Company historically been operating under the new Business Model, the Company believes they provide a basis for comparison at the outset of the transition to the new Business Model. Professional services revenue and total expenses are identical under both the new and old Business Models; therefore, management's discussion and analysis of these captions has not been repeated under the pro forma results of operations. The following pro forma measures may not be comparable to similarly titled measures reported by other companies.
Fiscal Year Ended March 31, |
||||||
2002 |
2001 |
|||||
(in millions, except per share amounts) |
||||||
Pro Forma |
Pro Forma |
|||||
GAAP |
Operating |
GAAP |
Operating |
|||
Results |
Adjustments |
Results |
Results |
Adjustments |
Results |
|
Revenue(8) |
$ 2,964 |
$2,837(1) |
$5,801 |
$4,190 |
$1,368(2) |
$5,558 |
Total expenses(8) |
4,349 |
(1,015)(3) |
3,334 |
4,856 |
(820)(4) |
4,036 |
Pretax (loss) income |
(1,385) |
3,852(5) |
2,467 |
(666) |
2,188(5) |
1,522 |
Income tax (benefit) provision |
(283) |
1,208(6) |
925 |
(75) |
646(6) |
571 |
Net loss |
$(1,102) |
N/A |
$ (591) |
N/A |
||
Net operating income |
N/A |
$1,542 |
N/A |
$ 951 |
||
Diluted LPS |
$ (1.91) |
N/A |
$(1.02) |
N/A |
||
Shares used |
577 |
N/A |
582 |
N/A |
||
Diluted operating EPS |
N/A |
$ 2.61 |
N/A |
$ 1.61 |
||
Shares used |
577 |
14(7) |
591 |
582 |
10(7) |
592 |
(1) |
Represents amortization of revenue recognized at contract signing from direct product sales in prior fiscal years for CA ($2,513), Sterling ($161) and PLATINUM ($163) as if revenue had been ratably recognized since their inception. |
(2) |
Represents amortization of revenue recognized at contract signing from direct product sales in prior fiscal years for CA ($2,317), Sterling ($228) and PLATINUM ($252) as if revenue had been ratably recognized since their inception, offset by revenue recognized up-front ($1,429) under the old Business Model. |
(3) |
Represents the elimination of acquisition amortization ($956) and a charge associated with the impairment of assets for sale ($59). |
(4) |
Represents the elimination of acquisition amortization ($973), a gain associated with the 1995 Stock Plan ($184) and a charge related to the Inacom bankruptcy ($31). |
(5) |
Represents the effect on pre-tax loss resulting from the adjustments to revenue and expenses reflected in footnotes (1), (2), (3) and (4). |
(6) |
Represents the tax effect of adjustments. The assumed effective tax rate approximated 37.5%. |
(7) |
Represents the inclusion of common stock equivalents since they are no longer antidilutive. |
(8) |
Prior period adjusted to conform with current period presentation. See Note 1 of the Consolidated Financial Statements for additional information. |
Total pro forma revenue for the fiscal year ended March 31, 2002 was $5.801 billion, an increase of 4%, or $243 million, over the prior year pro forma revenue of $5.558 billion. The increase was attributable to the ratable recognition of revenue on contracts transacted during the prior fiscal year, partially offset by a reduction in professional services revenue ($222 million), which was primarily the result of the divestiture of FSG in the third quarter of fiscal year 2001, which generated $94 million of revenue in that fiscal year and the Company's decision to reduce professional services associated with non-CA products. North America and international pro forma revenue represented 64% and 36%, respectively, of overall pro forma revenue in both fiscal years 2002 and 2001. The international pro forma revenue was unfavorably impacted by the effect of exchange rates on the U.S. dollar versus foreign currencies.
On a pro forma basis, pre-tax income excluding acquisition amortization and special charges was $2.467 billion for fiscal year 2002, an increase of 62%, or $945 million, over prior year's pre-tax income of $1.522 billion, exclusive of acquisition amortization and special items. Pro forma net income, excluding acquisition amortization and special items, was $1.542 billion for the fiscal year ended March 31, 2002, an increase of $591 million, or 62%, over fiscal year 2001. The increase was largely attributable to the Company's emphasis on overall cost control measures related to a reduction in the Company's headcount of approximately 3,000 over the prior fiscal year. The Company's consolidated annual effective tax rate, excluding acquisition amortization and special items, was assumed to be 37.5% for both fiscal years 2002 and 2001.
In-Process Research and Development
In the fourth quarter of fiscal year 2000, the Company acquired Sterling in a stock-for-stock exchange valued at approximately $4.1 billion. In the first quarter of fiscal year 2000, the Company acquired PLATINUM for approximately $4.3 billion in cash and assumed liabilities. Acquired in-process research and development ("IPR&D") charges relate to acquisitions of software companies accounted for under the purchase method, in which a portion of the purchase price is allocated to acquired in-process technology and is expensed immediately since the technological feasibility of the research and development projects has not yet been achieved and is believed to have no alternative future use. Independent valuations of Sterling and PLATINUM, using the "Income Approach," were performed and used as an aid in determining the fair value of the identifiable intangible assets and in allocating the purchase price among the acquired assets, including the portion of the purchase price attributed to IPR&D, which was $150 million and $645 million for Sterling and PLATINUM, respectively. This approach focuses on the income-producing capability of the asset, which was determined through review of data provided by both the acquired companies and independent sources and through analysis of relevant market sizes, growth factors and expected trends in technology. The steps followed in applying this approach included estimating the costs to develop the purchased in-process technology into commercially viable products, estimating the resulting net cash flows from such projects and discounting the net cash flows back to their present value using a rate of return commensurate with the relative risk levels.
The ongoing development projects at Sterling at the time of the purchase were composed primarily of application development and information management, business intelligence, network management and storage management tools and solutions. The acquired projects included add-on features, tools and next-generation versions of COOL, VISION™, EUREKA™, SAMS™ and SOLVE® product families. At the time of acquisition, it was estimated that, on average, 68% of the development effort had been completed and the remaining development effort would take approximately 14 months to complete, with a cost of approximately $9 million. Approximately $2 million and $7 million were incurred during the years ended March 31, 2002 and 2001, respectively, on the Sterling related projects and no additional amounts are expected to be incurred relative to these projects. Products from each of the aforemention ed projects are currently commercially available under the Sterling product family or the Company's rebranded product names.
The ongoing development projects at PLATINUM at the time of the purchase were composed primarily of application development, database and enterprise management tools and data warehousing solutions. The acquired projects included add-on features, tools and next generation versions of DB2 Solutions, ProVision™, Security, Advantage application development, end-to-end data warehousing, and Internet infrastructure product families. At the time of acquisition, it was estimated that, on average, 68% of the development effort had been completed and the remaining development effort would take approximately 12 months to complete, with a cost of approximately $41 million. Approximately $2 million, $19 million and $16 million were incurred during the years ended March 31, 2002, 2001 and 2000, respectively, on the PLATINUM related projects and no additional amounts are expected to be incurred relative to these projec ts. Products from each of the aforementioned projects are currently commercially available under the PLATINUM product family or the Company's rebranded product names.
In order for the Company to succeed in the highly competitive and rapidly changing marketplace in which it operates, it has been the Company's philosophy to continue to develop, as well as integrate, acquired projects into its solutions. The Company is committed to both the Sterling and PLATINUM product lines and continues to invest in the development, enhancement and integration of the acquired projects. In addition, the Company does not specifically track revenue generated from completed IPR&D projects subsequent to the closing and integration of acquisitions.
If these projects do not continue to be successfully developed, supported and marketed, the revenue and profitability of the Company may be adversely affected in future periods. Additionally, the value of other intangible assets acquired may become impaired. Results will also be subject to uncertain market events and risks that are beyond the Company's control, such as trends in technology, government regulations, market size and growth and product introduction by competitors. Management believes that the assumptions used in the purchased IPR&D valuation reasonably estimate the future benefits. There can be no assurances that in future periods actual results will not deviate from current estimates.
Liquidity and Capital Resources
Cash, cash equivalents and marketable securities totaled $1.180 billion at March 31, 2002, an increase of $330 million from the March 31, 2001 balance of $850 million. The Company made net debt repayments of over $580 million during fiscal year 2002, using cash on hand and cash from operations to repay over $1.240 billion in debt, offset by $660 million Convertible Senior Notes issued in March 2002. The Company intends to use the proceeds from the Convertible Senior Notes issuance to further repay debt in fiscal year 2003. Additionally, the Company repurchased approximately $95 million in treasury stock in fiscal year 2002. Cash generated from operations for fiscal year 2002 was $1.251 billion, a decrease of $132 million from the prior year's cash from operations of $1.383 billion. Cash from operations was unfavorably impacted this fiscal year compared with the prior fiscal year by a reduction in customer paym ents at contract signing of the entire multi-year arrangement.
The Company's bank credit facilities consist of a $1 billion four-year revolving credit facility and a $2 billion four-year term loan. As of March 31, 2002, $600 million remained outstanding under the four-year term loan and $600 million was drawn under the $1 billion four-year revolver. The drawings under the revolver were used to repay $600 million of the term loan during fiscal year 2002. The interest rates on such debt are determined based on a ratings grid, which applies a margin to the prevailing London InterBank Offered Rate ("LIBOR"). In April 2002, the Company repaid $250 million of the four-year revolving credit facility that was due in the first quarter of fiscal year of 2004.
During the year, the Company repaid a 75 million British Pound Sterling denominated 364-day facility. In addition, the Company has a $1 billion Commercial Paper ("CP") program. The four-year revolver supports the CP program as a backstop facility. As of March 31, 2002, $82 million was outstanding under the CP program.
The Company also utilizes other financial markets in order to maintain its broad sources of liquidity. In fiscal year 1999, $1.750 billion of unsecured Senior Notes were issued in a transaction pursuant to Rule 144A of the Securities Act of 1933. Amounts borrowed, rates and maturities for each issue are $575 million at 6.25% due April 15, 2003, $825 million at 6.375% due April 15, 2005 and $350 million at 6.5% due April 15, 2008. As of March 31, 2002, $128 million was outstanding under the Company's 6.77% Senior Notes. These notes call for annual repayment of $64 million each April until final maturity in April 2003.
In fiscal year 2002, $660 million of unsecured 5% Convertible Senior Notes, due March 15, 2007, were issued in a transaction pursuant to Rule 144A. The Notes are senior unsecured indebtedness and rank equally with all existing senior unsecured indebtedness. The holders of the Notes may convert all or some of their Notes at any time prior to or on March 14, 2007, unless previously redeemed or repurchased, at a conversion price of $24.34 per share. The initial conversion rate is 41.0846 shares per $1,000 principal amount of the Notes and is subject to adjustment under certain circumstances. The Notes may not be redeemed by the Company during the first three years that they are outstanding and may be called thereafter until maturity at the Company's option at declining premiums to par. The Company intends to file a registration statement with respect to the Notes and the common stock issuable upon conversion of t he Notes. Concurrently with the issuance of the Notes, the Company entered into a call spread repurchase option transaction ("Call Spread"). The option purchase price of the Call Spread was $95 million. The entire purchase price of $95 million has been charged to Stockholders' Equity. Under the terms of the Call Spread, the Company has the option to purchase outstanding shares equivalent to the number of shares that may be issued if all Notes are converted into shares (27.1159 million shares), thereby mitigating dilution to shareholders. The Call Spread can be exercised at the three-year anniversary of the issuance of the Notes, at an exercise price of $24.83 per share. To limit the cost of the Call Spread, an upper limit of $36.60 per share has been set such that if the price of the common stock is above that limit at the time of exercise, the number of shares eligible to be purchased will be proportionately reduced based on the amount the common share price exceeds $36.60 at time of exercise. The Call Spre ad is intended to give the Company the option at the three-year anniversary to eliminate dilution as a result of the Notes being converted to common shares up to the $36.60 price per common share and significantly mitigate dilution if the share price exceeds $36.60 at that time. The Call Spread was provided by two leading banking institutions.
Unsecured and uncommitted multi-currency lines of credit are available to meet any short-term working capital needs for subsidiaries operating outside the United States. These lines total $51 million, of which $15 million was drawn as of March 31, 2002.
Debt ratings for the Company's senior unsecured notes and its bank credit facilities are BBB+ and Baa2 from Standard & Poor's and Moody's Investors Service, respectively. The Company's CP program is rated A-2 from Standard & Poor's and P-2 from Moody's.
Peak borrowings under all debt facilities during fiscal year 2002 totaled approximately $4.445 billion. The weighted-average interest rate for all debt facilities during fiscal year 2002 was 5.95%.
As of March 31, 2002, the cumulative number of shares purchased under the Company's various open market Common Stock repurchase programs was 170 million, including approximately 3 million shares purchased in fiscal year 2002. The remaining number of shares authorized for repurchase is approximately 30 million.
Capital resource requirements as of March 31, 2002 consisted of lease obligations for office space, computer equipment, mortgage or loan obligations and amounts due as a result of product and company acquisitions. The Company has commitments to invest $17 million in connection with joint venture agreements.
It is expected that existing cash, cash equivalents, marketable securities, the availability of borrowings under credit lines and expected cash provided from operations will be sufficient to meet ongoing cash requirements. The Company expects to renew its bank credit lines prior to their expiration, during the quarter ended June 30, 2003. The Company expects its long-standing history of providing extended payment terms to customers to continue under the new Business Model.
Contractual Obligations and Commitments
As of March 31, 2002, the Company's contractual obligations and commitments were as follows:
Outstanding debt, inclusive of interest to be paid on such debt, grouped by year of maturity, is as follows: 2003 - $696 million; 2004 - $1,612 million; 2005 - $108 million; 2006 - $882 million; 2007 - $716 million and thereafter - $351 million.
In addition, future minimum lease payments under operating leases are: 2003 - $140 million; 2004 - $101 million; 2005 - $85 million; 2006 - $64 million; 2007 - $56 million; and thereafter - $198 million.
The Company also has commitments to invest $17 million in connection with joint venture agreements.
New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations." SFAS 141 addresses the accounting for acquisitions of businesses and is effective for acquisitions occurring on or after July 1, 2001. This statement is not expected to have an impact on the Company.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets," which requires the use of a non-amortization approach to account for purchased goodwill and certain intangibles. This statement is effective for fiscal years beginning after December 15, 2001. Under the non-amortization approach, goodwill and certain intangibles will not be amortized into results of operations, but instead will be reviewed for impairment, written down and charged to results of operations only in periods in which the recorded value of goodwill and certain intangibles is more than its fair value. The Company is having an independent valuation analysis completed and does not anticipate any material transitional impairment; however, future impairment reviews may result in periodic write-downs. SFAS 142 will have the effect of substantially reducing the Company's amortization of goodwill and intangibles commencing A pril 1, 2002. The Company amortized $429 million, $470 million and $221 million of goodwill for the fiscal years ended March 31, 2002, 2001 and 2000, respectively.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS 143 requires, among other things, that entities record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. This statement is not expected to have an impact on the Company.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144") which supersedes SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS 144 requires, among other things, that long-lived assets be measured at the lower of carrying amount or fair value, less cost to sell, whether reported in continuing operations or in discontinued operations. SFAS 144 is effective for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. The Company is currently assessing the impact of adoption of SFAS 144.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS 145, among other things, rescinds SFAS 4, which required all gains and losses from the extinguishment of debt to be classified as an extraordinary item and amends SFAS 13 to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. This statement is not expected to have an impact on the Company.
The Emerging Issues Task Force ("EITF") of the FASB issued EITF 00-25, "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products." This EITF is effective for annual and interim financial statements beginning after December 15, 2001. EITF 00-25, as further defined by EITF 01-9, "Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products)," requires, among other things, that payments made to resellers by the Company for cooperative advertising, buydowns and similar arrangements should be classified as reductions to net sales. Such payments, primarily consisting of rebates, incentives and other cooperative advertising type costs, totaled $13 million for the fiscal year ended March 31, 2002. The Company has historically reported such payments as a component of SG&A. To enable comparisons between fiscal 2002 results an d the results of prior years, the Company has reclassified these payments in the prior years from SG&A to software fees and other. The impact of the reclassification reduces both software fees and other and SG&A by $16 million and $18 million in fiscal years 2001 and 2000, respectively. The reclassifications do not affect the Company's (loss) profit from operations, net (loss) income or basic and diluted (loss) earnings per share.
The Emerging Issues Task Force issued EITF D-103, "Income Statement Characterization of Reimbursements Received for 'Out-of-Pocket' Expenses Incurred." This EITF is effective for financial reporting periods beginning after December 15, 2001. EITF D-103 requires that reimbursements received for out-of-pocket expenses incurred should be characterized as revenue in the statement of operations. Such reimbursements totaled $8 million for the fiscal year ended March 31, 2002. The Company has historically reported such reimbursements as a component of SG&A. To enable comparisons between fiscal 2002 results and the results of prior years, the Company has reclassified these reimbursements in the prior years from SG&A to professional services revenue. The impact of the reclassification increases both professional services revenue and SG&A by $8 million and $9 million in fiscal years 2001 and 2000, respective ly. The reclassifications do not affect the Company's (loss) profit from operations, net (loss) income or basic and diluted (loss) earnings per share.
Risk Factors
Current and potential stockholders should consider carefully the risk factors described below. Any of these factors, or others, many of which are beyond the Company's control, could negatively affect the Company's revenue, profitability or cash flow in the future.
Operating results and revenue are subject to fluctuations caused by many factors.
Quarterly and annual results of operations are affected by a number of factors, including those listed below, which in turn could adversely affect the Company's revenue, profitability or cash flow in the future. These factors include:
- |
Demand for products and services; |
- |
Length of sales cycle; |
- |
Customer implementation of the Company's products; |
- |
Magnitude of price and product competition; |
- |
Introduction of new hardware; |
- |
General economic conditions in countries in which customers do a substantial amount of business; |
- |
Customer budgets for hardware and software; |
- |
Ability to develop and introduce new or enhanced versions of the Company's products; |
- |
Changes in foreign currency exchange rates; |
- |
Ability to control costs; |
- |
The size of licensing transactions; |
- |
Ability to retain qualified personnel; and |
- |
Reaction of customers to the new Business Model. |
Any of the foregoing factors may cause the Company's operating expenses to be disproportionately high or cause its revenue and operating results to fluctuate. As a consequence, the Company's business, financial condition and operating results could be adversely affected.
The computer software business is highly competitive.
The market in which the Company competes is marked by rapid and substantial technological change, the steady emergence of new companies and products, evolving industry standards and changing customer needs. To remain competitive, the Company must develop new products and continue to enhance existing products. The Company may be unsuccessful in its ability to develop new releases or new products that meet the needs of its customers in light of competitive alternatives available in the market. In addition, the introduction of new products or versions of existing products may not meet with customer acceptance or may be delayed. The Company's inability to bring new products and enhancements to existing products to the market in a timely manner or the failure for these products to achieve market acceptance could have a material adverse effect on its business, financial condition and operating results.
The software business is marked by easy entry and large, entrenched businesses.
Many companies with whom the Company competes, including IBM, Sun, HP and other large computer manufacturers, have substantial resources, a larger installed base of customers in any particular market niche, as well as the ability to develop and market software programs similar to and competitive with the products offered by the Company. Competitive products are also offered by numerous independent software companies that specialize in specific aspects of the highly fragmented software industry. Some, like Microsoft, Oracle Corporation and SAP AG, are the leading developers and vendors in their specialized markets. In addition, new companies enter the market on a frequent and regular basis, offering products that compete with those offered by the Company. Increased competition also results from consolidation of existing companies within the industry. Additionally, many customers historically have developed thei r own solutions that compete with those offered by the Company. Competition from any of these sources can result in price reductions, or displacement of the Company's products, which could have a material adverse effect on the Company's business, financial condition and operating results.
The Company's products must remain compatible with ever-changing operating environments.
IBM, HP, Sun and Microsoft are by far the largest suppliers of systems software and, in most cases, are the manufacturers of the computer hardware systems used by most of the Company's customers. Historically, these operating system developers have modified or introduced new operating systems, systems software and computer hardware. Such new products could in the future incorporate features which perform functions currently performed by the Company's products or could require substantial modification of the Company's products to maintain compatibility with these companies' hardware or software. Although the Company has to date been able to adapt its products and its business to changes introduced by hardware manufacturers and system software developers, there can be no assurance that it will be able to do so in the future. Failure to adapt the Company's products in a timely manner to such changes or customer d ecisions to forego the use of the Company's products in favor of those with comparable functionality contained either in the hardware or operating system could have a material adverse effect on its business, financial condition and operating results.
Future product development is dependent upon access to third-party operating systems.
In the past, licensees using proprietary operating systems were furnished with "source code," which makes the operating system generally understandable to programmers, and "object code," which directly controls the hardware and other technical documentation. Since the availability of source code facilitated the development of systems and applications software, which must interface with the operating systems, independent software vendors such as the Company were able to develop and market compatible software. IBM and other hardware vendors have a policy of restricting the use or availability of the source code for some of their operating systems. To date, this policy has not had a material effect on the Company. Some companies, however, may adopt more restrictive policies in the future or impose unfavorable terms and conditions for such access. These restrictions may, in the future, result in higher research an d development costs for the Company in connection with the enhancement and modification of the Company's existing products and the development of new products. Although the Company does not expect that such restrictions will have this adverse effect, there can be no assurances that such restrictions or other restrictions will not have a material adverse effect on the Company's business, financial condition and operating results.
Third-party microcode could impact product development.
The Company anticipates ongoing use of microcode or firmware provided by hardware manufacturers. Microcode and firmware are essentially software programs in hardware form and are therefore less flexible than other types of software. The Company believes that such continued use will not have a significant impact on the Company's operations and that its products will remain compatible with any changes to such code. However, there can be no assurance that future technological developments involving such microcode will not have an adverse impact on the Company's business, financial condition and operating results.
Customer decisions are influenced by general economic conditions.
The Company's products are designed to improve the productivity and efficiency of its customers' information processing resources. In a recessionary environment, the Company's products are often a reasonable economic alternative for customers faced with the prospect of incurring expenditures to increase their existing information processing resources. However, a general slowdown in the world economy or a particular region could cause customers to delay or forego decisions to license new products or upgrades to their existing environments and this could adversely affect the Company's business, financial condition and operating results.
Failure to protect the Company's intellectual property rights would weaken its competitive position.
Future success of the Company is dependent upon its proprietary technology. The Company protects its proprietary information through the use of patent, copyright, trademark, trade secret laws, confidentiality procedures and contractual provisions. Notwithstanding the Company's efforts to protect its proprietary rights, policing unauthorized use or copying of its proprietary information is difficult. Unauthorized use or copying occurs from time to time and litigation to enforce intellectual property rights could result in significant costs and diversion of resources. Moreover, the laws of some foreign jurisdictions do not afford the same degree of protection to the Company's proprietary rights as do the laws of the United States. For example, "shrink-wrap" or "click-on" licenses may be unenforceable in whole or in part in some jurisdictions in which the Company operates. In addition, patents the Company has obt ained may be circumvented, challenged, invalidated or designed around by other companies. The Company's inability to adequately protect its intellectual property for these or other reasons could adversely affect its business, financial condition and operating results.
The markets for some or all the Company's key product areas may not continue to grow.
The Company has identified six product focus areas: Enterprise Management, Security, Storage, Portal and Business Intelligence, Application Life Cycle Management and Data Management and Application Development. Some or all of these areas may not continue to grow, may not grow at their current rates, may decline in growth or customers may decline or forego use of products in some or all of these focal areas. This is particularly true in newly emerging areas, such as Portal and Business Intelligence. A decline in these focus areas could result in decreased demand for the Company's products, which would adversely impact its business, financial condition and operating results.
Certain software is licensed from third parties.
Some of the Company's products contain software licensed from third parties. Some of these licenses may not be available to the Company in the future on terms that are acceptable or allow its products to remain competitive. The loss of these licenses or the ability to maintain any of them on commercially acceptable terms could delay development of future products or enhancement of existing products. This could adversely affect the Company's business, financial condition and operating results.
Customers are still adapting to the Company's new Business Model.
The Company's new Business Model affords customers greater flexibility in licensing transactions. For example, under the new Business Model, the Company licenses software on a month-to-month or other short-term basis in order to allow customers the opportunity to try the Company's software solutions without committing to a multi-year license obligation. Transactions such as these increase the risk that customers will not fully implement the Company's software and will not enter into a long-term relationship with the Company. This could adversely affect the Company's business, financial condition and operating results. This effect could be diminished if customers elect cost certainty by committing to longer contract periods.
Third parties could claim that the Company's products infringe their intellectual property rights.
From time to time the Company receives notices from third parties claiming infringement of various forms of their intellectual property. Investigation of these claims, whether with or without merit, can be expensive and could affect development, marketing or shipment of the Company's products. As the number of software patents issued increases, it is likely that additional claims, with or without merit, will be asserted. Defending against such claims is time-consuming and could result in significant litigation expense or settlement with unfavorable terms that could adversely affect the Company's business, financial condition and operating results.
Changes to compensation of the Company's sales organization.
The Company revised its compensation plan for the sales organization effective April 1, 2001. The new compensation plan is in alignment with the new Business Model objectives of providing customer flexibility and satisfaction. The compensation plan may encourage behavior not anticipated or intended as it is implemented, which could adversely affect the Company's business, financial condition and operating results.
The success of the Company's international operations is subject to many factors.
International revenue has historically represented approximately one-third of the Company's total worldwide revenue. Continued success in selling the Company's products outside of the United States depends on a variety of factors, including the following:
- |
Reorganizations of the sales force; |
- |
Fluctuations in foreign exchange currency rates; |
- |
Staffing key managerial positions; |
- |
General economic conditions in foreign countries; |
- |
Political instability; and |
- |
Trade restrictions such as tariffs, duties or other controls affecting foreign operations. |
Increase in tariffs, the imposition of trade restrictions or other factors may adversely affect the Company's business, financial condition and operating results.
Fluctuations in foreign currencies could result in transaction losses.
Most of the revenue and expenses of the Company's foreign subsidiaries are denominated in local currencies. Due to the substantial volatility of currency exchange rates, it is not possible to predict the effect of exchange rate fluctuations on the Company's future operating results. Given the relatively long sales cycle that is typical for many of the Company's products, foreign currency fluctuations could result in substantial changes in the foreign currency impact on these transactions. Additionally, deterioration of the exchange rate of foreign currencies against the U.S. dollar can affect the Company's ability to increase its revenue within those markets, all of which may adversely impact the Company's business, financial condition and operating results.
The Company could be subject to fines, penalties or other sanctions as a result of a joint inquiry by the SEC and U.S. Attorney's Office.
Since February 2002, the Company has been cooperating with a joint inquiry by the staff of the Northeast Regional Office of the Securities and Exchange Commission and the United States Attorney's Office for the Eastern District of New York concerning certain of the Company's accounting practices. See "Item 3. Legal Proceedings." Although the Company is unable at this point to predict the scope or outcome of this inquiry, it is possible that it could result in the institution of administrative, civil injunctive or criminal proceedings, the imposition of fines and penalties, and/ or other remedies and sanctions. The conduct of these proceedings could negatively impact the Company's stock price. In addition, the Company expects to continue to incur expenses associated with responding to these agencies, regardless of the outcome and this may divert the efforts and attention of the Company's management team from no rmal business operations.
The Company may become dependent upon large transactions.
The Company has historically been dependent upon large dollar enterprise transactions with individual customers. As a result of the flexibility afforded by the new Business Model, the Company anticipates that there will be fewer of these transactions in the future. There can be no assurances, however, that the Company will not be reliant on large dollar enterprise transactions in the future and the failure to close such transactions could adversely affect the Company's business, financial conditions and operating results.
A large portion of business is consummated at the end of each quarter.
Historically, a significant percentage of the Company's quarterly transactions are finalized in the last few days of the quarter, which may impact financial performance. One of the intended benefits the Company anticipates from the new Business Model will be a more predictable revenue stream throughout the quarter. Even as customers continue to transition to the new Business Model, it is still likely that a large number of transactions will be consummated in the last few days of the quarter, with the risk that some of these may not become final. Failure to finalize transactions in the last few days of the quarter could adversely affect the Company's business, financial condition and operating results.
Growth depends upon successful integration of acquisitions.
The Company's growth strategy is based upon internal development of technology, selective acquisitions and integration of such acquisitions into ongoing operations. Implementation of this growth strategy may result in strains on the Company's management team, internal systems and financial resources. Difficulties encountered in successfully integrating acquired companies and products may adversely affect the Company's business, financial condition and operating results.
The Company has a significant amount of debt.
As of March 31, 2002, the Company had approximately $3.8 billion of debt outstanding consisting of bank credit lines, unsecured fixed-rate senior note obligations, convertible senior notes, commercial paper and unsecured multi-currency credit facilities. The Company expects that existing cash, cash equivalents, marketable securities, expected cash provided from operations and the anticipated renewal of bank credit facilities will be sufficient to meet ongoing cash requirements. Failure to generate sufficient cash as the debt becomes due or to renew credit lines prior to their expiration may adversely affect the Company's business, financial condition and operating results.
The Company's credit ratings have been downgraded and could be downgraded further.
In March 2002, Moody's Investors Service downgraded the Company's senior unsecured long-term debt rating and shifted its rating outlook on the Company from stable to negative. In addition, in February 2002 Standard & Poor's revised its rating outlook on the Company from stable to negative. The Company cannot assure investors that Moody's, Standard & Poor's or any other rating agency will not further downgrade the Company's credit ratings in the future. If the Company's credit ratings are downgraded, it could be required to, among other things, pay additional interest under its credit agreements or other debt. Any such downgrades could also affect the ability of the Company to obtain additional financing in the future and will affect the terms of any such financing.
The Company's stock price may continue to be volatile.
The Company's stock price is subject to significant fluctuations in response to variations in quarterly operating results, the gain or loss of significant contracts, changes in earnings estimates by analysts, announcements of technological innovations or new products by the Company or the Company's competitors, changes in domestic and international economic and business conditions, general conditions in the software and computer industries and other events or factors. In addition, the stock market in general has experienced extreme price and volume fluctuations that have affected the market price of many companies in industries similar or related to the Company's and that have been unrelated to the operating performance of these companies. These market fluctuations have in the past adversely affected and may continue to adversely affect the market price of the Company's common stock.
Acts of terrorism or war may adversely affect the Company's business.
Acts of terrorism, acts of war and other unforeseen events, may cause damage or disruption to the Company's properties, business, employees, suppliers, distributors, resellers and customers, which could have an adverse effect on the Company's business, financial condition and operating results. Such events may also result in an economic slowdown in the United States or elsewhere, which could adversely affect the Company's business, financial condition and operating results.
Item 7(a). Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
The Company's exposure to market rate risk for changes in interest rates relates primarily to the Company's investment portfolio, debt payable and installment accounts receivable. The Company has a prescribed methodology whereby it invests its excess cash in debt instruments of government agencies and high quality corporate issuers (Standard & Poor's single "A" rating and higher). To mitigate risk, many of the securities have a maturity date within one year, and holdings of any one issuer excluding the U.S. Government do not exceed 10% of the portfolio. Periodically, the portfolio is reviewed and adjusted if the credit rating of a security held has deteriorated. The Company does not utilize derivative financial instruments.
The Company maintains a blend of both fixed and floating rate debt instruments. As of March 31, 2002, the Company's outstanding debt approximated $3.8 billion, with approximately $2.5 billion in fixed rate obligations. If market rates were to decline, the Company could be required to make payments on the fixed rate debt that would exceed those based on current market rates. Each 25 basis point decrease in interest rates would have an associated annual opportunity cost of approximately $6 million. Each 25 basis point increase or decrease in interest rates would have an approximately $3 million annual effect on variable rate debt interest based on the balances of such debt as of March 31, 2002.
The Company offers financing arrangements with installment payment terms in connection with its software solution sales. The aggregate contract value under the old Business Model includes an imputed interest element, which can vary with the interest rate environment. Each 25 basis point increase in interest rates would have an associated annual opportunity cost of approximately $9 million.
Foreign Currency Exchange Risk
The Company conducts business on a worldwide basis through branches and subsidiaries in 45 countries. The Company is therefore exposed to movement in currency exchange rates. As part of its risk management strategy and consistent with prior years, the Company did not enter into any foreign exchange derivative transactions. In addition, the Company manages its level of exposure by denominating international sales and payments of related expense in the local currency of its subsidiaries. A 1% decline in all foreign currencies against the U.S. dollar would have an insignificant effect on the Company's net (loss) income.
Equity Price Risk
The Company has minimal investments in marketable equity securities of publicly-traded companies. As of March 31, 2002, these investments were considered available-for-sale with any unrealized gains or losses deferred as a component of stockholders' equity. It is not customary for the Company to make investments in equity securities as part of its investment strategy.
Item 8. Financial Statements and Supplementary Data
The Financial Statements of the Company are listed in the Index to Financial Statements filed as part of this Form 10-K and are incorporated herein by reference.
The Supplementary Data specified by Item 302 of Regulation S-K as it relates to selected quarterly data is included in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations." Information on the effects of changing prices is not required.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
Reference is made to the Registrant's definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the end of the Registrant's fiscal year for information concerning directors, which information is incorporated herein by reference, and to Part I of this Annual Report on Form 10-K for information concerning executive officers under the caption "Executive Officers of the Registrant."
Item 11. Executive Compensation
Reference is made to the Registrant's definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the end of the Registrant's fiscal year for information concerning executive compensation, which information is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Reference is made to the Registrant's definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the end of the Registrant's fiscal year for information concerning security ownership of each person known by the Company to own beneficially more than 5% of the Company's outstanding shares of Common Stock, of each director of the Company and all executive officers and directors as a group and equity compensation plan information, which information is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Reference is made to the Registrant's definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the end of the Registrant's fiscal year for information concerning certain relationships and related transactions, which information is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) |
(1) The Registrant's financial statements together with a separate table of contents are annexed hereto. |
(2) Financial Statement Schedules are listed in the separate table of contents annexed hereto. |
|
(3) Exhibits. |
Regulation S-K Exhibit Number |
||||
3.1 |
Restated Certificate of Incorporation. |
Previously filed as an Exhibit to the Company's Form 10-Q for the fiscal quarter ended December 31, 1998 and incorporated herein by reference. |
||
3.2 |
By-Laws. |
Previously filed as an Exhibit to the Company's Form 10-Q for the fiscal quarter ended December 31, 1998 and incorporated herein by reference. |
||
4.1 |
Certificate of Designation of Series One Junior Participating Preferred Stock, Class A of the Company. |
Previously filed as Exhibit 3 to the Company's Current Report on Form 8-K dated June 18, 1991 and incorporated herein by reference. |
||
4.2 |
Rights Agreement dated as of June 18, 1991 between the Company and Man-ufacturers Hanover Trust Company. |
Previously filed as Exhibit 4 to the Company's Current Report on Form 8-K dated June 18, 1991 and incorporated herein by reference. |
||
4.3 |
Amendment No. 1 dated May 17, 1995 to Rights Agreement dated as of June 18, 1991. |
Previously filed as Exhibit C to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1995 and incorporated herein by reference. |
||
4.4 |
Amendment No. 2 dated May 23, 2001 to Rights Agreement dated as of June 18, 1991. |
Previously filed as Exhibit 4.6 to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2001 and incorporated herein by reference. |
||
4.5 |
Amendment No. 3 dated November 9, 2001 to Rights Agreement dated as of June 18, 1991. |
Previously filed as Exhibit 99.1 to the Company's Form 8-K dated November 9, 2001 and incorporated herein by reference. |
||
4.6 |
Indenture with respect to the Com-pany's $1.75 billion Senior Notes, dated April 24, 1998 between the Company and The Chase Manhattan Bank, as Trustee. |
Previously filed as Exhibit 4(f) to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1998 and incorporated herein by reference. |
||
4.7 |
Indenture with respect to the Company's 5% Convertible Senior Notes due 2007, dated March 18, 2002, between the Company and State Street Bank and Trust Company, as Trustee. |
Filed herewith. |
||
4.8 |
Registration Rights Agreement dated March 18, 2002 among the Company and the Initial Purchasers of the 5% Convertible Senior Notes. |
Filed herewith. |
||
4.9 |
Purchase Agreement dated March 13, 2002 among the Initial Purchasers of the Convertible Senior Notes and the Company. |
Filed herewith. |
||
10.1* |
1987 Non-Statutory Stock Option Plan. |
Previously filed as Appendix C to the Company's definitive Proxy Statement dated July 1, 1987 and incorporated herein by reference. |
||
10.2* |
Amendment No. 1 to the 1987 Non-Statutory Stock Option Plan dated October 20, 1993. |
Previously filed as Exhibit C to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1994 and incorporated herein by reference. |
||
10.3* |
1991 Stock Incentive Plan, as amended. |
Previously filed as Exhibit 1 to the Company's Form 10-Q for the fiscal quarter ended September 30, 1997 and incorporated herein by reference. |
||
10.4* |
1993 Stock Option Plan for Non-Employee Directors. |
Previously filed as Annex 1 to the Company's definitive Proxy Statement dated July 7, 1993 and incorporated herein by reference. |
||
10.5* |
Amendment No. 1 to the 1993 Stock Option Plan for Non-Employee Direc-tors dated October 20, 1993. |
Previously filed as Exhibit E to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1994 and incorporated herein by reference. |
||
10.6* |
1994 Annual Incentive Compensation Plan, as amended. |
Previously filed as Exhibit A to the Company's definitive Proxy Statement dated July 7, 1995 and incorporated herein by reference. |
||
10.7* |
1995 Key Employee Stock Ownership Plan. |
Previously filed as Exhibit B to the Company's definitive Proxy Statement dated July 7, 1995 and incorporated herein by reference. |
||
10.8 |
Credit Agreement dated as of May 26, 1999 among the Company, the Banks, which are parties thereto and Credit Suisse First Boston, as agent, with respect to $3 billion Term and Revolv-ing Loan. |
Previously filed as Exhibit 10.1 to the Company's Current Report on Form 8-K dated May 28, 1999 and incorporated herein by reference. |
||
10.9 |
First Amendment to the Amended and Restated Credit Agreement dated May 26, 1999. |
Previously filed as Exhibit 99.2 to the Company's Form 10-Q for the fiscal quarter ended December 31, 2000 and incorporated herein by reference. |
||
10.10* |
1996 Deferred Stock Plan for Non-Employee Directors. |
Previously filed as Exhibit D to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1996 and incorporated herein by reference. |
||
10.11* |
Amendment No. 1 to the 1996 Deferred Stock Plan for Non-Employee Directors. |
Previously filed on Exhibit A to the Company's Proxy Statement dated July 6, 1998 and incorporated herein by reference. |
||
10.12* |
1998 Incentive Award Plan. |
Previously filed on Exhibit B to the Company's Proxy Statement dated July 6, 1998 and incorporated herein by reference. |
||
10.13* |
Year 2000 Employee Stock Purchase Plan. |
Previously filed on Exhibit A to the Company's Proxy Statement dated July 12, 1999 and incorporated herein by reference. |
||
10.14 |
Note Purchase Agreement dated as of April 1, 1996. |
Previously filed as Exhibit D to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1996 and incorporated herein by reference. |
||
10.15 |
Amendment No. 1 to Note Purchase Agreement dated as of April 1, 1996. |
Previously filed as Exhibit 10.18 to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2001 and incorporated herein by reference. |
||
10.16* |
2001 Stock Option Plan. |
Previously filed as Exhibit B to the Company's Proxy Statement dated July 18, 2001 and incorporated herein by reference. |
||
21 |
Subsidiaries of the Registrant. |
Filed herewith. |
||
23 |
Consent of KPMG LLP. |
Filed herewith. |
(b) |
Reports on Form 8-K. |
The Registrant filed a Report on Form 8-K dated January 22, 2002 to report an event under Items 5 and 7. |
|
The Registrant filed a Report on Form 8-K dated February 4, 2002 to report an event under Items 5 and 7. |
|
The Registrant filed a Report on Form 8-K dated February 6, 2002 to report an event under Items 5 and 7. |
|
The Registrant filed a Report on Form 8-K dated February 8, 2002 to report an event under Items 5 and 7. |
|
The Registrant filed a Report on Form 8-K dated February 22, 2002 to report an event under Items 5 and 7. |
|
The Registrant filed a Report on Form 8-K dated February 25, 2002 to report an event under Items 5 and 7. |
|
The Registrant filed a Report on Form 8-K dated March 4, 2002 to report an event under Items 5 and 7. |
|
The Registrant filed a Report on Form 8-K dated March 20, 2002 to report an event under Items 5 and 7. |
|
The Registrant filed a Report on Form 8-K dated March 28, 2002 to report an event under Items 5 and 7. |
|
(c) |
Exhibits: See Index to Exhibits. |
(d) |
Financial Statement Schedules: The response to this portion of Item 14 is submitted as a separate section of this report. |
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.
COMPUTER ASSOCIATES INTERNATIONAL, INC. |
||
By /s/ SANJAY KUMAR |
||
Sanjay Kumar |
||
President and Chief |
||
Executive Officer |
||
By /s/ IRA H. ZAR |
||
Ira H. Zar |
||
Executive Vice President - Finance |
||
Principal Financial and Accounting Officer |
||
Dated: May 14, 2002 |
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated:
Name |
Title |
||||
/s/ CHARLES B. WANG |
Chairman and Director |
||||
Charles B. Wang |
|||||
/s/ SANJAY KUMAR |
President, Chief Executive Officer |
||||
Sanjay Kumar |
and Director |
||||
/s/ RUSSELL M. ARTZT |
Director |
||||
Russell M. Artzt |
|||||
/s/ ALFONSE M. D'AMATO |
Director |
||||
Alfonse M. D'Amato |
|||||
/s/ WILLEM F.P. de VOGEL |
Director |
||||
Willem F.P. de Vogel |
|||||
/s/ RICHARD A. GRASSO |
Director |
||||
Richard A. Grasso |
|||||
/s/ SHIRLEY STRUM KENNY |
Director |
||||
Shirley Strum Kenny |
|||||
/s/ JAY W. LORSCH |
Director |
||||
Jay W. Lorsch |
|||||
/s/ ROEL PIEPER |
Director |
||||
Roel Pieper |
|||||
/s/ LEWIS S. RANIERI |
Director |
||||
Lewis S. Ranieri |
|||||
/s/ WALTER P. SCHUETZE |
Director |
||||
Walter P. Schuetze |
|||||
Dated: May 14, 2002 |
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14(a)(1) AND (2) AND ITEM 14(d)
LIST OF FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
YEAR ENDED MARCH 31, 2002
Page |
|
The following consolidated financial statements of Computer Associates International, Inc. and subsidiaries are included in Item 8: |
|
Report of Independent Auditors |
34 |
The following consolidated financial statement schedule of Computer Associates International, Inc. and subsidiaries is included in Item 14(d): |
|
Schedule II - Valuation and Qualifying Accounts |
58 |
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Computer Associates International, Inc.
We have audited the accompanying consolidated balance sheets of Computer Associates International, Inc. and subsidiaries as of March 31, 2002 and 2001, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three year period ended March 31, 2002. Our audits also included the financial statement schedule as of and for the years ended March 31, 2002, 2001 and 2000 listed in the Index at Item 14(a). These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Computer Associates International, Inc. and subsidiaries at March 31, 2002 and 2001, and the consolidated results of their operations and their cash flows for each of the years in the three year period ended March 31, 2002, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
KPMG LLP |
New York, New York
May 10, 2002
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES |
|||
CONSOLIDATED STATEMENTS OF OPERATIONS |
|||
Year Ended March 31, |
|||
2002 |
2001 |
2000 |
|
(in millions, except per share amounts) |
Revenue: |
|||||||||
Subscription revenue |
$ |
827 |
$ |
59 |
$ |
- |
|||
Operating Expenses: |
|||||||||
Amortization of capitalized software costs (Loss) income before income taxes |
|
487 |
|
|
492 |
|
|
271 |
|
BASIC (LOSS) EARNINGS PER SHARE |
$ |
(1.91 |
) |
$ |
(1.02 |
) |
$ |
1.29 |
|
Basic weighted-average shares |
|
|
|
||||||
DILUTED (LOSS) EARNINGS PER SHARE |
$ |
(1.91 |
) |
$ |
(1.02 |
) |
$ |
1.25 |
|
Diluted weighted-average shares |
|
|
|
|
|
||||
* Common share equivalents are not included since their effect would be antidilutive. |
|||||||||
See Notes to the Consolidated Financial Statements. |
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES |
|||
CONSOLIDATED BALANCE SHEETS |
|||
March 31, |
|||
ASSETS |
2002 |
2001 |
|
(dollars in millions) |
CURRENT ASSETS |
||||
Cash and cash equivalents |
$ |
1,093 |
$ |
763 |
INSTALLMENT ACCOUNTS RECEIVABLE, due after one year, net |
1,566 |
2,883 |
||
PROPERTY AND EQUIPMENT |
||||
Land and buildings |
531 |
524 |
||
|
||||
PURCHASED SOFTWARE PRODUCTS, net of accumulated |
||||
amortization of $2,648 and $2,193, respectively |
1,836 |
2,328 |
||
|
||||
GOODWILL AND OTHER INTANGIBLE ASSETS, net of |
||||
accumulated amortization of $1,524 and $1,023, respectively |
4,835 |
5,400 |
||
OTHER ASSETS |
210 |
222 |
||
TOTAL ASSETS |
$ |
12,226 |
$ |
14,436 |
See Notes to the Consolidated Financial Statements. |
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES |
|||
CONSOLIDATED BALANCE SHEETS |
|||
March 31, |
|||
LIABILITIES AND STOCKHOLDERS' EQUITY |
2002 |
2001 |
|
(dollars in millions) |
CURRENT LIABILITIES |
||||||
Loans payable and current portion of long-term debt |
$ |
508 |
$ |
816 |
||
LONG-TERM DEBT, net of current portion |
3,334 |
3,629 |
||||
DEFERRED INCOME TAXES |
1,267 |
1,900 |
||||
DEFERRED SUBSCRIPTION REVENUE |
||||||
(COLLECTED) - NON-CURRENT |
208 |
127 |
||||
DEFERRED MAINTENANCE REVENUE |
456 |
538 |
||||
OTHER NON-CURRENT LIABILITIES |
23 |
10 |
||||
STOCKHOLDERS' EQUITY |
||||||
Preferred stock, no par value, 10,000,000 shares authorized, |
||||||
no shares issued |
- |
- |
||||
630,920,576 shares issued |
63 |
|
63 |
|
||
55,223,485 shares for 2001 |
(1,298 |
) |
(1,314 |
) |
||
TOTAL STOCKHOLDERS' EQUITY |
4,617 |
5,780 |
||||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY |
$ |
12,226 |
$ |
14,436 |
||
See Notes to the Consolidated Financial Statements. |
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES |
||
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY |
||
Accumulated |
||||||
Additional |
Other |
Total |
||||
Common |
Paid-In |
Retained |
Comprehensive |
Treasury |
Stockholders' |
|
Stock |
Capital |
Earnings |
Loss |
Stock |
Equity |
|
(in millions, except dividends declared per share) |
Balance at March 31, 1999 Net income Translation adjustment |
$63 |
$1,141 |
$3,468 |
$(180) |
$(1,763) |
$2,729 |
|
in 2000 |
(91) |
(91) |
|||||
included in net income |
(9) |
(9 )596 |
|||||
($.080 per share) |
|
(43) |
(43) |
||||
options and other |
|
9 |
|
|
117 |
126 |
|
in 2001 |
(109) |
(109) |
|||||
securities, net of tax |
1 |
1 (699) |
|||||
($.080 per share) |
(47) |
(47) |
|||||
options, ESPP and other |
|
17 |
|
|
80 |
97 |
|
in 2002 |
31 |
31 |
|||||
securities, net of tax |
(4) |
(4 )(1,075) |
|||||
($.080 per share) |
|
(46) |
(46) |
||||
Exercise of common stock |
|||||||
options, ESPP |
|
33 |
|
|
91 |
124 |
|
See notes to the Consolidated Financial Statements. |
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES |
||||||
CONSOLIDATED STATEMENTS OF CASH FLOWS |
||||||
Year Ended March 31, |
|||
2002 |
2001 |
2000 |
|
(in millions) |
OPERATING ACTIVITIES: |
|||||||||
Net (loss) income |
$ |
(1,102 |
) |
$ |
(591 |
) |
$ |
696 |
|
provided by operating activities: |
|||||||||
Depreciation and amortization |
1,096 |
|
1,110 |
|
594 |
|
|||
net of effect of acquisitions: |
|||||||||
(Increase) decrease in trade and installment receivables, net |
|
|
|
|
|
|
|||
INVESTING ACTIVITIES: |
|||||||||
Acquisitions, primarily purchased software, marketing |
|||||||||
rights and intangibles, net of cash acquired |
(2 |
) |
(174 |
) |
(3,049 |
) |
|||
FINANCING ACTIVITIES: |
|||||||||
Dividends paid |
(46 |
) |
(47 |
) |
(43 |
) |
|||
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
|||||||||
BEFORE EFFECT OF EXCHANGE RATE CHANGES ON CASH |
334 |
(519 |
) |
909 |
|||||
Effect of exchange rate changes on cash |
(4 |
) |
(25 |
) |
(1 |
) |
|||
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
330 |
(544 |
) |
908 |
|||||
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR |
763 |
1,307 |
399 |
||||||
CASH AND CASH EQUIVALENTS - END OF YEAR |
$ |
1,093 |
$ |
763 |
$ |
1,307 |
|||
See Notes to the Consolidated Financial Statements. |
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Significant Accounting Policies
Description of Business: Computer Associates International, Inc. and subsidiaries (the "Company") designs, develops, markets, licenses and supports a wide range of integrated enterprise computer software solutions.
Principles of Consolidation: The Consolidated Financial Statements include the accounts of the Company and its majority owned and controlled subsidiaries. Investments in affiliates owned 50% or less are accounted for by the equity method with liabilities of approximately $5 million. Intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates:
The preparation of financial statements in conformity with generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Although these estimates are based on management's knowledge of current events and actions it may undertake in the future, these estimates may ultimately differ from actual results.Translation of Foreign Currencies: Foreign currency assets and liabilities of the Company's international subsidiaries are translated using the exchange rates in effect at the balance sheet date. Results of operations are translated using the average exchange rates prevailing throughout the year. The effects of exchange rate fluctuations on translating foreign currency assets and liabilities into U.S. dollars are accumulated as part of the foreign currency translation adjustment in Stockholders' Equity. Gains and losses from foreign currency transactions are included in the "Selling, general and administrative" ("SG&A") line item on the Consolidated Statements of Operations in the period in which they occur. Net (loss) income includes exchange transaction losses of approximately $4 million, $9 million and $3 million in the fiscal years ended March 31, 2002, 2001 and 2000, respectively.
Basis of Revenue Recognition: The Company derives revenue from licensing software products and providing post-contract customer support (hereafter referred to as "maintenance") and professional services, such as consulting and education services. The Company licenses its software products to end users primarily through the Company's direct sales force.
The Company licenses to customers the right to use its software products pursuant to software license agreements (hereafter referred to as a "license arrangement"). The license arrangement generally restricts the customer's right to use the Company's enterprise software products as specified in the license arrangement. The license arrangements' original terms generally range from one to ten years for license arrangements prior to December 2000 and one to five years for license arrangements beginning in December 2000. In addition, customers can subscribe to software arrangements under month-to-month licenses beginning in December 2000. The timing and amount of license revenue recognized during an accounting period is determined by the nature of the contractual provisions included in the license arrangement with customers.
Beginning in December 2000, the Company began executing software license arrangements that include flexible contractual provisions that, among other things, allow customers to receive unspecified future software products within designated product lines. Under these arrangements (referred to as the "new Business Model"), the Company is required to recognize revenue attributable to the software products ratably over the term of the license arrangement commencing upon delivery of the currently available software products.
The Company recognizes revenue pursuant to the requirements of the American Institute of Certified Public Accountants ("AICPA") Statement of Position No. 97-2 "Software Revenue Recognition" ("SOP 97-2"), issued in October 1997, as amended by AICPA Statement of Position No. 98-4 and No. 98-9. SOP 97-2 was effective for the Company April 1, 1998. Amendment 98-4 deferred for one year to April 1, 1999, the effective date of certain SOP 97-2 provisions pertaining to multiple-element arrangements. SOP 98-9 amended SOP 97-2 and requires recognition of revenue under the "residual method" when certain criteria are met and was effective for the Company April 1, 1999. These statements set forth GAAP for recognizing revenue on software transactions and establish four criteria necessary in order to recognize revenue - persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and
collectibility is probable. Under the residual method, revenue is recognized in a multiple element arrangement when company-specific objective evidence of fair value exists for all of the undelivered elements in the arrangement, but does not exist for one or more of the delivered elements in the arrangement. At the outset of the arrangement with the customer, the Company defers revenue for the fair value of its undelivered elements (e.g., maintenance, consulting, education services) and recognizes revenue for the remainder of the arrangement fee attributable to the elements initially delivered in the arrangement when the criteria in SOP 97-2 have been met. For
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Note 1 - Significant Accounting Policies (Continued)
license arrangements prior to December 2000 (referred to as the "old Business Model"), once the four criteria in SOP 97-2 were met, revenue was recognized up-front for such delivered elements. Under the new Business Model, once the four criteria are met, revenue attributable to license and maintenance fees is recognized ratably over the arrangement term as the terms of such arrangements provide for flexible contractual provisions, such as "unspecified future deliverables."
Subscription Revenue: Subscription revenue represents the ratable recognition of revenue by the Company attributable to license arrangements under the new Business Model.
Deferred subscription revenue, in general, represents the aggregate portion of all undiscounted contractual and committed license and maintenance fees pursuant to all new Business Model arrangements that has not yet been recognized as revenue on a ratable basis over the life of the license arrangement.
Beginning in fiscal year 2002, the Company has disaggregated the total deferred subscription revenue into two components, the amount of cash collected in excess of the amount recognized as revenue and the amount that has not yet been collected that has not been recognized as revenue. Each appear within the Company's Consolidated Balance Sheets as "Deferred subscription revenue (collected)," and as "Deferred subscription revenue," a component of installment accounts receivable, respectively. The components of installment accounts receivables are detailed in Note 5. Each of these components is further classified as either current or non-current. Balances applicable to fiscal year 2001 have been reclassified for comparability purposes.
Software Fees and Other: Prior to December 2000, the Company executed software license arrangements that included contractual provisions that resulted in the recognition of revenue attributable to the software products upon delivery of the software products, provided that the arrangement fee was fixed or determinable, collectibility of the fee was probable and persuasive evidence of an arrangement existed.
The Company has a standard business practice of entering into long term installment contracts with customers. The Company has a history of enforcing the contract terms and successfully collecting under such arrangements, and therefore considers such fees fixed or determinable.
The Company also enters into license arrangements with distribution partners whereby revenue is recognized upon sell-through to the end user by the distribution partner.
Maintenance: For arrangements executed under the old Business Model, maintenance was bundled for a portion of the term of the license arrangement. Under these arrangements, the fair value of the maintenance, which was based on optional annual renewal rates stated in the arrangement, initially was deferred and subsequently amortized into revenue over the initial contractual term of the arrangement. Maintenance renewals have been recognized ratably over the term of the renewal arrangement. The Company has recently experienced maintenance renewal rates on such contracts of approximately 80%.
The "Deferred maintenance revenue" line item on the Company's Consolidated Balance Sheets principally represents payments received in advance of services rendered as of the balance sheet dates.
For arrangements executed under the new Business Model, maintenance is bundled for the entire term of the license arrangement. Under these arrangements, maintenance revenue is included in subscription revenue and is recognized ratably over the term of the license arrangement, along with the license fee, commencing upon delivery of the currently available software products.
Financing Fees: Accounts receivable resulting from old Business Model product sales with extended payment terms are discounted to present value at prevailing market rates. In subsequent periods, the receivable is increased to the amount due and payable by the customer through the accretion of financing revenue on the unpaid receivables due in future years.
Professional Services: Professional services revenue is derived from the Company's consulting services and educational programs. The fair value of the professional services, which is based on fees charged to customers when the related services are sold separately or under time and materials contracts, initially is deferred and subsequently recognized as revenue when the services are performed. For professional services rendered pursuant to a fixed-price contract, revenue is recognized on the percentage-of-completion method.
Marketable Securities: The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Note 1 - Significant Accounting Policies (Continued)
The Company has determined that all of its investment securities are to be classified as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses reported in Stockholders' Equity under the caption "Accumulated Other Comprehensive Loss." The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in interest income. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in SG&A expenses. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in interest income.
Fair Value of Financial Instruments: The fair value of the Company's cash and cash equivalents, accounts payable and accrued expense amounts approximate their carrying value. See Notes 3, 5 and 6 for the fair value related to the Company's investments, accounts receivable and debt payable, respectively.
Statement of Cash Flows: Interest payments for the fiscal years ended March 31, 2002, 2001 and 2000 were $239 million, $344 million and $319 million, respectively. Income taxes paid for these fiscal years were $277 million, $317 million and $368 million, respectively.
Concentration of Credit Risk: Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of marketable securities and accounts receivable. The Company's marketable securities consist primarily of high quality securities with limited exposure to any single instrument. The Company's accounts receivable balances have limited exposure to concentration of credit risk due to the diverse customer base and geographic areas covered by operations.
Property and Equipment: Land, buildings, equipment, furniture and improvements are stated at cost. Depreciation and amortization are provided over the estimated useful lives of the assets by the straight-line method. Building and improvements are generally estimated to have 30 to 40 year lives and the remaining property and equipment are estimated to have 5 to 7 year lives.
Accounting for Stock-Based Compensation: The Company accounts for employee stock-based compensation in accordance with Accounting Principles Board ("APB") Opinion 25, "Accounting for Stock Issued to Employees" and related interpretations. Pro forma net (loss) income and net (loss) income per share disclosures required by SFAS 123 "Accounting for Stock-Based Compensation," are included in Note 9.
Goodwill:
Goodwill represents the excess of the aggregate purchase price over the fair value of the tangible and identifiable assets and in-process research and development acquired by the Company in a purchase business combination. The Company amortizes goodwill over its estimated useful life, which ranges from 10 to 20 years, depending on the nature of the business acquired. The Company recorded amortization of goodwill for the fiscal years ended March 31, 2002, 2001 and 2000 of $429 million, $470 million and $221 million, respectively. Unamortized goodwill at March 31, 2002 and 2001 was $4,483 million and $4,976 million, respectively. In July 2001, the FASB issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), which requires the use of a non-amortization approach to account for purchased goodwill and certain intangibles. This statement is eff ective for fiscal years beginning after December 15, 2001. Under the non-amortization approach, goodwill and certain intangibles will not be amortized into results of operations, but instead will be reviewed for impairment and written down and charged to results of operations only in periods in which the recorded value of goodwill and certain intangibles is more than its fair value. The Company is having an independent valuation analysis completed and does not anticipate any material transitional impairment; however, future impairment reviews may result in future periodic write-downs. SFAS 142 will have the effect of eliminating the Company's amortization of goodwill commencing April 1, 2002.Capitalized Software Costs: Capitalized software costs include the fair value of rights to market software products acquired in purchase business combinations ("Purchased Software Products"). In allocating the purchase price to the assets acquired in a purchase business combination, the Company allocates a portion of the purchase price equal to the fair value at the acquisition date of the rights to market the software products of the acquired company. The Company recorded amortization of Purchased Software Products for the fiscal years ended March 31, 2002, 2001 and 2000 of $455 million, $467 million and $250 million, respectively, which were included in the "Amortization of capitalized software costs" line item on the accompanying Consolidated Statements of Operations.
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Note 1 - Significant Accounting Policies (Continued)
In accordance with SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed," internally-generated software development costs associated with new products and significant enhancements to existing software products are expensed as incurred until technological feasibility has been established. Internally-generated software development costs of $53 million, $49 million and $36 million were capitalized during fiscal years 2002, 2001 and 2000, respectively. The Company recorded amortization of $32 million, $25 million and $21 million for the fiscal years ended March 31, 2002, 2001 and 2000, respectively, which was included in the "Amortization of capitalized software costs" line item on the accompanying Consolidated Statements of Operations. Unamortized internally-generated software development costs included in the Other Assets line item on the accompanying Consolidated Balance Sheets as of March 31, 2002 and 2001 were $130 million and $111 million, respectively.
Annual amortization of capitalized software costs is the greater of the amount computed using (i) the ratio that current gross revenue for a product bears to the total of current and anticipated future revenue for that product or (ii) the straight-line method over the remaining estimated economic life of the product. The Company amortized capitalized software costs using the straight-line method in fiscal years 2002, 2001 and 2000, as anticipated future revenue is projected to increase for several years considering the Company is continuously integrating current enterprise software technology into new solutions.
The carrying values of goodwill, purchase software products, other intangible assets and other long-lived assets, including investments, are reviewed on a regular basis for the existence of facts or circumstances, both internally and externally, that may suggest impairment, which includes an assessment of the net realizable value of capitalized software costs as of the balance sheet date. If an impairment is determined to exist, any related impairment loss is calculated based on net realizable value for capitalized software and fair value for all other intangibles.
Net (Loss) Earnings Per Share: Basic (loss) earnings per share and diluted (loss) earnings per share are computed by dividing net (loss) income by the weighted-average number of common shares outstanding for the period. Diluted earnings per share is computed by dividing net income by the sum of the weighted-average number of common shares outstanding for the period plus the assumed exercise of all dilutive securities, such as stock options and convertible securities.
Year Ended March 31, |
|||
2002 |
2001 |
2000 |
|
(in millions, except per share amounts) |
Net (loss) income (1)Diluted (Loss) Earnings Per Share |
$(1,102) |
$ (591) |
$ 696 |
||
Weighted-average shares outstanding and |
|||||
common share equivalents (1)Diluted (Loss) Earnings Per Share |
577 $ (1.91) |
582 $(1.02) |
557 $1.25 |
||
Diluted Share Computation |
|||||
Weighted-average common shares outstanding Weighted-average stock options outstanding, net |
577 |
582 |
539 |
||
Weighted-average shares outstanding and |
|||||
common share equivalents (3) |
577 |
582 |
557 |
||
(1) |
If the twelve-month period ended March 31, 2002 had resulted in net income, interest expense related to the convertible senior notes would have been added back to the net income in order to calculate diluted earnings per share. The related interest expense, net of tax, for the year ended March 31, 2002 totaled less than $1 million. |
||||
(2) |
Beginning in fiscal year 2003, the common share equivalents related to convertible debt outstanding would amount to 27 million to the extent that they are not antidilutive. |
||||
(3) |
For fiscal years 2002 and 2001, common share equivalents (convertible senior note shares and stock options) are not included since their effect would be antidilutive. If the twelve-month periods ended March 31, 2002 and 2001 had resulted in net income, the weighted-average shares outstanding and common share equivalents would have been 591 and 592 million, respectively. |
Note 1 - Significant Accounting Policies (Continued)
Comprehensive Loss: Comprehensive loss includes foreign currency translation adjustments and unrealized gains or losses on the Company's available-for-sale securities and reclassification adjustments for gains included in net (loss) income. As of March 31, 2002 and 2001, the accumulated comprehensive loss included a foreign currency translation loss of $358 million and $389 million, respectively, and an unrealized (loss) gain on equity securities of $(3) million and $1 million, respectively. The components of comprehensive loss, net of applicable tax, for the fiscal years ended March 31, 2002, 2001 and 2000, are included within the Consolidated Statements of Stockholders' Equity.
Reclassifications: Certain prior years' balances have been reclassified to conform with the current year's presentation.
The Emerging Issues Task Force ("EITF") of the FASB issued EITF 00-25, "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products." This EITF is effective for annual and interim financial statements beginning after December 15, 2001. EITF 00-25, as further defined by EITF 01-9, "Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products)," requires, among other things, that payments made to resellers by the Company for cooperative advertising, buydowns and similar arrangements should be classified as reductions to net sales. Such payments, primarily consisting of rebates, incentives and other cooperative advertising type costs, totaled $13 million for the fiscal year ended March 31, 2002. The Company has historically reported such payments as a component of SG&A. To enable comparisons between fiscal 2002 results an d the results of prior years, the Company has reclassified these payments in the prior years from SG&A to the "Software fees and other" line item. The impact of the reclassification reduces both software fees and other and SG&A by $16 million and $18 million in fiscal years 2001 and 2000, respectively. The reclassifications do not affect the Company's (loss) profit from operations, net (loss) income or basic and diluted (loss) earnings per share.
The Emerging Issues Task Force issued EITF D-103, "Income Statement Characterization of Reimbursements Received for 'Out-of-Pocket' Expenses Incurred." This EITF is effective for financial reporting periods beginning after December 15, 2001. EITF D-103 requires that reimbursements received for out-of-pocket expenses incurred should be characterized as revenue in the statement of operations. Such reimbursements totaled $8 million for the fiscal year ended March 31, 2002. The Company has historically reported such reimbursements as a component of SG&A. To enable comparisons between fiscal 2002 results and the results of prior years, the Company has reclassified these reimbursements in the prior years from SG&A to the "Professional services" revenue line item. The impact of the reclassification increases both professional services revenue and SG&A by $8 million and $9 million in fiscal years 2001 and 2000, respectively. The reclassifications do not affect the Company's (loss) profit from operations, net (loss) income or basic and diluted (loss) earnings per share.
The Company has historically included the cost of professional services as components of the SG&A and "Commissions and royalties" line items on the Consolidated Statements of Operations. Beginning in fiscal year 2002, such costs have been included in the "Cost of professional services" line item. To enable comparisons between fiscal 2002 results and the results of prior years, the Company has reclassified these costs in the prior years from SG&A and commissions and royalties to cost of professional services. The impact of the reclassification reduces SG&A and increases cost of professional services by $437 million and $418 million in fiscal years 2001 and 2000, respectively, and reduces commissions and royalties and increases cost of professional services by $26 million and $28 million in fiscal years 2001 and 2000, respectively. The reclassifications do not affect the Company's (loss) profit from operations, net (loss) income or basic and diluted (loss) earnings per share.
The Company has historically included the amortization of purchased software and internally developed capitalized software as a component of the "Depreciation and amortization" line item on the Consolidated Statements of Operations. Beginning in fiscal year 2002, such costs have been included in the "Amortization of capitalized software costs" line item. To enable comparisons between fiscal 2002 results and the results of prior years, the Company has reclassified these costs in the prior years from depreciation and amortization to amortization of capitalized software costs. In addition, the title of the line item "Depreciation and amortization" has been changed to "Depreciation and amortization of goodwill and other intangibles" to more fully describe the components of that line item. The impact of the reclassification reduces depreciation and amortization of goodwill and other intangibles and increases amorti zation of capitalized software costs by $492 million and $271 million in fiscal years 2001 and 2000, respectively. The reclassifications do not affect the Company's (loss) profit from operations, net (loss) income or basic and diluted (loss) earnings per share.
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Note 1 - Significant Accounting Policies (Continued)
Payments received in advance of the recognition of the related revenue for product license fees recorded under the new Business Model are shown as "Deferred subscription revenue (collected)" on the accompanying Consolidated Balance Sheets. See the "Subscription revenue" caption of Note 1 for additional information concerning this reclassification. At March 31, 2001, this amount was reflected in "Trade and installment accounts receivable, net" and "Installment accounts receivable."
Note 2 - Acquisitions
On March 31, 2000, the Company acquired Sterling Software, Inc. ("Sterling") and merged one of its wholly owned subsidiaries into Sterling, at which time Sterling became a wholly owned subsidiary of the Company. The shareholders of Sterling received 0.5634 shares of the Company's common stock for each share of Sterling common stock. The Company issued approximately 46.8 million shares of common stock with an approximate fair value of $3.3 billion. Sterling was a developer and provider of systems management, business intelligence, and application development software products and services, as well as a supplier of specialized information technology services for sectors of the federal government.
On May 28, 1999, the Company acquired the common stock and the options to acquire the common stock of PLATINUM technology International, inc. ("PLATINUM") in a cash transaction of approximately $3.6 billion, which was paid from drawings under the Company's $4.5 billion credit agreements. PLATINUM was engaged in providing software products in the areas of database management, eBusiness, application infrastructure management, decision support, data warehousing and knowledge management, as well as Year 2000 reengineering and other consulting services.
The purchase price for the Sterling and PLATINUM acquisitions have been allocated to assets acquired and liabilities assumed based on their fair value at the dates of acquisitions, as adjusted within the allocation period, as follows:
|
Sterling |
PLATINUM |
||||||
(in millions) |
||||||||
Cash and cash equivalents |
$ |
476 |
$ |
57 |
(1) |
Includes an allocation for the assembled workforce, customer relationships, and trademarks/trade names |
of $142 million and $337 million for Sterling and PLATINUM, respectively. |
An independent analysis using future product cash flow forecasts and percentage of product development completion assumptions was utilized to value the in-process research and development amounts which had not reached technological feasibility and had no alternative future use. Accordingly, $645 million and $150 million were expensed as non-recurring charges in fiscal year 2000 related to the PLATINUM and Sterling acquisitions, respectively.
The following table reflects unaudited pro forma combined results of the operations of the Company, Sterling and PLATINUM, as adjusted within the allocation period, on the basis that the acquisitions had taken place at the beginning of fiscal year 2000 under the old Business Model:
Year Ended March 31, |
|
2000 |
|
(in millions, except per share amounts) |
Revenue |
$ |
7,073 |
|
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Note 2 - Acquisitions (Continued)
The following table reflects unaudited pro forma combined results of the operations of the Company, Sterling and PLATINUM, as adjusted within the allocation period, on the basis that the acquisitions had taken place at the beginning of fiscal year 2000 under the old Business Model. All special charges, net of taxes, including the purchased research and development charge for PLATINUM and Sterling in fiscal year 2000 of $645 million and $150 million, respectively, the non-cash charge of $32 million related to CHS Electronics, Inc. ("CHS") recorded in fiscal year 2000, and all special charges recorded by PLATINUM and Sterling in fiscal year 2000 have been excluded:
Year Ended March 31, |
|
2000 |
|
(in millions, except per share amounts) |
Revenue |
$ |
7,073 |
|
In management's opinion, the pro forma combined results of operations are not indicative of the actual results that would have occurred had the acquisitions been consummated at the beginning of fiscal year 2000 and had been under the old Business Model or of future operations of the combined entities under the ownership and operation of the Company.
On October 31, 2000, the Company completed the sale of Sterling's Federal Systems Group ("FSG"), a provider of government consulting services, for approximately $150 million in cash. Since the Company did not note the occurrence of any events or trends that would have impacted the fair value of FSG since the purchase of Sterling, the Company viewed the selling price of FSG as an indicator of its fair value and adjusted the allocation of Sterling's purchase price. As a result, no gain or loss was recorded on the sale.
During fiscal years 2002, 2001 and 2000, the Company acquired other consulting businesses and product technologies in addition to the ones described above, which, individually or collectively, were not material to the consolidated financial statements taken as a whole. The excess of cost over net assets acquired is being amortized on a straight-line basis over the expected period to be benefited. The Consolidated Statements of Operations reflect the results of operations of the companies since the effective dates of the acquisitions.
Liabilities related to acquisitions consist of the following:
Sterling |
PLATINUM |
Other |
|||||||||||||||||||||
Duplicate |
Duplicate |
Duplicate |
|||||||||||||||||||||
Facilities & |
Employee |
Facilities & |
Employee |
Facilities & |
Employee |
||||||||||||||||||
Other Costs |
Costs |
Other Costs |
Costs |
Other Costs |
Costs |
||||||||||||||||||
(in millions) |
|||||||||||||||||||||||
Balance at March 31, 1999: New charges Settlements Adjustments Balance at March 31, 2000: Settlements Adjustments Balance at March 31, 2001: Settlements Adjustments Balance at March 31, 2002: |
$ |
- |
|
$ |
- |
|
$ |
- |
|
$ |
- |
|
$ |
108 |
|
$ |
26 |
|
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Note 2 - Acquisitions (Continued)
The employee costs relate to involuntary termination benefits and the duplicate facilities and other costs relate to operating leases, which are actively being renegotiated and expire at various times through 2010, negotiated buyouts of the operating lease commitments and other contractually related liabilities. The fiscal year 2001 Sterling and PLATINUM adjustments represent changes in the exit plan from its formulation until its finalization less than one year from the completion of the respective acquisition. The remaining acquisition adjustments, which resulted in a reduction to the corresponding liability and related goodwill, represent reductions due to the settlement of obligations at amounts less than those originally estimated. The remaining liability balances are included in the "Accrued expenses and other liabilities" line item on the accompanying Consolidated Balance Sheets.
Note 3 - Marketable Securities
The following is a summary of marketable securities classified as available-for-sale:
Year Ended March 31, |
|||||
2002 |
2001 |
||||
Debt/Equity Securities: |
(in millions) |
||||
Cost |
$91 |
$86 |
There were no realized gains or losses for the fiscal years ended March 31, 2002 or 2001. For the fiscal year ended March 31, 2000, the Company recorded an approximate $50 million loss due to an other than temporary decline in the fair value of an investment in CHS Electronics, Inc., which was included within SG&A.
The estimated fair value of debt and equity securities is based upon published closing prices of those securities at March 31, 2002. For debt securities, amortized cost is classified by contractual maturity. Expected maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.
March 31, 2002 |
|||||
|
Estimated |
||||
Debt securities recorded at market, maturing: |
(in millions) |
||||
Within one year or less |
$22 |
$22 |
Note 4 - Segment and Geographic Information
The Company's chief operating decision-maker reviews financial information presented on a consolidated basis, accompanied by disaggregated information about revenue, by geographic region, for purposes of assessing financial performance and making operating decisions. Accordingly, the Company considers itself to be operating in a single industry segment. The Company is principally engaged in the design, development, marketing, licensing and support of integrated enterprise computer software solutions operating on a diverse range of hardware platforms and operating systems. The Company does not manage its business by solution or focus area and therefore does not maintain its revenue on such a basis.
The following table presents information about the Company by geographic area for the fiscal years ended March 31, 2002, 2001 and 2000:
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Note 4 - Segment and Geographic Information (Continued)
United States |
Europe (a) |
Other (a) |
Eliminations |
Total |
||||||||||||||||
(in millions) |
||||||||||||||||||||
March 31, 2002 |
||||||||||||||||||||
Revenue: |
||||||||||||||||||||
To unaffiliated Total Revenue |
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Property and |
|
|
|
|
|
|||||||||||||||
March 31, 2001 |
||||||||||||||||||||
Revenue: |
||||||||||||||||||||
To unaffiliated Total Revenue |
|
|
|
|
|
|
|
|
|
|
||||||||||
Property and |
|
|
|
|
|
|||||||||||||||
March 31, 2000 |
||||||||||||||||||||
Revenue: |
||||||||||||||||||||
To unaffiliated Total Revenue |
|
|
|
|
|
|
|
|
|
|
||||||||||
Property and |
|
|
|
|
|
(a) |
The Company operates through branches and wholly owned subsidiaries in Canada and 44 foreign countries located in the Middle East, Africa, Europe (22), South America (7), and Asia/Pacific (13). Revenue is allocated to a geographic area based on the location of the sale. |
(b) |
Represents royalties from foreign subsidiaries determined as a percentage of certain amounts invoiced to customers. |
No single customer accounted for 10% or more of total revenue for the fiscal years ended March 31, 2002, 2001 or 2000.
Note 5 - Trade and Installment Accounts Receivable
The Company uses installment contracts as a standard business practice and has a history of successfully collecting under the original payment terms without making concessions on payments, software products, maintenance or professional services. Net trade and installment accounts receivable is composed of the total amounts due from customers pursuant to arrangement fee commitments to pay awaiting the passage of time, less unamortized discounts based on imputed interest for the time value of money for contracts under the old Business Model, unearned revenue attributable to maintenance, deferred subscription revenue, unearned professional services contracted for in the license arrangement and allowances for doubtful accounts. Deferred subscription revenue represents the deferred license and maintenance fees from license arrangements under the new Business Model, which will amortize into revenue over the respecti ve license arrangement term. Trade and installment accounts receivable consist of the following:
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Note 5 - Trade and Installment Accounts Receivable (Continued)
March 31, |
||
2002 |
2001 |
|
(in millions) |
Billed accounts receivable |
$ |
1,011 |
|
$ |
1,443 |
|
Unbilled amounts due beyond the next twelve months - new Business Model |
$ |
1,565 |
|
$ |
1,047 |
|
At March 31, 2002 and 2001, unearned revenue - current consists of unamortized discounts of $288 million and $435 million, respectively, unearned maintenance of $290 million and $462 million, respectively, deferred subscription revenue of $522 million and $314 million, respectively, and unearned professional services of $58 million and $96 million, respectively.
At March 31, 2002 and 2001, unearned revenue - non-current consists of unamortized discounts of $417 million and $727 million, respectively, unearned maintenance of $333 million and $636 million, respectively, and deferred subscription revenue of $1,919 million and $1,268 million, respectively.
Unbilled amounts under the new Business Model are generally collectible over one to five years. As of March 31, 2002, on a cumulative basis, approximately 34%, 69%, 86%, 93% and 96% of amounts due from customers recorded under the new Business Model come due within fiscal years ended 2003 through 2007, respectively.
Unbilled amounts under the old Business Model are generally collectible over three to six years. As of March 31, 2002, on a cumulative basis, approximately 36%, 59%, 74%, 83% and 88% of amounts due from customers recorded under the old Business Model come due within fiscal years ended 2003 through 2007, respectively.
The provision for doubtful accounts for the fiscal years ended March 31, 2002, 2001 and 2000 was $233 million, $235 million and $77 million, respectively, and is included in SG&A.
The Company expects the allowance for doubtful accounts to continue to decline as net installment accounts receivable under the old Business Model are billed and collected over the remaining life.
The Company's estimate of the fair value of net installment accounts receivable under the old Business Model approximate carrying value since it is net of discounts, unearned contractual obligations and an allowance for doubtful accounts. The fair value of the unbilled amounts under the new Business Model (unbilled amounts due, less deferred subscription revenue) may have a fair value greater than that reflected in the balance sheet. Currently, amounts due from customers under the new Business Model are offset by unearned revenue related to these contracts, leaving no or minimal carrying value on the balance sheet for such amounts. The fair value may actually exceed this carrying value but cannot be practicably assessed since there is no existing market for a pool of customer receivables with such contractual commitments similar to that of the Company's. The actual fair value may not be known until these amoun ts are sold, securitized or collected. Although these customer contracts commit the customer to payment under a fixed schedule, the agreements are considered executory in nature due to the ongoing commitment to provide "unspecified future deliverables" as part of the contract terms.
In prior fiscal years, the Company sold individual accounts receivable under the old Business Model to an external third party subject to certain recourse provisions. These amounts approximated $218 million at March 31, 2002.
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Note 6 - Debt
As of March 31, 2002, the Company's committed bank credit facilities consisted of a $1 billion four-year revolver and a $2 billion four-year term loan. The facilities provide for interest based upon the prevailing London InterBank Offered Rate ("LIBOR") subject to a margin determined by a bank facility ratings grid. As of March 31, 2002, $600 million remained outstanding under the term loan at an effective interest rate of approximately 5.13% and $600 million remained outstanding under the four-year revolving credit facility at an effective interest rate of approximately 2.83%. These interest rates represent LIBOR plus an applicable margin on tranches ranging from one month to one year. In April 2002, the Company repaid $250 million of the four-year revolving credit facility that was due in the first quarter of fiscal year 2004. During fiscal year 2002, the Company elected not to renew its $1.3 billion 364-day facility when it expired in May 2001. In addition, the Company repaid a 75 million British Pound Sterling denominated 364-day facility.
The Company is also required to maintain certain financial ratios. Covenant calculations are based upon maintaining a ratio of cash generated from operations to interest expense, as well as maintaining a ratio of cash generated from operations to total debt, all of which is defined within the credit agreement. The Company is in compliance with such covenants.
In March 2002, the Company issued $660 million of 5% Convertible Senior Notes due 2007 (the "Notes"). The Notes were issued to the initial purchasers pursuant to a private placement under Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act") and subsequently resold to Qualified Institutional Buyers in reliance on Rule 144A and Regulation S of the Securities Act. The initial purchasers received a discount of 2.5% and the net proceeds to the Company were $644 million before deducting expenses payable by the Company of less than $1 million.
The Notes are senior unsecured indebtedness and rank equally with all existing senior unsecured indebtedness. The holders of the Notes may convert all or some of their Notes at any time prior to or on March 14, 2007, unless previously redeemed or repurchased, at a conversion price of $24.34 per share. The initial conversion rate is 41.0846 shares per $1,000 principal amount of the Notes and is subject to adjustment under certain circumstances. The Notes may not be redeemed by the Company during the first three years that they are outstanding and may be called thereafter until maturity at the Company's option at declining premiums to par. The Company intends to file a registration statement with respect to the Notes and the common stock issuable upon conversion of the Notes. Concurrently with the issuance of the Notes, the Company entered into a call spread repurchase option transaction ("Call Spread"). The opt ion purchase price of the Call Spread was $95 million. The entire purchase price of $95 million has been charged to Stockholders' Equity. Under the terms of the Call Spread, the Company has the option to purchase outstanding shares equivalent to the number of shares that may be issued if all Notes are converted into shares (27.1159 million shares), thereby mitigating dilution to shareholders. The Call Spread can be exercised at the three-year anniversary of the issuance of the Notes, at an exercise price of $24.83 per share. To limit the cost of the Call Spread, an upper limit of $36.60 per share has been set such that if the price of the common stock is above that limit at the time of exercise, the number of shares eligible to be purchased will be proportionately reduced based on the amount the common share price exceeds $36.60 at time of exercise. The Call Spread is intended to give the Company the option at the three year anniversary to eliminate dilution as a result of the Notes being converted to common shares up to the $36.60 price per common share and significantly mitigate dilution if the share price exceeds $36.60 at that time. The Call Spread was provided by two leading banking institutions.
As of March 31, 2002 and 2001, the Company has the following unsecured, fixed-rate interest senior note obligations outstanding:
March 31, |
||
2002 |
2001 |
|
(in millions) |
6.770% Senior Notes due April 2003 |
$128 |
$192 |
Debt ratings for the Company's senior unsecured notes and bank credit facilities are Baa2 and BBB+ from Moody's Investors Service and Standard & Poor's, respectively.
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Note 6 - Debt (Continued)
The Company is an issuer of Commercial Paper ("CP"). The above-mentioned revolver supports the CP program as a backstop facility. The program, rated A-2 by Standard & Poor's and P-2 by Moody's Investors Service, provides for maximum issuance of up to $1 billion in CP with maturities not to exceed 270 days. The Company had $82 million and $340 million of CP outstanding at March 31, 2002 and 2001, respectively, which bore interest at rates approximating 2.37% and 5.90%, respectively.
Unsecured and uncommitted multi-currency credit facilities of $51 million are available to meet any short-term working capital requirements and can be drawn upon, up to a predefined limit, by most subsidiaries. Under these multi-currency facilities, approximately $15 million and $14 million was drawn at March 31, 2002 and 2001, respectively.
As of March 31, 2002 and 2001, the Company had various other debt obligations outstanding, which approximated $7 million and $20 million, respectively.
The Company conducts an ongoing review of its capital structure and debt obligations as part of its risk management strategy. As of March 31, 2002, the fair value of the Company's debt was approximately $83 million less than its carrying value.
The maturities of outstanding debt for the next five fiscal years are as follows: 2003 - $508 million; 2004 - $1,497 million; 2005 - $0; 2006 - $826 million; and 2007 - $660 million.
Interest expense for the fiscal years ended March 31, 2002, 2001 and 2000 was $249 million, $370 million and $352 million, respectively.
Note 7 - Commitments and Contingencies
The Company leases real estate and certain data processing and other equipment with lease terms expiring through 2023. The leases are operating leases and generally provide for renewal options and additional rentals based on escalations in operating expenses and real estate taxes. The Company has no material capital leases.
Rental expense under operating leases for the fiscal years ended March 31, 2002, 2001 and 2000, was $220 million, $238 million and $205 million, respectively. Future minimum lease payments are: 2003 - $140 million; 2004 - $101 million; 2005 - $85 million; 2006 - $64 million; 2007 - $56 million; and thereafter - $198 million.
The Company has commitments to invest $17 million in connection with joint venture agreements.
In prior fiscal years, the Company sold individual accounts receivable under the old Business Model to an external third party subject to certain recourse provisions. These amounts approximated $218 million at March 31, 2002.
The Company, Charles B. Wang, Sanjay Kumar and Russell M. Artzt are defendants in a number of shareholder class action lawsuits, the first of which was filed July 23, 1998, alleging that a class consisting of all persons who purchased the Company's stock during the period January 20, 1998 until July 22, 1998 were harmed by misleading statements, representations and omissions regarding the Company's future financial performance. These cases, which seek monetary damages in an unspecified amount, have been consolidated into a single action (the "Shareholder Action") in the United States District Court for the Eastern District of New York ("NY Federal Court"). The NY Federal Court denied the defendants' motion to dismiss the Shareholder Action, and the parties currently are engaged in discovery. Although the ultimate outcome and liability, if any, cannot be determined, management, after consultation and review wit h counsel, believes that the facts do not support the plaintiffs' claims in the Shareholder Action and that the Company and its officers and directors have meritorious defenses. In the opinion of management, resolution of this litigation is not expected to have a material adverse effect on the financial position of the Company. In the event of an unfavorable resolution of this matter, however, the Company's earnings and cash flows in one or more periods could be materially adversely affected.
In addition, three derivative actions, the first of which was filed on July 30, 1998, alleging misleading statements and omissions similar to those alleged in the Shareholder Action were brought in the NY Federal Court on behalf of the Company against a majority of the Directors who were serving on the Company's board at that time. Another derivative action on behalf of the Company, alleging that the Company issued 14.25 million more shares than were authorized under the 1995 Key Employee Stock Ownership Plan (the "1995 Stock Plan"), was filed in the NY Federal Court. These derivative actions were consolidated into a single
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Note 7 - Commitments and Contingencies (Continued)
action (the "Derivative Action") in the NY Federal Court. Lastly, a derivative action on behalf of the Company was filed in the Chancery Court in Delaware (the "Delaware Action") on September 15, 1998 alleging that 9.5 million more shares were issued to the three 1995 Stock Plan participants than were authorized under the 1995 Stock Plan. The Derivative Action and the Delaware Action have been settled and both actions have been dismissed. Under the terms of the settlement the 1995 Stock Plan participants returned 4.5 million shares of Computer Associates stock to the Company. In the first quarter of fiscal year 2001, the Company recorded a $184 million gain in conjunction with the settlement.
On September 28, 2001, the United States Department of Justice filed a lawsuit alleging that the Company and PLATINUM had violated Federal antitrust laws, including alleged violation of the waiting period under the Hart-Scott-Rodino Act, in connection with the Company's acquisition of PLATINUM in May 1999. On April 23, 2002, the Company reached a settlement with the Department of Justice pursuant to which the Company will not admit any wrongdoing and will pay the government $638,000. The settlement is expected to become final after a public comment period of 60 days from the filing of the settlement order.
Since February 2002, the Company has been cooperating with a joint inquiry by the United States Attorney's Office for the Eastern District of New York and the staff of the Northeast Regional Office of the Securities and Exchange Commission concerning certain of the Company's accounting practices. The investigation appears generally to be focusing on issues relating to the Company's historical revenue recognition policies and practices. The Company has produced documents and information in response to a request for the voluntary production of documents, and understands that third parties have received subpoenas from the SEC for documents issued pursuant to a formal order of investigation. Such an order gives the SEC staff authority to issue subpoenas and take testimony, though the Company understands that the issuance of such an order does not reflect any finding or determination that any violation of law has o ccurred. The Company intends to continue to cooperate fully with the inquiry. At this point, the Company cannot predict the scope or outcome of the inquiry, which may include the institution of administrative, civil injunctive or criminal proceedings, the imposition of fines and penalties, or other remedies and sanctions. The Company also cannot predict what impact, if any, the inquiry may have on the Company's results of operations or financial condition.
In February and March 2002, a number of shareholder lawsuits were filed in the U.S. District Court for the Eastern District of New York against the Company and Messrs. Wang, Kumar and Ira H. Zar, the Company's Chief Financial Officer. The lawsuits allege, among other things, that the Company made misleading statements of material fact or omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading. Each of the named individual plaintiffs seeks to represent a class consisting of purchasers of the Company's common stock and call options and sellers of put options for the period May 28, 1999 through February 25, 2002. Class action status has not yet been certified in this litigation. In April 2002, a derivative suit against all the Directors of the Company except Mr. Jay W. Lorsch and Mr. Walter P. Schuetze was filed in th e Chancery Court in Delaware alleging breach of their fiduciary duties resulting in damages to the Company of an unspecified amount. This derivative suit is based on essentially the same allegations as those contained in the February and March 2002 shareholder lawsuits. The Company believes that the facts do not support the claims in these lawsuits and the Company and its officers and directors have meritorious defenses and intend to contest the lawsuits vigorously. In the opinion of management, resolution of this litigation is not expected to have a material adverse effect on the financial position of the Company. In the event of an unfavorable resolution of this matter, however, the Company's earnings and cash flows in one or more periods could be materially adversely affected.
The Company, various subsidiaries and certain current and former officers have been named as defendants in other various claims and lawsuits arising in the normal course of business. The Company believes that it has meritorious defenses in connection with such claims and lawsuits and intends to vigorously contest each of them. In the opinion of the Company's management, the results of these other claims and lawsuits, either individually or in the aggregate, are not expected to have a material effect on the Company's results of operations, financial position or cash flows.
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Note 8 - Income Taxes
The amounts of (loss) income before (benefit) provision for income taxes attributable to domestic and foreign operations are as follows:
Year Ended March 31, |
|||
2002 |
2001 |
2000 |
|
(in millions) |
Domestic |
$ |
(1,166 |
) |
$ |
(344 |
) |
$ |
1,452 |
The (benefit) provision for income taxes consists of the following:
Year Ended March 31, |
|||
2002 |
2001 |
2000 |
|
(in millions) |
Current: |
|||||||||
Federal |
$ |
186 |
$ |
204 |
$ |
401 |
|||
Deferred: |
|||||||||
Federal |
$ |
(401 |
) |
$ |
(169 |
) |
$ |
381 |
|
Total: |
|||||||||
Federal |
$ |
(215 |
) |
$ |
35 |
|
$ |
782 |
The (benefit) provision for income taxes is reconciled to the tax (benefit) provision computed at the federal statutory rate as follows:
Year Ended March 31, |
|||
2002 |
2001 |
2000 |
|
(in millions) |
Tax (benefit) expense at U.S. federal statutory rate |
$ |
(485 |
) |
$ |
(233 |
) |
$ |
556 |
|
Purchased research and development |
- |
- |
278 |
||||||
net assets acquired |
186 |
177 |
83 |
||||||
sales corporation |
|
(4 |
) |
|
(25 |
) |
|
(72 |
) |
Deferred income taxes reflect the impact of temporary difference between the carrying amounts of assets and liabilities recognized for financial reporting purposes and the amounts recognized for tax purposes. The tax effects of the temporary differences are as follows:
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Note 8 - Income Taxes (Continued)
March 31, |
||
2002 |
2001 |
|
(in millions) |
Deferred tax assets |
$ |
141 |
$
|
173 |
|
Modified accrual basis accounting |
$ |
842 |
$ |
1,260 |
|
Net deferred tax liability |
$ |
1,274 |
$ |
1,794 |
Deferred tax assets primarily relate to acquisition liabilities, such as duplicate facility, employee severance and other costs, and foreign net operating losses ("NOLs"). Foreign NOLs totaled approximately $185 million and $75 million as of March 31, 2002 and 2001, respectively. These NOLs generally expire between 2003 and 2013. A valuation allowance on the net deferred tax assets of $120 million was not established in the year ended March 31, 2002 for certain NOLs since management believes it is more likely than not that such NOLs will be realized.
No provision has been made for federal income taxes on unremitted earnings of the Company's foreign subsidiaries (approximately $242 million of earnings as of March 31, 2002), since the Company plans to permanently reinvest all such earnings.
Note 9 - Stock Plans
The Company had a 1981 Incentive Stock Option Plan (the "1981 Plan") pursuant to which options to purchase up to 27 million shares of Common Stock of the Company were available for grant to employees (including officers of the Company). The 1981 Plan expired on October 23, 1991. Therefore, from and after that date no new options could be granted under the 1981 Plan. Pursuant to the 1981 Plan, the exercise price could not be less than the Fair Market Value ("FMV") of each share at the date of grant. Options granted thereunder could be exercised in annual increments commencing one year after the date of grant and became fully exercisable after five years. All options expired ten years from date of grant unless otherwise terminated. As of March 31, 2002, there were no options outstanding under the 1981 Plan.
The Company has a 1987 Non-Statutory Stock Option Plan (the "1987 Plan") pursuant to which options to purchase up to 17 million shares of Common Stock of the Company could be granted to select officers and key employees of the Company. Pursuant to the 1987 Plan, the exercise price shall not be less than the FMV of each share at the date of grant. The option period shall not exceed 12 years. Options granted thereunder may be exercised in annual increments commencing one year after the date of grant and become fully exercisable after five years. The 1987 Plan expired on March 24, 2002. Therefore, from and after that date no new options can be granted under the 1987 Plan. All of the 3.0 million options which are outstanding under the 1987 Plan are exercisable as of March 31, 2002. These options are exercisable at $2.22 - $4.26 per share.
The Company's 1991 Stock Incentive Plan (the "1991 Plan") provides that stock appreciation rights and/or options, both qualified and non-statutory, to purchase up to 67.5 million shares of Common Stock of the Company may be granted to employees (including officers of the Company). Options granted thereunder may be exercised in annual increments commencing one year after the date of grant and become fully exercisable after five years. All options expire ten years from date of grant unless otherwise terminated. Shares terminated that were unexercised are available for reissuance. As of March 31, 2002, no stock appreciation rights have been granted under this plan and 70.9 million options have been granted, including options issued that were previously terminated due to employee forfeitures. As of March 31, 2002, 20.0 million of the 36.7 million options which were outstanding under the 1991 Plan were exercisable. These options are exercisable at $4.26 - $74.69 per share.
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Note 9 - Stock Plans (Continued)
The 1993 Stock Option Plan for Non-Employee Directors (the "1993 Plan") provides for non-statutory options to purchase up to a total of 337,500 shares of Common Stock of the Company to be available for grant to each member of the Board of Directors who is not otherwise an employee of the Company. Pursuant to the 1993 Plan, the exercise price shall be the FMV of the shares covered by the option at the date of grant. The option period shall not exceed ten years, and each option may be exercised in whole or in part on the first anniversary date of its grant. As of March 31, 2002, 222,750 options have been granted under this plan. As of March 31, 2002, all of the 128,250 options which are outstanding under the 1993 Plan are exercisable. These options are exercisable at $7.59 - $51.44 per share.
The 2001 Stock Option Plan (the "2001 Plan") was effective as of July 1, 2001. The 2001 Plan provides that non-statutory and incentive stock options to purchase up to 7.5 million shares of Common Stock of the Company may be granted to select employees and consultants. All options expire ten years from the date of grant unless otherwise terminated. As of March 31, 2002, 4.5 million options have been granted. These options are exercisable in annual increments commencing one year after the date of grant and become fully exercisable after three years. As of March 31, 2002, 4.5 million options are outstanding, none of which are exercisable.
In connection with the acquisitions in fiscal year 2000, options outstanding under the acquired companies' stock option plans were converted into options to purchase 7.2 million shares of Common Stock of the Company. As of March 31, 2002, 2.5 million of the 2.7 million options outstanding are exercisable at $3.27 - $70.12 per share. Options granted under these acquired companies' plans become exercisable over periods ranging from one to five years and expire ten years from the date of grant.
The following table summarizes the activity under these plans (shares in millions):
2002 |
2001 |
2000 |
|||||
Weighted- |
Weighted- |
Weighted- |
|||||
Shares |
Price |
Shares |
Price |
Shares |
Price |
Beginning of year |
48.5 |
$28.71 |
47.6 |
$28.39 |
41.0 |
$21.67 |
|
at end of year |
25.5 |
$24.77 |
23.4 |
$20.72 |
22.9 |
$15.68 |
The following table summarizes information about these plans as of March 31, 2002 (shares in millions):
Options Outstanding |
Options Exercisable |
||||
Weighted- |
|||||
Average |
Weighted- |
||||
Range of |
Remaining |
Average |
Weighted- |
||
Exercise |
Contractual |
Exercise |
Average |
||
Prices |
Shares |
Life |
Price |
Shares |
Exercise Price |
$ 2.22 - |
$10.00 |
7.1 |
1.6 years |
$ 6.18 |
7.0 |
$ 6.18 |
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Note 9 - Stock Plans (Continued)
The Company maintains the Year 2000 Employee Stock Purchase Plan (the "Purchase Plan") for all eligible employees. Under the terms of the Purchase Plan, employees may elect to withhold between 1% and 25% of their base pay through regular payroll deductions, subject to Internal Revenue Code limitations. Shares of the Company's common stock may be purchased at six-month intervals at 85% of the lower of the FMV on the first or the last day of each six-month period. During fiscal 2002, employees purchased 654,163 shares at an average price of $21.91 per share. As of March 31, 2002, 28.7 million shares were reserved for future issuance.
If the Company had elected to recognize compensation expense based on fair value of stock plans as prescribed by SFAS No. 123, net (loss) income and net (loss) earnings per share would have been adjusted to the pro forma amounts in the table below:
Year Ended March 31, |
|||
2002 |
2001 |
2000 |
|
(in millions, except per share amounts) |
Net (loss) income - as reported |
$ |
(1,102 |
) |
$ |
(591 |
) |
$ |
696 |
The weighted-average fair value at date of grant for options granted in fiscal 2002, 2001 and 2000 was $13.48, $17.10 and $27.98, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. The following weighted-average assumptions were used for option grants in fiscal 2002, 2001 and 2000, respectively: dividend yields of .37%, .30% and .15%; expected volatility factors of .65, .65 and .50; risk-free interest rates of 4.9%, 6.1% and 5.6%; and an expected life of six years. The compensation expense and pro forma net (loss) income may not be indicative of amounts to be included in future periods.
The weighted-average fair value of Purchase Plan shares for offering periods commencing in fiscal 2002, 2001 and 2000 was $11.76, $10.20 and $20.87, respectively. The fair value is estimated on the first date of the offering period using the Black-Scholes option pricing model. The following weighted-average assumptions were used for Purchase Plan shares in fiscal 2002, 2001 and 2000, respectively; dividend yields of .22%, .32% and .11%; expected volatility factors of .65, .65 and .50; risk free interest rates of 2.7%, 5.8% and 6.0%; and an expected life of six months. The compensation expense and pro forma net (loss) income may not be indicative of amounts to be included in future periods.
Under the 1998 Incentive Award Plan (the "1998 Plan"), a total of four million Phantom Shares, as defined in the 1998 Plan, are available for grant to certain of the Company's employees from time to time through March 31, 2008. As of March 31, 2002 approximately 1.1 million Phantom Shares have been awarded under the 1998 Plan. Each Phantom Share is equivalent to one share of the Company's common stock. Vesting, at 20% of the grant amount per annum, is contingent upon attainment of specific criteria, including an annual Target Closing Price ("Price") for the Company's common stock and the participant's continued employment.
The Price is based on the average closing price of the Company's common stock on the New York Stock Exchange for the ten days up to and including March 31 of each fiscal year. The Price was met on March 31, 2000 and the Company began to recognize a non-cash charge over the employment period (approximately $3 million, $2 million and $2 million for the fiscal years ended March 31, 2002, 2001 and 2000, respectively). The price was not met on either March 31, 2002 or March 31, 2001 for the third and second tranche, respectively. If additional tranches vest, the annual non-cash charge will increase. Since the price of any future vested Phantom Shares is undetermined, any incremental expense is unknown. As of March 31, 2002, 638,960 Phantom Shares have not been forfeited and are outstanding under the 1998 Plan.
All stock plans of the Company have been approved by the stockholders.
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Note 10 - Profit Sharing Plan
The Company maintains a defined contribution plan, the Computer Associates Savings Harvest Plan (the "CASH Plan"), for the benefit of employees of the Company. The CASH Plan is intended to be a qualified plan under Section 401(a) of the Internal Revenue Code of 1986 (the "Code") and contains a qualified cash or deferred arrangement as described under Section 401(k) of the Code. Pursuant to the CASH Plan, eligible participants may elect to contribute a percentage of their base compensation. The matching contributions to the CASH Plan totaled approximately $12 million, $11 million and $10 million for the fiscal years ended March 31, 2002, 2001 and 2000, respectively. In addition, the Company may make discretionary contributions to the CASH Plan. The discretionary contributions to the CASH Plan totaled approximately $24 million, $24 million and $25 million for the fiscal years ended March 31, 2002, 2001 and 2000, respectively.
Note 11 - Rights Plan
Each outstanding share of the Company's Common Stock carries a stock purchase right issued under the Company's Rights Agreement, dated June 18, 1991, as amended May 17, 1995, May 23, 2001 and November 9, 2001 (the "Rights Agreement"). Under certain circumstances, each right may be exercised to purchase one one-thousandth of a share of Series One Junior Participating Preferred Stock, Class A, for $150. Under certain circumstances, following (i) the acquisition of 20% or more of the Company's outstanding Common Stock by an Acquiring Person (as defined in the Rights Agreement), (ii) the commencement of a tender offer or exchange offer which would result in a person or group owning 20% or more of the Company's outstanding common stock, or (iii) the determination by the Company's Board of Directors and a majority of the Disinterested Directors (as defined in the Rights Agreement) that a 15% stockholder is an Advers e Person (as defined in the Rights Agreement), each right (other than rights held by an Acquiring Person or Adverse Person) may be exercised to purchase common stock of the Company or a successor company with a market value of twice the $150 exercise price. The rights, which are redeemable by the Company at one cent per right, expire in November 2006.
Note 12 - Subsequent Event
In April 2002, the Company completed the sale to SSA Global Technologies, Inc. ("SSA") of certain assets of the Company, principally the supply-chain management, financial management and human resource management product lines under the name interBiz. These interBiz operations generated approximately $82 million of revenue for the fiscal year ended March 31, 2002. In addition, at March 31, 2002, approximately $88 million of deferred subscription revenue has accumulated since the introduction of the Company's subscription model in October 2000. Approximately 725 employees were transferred to SSA as part of this transaction. Under the provisions of SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," the Company recorded a non-cash impairment charge to operations related to the above assets of $59 million in March 2002, which was included in SG&A on the accompanying Consolidated Statements of Operations.
SCHEDULE II
COMPUTER ASSOCIATES INTERNATIONAL, INC.
AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Additions |
||||||
Balance at |
Charged to |
Charged |
Balance |
|||
beginning |
Costs and |
to other |
at end |
|||
Description |
of period |
Expenses |
accounts (a) |
Deductions (b) |
of period |
|
(in millions) |
Reserves and allowances
deducted from assets to
which they apply:
Allowance for doubtful accounts
(c)
Year ended March 31, 2002 |
$ |
449 |
$ |
233 |
$ |
- |
$ |
269 |
$ |
413 |
(a) |
Reserves and adjustments thereto of acquired companies. |
(b) |
Write-offs of amounts against allowance provided. |
(c) |
The Company expects the allowance for doubtful accounts to continue to decline as net installment accounts receivable under the old Business Model are billed and collected over the remaining life. |
Exhibit A
Subsidiaries of the Registrant
Name of Subsidiary ACCPAC International, Inc. C.A. Computer Associates GmbH C.A. Computer Associates India Private Limited C.A. Computer Associates Israel Ltd. C.A. Computer Associates S.A. C.A. Foreign Spain S.L. C.A. Foreign, Inc. C.A. Islandia Realty, Inc. CA Management, Inc. CA Real Estate, Inc. CA Research, Inc. Computer Associates Services, Inc. Computer Associates AG Computer Associates Canada Company Computer Associates Caribbean, Inc. Computer Associates CIS Ltd. Computer Associates de Argentina S.A. Computer Associates do Brasil Ltda. Computer Associates de Chile Ltd. Computer Associates de Colombia S.A. Computer Associates de Mexico, S.A. de C.V. Computer Associates de Venezuela, C.A. Computer Associates Del Peru S.A. Computer Associates Finland OY Computer Associates Hellas Sole Partner LLC Computer Associates, Inc. Computer Associates International (China) Ltd. Computer Associates International G.m.b.H. Computer Associates CZ, s.r.o. Computer Associates International Limited Computer Associates Japan Ltd. Computer Associates Korea Ltd. Computer Associates Bilgisayar Yazilim Pazarlama Ltd. Sti. Computer Associates (M) Sdn. Bhd. Computer Associates Middle East WLL Computer Associates Maroc Computer Associates Norway A/S Computer Associates (N.Z.) Ltd. Computer Associates Plc Computer Associates B.V. Computer Associates Pte. Ltd. Computer Associates Pty. Ltd. Computer Associates Real Estate BV Computer Associates S.A. Computer Associates S.A. Computer Associates Scandinavia A/S Computer Associates Africa (Pty.) Ltd. Computer Associates S.p.A. Computer Associates Sp. z o.o. Computer Associates Sweden AB Computer Associates Taiwan Ltd. Computer Associates (Thailand) Co. Ltd. Computer Associates Think, Inc. iCan-SP, Inc. Philippine Computer Associates International, Inc. PT Computer Associates Sterling Software, Inc. |
Jurisdiction of Incorporation Delaware Germany India Israel Spain Spain Delaware New York Delaware Delaware Delaware Delaware Switzerland Canada Puerto Rico Russia Argentina Brazil Chile Colombia Mexico Venezuela Peru Finland Greece Delaware China Austria The Czech Republic Hong Kong Japan Korea Turkey Malaysia Bahrain Morocco Norway New Zealand United Kingdom The Netherlands Singapore Australia The Netherlands Belgium France Denmark South Africa Italy Poland Sweden Taiwan Thailand Delaware Delaware Philippines Indonesia Delaware |
COMPUTER ASSOCIATES INTERNATIONAL, INC.
as Issuer
AND
STATE STREET BANK AND TRUST COMPANY
as Trustee
____________________
Indenture
Dated as of March 18, 2002
___________________
5% Convertible Senior Notes due 2007
TABLE OF CONTENTS
Page
ARTICLE 1
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
SECTION 1.01. Definitions |
1 |
SECTION 1.02. Compliance Certificates and Opinions |
9 |
SECTION 1.03. Form of Documents Delivered to Trustee |
9 |
SECTION 1.04. Acts of Holders; Record Dates |
10 |
SECTION 1.05. Notices, Etc., to Trustee and Company |
11 |
SECTION 1.06. Notice to Holders; Waiver |
11 |
SECTION 1.07. Conflict with Trust Indenture Act |
11 |
SECTION 1.08. Effect of Headings and Table of Contents |
11 |
SECTION 1.09. Successors and Assigns |
12 |
SECTION 1.10. Separability Clause |
12 |
SECTION 1.11. Benefits of Indenture |
12 |
SECTION 1.12. Governing Law |
12 |
SECTION 1.13. Legal Holiday |
12 |
ARTICLE 2
SECURITY FORMS
SECTION 2.01. Forms Generally |
12 |
SECTION 2.02. Form of Face of Security |
13 |
SECTION 2.03. Form of Reverse of Security |
16 |
ASSIGNMENT FORM
SECTION 2.04. Form of Trustee's Certificate of Authentication |
26 |
SECTION 2.05. Legend on Restricted Securities |
26 |
ARTICLE 3
THE SECURITIES
SECTION 3.01. Title and Terms |
26 |
SECTION 3.02. Denominations |
27 |
SECTION 3.03. Execution, Authentication, Delivery and Dating |
27 |
SECTION 3.04. Temporary Securities |
27 |
SECTION 3.05. Registration; Registration of Transfer and Exchange; Restrictions on Transfer |
28 |
SECTION 3.06. Mutilated, Destroyed, Lost and Stolen Securities |
30 |
SECTION 3.07. Persons Deemed Owners |
30 |
SECTION 3.08. Book-entry Provisions for Global Securities |
31 |
SECTION 3.09. Cancellation |
32 |
SECTION 3.10. Special Transfer Provisions |
32 |
SECTION 3.11. Cusip Numbers |
34 |
ARTICLE 4
SATISFACTION AND DISCHARGE
SECTION 4.01. Satisfaction and Discharge of Indenture |
34 |
SECTION 4.02. Application of Trust Money |
35 |
ARTICLE 5
REMEDIES
SECTION 5.01. Events of Default |
35 |
SECTION 5.02. Acceleration of Maturity; Rescission and Annulment |
37 |
SECTION 5.03. Collection of Indebtedness and Suits for Enforcement by Trustee |
38 |
SECTION 5.04. Trustee May File Proofs of Claim |
38 |
SECTION 5.05. Trustee May Enforce Claims Without Possession of Securities |
39 |
SECTION 5.06. Application of Money Collected |
39 |
SECTION 5.07. Limitation on Suits |
39 |
SECTION 5.08. Unconditional Right of Holders to Receive Payment |
40 |
SECTION 5.09. Restoration of Rights and Remedies |
40 |
SECTION 5.10. Rights and Remedies Cumulative |
40 |
SECTION 5.11. Delay or Omission Not Waiver |
41 |
SECTION 5.12. Control by Holders |
41 |
SECTION 5.13. Waiver of Past Defaults |
41 |
SECTION 5.14. Undertaking for Costs |
42 |
SECTION 5.15. Waiver of Stay or Extension Laws |
42 |
ARTICLE 6
THE TRUSTEE
SECTION 6.01. Certain Duties and Responsibilities |
42 |
SECTION 6.02. Notice of Defaults |
42 |
SECTION 6.03. Certain Rights of Trustee |
43 |
SECTION 6.04. Not Responsible for Recitals |
44 |
SECTION 6.05. May Hold Securities |
44 |
SECTION 6.06. Money Held in Trust |
44 |
SECTION 6.07. Compensation and Reimbursement |
44 |
SECTION 6.08. Disqualification; Conflicting Interests |
45 |
SECTION 6.09. Corporate Trustee Required; Eligibility |
45 |
SECTION 6.10. Resignation and Removal; Appointment of Successor |
46 |
SECTION 6.11. Acceptance of Appointment by Successor |
47 |
SECTION 6.12. Merger, Conversion, Consolidation or Succession to Business |
47 |
SECTION 6.13. Preferential Collection of Claims Against |
47 |
ARTICLE 7
HOLDERS' LISTS AND REPORTS BY TRUSTEE
SECTION 7.01. Company to Furnish Trustee Names and Addresses of Holders |
48 |
SECTION 7.02. Preservation of Information; Communications to Holders |
48 |
SECTION 7.03. Reports by Trustee |
48 |
SECTION 7.04. Reports by Company |
49 |
ARTICLE 8
CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE
SECTION 8.01. Company May Consolidate, Etc., Only on Certain Terms |
49 |
SECTION 8.02. Successor Substituted |
50 |
ARTICLE 9
SUPPLEMENTAL INDENTURES
SECTION 9.01. Supplemental Indentures Without Consent of Holders |
50 |
SECTION 9.02. Supplemental Indentures with Consent of Holders |
51 |
SECTION 9.03. Execution of Supplemental Indentures |
52 |
SECTION 9.04. Effect of Supplemental Indentures |
52 |
SECTION 9.05. Conformity with Trust Indenture Act |
53 |
SECTION 9.06. Reference in Securities to Supplemental Indentures |
53 |
ARTICLE 10
COVENANTS
SECTION 10.01. Payments |
53 |
SECTION 10.02. Maintenance of Office or Agency |
53 |
SECTION 10.03. Money for Security Payments to Be Held in Trust |
54 |
SECTION 10.04. Statement by Officers as to Default |
55 |
SECTION 10.05. Existence |
55 |
SECTION 10.06. Reports and Delivery of Certain Information |
55 |
SECTION 10.07. Resale of Certain Securities |
56 |
SECTION 10.08. Book-Entry System |
56 |
SECTION 10.09. [Reserved.] |
56 |
SECTION 10.10. Additional Amounts under the Registration Rights Agreement |
56 |
ARTICLE 11
REDEMPTION AND PURCHASES
SECTION 11.01. Right to Redeem; Notices to Trustee |
56 |
SECTION 11.02. Selection of Securities to Be Redeemed |
57 |
SECTION 11.03. Notice of Redemption |
57 |
SECTION 11.04. Effect of Notice of Redemption |
58 |
SECTION 11.05. Deposit of Redemption Price |
58 |
SECTION 11.06. Securities Redeemed in Part |
58 |
SECTION 11.07. Conversion Arrangement on Call for Redemption |
58 |
SECTION 11.08. [Reserved.] |
59 |
SECTION 11.09. Repurchase of Securities at Option of the Holder upon Fundamental Change |
59 |
SECTION 11.10. Effect of Fundamental Change Repurchase Notice |
62 |
SECTION 11.11. Deposit of Fundamental Change Repurchase Price |
63 |
SECTION 11.12. Securities Repurchased in Part |
64 |
SECTION 11.13. Covenant to Comply With Securities Laws Upon Repurchase of Securities |
64 |
SECTION 11.14. Repayment to the Company |
64 |
ARTICLE 12
INTEREST PAYMENTS ON THE SECURITIES
SECTION 12.01. Interest Rate |
64 |
SECTION 12.02. Payment of Interest; Interest Rights Preserved |
65 |
ARTICLE 13
CONVERSION
SECTION 13.01. Right to Convert |
66 |
SECTION 13.02. Exercise of Conversion Privilege; Issuance of Common Stock on Conversion; No Adjustment for Interest or Dividends |
67 |
SECTION 13.03. Cash Payments in Lieu of Fractional Shares |
68 |
SECTION 13.04. Conversion Price |
68 |
SECTION 13.05. Adjustment of Conversion Price |
69 |
SECTION 13.06. Effect of Reclassification, Consolidation, Merger or Sale |
76 |
SECTION 13.07. Taxes on Shares Issued |
77 |
SECTION 13.08. Reservation of Shares; Shares to be Fully Paid; Compliance with Governmental Requirements; Listing of Common Stock |
77 |
SECTION 13.09. Responsibility of Trustee |
78 |
SECTION 13.10. Notice to Holders Prior to Certain Actions |
78 |
INDENTURE, dated as of March 18, 2002, between COMPUTER ASSOCIATES INTERNATIONAL, INC., a corporation duly organized and existing under the laws of the State of Delaware, as Issuer (herein called the "Company"), having its principal office at One Computer Associates Plaza, Islandia, New York 11749, and STATE STREET BANK AND TRUST COMPANY, a Massachusetts trust company, as Trustee (herein called the "Trustee").
RECITALS OF THE COMPANY
The Company has duly authorized the creation of an issue of 5% Convertible Senior Notes due 2007 (each a "Security" and collectively, 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 executed by the Company and authenticated and delivered hereunder and duly issued by the Company, the valid obligations of the Company, and to make this Indenture a valid agreement of the Company, in accordance with the terms of the Securities and the Indenture, have been done.
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
For and in consideration of the premises and the purchases of the Securities by the Holders thereof, it is mutually agreed, for the benefit of the Company and the equal and proportionate benefit of all Holders of the Securities, as follows:
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
SECTION 1.01. Definitions. For all purposes of this Indenture, except as otherwise expressly provided or unless the context otherwise requires:
"Act," when used with respect to any Holder, has the meaning specified in Section 1.04.
"Additional Amounts" shall have the meaning given to such term in the Registration Rights Agreement.
"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 Members" has the meaning specified in Section 3.08.
"Board of Directors" means, with respect to any Person, either the board of directors of such Person or any duly authorized committee of that board.
"Board Resolution" means, with respect to any Person, a copy of a resolution certified by the Secretary or an Assistant Secretary of such Person to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification, and delivered to the Trustee.
"Business Day" means any day other than a Saturday, a Sunday or a day on which banking institutions in The City of New York or Boston, Massachusetts, are authorized or obligated by law, or executive order or governmental decree to be closed.
"Capital Stock" means any and all shares, interests, participations, rights or other equivalents (however designated) of corporate stock, including, without limitation, with respect to partnerships, partnership interests (whether general or limited) and any other interest or participation that confers on a Person the right to receive a share of the profits and losses of, or distributions of assets of, such partnership.
"Change in Control" has the meaning specified in Section 11.09.
"Closing Price" has the meaning specified in Section 13.05.
"Commission" means the 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 shares of Common Stock, par value $.10 per share, of the Company as it exists on the date of this Indenture or any other shares of Capital Stock of the Company into which the Common Stock shall be reclassified or changed.
"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 Request" or "Company Order" means a written request or order signed in the name of the Company by its Chairman of the Board, its Vice Chairman of the Board, its President or any Vice President, and by its Treasurer, an Assistant Treasurer, its Secretary or an Assistant Secretary, and delivered to the Trustee.
"Continuing Director" means, at any date, a member of the Company's Board of Directors (i) who was a member of such board on January 1, 2002 or (ii) who was nominated or elected by at least a majority of the directors who were Continuing Directors at the time of such nomination or election or whose election to the Company's Board of Directors was recommended or endorsed by at least a majority of the directors who were Continuing Directors at the time of such nomination or election or such lesser number comprising a majority of a nominating committee comprised of independent directors if authority for such nominations or elections has been delegated to a nominating committee whose authority and composition have been approved by at least a majority of the directors who were Continuing Directors at the time such committee was formed. (Under this definition, if the Board of Directors of the Company as of the date of this Indenture were to approve a new director or directors and then resi gn, no Change in Control would occur even though the current Board of Directors would thereafter cease to be in office).
"Conversion Agent" means the Trustee or such other office or agency designated by the Company where Securities may be presented for conversion.
"Conversion Notice" has the meaning specified in Section 13.02.
"Conversion Price" has the meaning specified in the Securities.
"Corporate Trust Office" means the office of the Trustee at which the corporate trust business of the Trustee shall, at any particular time, be principally administered, which office is, at the date of this Indenture, located at 2 Avenue de Lafayette - 6th Floor, Boston, Massachusetts 02111-1724, Attention: Corporate Trust Administration.
"corporation" means a corporation, association, company, joint-stock company or business trust.
"Current Market Price" has the meaning specified in Section 13.05.
"Default" means any event that is or with the passage of time or the giving of notice or both would become an Event of Default.
"Defaulted Interest" has the meaning specified in Section 12.02.
"Depositary" means The Depository Trust Company until a successor Depositary shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Depositary" shall mean such successor Depositary.
"Distributed Securities" has the meaning specified in Section 13.05.
"Equity Interests" means Capital Stock and all warrants, options or other rights to acquire Capital Stock (but excluding any debt security that is convertible into, or exchangeable for, Capital Stock).
"Event of Default" has the meaning specified in Section 5.01.
"Exchange Act" means the U.S. Securities Exchange Act of 1934, as amended.
"Expiration Time" has the meaning specified in Section 13.05.
"fair market value" has the meaning specified in Section 13.05.
"Fundamental Change" has the meaning specified in Section 11.09.
"Fundamental Change Company Notice" has the meaning specified in Section 11.09.
"Fundamental Change Repurchase Date" has the meaning specified in Section 11.09.
"Fundamental Change Repurchase Notice" has the meaning specified in Section 11.09.
"Fundamental Change Repurchase Price" has the meaning specified in the Securities.
"GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as have been approved by a significant segment of the accounting profession, in each case, as in effect in the United States on the date hereof.
"Global Security" means a Security in global form registered in the Security Register in the name of a Depositary or a nominee thereof.
"Holder" or "Securityholder" means a Person in whose name a 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 Banc of America Securities LLC, Salomon Smith Barney Inc., ABN AMRO Rothschild LLC, Mizuho International plc, Robertson Stephens, Inc., RBC Dain Rauscher Inc. and Tokyo-Mitsubishi International plc.
"Interest Payment Date" means each March 15 and September 15 of each year, commencing September 15, 2002.
"Investment Company Act" means the Investment Company Act of 1940 and any statute successor thereto, in each case as amended from time to time.
"Issue Date" means the date the Securities are originally issued as set forth on the face of the Security under this Indenture.
"Maturity", when used with respect to any Security, means the date on which the principal or Fundamental Change Repurchase Price of such Security becomes due and payable as therein or herein provided, whether at the Stated Maturity, on a Redemption Date or Fundamental Change Repurchase Date, or by declaration of acceleration or otherwise.
"nonelecting share" has the meaning specified in Section 13.06.
"Non-U.S. Person" means a Person who is not a U.S. person, as defined in Regulation S.
"Notice of Default" has the meaning specified in Section 5.01.
"Officers' Certificate" means a certificate signed by the Chairman of the Board, the President, the Chief Financial Officer or any Vice President, and by 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 10.04 shall be the principal executive, financial or accounting officer of the Company.
"Opinion of Counsel" means a written opinion of counsel, who may be external or in-house counsel for the Company, and who shall be reasonably 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:
provided, however, that, in determining whether the Holders of the requisite Principal Amount of the Outstanding Securities 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 of 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 request, demand, authorization, direction, notice, consent or waiver, only Securities which a Responsible Officer of the Trustee actually knows 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 establishes to the satisfaction of the Trustee the pledgee's right so to act with respect to such Securities and that the pledgee is not the Company or any other obligor upon the Securities or any Affiliate of the Company or of such other obligor.
"Paying Agent" means any Person authorized by the Company to pay the principal of, interest and Additional Amounts on or Redemption Price or Fundamental Change Repurchase Price of any Securities on behalf of the Company. The Trustee shall initially be the Paying Agent.
"Person" means any individual, corporation, partnership, limited liability company, joint venture, trust, unincorporated organization or government or any agency or political subdivision thereof.
"Physical Securities" means permanent certificated Securities in registered form issued in denomination of $1,000 Principal Amount and integral multiples thereof.
"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 3.06 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.
"Principal Amount" of a Security means the Principal Amount as set forth on the face of the Security.
"Purchase Agreement" means the Purchase Agreement, dated March 13, 2002, entered into by the Company and the Initial Purchasers in connection with the sale of the Securities.
"Purchased Shares" has the meaning specified in Section 13.05.
"Qualified Institutional Buyer" or "QIB" shall have the meaning specified in Rule 144A.
"Record Date" has the meaning specified in Section 13.05.
"Redemption Date" shall mean the date specified for redemption of the Securities in accordance with the terms of the Securities and Article 11 hereof.
"Redemption Price" has the meaning specified in the Securities.
"Registration Rights Agreement" means the Registration Rights Agreement, dated as of March 18, 2002, between the Company and the Initial Purchasers, for the benefit of themselves and the Holders, as the same may be amended or modified from time to time in accordance with the terms thereof.
"Regular Record Date" for the interest payable on any Interest Payment Date means March 1 or September 1 (whether or not a Business Day) next preceding such Interest Payment Date.
"Regulation S" means Regulation S under the Securities Act.
"Resale Registration Statement" means a registration statement under the Securities Act registering the Securities for resale pursuant to the terms of the Registration Rights Agreement.
"Responsible Officer" means any officer of the Trustee within the Corporate Trust Office of the Trustee with direct responsibility for the administration of this Indenture and also, with respect to a particular matter, any other officer of the Trustee to whom such matter is referred because of such officer's knowledge and familiarity with the particular subject.
"Restricted Global Security" means a Global Security representing Restricted Securities.
"Restricted Security" or "Restricted Securities" has the meaning specified in Section 2.05.
"Rule 144" means Rule 144 under the Securities Act (including any successor rule thereto), as the same may be amended from time to time.
"Rule 144A" means Rule 144A under the Securities Act (including any successor rule thereto), as the same may be amended from time to time.
"Rule 144A Information" has the meaning specified in Section 2.03.
"Securities Act" means the U.S. Securities Act of 1933, as amended, and the rules and regulations of the Commission promulgated thereunder.
"Security" or "Securities" has the meaning specified in the first paragraph of the Recitals of the Company.
"Security Register" and "Security Registrar" have the respective meanings specified in Section 3.05.
"significant subsidiary" has the meaning given to that term in Rule 1-02 of Regulation S-X under the Exchange Act, except that references to income from continuing operations are changed to revenues.
"Special Record Date" has the meaning specified in Section 12.02.
"Stated Maturity," when used with respect to any Security, means the date specified in such Security as the fixed date on which an amount equal to the principal amount of such Security together with accrued and unpaid interest, if any, is due and payable.
"Step-up Date" has the meaning specified the Securities.
"Stock Transfer Agent" means Mellon Investor Services LLP or such other Person designated by the Company as the transfer agent for the Common Stock.
"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 which ordinarily has voting power for the election of directors, whether at all times or only so long as no senior class of stock has such voting power by reason of any contingency.
"Surviving Entity" has the meaning specified in Section 8.01.
"Trading Day" has the meaning specified in Section 13.05.
"Trigger Event" has the meaning specified in Section 13.05.
"Trust Indenture Act" means the Trust Indenture Act of 1939 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 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.
"Unrestricted Global Security" means a Global Security representing Securities which are not Restricted Securities.
"Vice President," when used with respect to the Company or the Trustee, means any vice president, whether or not designated by a number or a word or words added before or after the title "vice president".
"Voting Stock" has the meaning specified in Section 11.09.
SECTION 1.02. Compliance Certificates and Opinions. 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 such certificates and opinions as may be required under the Trust Indenture Act. Each such certificate or opinion shall be given in the form of an Officers' Certificate, if to be given by an officer of the Company, or an Opinion of Counsel, if to be given by counsel, and shall comply with the requirements of the Trust Indenture Act and any other requirement set forth in this Indenture.
SECTION 1.03. Form of Documents Delivered to 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 his 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 stating that the information with respect to such factual matters is in the possession of the Company, 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 1.04. Acts of Holders; Record Dates.
SECTION 1.05. Notices, Etc., to Trustee and Company. Any request, demand, authorization, direction, notice, consent, waiver or Act of Holders or other document provided or permitted by this Indenture to be made upon, given or furnished to, or filed with:
SECTION 1.06. Notice to Holders; Waiver. Where this Indenture provides for notice to Holders of any event, such notice shall be sufficiently given (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to each Holder affected by such event, at such Holder's address as it appears in the Security Register, not later than the latest date (if any), and not earlier than the earliest date (if any), prescribed for the giving of such notice. In any case where notice to Holders is given by mail, neither the failure to mail such notice, nor any defect in any notice so mailed, to any particular Holder shall affect the sufficiency of such notice with respect to other Holders. Where this Indenture provides for notice in any manner, such notice may be waived in writing by the Person entitled to receiv e such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Holders 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.
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 as shall be made with the approval of the Trustee shall constitute a sufficient notification for every purpose hereunder.
SECTION 1.07. 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 Indenture as so modified or to be excluded, as the case may be.
SECTION 1.08. 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 1.09. Successors and Assigns. All covenants and agreements in this Indenture by the Company shall bind its successors and assigns, whether so expressed or not.
SECTION 1.10. Separability Clause. In case any provision in this Indenture or in 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 1.12. Benefits of Indenture. Nothing in this Indenture or in the Securities, express or implied, shall give to any Person, other than the parties hereto and their respective successors hereunder and the Holders of Securities, any benefit or any legal or equitable right, remedy or claim under this Indenture.
SECTION 1.13. Governing Law. This Indenture and the Securities shall be governed by and construed in accordance with the laws of the State of New York.
SECTION 1.14. Legal Holiday. In any case where any Interest Payment Date or Stated Maturity of any Security shall not be a Business Day, then (notwithstanding any other provision of this Indenture or of the Securities) payment of interest or principal need not be made on such date, but may be made on the next succeeding Business Day with the same force and effect as if made on the Interest Payment Date or at the Stated Maturity, provided that no interest shall accrue with respect to such payment for the period from and after such Interest Payment Date or Stated Maturity, as the case may be.
SECTION 2.01. Forms Generally. The Securities and the Trustee's certificates of authentication shall be in substantially the forms 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 or Depositary therefor, the Internal Revenue Code of 1986, as amended, and regulations thereunder, or as may, consistently herewith, be determined by the officers executing such Securities, as evidenced by their execution thereof.
The Securities shall be initially issued in the form of permanent Global Securities in registered form in substantially the form set forth in this Article. The aggregate Principal Amount of the Global Securities may from time to time be increased or decreased by adjustments made on the records of the Trustee, as custodian for the Depositary, as hereinafter provided.
SECTION 1.02. Form of Face of Security. [INCLUDE IF SECURITY IS A RESTRICTED SECURITY - THIS SECURITY (OR ITS PREDECESSOR) WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND THIS SECURITY AND THE COMMON STOCK ISSUABLE UPON CONVERSION THEREOF MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THIS SECURITY IS 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 OR REGULATION S THEREUNDER.
THE HOLDER OF THIS SECURITY AGREES FOR THE BENEFIT OF THE COMPANY THAT (A) THIS SECURITY AND THE COMMON STOCK ISSUABLE UPON CONVERSION THEREOF MAY BE OFFERED, RESOLD, PLEDGED OR OTHERWISE TRANSFERRED, ONLY (I) INSIDE THE UNITED STATES TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (II) OUTSIDE THE UNITED STATES IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH REGULATION S UNDER THE SECURITIES ACT, (III) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144 (IF AVAILABLE) OR OTHER APPLICABLE EXEMPTION OR (IV) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, IN EACH OF CASES (I) THROUGH (IV) IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES, AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER OF THIS SECURITY FROM IT OF THE RESALE RESTRICTIO NS REFERRED TO IN (A) ABOVE.
THIS SECURITY AND ANY RELATED DOCUMENTATION MAY BE AMENDED OR SUPPLEMENTED FROM TIME TO TIME TO MODIFY THE RESTRICTIONS ON AND PROCEDURES FOR RESALES AND OTHER TRANSFERS OF THIS SECURITY 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 SHALL BE DEEMED BY THE ACCEPTANCE OF THIS SECURITY TO HAVE AGREED TO ANY SUCH AMENDMENT OR SUPPLEMENT.
THE HOLDER OF THIS SECURITY IS SUBJECT TO, AND ENTITLED TO THE BENEFITS OF, A REGISTRATION RIGHTS AGREEMENT, DATED AS OF MARCH 18, 2002, ENTERED INTO BY THE COMPANY FOR THE BENEFIT OF CERTAIN HOLDERS OF SECURITIES FROM TIME TO TIME.]
[INCLUDE IF SECURITY IS A GLOBAL SECURITY - THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITARY OR A NOMINEE THEREOF. THIS SECURITY MAY NOT BE EXCHANGED IN WHOLE OR IN PART FOR A SECURITY REGISTERED, AND NO TRANSFER OF THIS SECURITY IN WHOLE OR IN PART MAY BE REGISTERED, IN THE NAME OF ANY PERSON OTHER THAN SUCH DEPOSITARY OR A NOMINEE THEREOF, EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE.
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY ("DTC"), A NEW YORK CORPORATION, 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 IN AS MUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.]
COMPUTER ASSOCIATES INTERNATIONAL, INC.
5% Convertible Senior Notes due 2007
No. |
CUSIP NO. [ ] |
$[ ] |
Computer Associates International, Inc., a corporation duly organized and validly existing under the laws of the State of Delaware (herein called the "Company"), which term includes any successor corporation under the Indenture referred to on the reverse hereof), for value received hereby promises to pay to Cede & Co., or registered assigns, the principal sum of [ ] United States Dollars ($ ) [INCLUDE IF SECURITY IS A GLOBAL SECURITY - (which amount may from time to time be increased or decreased by adjustments made on the records of the Trustee, as custodian for the Depositary, in accordance with the rules and procedures of the Depositary)] on March 15, 2007 (the "Stated Maturity") and to pay interest on said principal sum semi-annually on March 15 and September 15 of each year, commencing September 15, 2002 at the initial rate of 5% per annum to holders of record on the immediately preceding March 1 and September 1, respective ly. Interest on this Security shall accrue from the most recent date to which interest has been paid, or if no interest has been paid, from March 18, 2002, until the Principal Amount is paid or duly made available for payment. Except as otherwise provided in the Indenture, the interest payable on this Security pursuant to the Indenture on any March 15 or September 15 will 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, which shall be the March 1 or September 1 (whether or not a Business Day) next preceding such March 15 or September 15, respectively; provided that, any such interest not punctually paid or duly provided for shall be payable as provided in the Indenture. Payment of the principal of and interest accrued on this Security shall be made by check mailed to the address of the Holder of this Security specified in the register of Securities, or, at the option of the Holder of this Secu rity, at the Corporate Trust Office, in such lawful money of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts; provided, however, that, with respect to any Holder of Securities with an aggregate principal amount in excess of $5,000,000, at the request of such Holder in writing to the Company, interest on such Holder's Securities shall be paid by wire transfer in immediately available funds in accordance with the written wire transfer instruction supplied by such Holder from time to time to the Trustee and Paying Agent (if different from the Trustee) at least two days prior to the applicable Regular Record Date; provided that any payment to the Depositary or its nominee shall be paid by wire transfer in immediately available funds in accordance with the wire transfer instruction supplied by the Depositary or its nominee from time to time to the Trustee and Paying Agent (if different from Trustee) at least two days prior to t he applicable Regular Record Date.
Reference is made to the further provisions of this Security set forth on the reverse hereof, including, without limitation, provisions giving the Company the right to repurchase this Security commencing March 21, 2005 and the Holder of this Security the right to convert this Security into Common Stock of the Company and the right to require the Company to repurchase this Security upon certain events, in each case, on the terms and subject to the limitations referred to on the reverse hereof and as more fully specified in the Indenture. Such further provisions shall for all purposes have the same effect as though fully set forth at this place.
This Security shall be deemed to be a contract made under the laws of the State of New York, and for all purposes shall be construed in accordance with and governed by the laws of said State.
This Security shall not be valid or become obligatory for any purpose until the certificate of authentication hereon shall have been manually signed by the Trustee or a duly authorized authenticating agent under the Indenture.
IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed.
COMPUTER ASSOCIATES INTERNATIONAL, INC.
By: _________________________
Authorized Signatory
Attest:
By: _________________________
Authorized Signatory
SECTION 1.03. Form of Reverse of Security. This Security is one of a duly authorized issue of Securities of the Company, designated as its 5% Convertible Senior Notes due 2007 (herein called the "Securities"), all issued or to be issued under and pursuant to an Indenture dated as of March 18, 2002 (herein called the "Indenture"), between the Company and State Street Bank and Trust Company (herein called the "Trustee"), to which Indenture and all indentures supplemental thereto reference is hereby made for a description of the rights, limitations of rights, obligations, duties and immunities thereunder of the Trustee, the Company and the Holders of the Securities.
The indebtedness evidenced by the Securities is unsecured and unsubordinated indebtedness of the Company and ranks equally with the Company's other unsecured and unsubordinated indebtedness.
Redemption at the Option of the Company. No sinking fund is provided for the Securities. The Securities are redeemable as a whole, or from time to time in part, at any time on or after March 21, 2005 at the option of the Company at the following redemption prices (each, a "Redemption Price"), expressed as a percentage of Principal Amount for Securities redeemed during the periods set forth below:
Period |
Redemption Price |
Beginning on March 21, 2005 through March 20, 2006 |
102% |
Beginning on March 21, 2006 |
101% |
in each case together with accrued and unpaid interest and Additional Amounts, if any, to, but excluding, the Redemption Date.
Purchase By the Company at the Option of the Holder. At the option of the Holder and subject to the terms and conditions of the Indenture, the Company shall become obligated to repurchase the Securities if a Fundamental Change occurs at any time prior to March 15, 2007 at 100% of the Principal Amount plus accrued and unpaid interest and Additional Amounts, if any, to, but excluding, the Fundamental Change Repurchase Date (the "Fundamental Change Repurchase Price"), which Fundamental Change Repurchase Price shall be paid in cash.
Holders have the right to withdraw any Fundamental Change Repurchase Notice by delivering to the Paying Agent a written notice of withdrawal in accordance with the provisions of the Indenture.
If cash sufficient to pay the Fundamental Change Repurchase Price of all Securities or portions thereof to be purchased on a Fundamental Change Repurchase Date is deposited with the Paying Agent on the Business Day following the Fundamental Change Repurchase Date, interest will cease to accrue on such Securities (or portions thereof) immediately after such Fundamental Change Repurchase Date, and the Holder thereof shall have no other rights as such (other than the right to receive the Fundamental Change Repurchase Price upon surrender of such Security).
Conversion. Subject to the provisions of the Indenture, the Holder hereof has the right, at its option, at any time following the date of issuance of the Securities and prior to the close of business on the Business Day next preceding March 15, 2007 (except that with respect to any Security or portion of a Security which shall be called for redemption, prior to the close of business five days prior to the Redemption Date) (unless the Company shall default in payment of the Redemption Price), to convert the Principal Amount hereof or any portion of such principal which is $1,000 or an integral multiple thereof, into that number of fully paid and non-assessable shares of Common Stock, as said shares shall be constituted at the date of conversion, obtained by dividing the Principal Amount of this Security or portion thereof to be converted by the conversion price of $24.34 (the "Conversion Price") as adjusted from time to time as provided in the Indenture, upon surrender of this Secu rity, together with a Conversion Notice as provided in the Indenture, to the Company at the office or agency of the Company maintained for that purpose in Boston, Massachusetts, which is initially the Corporate Trust Office, and, unless the shares issuable on conversion are to be issued in the same name as this Security, duly endorsed by, or accompanied by instruments of transfer in form satisfactory to the Company duly executed by, the Holder or by his duly authorized attorney. No adjustment in respect of interest or dividends will be made upon any conversion; provided, however, that, if this Security shall be surrendered for conversion during the period from the close of business on any Regular Record Date for the payment of interest through the close of business on the Business Day next preceding the following Interest Payment Date, and has not been called for redemption on a Redemption Date that occurs during such period, such Security (or portion thereof being converted) must be accompanied by a n amount, in funds acceptable to the Company, equal to the interest payable on such Interest Payment Date on the Principal Amount being converted; provided, however, that no such payment shall be required if there shall exist at the time of conversion a default in the payment of interest or Additional Amounts on the Securities. No fractional shares will be issued upon any conversion, but an adjustment and payment in cash will be made, as provided in the Indenture, in respect of any fraction of a share which would otherwise be issuable upon the surrender of any Securities for conversion. Securities in respect of which a Holder is exercising its right to require repurchase on a Fundamental Change Repurchase Date may be converted only if such Holder withdraws its election to exercise such right in accordance with the terms of the Indenture. Any Securities called for redemption, unless surrendered for conversion by the Holders thereof on or before the close of business five days prior to the date f ixed for redemption, may be deemed to be redeemed from such Holders for an amount equal to the applicable Redemption Price, by one or more investment banks or other purchasers who may agree with the Company (i) to purchase such Securities from the Holders thereof and convert them into shares of the Common Stock and (ii) to make payment for such Securities as aforesaid to the Trustee in trust for the Holders.
[INCLUDE IF SECURITY IS A GLOBAL SECURITY - In the event of a deposit or withdrawal of an interest in this Security, including an exchange, transfer, 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 rules and procedures of the Depositary.]
[INCLUDE IF SECURITY IS A RESTRICTED SECURITY - Subject to certain limitations in the Indenture, at any time when the Company is not subject to Section 13 or 15(d) of the United States Securities Exchange Act of 1934, as amended, upon the request of a Holder of a Restricted Security, the Company will promptly furnish or cause to be furnished Rule 144A Information (as defined below) to such Holder of Restricted Securities, or to a prospective purchaser of any such security designated by any such Holder, to the extent required to permit compliance by any such Holder with Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"). "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).]
If an Event of Default shall occur and be continuing, the Principal Amount plus interest accrued and Additional Amounts, if any, through such date on all the Securities may be declared due and payable in the manner and with the effect provided in the Indenture.
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 the consent of the Holders of not less than a majority in aggregate Principal Amount of the Outstanding Securities. The Indenture also contains provisions permitting the Holders of specified percentages in aggregate Principal Amount of the Outstanding Securities, 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 upon the registration of transfer hereof or in exchange herefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this 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 with respect to the Securities, the Holders of not less than 25% in aggregate 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 satisfactory to it, and the Trustee shall not have received from the Holders of a majority in Principal Amount of Outstanding Securities 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 b y the Holder of this Security for the enforcement of any payment of said principal hereof or interest hereon on or after the respective due dates expressed herein or for the enforcement of any conversion right.
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 Amount or Fundamental Change Repurchase Price of, and interest and Additional Amounts, if any, on, this Security at the times, place and rate, and in the coin or currency, herein prescribed.
As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Security is registrable in the Security Register, upon surrender of this Security for registration of transfer at the office or agency of the Company in Boston, Massachusetts, 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 hereof 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.
The Securities are issuable only in registered form in denominations of $1,000 and any integral multiple of $1,000 above that amount, 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 a different authorized denomination, as requested by the Holder surrendering the same.
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 cover any tax or other governmental charge payable in connection therewith.
Prior to due presentment of 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 this Security is registered as the owner hereof for all purposes, whether or not this Security be overdue, and neither the Company, the Trustee nor any such agent shall be affected by notice to the contrary.
This Security shall be governed by and construed in accordance with the laws of the State of New York.
All terms used in this Security which are defined in the Indenture shall have the meanings assigned to them in the Indenture.
If you want to assign this Security, fill in the form below and have your signature guaranteed:
I or we assign and transfer this Security to:
(Print or type name, address and zip code and social security or tax ID number of assignee)
and irrevocably appoint _____________________________________ agent to transfer this Security on the books of the Company. The agent may substitute another to act for him.
Date: __________________ Signed: ____________________
(Sign exactly as your name appears on the other side of this Security)
Signature Guarantee:
Note: Signatures must be guaranteed by an "eligible guarantor institution" meeting the requirements of the Security Registrar, which requirements include membership or participation in the Security Transfer Agent Medallion Program ("STAMP") or such other "signature guarantee program" as may be determined by the Security Registrar in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended.
In connection with any transfer of this Security occurring prior to the date which is the earlier of (i) the date of the declaration by the Commission of the effectiveness of a registration statement under the Securities Act of 1933, as amended (the "Securities Act"), covering resales of this Security (which effectiveness shall not have been suspended or terminated at the date of the transfer) and (ii) March 18, 2004, the undersigned confirms that it has not utilized any general solicitation or general advertising in connection with the transfer and that this Security is being transferred:
[Check One]
(1) |
to the Company or a subsidiary thereof; or |
|
(2) |
pursuant to and in compliance with Rule 144A under the Securities Act; or |
|
(3) |
outside the United States to a "foreign person" in compliance with Rule 904 of Regulation S under the Securities Act; or |
|
(4) |
pursuant to the exemption from registration provided by Rule 144 under the Securities Act, or |
|
(5) |
pursuant to another available exemption from the registration requirements of the Securities Act. |
|
Unless one of the boxes is checked, the Trustee will refuse to register any of the Securities evidenced by this certificate in the name of any Person other than the registered Holder thereof, provided that if box (3), (4) or (5) is checked, the Company may require, prior to registering any such transfer of the Securities, in its sole discretion, such legal opinions, certifications (including an investment letter in the case of box (3)) and other information as the Company may reasonably request 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.
If none of the foregoing boxes is checked, the Trustee or Security Registrar shall not be obligated to register this Security in the name of any Person other than the Holder hereof unless and until the conditions to any such transfer of registration set forth herein and in Section 3.10 of the Indenture shall have been satisfied.
Date: Signed:
(Sign exactly as your name appears on the other side of this Security)
Signature Guarantee:
Note: Signatures must be guaranteed by an "eligible guarantor institution" meeting the requirements of the Security Registrar, which requirements include membership or participation in the Security Transfer Agent Medallion Program ("STAMP") or such other "signature guarantee program" as may be determined by the Security Registrar in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended.
TO BE COMPLETED BY PURCHASER IF (2) ABOVE IS CHECKED
The undersigned represents and warrants that it is purchasing this Security for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a "qualified institutional buyer" within the meaning of Rule 144A under the Securities Act and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Company as the undersigned has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon the undersigned's foregoing representations in order to claim the exemption from registration provided by Rule 144A.
Date: Signed:
NOTICE: To be executed by an executive officer.
CONVERSION NOTICE
If you want to convert this Security into Common Stock of the Company, check the box: ڤ
To convert only part of this Security, state the Principal Amount to be converted (which must be $1,000 or an integral multiple of $1,000):
$_________________________________
If you want the stock certificate made out in another person's name, fill in the form below:
(Insert other person's social security or tax ID no.) |
(Print or type other person's name, address and zip code) |
Date: __________________ Signed: ____________________
(Sign exactly as your name appears on the other side of this Security)
Signature Guarantee:
Note: Signatures must be guaranteed by an "eligible guarantor institution" meeting the requirements of the Security Registrar, which requirements include membership or participation in the Security Transfer Agent Medallion Program ("STAMP") or such other "signature guarantee program" as may be determined by the Security Registrar in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended.
[TO BE ATTACHED TO GLOBAL SECURITIES]
SCHEDULE OF INCREASES OR DECREASES IN GLOBAL SECURITY
The following increases or decreases in this Global
Security have been made:
Date of Exchange |
Amount of decrease in Principal Amount of this Global Security |
Amount of increase in Principal Amount of this Global Security |
Principal Amount of this Global Security following such decrease or increase |
Signature of |
SECTION 2.04. Form of 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, as Trustee
By
Authorized Signatory
SECTION 2.05. Legend on Restricted Securities. During the period beginning on March 18, 2002 and ending on the date two years from such date, any Security including any Security issued in exchange therefor or in lieu thereof, shall be deemed a "Restricted Security" and shall be subject to the restrictions on transfer provided in the legends set forth on the face of the form of Security in Section 2.02; provided, however, that the term "Restricted Security" shall not include any Securities as to which restrictions have been terminated in accordance with Section 3.05. All Securities shall bear the applicable legends set forth on the face of the form of Security in Section 2.02. Except as provided in Section 3.05 and Section 3.10, the Trustee shall not issue any unlegended Security until it has received an Officers' Certificate from the Company directing it to do so.
SECTION 3.01 Title and Terms. The aggregate Principal Amount of Securities which may be authenticated and delivered under this Indenture is limited to $600,000,000 (subject to increase by up to $60,000,000 in the event the Initial Purchasers exercise the option granted to them in the Purchase Agreement), except for Securities authenticated and delivered upon registration or transfer of, or in exchange for, or in lieu of, other Securities pursuant to Section 3.04, 3.05, 3.06, 9.06, 11.06, 11.12 or 13.02.
The Securities shall be known and designated as the "5% Convertible Senior Notes due 2007" of the Company. The Principal Amount shall be payable on March 15, 2007.
The Principal Amount and accrued interest and Additional Amounts, if any, on the Securities shall be payable at the office or agency of the Company in Boston, Massachusetts maintained for such purpose and at any other office or agency maintained by the Company for such purpose; provided, however, that at the option of the Company payments may be made by wire transfer or by check mailed to the address of the Person entitled thereto as such address shall appear in the Security Register.
The Securities shall not have the benefit of a sinking fund.
The Securities shall not be superior in right of payment to, and shall rank pari passu with, all other existing and future senior unsecured and unsubordinated indebtedness of the Company.
SECTION 3.02. Denominations. The Securities shall be issuable only in registered form without coupons and in denominations of $1,000 and any integral multiple of $1,000 above that amount.
SECTION 3.03. Execution, Authentication, Delivery and Dating. The Securities shall be executed on behalf of the Company by its Chairman of the Board, its President, its Chief Financial Officer or one of its Vice Presidents, attested by its Secretary or one of its Assistant Secretaries. The signature of any of these officers on the Securities may be manual or facsimile.
Securities bearing the manual or facsimile signatures 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 for authentication, together with a Company Order for the authentication and delivery of such Securities. The Company Order shall specify the amount of Securities to be authenticated, and shall further specify the amount of such Securities to be issued as a Global Security or as Physical Securities. The Trustee in accordance with such Company Order shall authenticate and deliver such Securities as in this Indenture provided and not otherwise.
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, 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 3.04. Temporary Securities. Pending the preparation of definitive Securities, the Company may execute, and upon Company Order the Trustee shall authenticate and deliver, temporary Securities which are printed, lithographed, typewritten, mimeographed or otherwise produced, in any authorized denomination, substantially of the tenor of the definitive Securities in lieu of which they are issued and with such appropriate insertions, omissions, substitutions and other variations as the officers executing such Securities may determine, as evidenced by their execution of such Securities.
If temporary Securities are issued, the Company will cause definitive Securities to be prepared without unreasonable delay. After the preparation of definitive Securities, the temporary Securities shall be exchangeable for definitive Securities upon surrender of the temporary Securities at any office or agency of the Company designated pursuant to Section 10.02, without charge to the Holder. Upon surrender for cancellation of any one or more temporary Securities the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a like Principal Amount of definitive Securities of authorized denominations. Until so exchanged the temporary Securities shall in all respects be entitled to the same benefits under this Indenture as definitive Securities.
SECTION 3.05. Registration; Registration of Transfer and Exchange; Restrictions on Transfer.
Upon surrender for registration of transfer of any Security at an office or agency of the Company designated pursuant to Section 10.02 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 tenor, each such Security bearing such restrictive legends as may be required by this Indenture (including Sections 2.02, 2.05 and 3.10).
At the option of the Holder and subject to the other provisions of this Section 3.05 and to Section 3.10, Securities may be exchanged for other Securities of any authorized denominations and of a like aggregate Principal Amount and tenor, upon surrender of the Securities to be exchanged at such office or agency. Whenever any Securities are so surrendered for exchange, the Company shall execute, and the Trustee shall authenticate and deliver, the Securities which the Holder making the exchange is entitled to receive.
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.
Every Security presented or surrendered for registration of transfer or for exchange shall (if so required by the Company or the Trustee) be duly endorsed, or be 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. As a condition to the registration of transfer of any Restricted Securities, the Company or the Trustee may require evidence satisfactory to them as to the compliance with the restrictions set forth in the legend on such securities.
Except as provided in the following sentence and in Section 3.10, all Securities originally issued hereunder and all Securities issued upon registration of transfer or exchange or replacement thereof shall be Restricted Securities and shall bear the legend required by Sections 2.02 and 2.05, unless the Company shall have delivered to the Trustee (and the Security Registrar, if other than the Trustee) a Company Order stating that the Security is not a Restricted Security and may be issued without such legend thereon. Securities which are issued upon registration of transfer of, or in exchange for, Securities which are not Restricted Securities shall not be Restricted Securities and shall not bear such legend.
No service charge shall be made for any registration of transfer or exchange of Securities, 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 3.04 or 9.06 not involving any transfer.
The Company shall not be required to exchange or register a transfer of any Security (i) during the 15-day period immediately preceding the mailing of any notice of redemption of any Security, (ii) after any notice of redemption has been given to Holders of Securities, except, where such notice provides that such Security is to be redeemed only in part, the Company shall be required to exchange or register a transfer of the portion thereof not to be redeemed, (iii) that has been surrendered for conversion or (iv) as to which a Fundamental Change Repurchase Notice has been delivered and not withdrawn, except, where such Fundamental Change Repurchase Notice provides that such Security is to be purchased only in part, the Company shall be required to exchange or register a transfer of the portion thereof not to be purchased.
The restrictions imposed by this Section 3.05 and Sections 2.02, 2.05 and 3.10 upon the transferability of any particular Restricted Security shall cease and terminate upon delivery by the Company to the Trustee of an Officers' Certificate stating that such Restricted Security has been sold pursuant to an effective Resale Registration Statement under the Securities Act or transferred in compliance with Rule 144 under the Securities Act (or any successor provision thereto). Any Restricted Security as to which the Company has delivered to the Trustee an Officers' Certificate that such restrictions on transfer shall have expired in accordance with their terms or shall have terminated may, upon surrender of such Restricted Security for exchange to the Security Registrar in accordance with the provisions of this Section 3.05, be exchanged for a new Security, of like tenor and aggregate Principal Amount, which shall not bear the restrictive legends required by Sections 2.02 and 2.05. The Company shall inform the Trustee in writing of the effective date of any Resale Registration Statement registering the Securities under the Securities Act. 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 Resale Registration Statement.
As used in the preceding two paragraphs of this Section 3.05, the term "transfer" encompasses any sale, pledge, transfer or other disposition of any Restricted Security.
SECTION 3.06. Mutilated, Destroyed, Lost and 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 shall be delivered to the Company and the Trustee (i) evidence to their satisfaction of the destruction, loss or theft of any Security and (ii) such security or indemnity as may be required by them to save each of them and any agent of either of them harmless, then, in the absence of 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.
In case any such mutilated, destroyed, lost or stolen Security has become or is about to become due and payable or has been called for redemption in full, the Company in its discretion may, instead of issuing a new Security, pay such Security.
Upon the issuance of any new Security under this Section, 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 and any other expenses (including the fees and expenses of the Trustee) connected therewith.
Every new Security issued pursuant to this Section in lieu of any destroyed, lost or stolen Security shall constitute an original additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Security shall be at any time enforceable by anyone, and 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 are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities.
SECTION 3.07 Persons Deemed Owners. Prior to due presentment of a 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 of such Security for the purpose of receiving payment of principal on such Security (and interest, if the Securities have been converted into semi-annual coupon notes) and for all other purposes whatsoever, whether or not such Security be overdue, and neither the Company, the Trustee nor any agent of the Company or the Trustee shall be affected by notice to the contrary.
SECTION 3.08. Book-entry Provisions for Global Securities.
Members of, or participants in, the Depositary ("Agent Members") shall have no rights under this Indenture with respect to any Global Security held on their behalf by the Depositary, or the Trustee as its custodian, or under the Global Security, and the Depositary may be treated by the Company, the Trustee and any agent of the Company or the Trustee as the absolute owner of the Global Security for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Trustee or any agent of the Company or the Trustee from giving effect to any written certification, proxy or other authorization furnished by the Depositary or impair, as between the Depositary and its Agent Members, the operation of customary practices governing the exercise of the rights of any Holder.
SECTION 3.09. Cancellation. The Company at any time may deliver to the Trustee for cancellation any Securities previously authenticated and delivered hereunder which the Company may have acquired in any manner whatsoever, and may deliver to the Trustee for cancellation any Securities previously authenticated hereunder which the Company has not issued and sold. The Trustee shall cancel and dispose of all Securities surrendered for registration of transfer, exchange, payment, purchase, repurchase, redemption, conversion (pursuant to Article 13 hereof) or cancellation in accordance with its customary practices. If the Company shall acquire any of the Securities, such acquisition shall not operate as a redemption or satisfaction of the indebtedness represented by such Securities unless and until the same are delivered to the Trustee for cancel lation. The Company may not issue new Securities to replace Securities it has paid in full or delivered to the Trustee for cancellation.
SECTION 3.10. Special Transfer Provisions.
whereupon (1) the Security Registrar shall reflect on its books and records the date and (if the transfer does not involve a transfer of outstanding Physical Securities) a decrease in the Principal Amount of the Global Security in an amount equal to the Principal Amount of the beneficial interest in the Global Security to be transferred, and (b) the Company shall execute and the Trustee shall authenticate and deliver one or more Physical Securities of like tenor and amount.
The Security Registrar shall retain, in accordance with its customary procedures, copies of all letters, notices and other written communications received pursuant to this Section 3.10. The Company shall have the right to inspect and make copies of all such letters, notices or other written communications at any reasonable time upon the giving of reasonable written notice to the Security Registrar.
SECTION 3.11. Cusip Numbers. The Company in issuing the Securities may use "CUSIP" numbers (if then generally in use), and, if so, the Trustee shall use "CUSIP" numbers in notices of redemption as a convenience to Holders; provided that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Securities or as contained in any notice of a redemption and that reliance may be placed only on the other identification numbers printed on the Securities, and any such redemption shall not be affected by any defect in or omission of such numbers. The Company will promptly notify the Trustee of any change in the "CUSIP" numbers.
ARTICLE 4
SATISFACTION AND DISCHARGE
SECTION 4.01. Satisfaction and Discharge of Indenture. This Indenture shall cease to be of further effect (except as to any surviving rights of registration of transfer or exchange of Securities herein expressly provided for), and the Trustee, on demand of and at the expense of the Company, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture, when
Notwithstanding the satisfaction and discharge of this Indenture, the obligations of the Company to the Trustee under Section 6.07 and, if money shall have been deposited with the Trustee pursuant to subclause (ii) of Clause (a) of this Section, the obligations of the Trustee under Section 4.02 and the last paragraph of Section 10.03 shall survive.
SECTION 4.02. Application of Trust Money. Subject to the provisions of the last paragraph of Section 10.03, all money deposited with the Trustee pursuant to Section 4.01 shall be held in trust and applied by it, in accordance with the provisions of the Securities and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Persons entitled thereto, of the principal and interest and Additional Amounts, if any, for whose payment such money has been deposited with the Trustee.
SECTION 5.01. 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 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):
SECTION 5.02. Acceleration of Maturity; Rescission and Annulment.
Notwithstanding the foregoing, in the case of an Event of Default specified in Sections 5.01(e) or 5.01(f), the Principal Amount plus accrued and unpaid interest and Additional Amounts, if any, on all Outstanding Securities will ipso facto become due and payable without any declaration or other Act on the part of the Trustee or any Holder.
No such rescission shall affect any subsequent default or impair any right consequent thereon.
SECTION 5.03. Collection of Indebtedness and Suits for Enforcement by Trustee. The Company covenants that if:
the Company will, upon demand of the Trustee, pay to it, for the benefit of the Holders of such Securities, the whole amount then due and payable on such Securities, and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel.
If an Event of Default with respect to the Securities occurs and is continuing, the Trustee shall, subject to applicable law, proceed to protect and enforce its rights and the rights of the Holders by such appropriate judicial proceedings as the Trustee shall deem appropriate, 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 5.04. Trustee May File Proofs of Claim. In case of any judicial proceeding relative to the Company (or any other obligor upon the Securities), its property or its creditors, the Trustee shall be entitled and empowered, by intervention in such proceeding or otherwise, to take any and all actions authorized under the Trust Indenture Act in order to have claims of the Holders and the Trustee allowed in any such proceeding. In particular, the Trustee shall be authorized to collect and receive any moneys or other property payable or deliverable on any such claims 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 to make such payments to the Trustee and, in the event that the Trustee shal l consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due 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 6.07.
No provision of this Indenture shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder 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 in any such proceeding.
SECTION 5.05. 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, and any other amounts due the Trustee under Section 6.07, be for the ratable benefit of the Holders of the Securities in respect of which such judgment has been recovered.
SECTION 5.06. Application of Money Collected. Any money collected by the Trustee pursuant to this Article 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 to Holders, 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 6.07; and
SECOND: To the payment of the amounts then due and unpaid on the Securities for the Principal Amount, Redemption Price, Fundamental Change Repurchase Price or interest and Additional Amounts, if any, as the case may be, 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.
SECTION 5.07. 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 (other than in the case of an Event of Default specified in Section 5.01(a) or 5.01(b)), unless:
it being understood and intended that no one or more 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 Holders, or to obtain or to seek to obtain priority or preference over any other Holders or to enforce any right under this Indenture, except in the manner herein provided and for the equal and ratable benefit of all the Holders.
SECTION 5.08. Unconditional Right of Holders to Receive Payment. Notwithstanding any other provision of this Indenture, the right of any Holder to receive payment of the Principal Amount, Redemption Price, Fundamental Change Repurchase Price or interest and Additional Amounts, if any, in respect of the Securities held by such Holder, on or after the respective due dates expressed in the Securities or any Redemption Date or Fundamental Change Repurchase Date, as applicable, and to convert the Securities in accordance with Article 13, or to bring suit for the enforcement of any such payment on or after such respective dates or the right to convert, shall not be impaired or affected adversely without the consent of such Holder.
SECTION 5.09. Restoration of Rights and Remedies. If the Trustee or any Holder 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 shall be restored severally and respectively to their former positions hereunder and thereafter all rights and remedies of the Trustee and the 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 3.06, no right or remedy herein conferred upon or reserved to the Trustee or to the Holders 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 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 an acquiescence therein. Every right and remedy given by this Article or by law to the Trustee or to the Holders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Holders, as the case may be.
SECTION 5.12. Control by Holders. 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:
SECTION 5.13 Waiver of Past Defaults. The Holders of not less than a majority in Principal Amount of the Outstanding Securities may on behalf of the Holders of all the Securities waive any past Default hereunder and its consequences, except a Default:
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. In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as Trustee, in either case in respect of the Securities, a court may require any party litigant in such suit to file an undertaking to pay the costs of the suit, and the court may assess reasonable costs, including reasonable attorney's fees, against any party litigant in the suit having due regard to the merits and good faith of the claims or defenses made by the party litigant; but the provisions of this Section 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 for the enforcement of the payment of the Principal Amount or interest on any Security on or after Maturity of such Security, the Redemption Price or the Fundamental Change Purchase Price.
SECTION 5.15. Waiver of Stay 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, 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 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.
SECTION 6.01. Certain Duties and Responsibilities. The duties and responsibilities of the Trustee shall be as provided by the Trust Indenture Act. In case an Event of Default with respect to the Securities has occurred (which has not been cured or waived), the Trustee shall exercise 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 person would exercise or use under the circumstances in the conduct of such person's own affairs. Notwithstanding the foregoing, 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. Whether or not therein expressly so provided, every provision of th is 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 6.02. Notice of Defaults. The Trustee shall give the Holders notice of any Default hereunder within 90 days after the occurrence thereof; provided, that in the case of any Default in the payment of Principal Amount or interest on any of the Securities, Redemption Price or Fundamental Change Repurchase Price, the Trustee shall be protected in withholding such notice if and so long as a trust committee of directors or trustees and/or a Responsible Officer of the Trustee in good faith determines that the withholding of such notice is in the interest of the holders of Securities.
SECTION 6.03. Certain Rights of Trustee. Subject to the provisions of Section 6.01:
SECTION 6.04. Not Responsible for Recitals. 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 or of the Securities. The Trustee shall not be accountable for the use or application by the Company of Securities or the proceeds thereof.
SECTION 6.05. May Hold Securities. The Trustee, any Paying Agent, any Security Registrar or any other agent of the Company, in its individual or any other capacity, may become the owner or pledgee of Securities and, subject to Sections 6.08 and 6.13, may otherwise deal with the Company with the same rights it would have if it were not Trustee, Paying Agent, Security Registrar or such other agent.
SECTION 6.06. 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 6.07. Compensation and Reimbursement. The Company agrees:
The obligations of the Company under this Section 6.07 shall survive the resignation or removal of the Trustee and the satisfaction and discharge of this Indenture. To secure the Company's payment obligations in this Section 6.07, the Trustee shall have a lien prior to the Securities on all money or property held or collected by the Trustee, except that held in trust to pay principal and interest on the Securities. Such lien shall survive the resignation or removal of the Trustee and the satisfaction and discharge of this Indenture. When the Trustee incurs expenses or renders services after a Default or an Event of Default specified in Sections 5.01(e) or 5.01(f) hereof occurs, the expenses and the compensation for the services (including, the fees and expenses of its agents and counsel) are intended to constitute expenses of administration under U.S. Code, Title 11 or any other similar foreign, federal or state law for the relief of debtors.
SECTION 6.08. 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 6.09. 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 and has a combined capital and surplus of at least $50,000,000. If such Person 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 Person 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.
SECTION 6.10. Resignation and Removal; Appointment of Successor.
then, in any such case, (A) the Company by a Company Order may remove the Trustee, or (B) subject to Section 5.14, any Holder who has been a bona fide Holder of a Security for at least six months may, on behalf of such Holder and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee.
SECTION 6.11. 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 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 h ereunder. 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 qualified and eligible under this Article.
SECTION 6.12. 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 the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder, provided such corporation shall be otherwise qualified and 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 aut hentication and deliver the Securities so authenticated with the same effect as if such successor Trustee had itself authenticated such Securities.
SECTION 6.13. Preferential Collection of Claims Against. 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 7
HOLDERS' LISTS AND REPORTS BY TRUSTEE
SECTION 7.01. Company to Furnish Trustee Names and Addresses of Holders. The Company will furnish or cause to be furnished to the Trustee:
excluding from any such list names and addresses received by the Trustee in its capacity as Security Registrar; provided, however, that no such list need be furnished so long as the Trustee is acting as Security Registrar.
SECTION 7.02. Preservation of Information; Communications to Holders.
SECTION 7.03. Reports by Trustee.
SECTION 7.04. Reports by Company. 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 Exchange Act shall be filed with the Trustee within 15 days after the same is so required to be filed with the Commission. In the event the Company is not subject to Section 13 or 15(d) of the Exchange Act, it shall file with the Trustee upon request the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act. Delivery of such reports, information and documen ts to the Trustee is for informational purposes only and the Trustee's receipt of such shall not constitute constructive notice of any information contained therein or determinable from information contained therein, including the Company's compliance with any of its covenants hereunder (as to which the Trustee is entitled to rely exclusively on Officers' Certificates). It is expressly understood that materials transmitted electronically by the Company to the Trustee shall be deemed filed with the Trustee for purposes of this Section 7.04.
ARTICLE 8
CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE
SECTION 8.01. 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 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 or lease its properties and assets substantially as an entirety to the Company, unless:
SECTION 8.02. Successor Substituted. Upon any consolidation of the Company with, or merger of the Company into, any other Person or any conveyance, transfer or lease of the properties and assets of the Company substantially as an entirety in accordance with Section 8.01, the successor Person formed by such consolidation or into 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 9
SUPPLEMENTAL INDENTURES
SECTION 9.01. Supplemental Indentures Without Consent of Holders. Without the consent of any Holders, 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, in form satisfactory to the Trustee, for any of the following purposes:
SECTION 9.02. Supplemental Indentures with Consent of Holders. With the consent of the Holders of not less than a majority in Principal Amount of the Outstanding Securities, by Act of said Holders delivered to the Company and the Trustee, 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 under this Indenture; provided, however, that no such supplemental indenture shall, without the consent of the Holder of each Outstanding Security affected thereby,
It shall not be necessary for any Act of Holders 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 9.03. 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 Section 6.01) shall be fully protected in relying upon, in addition to the documents required by Section 1.02, an Opinion of Counsel stating that the execution of such supplemental indenture is authorized or permitted by this Indenture. Subject to the preceding sentence, the Trustee shall sign such supplemental indenture if the same does not adversely affect the Trustee's own rights, duties or immunities under this Indenture or otherwise. The Trustee may, but shall not be obligated to, enter into any such supplement al indenture which adversely affects the Trustee's own rights, duties or immunities under this Indenture or otherwise.
SECTION 9.04. 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 shall be bound thereby.
SECTION 9.05. Conformity with Trust Indenture Act. Every supplemental indenture executed pursuant to this Article shall conform to the requirements of the Trust Indenture Act.
SECTION 9.06. Reference in Securities to Supplemental Indentures. Securities authenticated and delivered after the execution of any supplemental indenture pursuant to this Article shall 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 Trustee and the Company, 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 10.01. Payments. The Company shall duly and punctually make all payments in respect of the Securities in accordance with the terms of the Securities and this Indenture.
SECTION 10.02. Maintenance of Office or Agency. The Company shall maintain in Boston, Massachusetts, an office or agency where Securities may be presented or surrendered for payment, 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, which shall initially be the Corporate Trust Office of the Trustee. The Company shall give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency. 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 of the Trust ee, and the Company hereby appoints the Trustee as its agent to receive all such presentations, surrenders, notices and demands.
The Company may also from time to time designate one or more other offices or agencies (in or outside Boston, Massachusetts) where the Securities may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in Boston, Massachusetts, for such purposes. The Company shall give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency.
SECTION 10.03. Money for Security Payments to Be Held in Trust. If the Company shall at any time act as its own Paying Agent, it shall, on or before each due date of any payment in respect of any of the Securities, segregate and hold in trust for the benefit of the Persons entitled thereto a sum sufficient to make the payment so becoming due until such sums shall be paid to such Persons or otherwise disposed of as herein provided and shall promptly notify the Trustee of its action or failure so to act.
Whenever the Company shall have one or more Paying Agents, it will, prior to each due date of any payment in respect of any Securities, deposit with a Paying Agent a sum sufficient to pay such amount, such sum to be held as provided by the Trust Indenture Act, and (unless such Paying Agent is the Trustee) the Company will promptly notify the Trustee of its action or failure so to act.
The Company shall 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 (i) comply with the provisions of the Trust Indenture Act applicable to it as a Paying Agent and (ii) during the continuance of any default by the Company (or any other obligor upon the Securities) in the making of any payment in respect of the Securities, upon the written request of the Trustee, forthwith pay to the Trustee all sums held in trust by such Paying Agent as such.
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 making of payments in respect of any Security and remaining unclaimed for two years after such payment has become due 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; provided, however, that the Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the Company cause to be published once, in a newspaper published in the English language, customarily published on each Business Day and of general circulation in The City of New York, notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such publication, any unclaimed balance of such money then remaining shall be repaid to the Company.
SECTION 10.04. Statement by Officers as to Default. The Company will 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 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 shall deliver to the Trustee, as soon as possible and in any event within five days after the Company becomes aware of the occurrence of any Event of Default or an event which, with notice or the lapse of time or both, would constitute an Event of Default, an Officers' Certificate setting forth the details of such Event of Default or default and the action which the Company proposes to take with respect thereto.
SECTION 10.05. Existence. Subject to Article 8, the Company shall 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 Board of Directors of 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.
SECTION 10.06. Reports and Delivery of Certain Information. Whether or not required by the rules and regulations of the Commission, so long as any Securities are outstanding, the Company shall furnish to the Trustee (i) all quarterly and annual financial information that is substantially equivalent to that which would be required to be contained in a filing with the Commission on Forms 10-Q and 10-K if the Company were required to file such Forms, including a "Management's Discussion and Analysis of Financial Condition and Results of Operations" section and, with respect to the annual information only, a report thereon by the Company's certified independent accountants and (ii) all reports that are substantially equivalent to that which would be required to be filed with the Commission on Form 8-K if the Company were requir ed to file such reports; provided that in each case the delivery of materials to the Trustee by electronic means shall be deemed to be "furnished" to the Trustee for purposes of this Section 10.06. Delivery of such reports, information and documents to the Trustee is for informational purposes only and the Trustee's receipt of such shall not constitute constructive notice of any information contained therein or determinable from information contained therein, including the Company's compliance with any of its covenants hereunder (as to which the Trustee is entitled to rely exclusively on Officers' Certificates). In addition, whether or not required by the rules and regulations of the Commission, the Company shall file a copy of all such information with the Commission for public availability (unless the Commission will not accept such a filing) and make such information available to investors who request it in writing. So long as any of the Securities remain Outstanding, the Compan y shall make available to any prospective purchaser of Securities or beneficial owner of Securities in connection with any sale thereof the information required by Rule 144A(d)(4) under the Securities Act, until the earlier of (a) such time as the Holders thereof have disposed of such Securities pursuant to an effective Resale Registration Statement or Rule 144 under the Securities Act and (b) March 18, 2004.
SECTION 10.07. Resale of Certain Securities. During the period beginning on the Issue Date and ending on the date that is two years from the Issue Date, the Company shall not, and shall not permit any of its "affiliates" (as defined under Rule 144 under the Securities Act or any successor provision thereto) to, resell any Securities which constitute "restricted securities" under Rule 144 that 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.
SECTION 10.08. Book-Entry System. If the Securities cease to trade in the Depositary's book-entry settlement system, the Company covenants and agrees that it shall use reasonable efforts to make such other book-entry arrangements that it determines are reasonable for the Securities.
SECTION 10.10. Additional Amounts under the Registration Rights Agreement. If at any time Additional Amounts become payable by the Company pursuant to the Registration Rights Agreement, the Company shall promptly deliver to the Trustee a certificate to that effect and stating (i) the amount of such Additional Amounts that are payable and (ii) the date on which such Additional Amounts are payable pursuant to the terms of the Registration Rights Agreement. Unless and until a Responsible Officer of the Trustee receives such a certificate, the Trustee may assume without inquiry that no Additional Amounts are payable. If the Company has paid Additional Amounts directly to the Persons entitled to such Additional Amounts, the Company shall deliver to the Trustee a certificate setting forth the particulars of such payment.
ARTICLE 11
REDEMPTION AND PURCHASES
SECTION 11.01. Right to Redeem; Notices to Trustee. The Company, at its option, may redeem the Securities in accordance with the provisions of the Securities and the Indenture. If the Company elects to redeem Securities, it shall notify the Trustee in writing of the Redemption Date, the Principal Amount of Securities to be redeemed and the Redemption Price.
The Company shall give the notice to the Trustee provided for in this Section 11.01 by a Company Order, at least 25 days before the Redemption Date (unless a shorter notice shall be satisfactory to the Trustee). The Company shall be entitled to revoke any notice given under Section 11.01 hereof by providing written notice of such revocation to the Trustee in the form of a Company Order no later than one Business Day prior to the date upon which the Trustee must give notice of redemption in accordance with Section 11.04 hereof.
SECTION 11.02. Selection of Securities to Be Redeemed. If less than all the Securities are to be redeemed, the Trustee shall select the Securities to be redeemed pro rata or by lot or by any other method the Trustee considers fair and appropriate (so long as such method is not prohibited by the rules of any stock exchange on which the Securities are then listed). The Trustee shall make the selection within 7 days from its receipt of the notice from the Company delivered pursuant to the second paragraph of Section 11.01 from Outstanding Securities not previously called for redemption.
Securities and portions of them the Trustee selects shall be in Principal Amounts of $1,000 or integral multiples of $1,000. Provisions of this Indenture that apply to Securities called for redemption also apply to portions of Securities called for redemption. The Trustee shall notify the Company promptly of the Securities or portions of Securities to be redeemed.
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.
SECTION 11.03. Notice of Redemption. At least 15 days but not more than 60 days before a Redemption Date, the Company shall mail a notice of redemption by first-class mail, postage prepaid, to each Holder of Securities to be redeemed.
The notice shall identify the Securities to be redeemed and shall state:
At the Company's written request delivered at least 15 days prior to the date such notice is to be given (unless a shorter time period shall be acceptable to the Trustee), the Trustee shall give the notice of redemption in the Company's name and at the Company's expense.
SECTION 11.04. Effect of Notice of Redemption. Once notice of redemption is given and not revoked by the Company in accordance with Section 11.01 hereof, Securities called for redemption become due and payable on the Redemption Date and at the Redemption Price stated in the notice except for Securities which are converted in accordance with the terms of this Indenture. Upon surrender to the Paying Agent, such Securities shall be paid at the Redemption Price stated in the notice.
SECTION 11.05. Deposit of Redemption Price. Prior to 10:00 a.m. (New York City Time) on a Redemption Date, the Company shall deposit with the Paying Agent (or if the Company or a Subsidiary or an Affiliate of either of them is the Paying Agent, shall segregate and hold in trust) money sufficient to pay the Redemption Price of all Securities to be redeemed on that date other than Securities or portions of Securities called for redemption which on or prior thereto have been delivered by the Company to the Trustee for cancellation or have been converted. The Paying Agent shall as promptly as practicable return to the Company any money not required for that purpose because of conversion of Securities pursuant to Article 13. If such money is then held by the Company in trust and is not required for such purpose it shall be discharged from such trust.
SECTION 11.06. Securities Redeemed in Part. Upon surrender of a Security that is redeemed in part, the Company shall execute and the Trustee shall authenticate and deliver to the Holder a new Security in an authorized denomination equal in principal amount to the unredeemed portion of the Security surrendered.
SECTION 11.07. 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 called for redemption by an agreement with one or more investment bankers or other purchasers to purchase such Securities by paying to the Trustee in trust for the Securityholders, on or prior to 10:00 a.m. New York City time on the Redemption Date, an amount that, together with any amounts deposited with the Trustee by the Company for the redemption of such Securities, is not less than the Redemption Price of such Securities. Notwithstanding anything to the contrary contained in this Article 11, the obligation of the Company to pay the Redemption Price of such Securities shall be deemed to be satisfied and discharged to the extent such amount is so p aid by such purchasers. If such an agreement is entered into, any Securities 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, acquired by such purchasers from such Holders and (notwithstanding anything to the contrary contained in Article 13) surrendered by such purchasers for conversion, all as of immediately prior to the close of business five days prior to the Redemption Date, subject to payment of the above amount as aforesaid. The Trustee shall hold and pay to the Holders whose Securities are selected for redemption any such amount paid to it for purchase and conversion in the same manner as it would moneys 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 obliga tions 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 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, except in the case of the Trustee's negligence or bad faith.
SECTION 11.09. Repurchase of Securities at Option of the Holder upon Fundamental Change.General. If prior to March 15, 2007 there shall have occurred a Fundamental Change, Securities shall be purchased by the Company, at the Fundamental Change Repurchase Price on a date that is not less than 25 days nor more than 35 days after the date of the mailing of the Fundamental Change Company Notice under Section 11.09(c) (the "Fundamental Change Repurchase Date"), at the option of the Holder thereof, upon:
(1) delivery to the Paying Agent by the Holder of a written notice of purchase (a "Fundamental Change Repurchase Notice"), substantially in the form of Exhibit B hereto, at any time from the opening of business on the date of the Fundamental Change Company Notice (as defined below) until the close of business on a date that is 5 Business Days prior to the Fundamental Change Repurchase Date stating:
(2) delivery of such Security to the Paying Agent for cancellation prior to, on or after the Fundamental Change Repurchase Date (together with all necessary endorsements) at the offices of the Paying Agent, such delivery being a condition to receipt by the Holder of the Fundamental Change Repurchase Price therefor; provided, however, that such Fundamental Change Repurchase Price shall be so paid pursuant to this Section 11.09 only if the Security so delivered to the Paying Agent shall conform in all respects to the description thereof in the related Fundamental Change Repurchase Notice.
The Company shall purchase from the Holder thereof, pursuant to this Section 11.09, a portion of a Security if the Principal Amount of such portion is $1,000 or an integral multiple of $1,000 if so requested by the Holder. Provisions of this Indenture that apply to the purchase of all of a Security also apply to the purchase of such portion of such Security.
Any purchase by the Company contemplated pursuant to the provisions of this Section 11.09 shall be consummated by the delivery of the consideration to be received by the Holder promptly following the later of the Fundamental Change Repurchase Date and the time of delivery of the Security.
Notwithstanding anything herein to the contrary, any Holder delivering to the Paying Agent the Fundamental Change Repurchase Notice contemplated by this Section 11.09(a) shall have the right to withdraw such Fundamental Change Repurchase Notice at any time prior to the close of business on the Business Day prior to the Fundamental Change Repurchase Date by delivery of a written notice of withdrawal to the Paying Agent in accordance with Section 11.10.
The Paying Agent shall promptly notify the Company of the receipt by it of any Fundamental Change Repurchase Notice or written notice of withdrawal thereof.
A "Fundamental Change" shall be deemed to have occurred at such time as any of the following events shall occur:
A "Change in Control" shall be deemed to have occurred when (i) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act) of shares representing more than 50% of the combined voting power of the then outstanding securities entitled to vote generally in elections of directors of the Company (the "Voting Stock"); (ii) approval by stockholders of the Company of any plan or proposal for the liquidation, dissolution or winding up of the Company; (iii) the Company (A) consolidates with or merges into any other Person or any other Person merges into the Company, and in the case of any such transaction, the outstanding Common Stock of the Company is changed or exchanged into other assets or securities as a result, unless the stockholders of the Company immediately before such transaction own, directly or indirectly immediately following such transaction, more than 50% of the combined voting power of the outstanding voting securities of the corporation resulting from such transaction in substantially the same proportion as their ownership of the Voting Stock immediately before such transaction, or (B) conveys, transfers or leases all or substantially all of its assets to any Person; or (iv) any time Continuing Directors do not constitute a majority of the Board of Directors of the Company (or, if applicable, a successor Person to the Company); provided that a Change in Control shall not be deemed to have occurred if either (x) the Closing Price (as defined in Section 13.05(g)(1) hereof) of the Common Stock for any 5 Trading Days during the 10 Trading Days immediately preceding the Change in Control is at least equal to 105% of the Conversion Price in effect on the date on which the Change in Control occurs or (y) in the case of a merger or consolidation otherwise constituting a Change in Control, al l of the consideration (excluding cash payments for fractional shares) in such merger or consolidation constituting the Change in Control consists of common stock traded on a United States national securities exchange or quoted on the Nasdaq National Market System (or which will be so traded or quoted when issued or exchanged in connection with such Change in Control) and as a result of such transaction or transactions the Securities become convertible solely into such common stock.
At the Company's request, the Trustee shall give such Fundamental Change Company Notice in the Company's name and at the Company's expense; provided, however, that, in all cases, the text of such Fundamental Change Company Notice shall be prepared by the Company.
SECTION 11.10. Effect of Fundamental Change Repurchase Notice. Upon receipt by the Paying Agent of the Fundamental Change Repurchase Notice specified in Section 11.09(a), the Holder of the Security in respect of which such Fundamental Change Repurchase Notice was given shall (unless such Fundamental Change Repurchase Notice is withdrawn as specified in the following two paragraphs) thereafter be entitled to receive solely the Fundamental Change Repurchase Price with respect to such Security. Such Fundamental Change Repurchase Price shall be paid to such Holder, subject to receipt of funds by the Paying Agent, promptly following the later of (x) the Fundamental Change Repurchase Date with respect to such Security (provided the conditions in Section 11.09(a) have been satisfied) and (y) the time of delivery of such Security to the Paying Agent by the Holder thereof in the manner required by Section 11.09(a). Securities in respect of which a Fundamental Change Repurchase Notice has been given by the Holder thereof may not be converted pursuant to Article 13 hereof on or after the date of the delivery of such Fundamental Change Repurchase Notice unless such Fundamental Change Repurchase Notice has first been validly withdrawn as specified in the following two paragraphs.
A Fundamental Change Repurchase Notice may be withdrawn by means of a written notice of withdrawal delivered to the office of the Paying Agent in accordance with the procedures set forth in the Fundamental Change Company Notice at any time prior to the close of business on the Business Day prior to the Fundamental Change Repurchase Date, specifying:
There shall be no purchase of any Securities pursuant to Section 11.09 if there has occurred (prior to, on or after, as the case may be, the giving, by the Holders of such Securities, of the required Fundamental Change Repurchase Notice and is continuing an Event of Default (other than a default in the payment of the Fundamental Change Repurchase Price with respect to such Securities). The Paying Agent will promptly return to the respective Holders thereof any Securities (x) with respect to which a Fundamental Change Repurchase Notice has been withdrawn in compliance with this Indenture, or (y) held by it during the continuance of an Event of Default (other than a default in the payment of the Fundamental Change Repurchase Price with respect to such Securities) in which case, upon such return, the Fundamental Change Repurchase Notice with respect thereto shall be deemed to have been withdrawn.
SECTION 11.11. Deposit of Fundamental Change Repurchase Price. Prior to 10:00 a.m. (local time in The City of New York) on the Business Day following the Fundamental Change Repurchase Date, the Company shall deposit with the Trustee or with the Paying Agent (or, if the Company or a Subsidiary or an Affiliate of either of them is acting as the Paying Agent, shall segregate and hold in trust as provided herein) an amount of money (in immediately available funds if deposited on such Business Day) sufficient to pay the Fundamental Change Repurchase Price of all the Securities or portions thereof which are to be purchased as of the Fundamental Change Repurchase Date. The Company shall promptly notify the Trustee in writing of the amount of any deposits of cash made pursuant to this Section.
SECTION 11.12. Securities Repurchased in Part. Any Security which is to be repurchased only in part shall be surrendered at the office of the Paying Agent (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 such Holder's attorney duly authorized in writing) and the Company shall execute and the Trustee shall authenticate and deliver 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 portion of the Principal Amount of the Security so surrendered which is not purchased.
SECTION 11.13. Covenant to Comply With Securities Laws Upon Repurchase of Securities. In connection with any offer to repurchase of Securities under Section 11.09 hereof (provided that such offer or repurchase constitutes an "issuer tender offer" for purposes of Rule 13e-4 (which term, as used herein, includes any successor provision thereto) under the Exchange Act at the time of such offer or repurchase), the Company shall (i) comply with Rule 13e-4 and Rule 14e-1 under the Exchange Act, (ii) file the related Schedule TO (or any successor schedule, form or report) under the Exchange Act, and (iii) otherwise comply with all Federal and state securities laws so as to permit the rights and obligations under Section 11.09 to be exercised in the time and in the manner specified in Sect ion 11.09.
SECTION 11.14 Repayment to the Company. The Trustee and the Paying Agent shall return to the Company any cash that remains unclaimed, together with interest or dividends, if any, thereon, held by them for the payment of the Fundamental Change Repurchase Price; provided, however, that to the extent that the aggregate amount of cash deposited by the Company pursuant to Section 11.11 exceeds the aggregate Fundamental Change Repurchase Price of the Securities or portions thereof which the Company is obligated to purchase as of the Fundamental Change Repurchase Date, then on the Business Day following the Fundamental Change Repurchase Date, the Trustee or the Paying Agent, as the case may be, shall return any such excess to the Company.
ARTICLE 12
INTEREST PAYMENTS ON THE SECURITIES
SECTION 12.01. Interest Rate. Interest on the Securities shall accrue at an initial rate of 5% per annum and shall be payable on each Interest Payment Date to holders of record on the Regular Record Date immediately preceding such Interest Payment Date. Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months. Interest on the Securities shall accrue from the most recent date to which interest has been paid, or if no interest has been paid, from March 18, 2002, until the Principal Amount is paid or duly made available for payment.
SECTIN 12.02. Payment of Interest; Interest Rights Preserved.Interest on any Security that 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 is registered at the close of business on the Regular Record Date for such interest at the office or agency of the Company maintained for such purpose. Each installment of interest on any Security shall be made by check mailed to the address of the Holder specified in the register of Securities, or, at the option of the Holder, at the Corporate Trust Office, in such lawful money of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts; provided, however, that, with respect to any Holder of Securities with an aggregate principal amount in excess of $5,000,000, at the request of such Holder in writing to the Company, interest on such Holder's Securities shall be paid by wire transfer in immediately available funds in accordance with the written wire transfer instruction supplied by such Holder from time to time to the Trustee and Paying Agent (if different from the Trustee) at least two days prior to the applicable Regular Record Date. In the case of a permanent Global Security, interest payable on any Interest Payment Date will be paid to the Depositary, with respect to that portion of such permanent Global Security held for its account by Cede & Co. for the purpose of permitting such party to credit the interest received by it in respect of such permanent Global Security to the accounts of the beneficial owners thereof.
Subject to the foregoing provisions, 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.
SECTION 13.01. Right to Convert. Subject to and upon compliance with the provisions of this Indenture, each Holder shall have the right, at its option, at any time following the Issue Date of the Securities hereunder through the close of business on the Business Day immediately prior to the date of the Stated Maturity of the Securities (except that, with respect to any Securities or portion thereof which shall be called for redemption, such right shall terminate, except as provided in Section 13.02 or Section 11.07, at the close of business five days prior to the date fixed for redemption of such Securities or portion thereof unless the Company shall default in payment due upon redemption thereof) to convert the Principal Amount of any such Securities, or any portion of such Principal Amount which is $1,00 0 or an integral multiple thereof, into that number of fully paid and non-assessable shares of Common Stock obtained by dividing the Principal Amount of the Securities or portion thereof surrendered for conversion by the Conversion Price in effect at such time, by surrender of the Securities so to be converted in whole or in part, together with any required funds, in the manner provided in Section 13.02. A Holder of Securities is not entitled to any rights of a Holder of Common Stock until such Holder has converted such Holder's Securities to Common Stock, and only to the extent such Securities are deemed to have been converted to Common Stock under this Article 13. A Security with respect to which a Holder has delivered a notice in accordance with Section 11.09 regarding such Holder's election to require the Company to repurchase such Holder's Securities on a Fundamental Change Repurchase Date may be converted in accordance with this Article 13 only if such Holder withdraws such notice by delivering a written notice of withdrawal to the Company prior to the close of business on the last Business Day prior to such Fundamental Change Repurchase Date.
SECTION 13.02. Exercise of Conversion Privilege; Issuance of Common Stock on Conversion; No Adjustment for Interest or Dividends. In order to exercise the conversion privilege with respect to any Securities in certificated form, the Holder of any such Securities to be converted in whole or in part shall surrender such Securities, duly endorsed, at the office of the Conversion Agent, accompanied by the funds, if any, required by the penultimate paragraph of this Section 13.02, and shall give written notice of conversion in the form provided on the Securities (or such other notice which is acceptable to the Company) (the "Conversion Notice") to the Conversion Agent that the Holder elects to convert such Securities or the portion thereof specified in said notice. Such notice shall also state the name or names (with address or addresses) in which the certificat e or certificates for shares of Common Stock which shall be issuable on such conversion shall be issued, and shall be accompanied by transfer taxes, if required pursuant to Section 13.07. All such Securities surrendered for conversion shall, unless the shares issuable on conversion are to be issued in the same name as the registration of such Securities, be duly endorsed by, or be accompanied by instruments of transfer in form satisfactory to the Company duly executed by, the Holder or his duly authorized attorney.
In order to exercise the conversion privilege with respect to any interest in Securities in global form, the Holder must complete the appropriate instruction form for conversion pursuant to the Depositary's book-entry conversion program, furnish appropriate endorsements and transfer documents if required by the Company or the Trustee or Conversion Agent, and pay the funds, if any, required by this Section 13.02 and any transfer taxes if required pursuant to Section 13.07.
As promptly as practicable after satisfaction of the requirements for conversion set forth above (but in no event later than 3 Business Days after satisfaction of such requirements for conversion), subject to compliance with any restrictions on transfer if shares issuable on conversion are to be issued in a name other than that of the Holder (as if such transfer were a transfer of the Securities (or portion thereof) so converted), the Company shall issue and shall deliver to such Holder at the office of the Conversion Agent, a certificate or certificates for the number of full shares of Common Stock issuable upon the conversion of such Securities or portion thereof in accordance with the provisions of this Article and a check or cash in respect of any fractional interest in respect of a share of Common Stock arising upon such conversion, as provided in Section 13.03. In case any Securities of a denomination greater than $1,000 shall be surrendered for partial conversion, the Company shall ex ecute and the Trustee shall authenticate and deliver to the Holder of the Securities so surrendered, without charge to him, new Securities in authorized denominations in an aggregate principal amount equal to the unconverted portion of the surrendered Securities.
Each conversion shall be deemed to have been effected as to any such Securities (or portion thereof) on the date on which the requirements set forth above in this Section 13.02 have been satisfied as to such Securities (or portion thereof), and the person in whose name any certificate or certificates for shares of Common Stock shall be issuable upon such conversion shall be deemed to have become on said date the Holder of record of the shares represented thereby; provided, however, that in case of any such surrender on any date when the stock transfer books of the Company shall be closed, the person or persons in whose name the certificate or certificates for such shares are to be issued shall be deemed to have become the record Holder thereof for all purposes on the next day on which such stock transfer books are open, but such conversion shall be at the Conversion Price in effect on the date upon which such Securities shall be surrendered.
All Securities or portions thereof surrendered for conversion during the period from the close of business on the Regular Record Date for any Interest Payment Date to the close of business on the Business Day next preceding the following Interest Payment Date shall (unless such Securities or portion thereof being converted shall have been called for redemption on a Redemption Date which occurs during the period from the close of business on such Regular Record Date to the close of business on the Business Day next preceding the following Interest Payment Date) be accompanied by payment, in funds acceptable to the Company, of an amount equal to the interest otherwise payable on such Interest Payment Date on the Principal Amount being converted; provided, however, that no such payment need be made if there shall exist at the time of conversion a default in the payment of interest on the Securities. Except as provided above in this Section 13.02, no payment or other adjustment sha ll be made for interest accrued on any Securities converted or for dividends on any shares issued upon the conversion of such Securities as provided in this Article.
Upon the conversion of an interest in Global Securities, the Trustee (or other Conversion Agent appointed by the Company) shall make a notation on such Global Securities as to the reduction in the Principal Amount represented thereby. The Company shall notify the Trustee in writing of any conversions of Securities effected through any Conversion Agent other than the Trustee.
SECTION 13.03. Cash Payments in Lieu of Fractional Shares. The Company will not issue fractional shares of Common Stock upon conversion of Securities. If multiple Securities shall be surrendered for conversion at one time by the same Holder, the number of full shares which shall be issuable upon conversion shall be computed on the basis of the aggregate Principal Amount of the Securities (or specified portions thereof to the extent permitted hereby) so surrendered. If any fractional share of stock would be issuable upon the conversion of any Securities, the Company shall make an adjustment and payment therefor in cash at the current market value thereof to the Holder of Securities. The current market value of a fraction of a share of Common Stock shall be determined by multiplying the average of Closing Prices (as defined in Section 13.05(g)) of such Common Stock in the 5 Trading Days before the date of conversion by such fraction and rounding the product to the nearest whole cent.
SECTION 13.04. Conversion Price. The conversion price shall be as specified in the Security (herein called the "Conversion Price"), subject to adjustment as provided in this Article 13.
SECTION 13.05. Adjustment of Conversion Price. The Conversion Price shall be adjusted from time to time by the Company as follows:
Each share of Common Stock issued upon conversion of securities pursuant to this Article 13 shall be entitled to receive the appropriate number of common stock or preferred stock purchase rights, if any, as may be provided by the terms of any stockholder rights plan adopted by the Company (notwithstanding the occurrence of an event causing such rights to separate from the Common Stock at or prior to the time of conversion). Any distribution of rights or warrants pursuant to a stockholder rights plan complying with the requirements set forth in the immediately preceding sentence of this paragraph shall not constitute a distribution of rights or warrants for the purposes of Section 13.05(b) or this Section 13.05(d).
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 be deemed not to have been distributed for purposes of this Section 13.05 (and no adjustment to the Conversion Price under this Section 13.05 will be required) until the occurrence of the earliest Trigger Event, whereupon such rights and warrants shall be deemed to have been distributed and an appropriate adjustment (if any is required) to the Conversion Price shall be made under this Section 13.05(d). If any such right or warrant, including any such existing ri ghts or warrants distributed prior to the date of this Indenture, are subject to events, upon the occurrence of which such rights or warrants become exercisable to purchase different securities, evidences of indebtedness or other assets, then the date of the occurrence of any and each such event shall be deemed to be the date of distribution and record date with respect to new rights or warrants with such rights (and a termination or expiration of the existing rights or warrants without exercise by any of the Holders thereof). In addition, in the event of any distribution (or deemed distribution) of rights or warrants, or any Trigger Event or other event (of the type described in the preceding sentence) with respect thereto that was counted for purposes of calculating a distribution amount for which an adjustment to the Conversion Price under this Section 13.05 was made, (1) in the case of any such rights or warrants which shall all have been redeemed or repurchased without exercise by any Hold ers thereof, the Conversion Price 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 or Holders of Common Stock with respect to such rights or warrants (assuming such Holder had retained such rights or warrants), made to all applicable Holders of Common Stock as of the date of such redemption or repurchase, and (2) in the case of such rights or warrants which shall have expired or been terminated without exercise by any Holders thereof, the Conversion Price shall be readjusted as if such rights and warrants had not been issued.
For purposes of this Section 13.05(d) and Sections 13.05(a) and (b), any dividend or distribution to which this Section 13.05(d) is applicable that also includes shares of Common Stock, or rights or warrants to subscribe for or purchase shares of Common Stock (or both), shall be deemed instead to be (1) a dividend or distribution of the evidences of indebtedness, assets or shares of capital stock other than such shares of Common Stock or rights or warrants (and any Conversion Price reduction required by this Section 13.05(d) with respect to such dividend or distribution shall then be made) immediately followed by (2) a dividend or distribution of such shares of Common Stock or such rights or warrants (and any further Conversion Price reduction required by Sections 13.05(a) and (b) with respect to such dividend or distribution shall then be made), except (A) the Record Date of such dividend or distribution shall be substituted as "t he date fixed for the determination of stockholders entitled to receive such dividend or other distribution" and "the date fixed for such determination" within the meaning of Sections 13.05(a) and (b) and (B) any shares of Common Stock included in such dividend or distribution shall not be deemed "outstanding at the close of business on the date fixed for such determination" within the meaning of Section 13.05(a).
To the extent permitted by applicable law, the Company from time to time may reduce the Conversion Price by any amount for any period of time if the period is at least 20 days, the reduction is irrevocable during the period and the Board of Directors shall have made a determination that such reduction would be in the best interests of the Company, which determination shall be conclusive. Whenever the Conversion Price is reduced pursuant to the preceding sentence, the Company shall mail to Holders of record of the Securities a notice of the reduction at least 15 days prior to the date the reduced Conversion Price takes effect, and such notice shall state the reduced Conversion Price and the period during which it will be in effect.
SECTION 13.06. Effect of Reclassification, Consolidation, Merger or Sale. If any of the following events occur, namely (i) any reclassification or change of shares of Common Stock issuable upon conversion of the Securities (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination, or any other change for which an adjustment is provided in Section 13.05(c)), (ii) any consolidation or merger or combination to which the Company is a party other than a merger in which the Company is the continuing corporation and which does not result in any reclassification of, or change (other than in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination) in outstanding shares of Common Stock, or (iii) any sale or conveyance of all or substantially all of the properties and assets of the Company to an y other person as a result of which holders of Common Stock shall be entitled to receive stock, securities or other property or assets (including cash) with respect to or in exchange for such Common Stock, then the Company or the successor or purchasing person, as the case may be, shall execute with the Trustee a supplemental indenture (which shall comply with the Trust Indenture Act of 1939 as in force at the date of execution of such supplemental indenture) providing that such Securities shall be convertible into the kind and amount of shares of stock, securities or other property or assets (including cash) receivable upon such reclassification, change, consolidation, merger, combination, sale or conveyance by a holder of a number of shares of Common Stock issuable upon conversion of such Securities (assuming, for such purposes, a sufficient number of authorized shares of Common Stock available to convert all such Securities) immediately prior to such reclassification, change, consolidation, merger, combin ation, sale or conveyance, assuming such holder of Common Stock did not exercise his rights of election, if any, as to the kind or amount of securities, cash or other property receivable upon such reclassification, change, consolidation, merger, combination, sale or conveyance (provided that, if the kind or amount of stock, securities or other property or assets (including cash) receivable upon such reclassification, change, consolidation, merger, combination, sale or conveyance is not the same for each share of Common Stock in respect of which such rights of election shall not have been exercised ("nonelecting share"), then for the purposes of this Section 13.06, the kind and amount of securities, cash or other property receivable upon such reclassification, change, consolidation, merger, combination, sale or conveyance for 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 ind enture shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article 13. The above provisions of this Section shall similarly apply to successive reclassifications, changes, consolidations, mergers, combinations, sales and conveyances. If this Section 13.06 applies to any event or occurrence, Section 13.05 shall not apply.
SECTION 13.07. Taxes on Shares Issued. The issue of stock certificates on conversions of Securities shall be made without charge to the converting Holder for any documentary, transfer, stamp or any similar tax in respect of the issue thereof. The Company shall not, however, be required to pay any such tax which may be payable in respect of any transfer involved in the issue and delivery of stock in any name other than that of the Holder of any Securities converted, and the Company shall not be required to issue or deliver any such stock certificate unless and until the person or persons requesting the issue thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid.
SECTION 13.08. Reservation of Shares; Shares to be Fully Paid; Compliance with Governmental Requirements; Listing of Common Stock. The Company shall provide, free from preemptive rights, out of its authorized but unissued shares or shares held in treasury, sufficient shares of Common Stock to provide for the conversion of the Securities from time to time as such Securities are presented for conversion.
Before taking any action which would cause an adjustment reducing the Conversion Price below the then par value, if any, of the shares of Common Stock issuable upon conversion of the Securities, the Company will take all corporate action which may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue shares of such Common Stock at such adjusted Conversion Price.
The Company covenants that all shares of Common Stock which may be issued upon conversion of Securities shall be newly issued shares or Treasury shares, shall be duly authorized, validly issued, fully paid and non-assessable and shall be free from preemptive rights and free from any lien or adverse claim.
The Company shall use its reasonable efforts to list or cause to have quoted any shares of Common Stock to be issued upon conversion of Securities on each national securities exchange or over-the-counter or other domestic market on which the Common Stock is then listed or quoted.
SECTION 13.09. Responsibility of Trustee. The Trustee and any other Conversion Agent shall not at any time be under any duty or responsibility to any Holder of Securities to determine the Conversion Price or whether any facts exist which may require any adjustment of the Conversion Price, or with respect to the nature or extent or calculation of any such adjustment when made, or with respect to the method employed, or herein or in any supplemental indenture provided to be employed, in making the same. The Trustee and any other Conversion Agent shall not be accountable with respect to the validity or value (or the kind or amount) of any shares of Common Stock, or of any securities or property, which may at any time be issued or delivered upon the conversion of any Securities; and the Trustee and any other Conversion Agent make no representations with respect thereto. Neither the Trustee nor any Conversion Agent shall be responsible for any failure of the Company to issue, transfer or deliver any shares of Common Stock or stock certificates or other securities or property or cash upon the surrender of any Securities for the purpose of conversion or to comply with any of the duties, responsibilities or covenants of the Company contained in this Article. Without limiting the generality of the foregoing, neither the Trustee nor any Conversion Agent shall be under any responsibility to determine the correctness of any provisions contained in any supplemental indenture entered into pursuant to Section 13.06 relating either to the kind or amount of shares of stock or securities or property (including cash) receivable by Holders upon the conversion of their Securities after any event referred to in such Section 13.06 or to any adjustment to be made with respect thereto, but, subject to the provisions of Section 6.01, may accept as conclusive evidence of the correctness of any such provisions, and shall be protected in relying upon, the Offic ers' Certificate (which the Company shall be obligated to file with the Trustee prior to the execution of any such supplemental indenture) with respect thereto.
SECTION 13.10. Notice to Holders Prior to Certain Actions. In case,
the Company shall cause to be filed with the Trustee and to be mailed to each Holder of Securities at such Holder's address appearing on the list of Securityholders provided for in Section 3.05 of this Indenture, as promptly as practicable but in any event at least 15 days prior to the applicable date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution or rights 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 or rights are to be determined, or (y) the date on which such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding up is expected to become effective or occur, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reclassification, conso lidation, merger, sale, transfer, dissolution, liquidation or winding up. Failure to give such notice, or any defect therein, shall not affect the legality or validity of such dividend, distribution, reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding up.
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.
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed as of the day and year first above written.
COMPUTER ASSOCIATES INTERNATIONAL,
INC.
By /s/ Ira Zar
Name: Ira Zar
Title: Executive Vice President and
Chief Financial Officer
STATE STREET BANK AND TRUST
COMPANY, as Trustee
By /s/ Donald E. Smith
Name: Donald E. Smith
Title: Vice President
EXHIBIT A
Form of Certificate to Be Delivered
in Connection with Transfers
Pursuant to Regulation S
_______________, ____
State Street Bank and Trust Company
2 Avenue de Lafayette - 6th Floor
Boston, Massachusetts 02111-1724
Attention: Corporate Trust Administration
Re: Computer Associates International, Inc. (the "Company")
5% Convertible Senior Notes due 2007 (the "Notes")
Ladies and Gentlemen:
In connection with our proposed sale of $ aggregate Principal Amount of the Notes, we confirm that such sale has been effected pursuant to and in accordance with Regulation S under the U.S. Securities Act of 1933, as amended (the "Securities Act"), and, accordingly, we represent that:
You and the Company are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy hereof to any interested party, in any administrative or legal proceedings or official inquiry with respect to the matters covered hereby. Terms used in this certificate have the meanings set forth in Regulation S.
Very truly yours,
[Name of Transferor]
By
Authorized Signature
EXHIBIT B
Form of Fundamental Change Repurchase Notice
_______________, ____
State Street Bank and Trust Company
2 Avenue de Lafayette - 6th Floor
Boston, Massachusetts 02111-1724
Attention: Corporate Trust Administration
Re: Computer Associates International, Inc. (the "Company")
5% Convertible Senior Notes due 2007
This is a Fundamental Change Repurchase Notice as defined in Section 11.09 of the Indenture dated as of March 18, 2002 (the "Indenture") between the Company and the State Street Bank and Trust Company, as Trustee. Terms used but not defined herein shall have the meanings ascribed to them in the Indenture.
Certificate No(s). of Securities: _____________________________
I intend to deliver the following aggregate Principal Amount of Securities for purchase by the Company pursuant to Section 11.09 of the Indenture (in multiples of $1,000):
$__________________________________
I hereby agree that the Securities will be purchased as of the Fundamental Change Repurchase Date pursuant to the terms and conditions thereof and of the Indenture.
Date: __________________ Signed: ____________________
(Sign exactly as your name appears on the other side of this Security)
Signature Guarantee:
Note: Signatures must be guaranteed by an "eligible guarantor institution" meeting the requirements of the Security Registrar, which requirements include membership or participation in the Security Transfer Agent Medallion Program ("STAMP") or such other "signature guarantee program" as may be determined by the Security Registrar in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended.
Certain Sections of this Indenture relating to
Sections 310 through 318 of the
Trust Indenture Act of 1939:
Trust Indenture |
Indenture |
|
§ 310(a)(1) |
|
6.09 |
(a)(2) |
|
6.09 |
(a)(3) |
|
Not Applicable |
(a)(4) |
|
Not Applicable |
(b) |
|
6.08 |
6.10 |
||
§ 311(a) |
|
6.13 |
(b) |
|
6.13 |
§ 312(a) |
|
7.01 |
7.02(a) |
||
(b) |
|
7.02(b) |
(c) |
|
7.02(c) |
§ 313(a) |
|
7.03(a) |
(b) |
|
7.03(a) |
(c) |
|
7.03(a) |
(d) |
|
7.03(b) |
§ 314(a)(1) |
|
7.04 |
(b) |
|
Not Applicable |
(c)(1) |
|
1.02 |
(c)(2) |
|
1.02 |
(c)(3) |
|
Not Applicable |
(d) |
|
Not Applicable |
(e) |
|
1.02 |
§ 315(a) |
|
6.01 |
(b) |
|
6.02 |
(c) |
|
6.01 |
(d) |
|
6.01 |
(e) |
|
5.14 |
§ 316(a)(1)(A) |
|
5.12 |
(a)(1)(B) |
|
5.13 |
(a)(2) |
|
Not Applicable |
(b) |
|
5.08 |
(c) |
|
1.04(c) |
§ 317(a)(1) |
|
5.03 |
(a)(2) |
|
5.04 |
(b) |
|
10.03 |
§ 318(a) |
|
1.07 |
Note: This reconciliation and tie shall not, for any purpose, be deemed to be a part of this Indenture.
REGISTRATION RIGHTS AGREEMENT
Dated as of March 18, 2002
By and Among
COMPUTER ASSOCIATES INTERNATIONAL, INC.
as Issuer
and
BANC OF AMERICA SECURITIES LLC
SALOMON SMITH BARNEY INC.
ABN AMRO ROTHSCHILD LLC
MIZUHO INTERNATIONAL PLC
ROBERTSON STEPHENS, INC.
RBC DAIN RAUSCHER INC.
TOKYO-MITSUBISHI INTERNATIONAL PLC
as Initial Purchasers
5% Convertible Senior Notes due 2007
TABLE OF CONTENTS
Page
1. |
Definitions |
1 |
2. |
Shelf Registration |
4 |
3. |
Additional Amounts |
7 |
4. |
Registration Procedures |
8 |
5. |
Registration Expenses |
12 |
6. |
Indemnification |
13 |
7. |
Rules 144 and 144A |
16 |
8. |
Miscellaneous |
17 |
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (the "Agreement") is dated as of March 18, 2002, by and among COMPUTER ASSOCIATES INTERNATIONAL, INC., a Delaware corporation (the "Company"), BANC OF AMERICA SECURITIES LLC, SALOMON SMITH BARNEY INC., ABN AMRO ROTHSCHILD LLC, MIZUHO INTERNATIONAL PLC, ROBERTSON STEPHENS, INC., RBC DAIN RAUSCHER INC. and TOKYO-MITSUBISHI INTERNATIONAL PLC (the "Initial Purchasers").
This Agreement is entered into in connection with the Purchase Agreement, dated March 13, 2002 (the "Purchase Agreement"), by and among the Company and the Initial Purchasers, which provides for the sale by the Company to the Initial Purchasers of $600,000,000 aggregate principal amount of the Company's 5% Convertible Senior Notes due 2007 (the "Firm Notes"), which are convertible into Common Stock of the Company, par value $.10 per share (the "Underlying Shares"), plus up to an additional $60,000,000 aggregate principal amount of the same that the Initial Purchasers may subsequently elect to purchase pursuant to the terms of the Purchase Agreement (the "Additional Notes" and, together with the Firm Notes, the "Convertible Notes"). The Convertible Notes are being issued pursuant to an indenture dated as of the date hereof (the "Indenture") between the Company and the State Street Bank and Trust Co mpany, as Trustee.
In order to induce the Initial Purchasers to enter into the Purchase Agreement, the Company has agreed to provide the registration rights set forth in this Agreement for the benefit of the Initial Purchasers and any subsequent holder or holders of the Convertible Notes or Underlying Shares. The execution and delivery of this Agreement is a condition to the Initial Purchasers' obligation to purchase the Firm Notes under the Purchase Agreement.
The parties hereby agree as follows:
As used in this Agreement, the following terms shall have the following meanings:
Additional Amounts Payment Date: See Section 3(c) hereof.
Additional Amounts: See Section 3(a) hereof.
Additional Notes: See the second introductory paragraph hereto.
Agreement: See the first introductory paragraph hereto.
Amendment Effectiveness Deadline Date: See Section 2(d) hereof.
Amount of Registrable Securities: (a) With respect to Convertible Notes constituting Registrable Securities, the aggregate principal amount of all such Convertible Notes outstanding, (b) with respect to Underlying Shares constituting Registrable Securities, the aggregate number of such Underlying Shares outstanding multiplied by the Conversion Price (as defined in the Indenture) in effect at the time of computing the Amount of Registrable Securities or, if no such Convertible Notes are then outstanding, the last Conversion Price that was in effect under the Indenture when any such Convertible Notes were last outstanding, and (c) with respect to combinations thereof, the sum of (a) and (b) for the relevant Registrable Securities.
Blue Sky Laws: State securities or "blue sky" laws.
Business Day: Any day that is not a Saturday, Sunday or a day on which banking institutions in New York are authorized or required by law to be closed.
Closing Date: March 18, 2002.
Company: See the first introductory paragraph hereto.
Convertible Notes: See the second introductory paragraph hereto.
Depositary: The Depository Trust Company until a successor is appointed by the Company.
Effectiveness Date: The 270th day after the Closing Date.
Effectiveness Period: See Section 2(a) hereof.
Exchange Act: The Securities Exchange Act of 1934, as amended, and the rules and regulations of the SEC promulgated thereunder.
Filing Date: The 180th day after the Closing Date.
Firm Notes: See the second introductory paragraph hereto.
Holder: Any holder of Registrable Securities.
Indemnified Holder: See Section 6 hereof.
Indemnified Person: See Section 6 hereof.
Indemnifying Person: See Section 6 hereof.
Indenture: See the second introductory paragraph hereto.
Initial Purchasers: See the first introductory paragraph hereto.
Initial Shelf Registration: See Section 2(a) hereof.
Initial Shelf Registration Statement: See Section 2(a) hereof.
Inspectors: See Section 4(l) hereof.
Losses: See Section 6 hereof.
New Requirements: See Section 2(a) hereof.
NASD: See Section 4(o) hereof.
Notice and Questionnaire: A written notice delivered to the Company containing substantially the information called for by the Form of Selling Securityholder Notice and Questionnaire attached as Annex A to the Offering Circular of the Company dated March 13, 2002 relating to the Convertible Notes.
Notice Holder: On any date, any Holder that has delivered a Notice and Questionnaire to the Company at least 5 Business Days prior to such date.
Person: An individual, partnership, corporation, limited liability company, unincorporated association, trust or joint venture, or a governmental agency or political subdivision thereof.
Prospectus: The prospectus included in any Registration Statement (including, without limitation, any prospectus subject to completion and a prospectus that includes any information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A promulgated under the Securities Act), as amended or supplemented by any prospectus supplement, and all other amendments and supplements to the Prospectus, including post-effective amendments, and all material incorporated by reference or deemed to be incorporated by reference in such Prospectus.
Purchase Agreement: See the second introductory paragraph hereto.
Records: See Section 4(l) hereof.
Registrable Securities: All Convertible Notes and all Underlying Shares upon original issuance thereof and at all times subsequent thereto until the earliest to occur of (i) a Registration Statement covering such Convertible Notes and Underlying Shares having been declared effective by the SEC and such Convertible Notes and Underlying Shares having been disposed of in accordance with such effective Registration Statement, (ii) such Convertible Notes and Underlying Shares having been sold in compliance with Rule 144, (iii) such Convertible Notes and any Underlying Shares ceasing to be outstanding and (iv) the date that is two years from the Closing Date. For purposes of this definition, Underlying Shares shall not include shares of Common Stock of the Company issued upon conversion of Convertible Notes that were previously disposed of in accordance with an effective Registration Statement or with Rule 144.
Registration Default: See Section 3(a) hereof.
Registration Statement: Any registration statement of the Company filed with the SEC pursuant to the provisions of this Agreement, including the Prospectus, amendments and supplements to such registration statement, including post-effective amendments, all exhibits and all material incorporated by reference or deemed to be incorporated by reference in such registration statement.
Rule 144: Rule 144 promulgated under the Securities Act, as such rule may be amended from time to time, or any similar rule (other than Rule 144A) or regulation hereafter adopted by the SEC providing for offers and sales of securities made in compliance therewith resulting in offers and sales by subsequent holders that are not affiliates of an issuer of such securities being free of the registration and prospectus delivery requirements of the Securities Act.
Rule 144A: Rule 144A promulgated under the Securities Act, as such rule may be amended from time to time, or any similar rule (other than Rule 144) or regulation hereafter adopted by the SEC.
Rule 415: Rule 415 promulgated under the Securities Act, as such rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the SEC.
SEC: The Securities and Exchange Commission.
Securities Act: The Securities Act of 1933, as amended, and the rules and regulations of the SEC promulgated thereunder.
Shelf Registration: See Section 2(b) hereof.
Shelf Registration Statement: See Section 2(b) hereof.
Subsequent Shelf Registration: See Section 2(b) hereof.
Suspension Period: See Section 3(b) hereof.
TIA: The Trust Indenture Act of 1939, as amended, and the rules and regulations of the SEC promulgated thereunder.
Trustee: The Trustee under the Indenture.
Underlying Shares: See the second introductory paragraph hereto.
The Company shall use its reasonable efforts to cause the Initial Shelf Registration to be declared effective under the Securities Act as soon as practicable after such Initial Shelf Registration is filed and, in any event, on or prior to the Effectiveness Date and to keep such Initial Shelf Registration continuously effective under the Securities Act until the earlier of when (i) all the Registrable Securities are registered under the Shelf Registration (as defined below) and have been disposed of in the manner set forth and as contemplated therein, (ii) all the Registrable Securities have been resold pursuant to Rule 144 under the Securities Act, (iii) all the Registrable Securities cease to be outstanding and (iv) two years have passed from the Closing Date (such shortest period being called the "Effectiveness Period").
No Holder of Registrable Securities may include any of its Registrable Securities in any Shelf Registration pursuant to this Agreement unless and until such Holder becomes a Notice Holder and, in the case that requirements under the Securities Act are changed after the date of this Agreement (all such requirements, the "New Requirements"), furnishes to the Company, upon request by the Company, any additional information pursuant to the New Requirements concerning such Holder required to be included in any Shelf Registration Statement or Prospectus included therein. Each Holder of Registrable Securities as to which any Shelf Registration Statement is being effected agrees to furnish promptly to the Company all information required to be disclosed so that the information previously furnished to the Company by such Holder is not materially misleading and does not omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading i n the light of the circumstances under which they were made. Subject to the foregoing, at the time the Initial Shelf Registration Statement is declared effective, each Holder that became a Notice Holder at the time of effectiveness shall be named as a selling securityholder in the Initial Shelf Registration Statement and the related Prospectus in such a manner as to permit such Holder to deliver such Prospectus to purchasers of Registrable Securities in accordance with applicable law. None of the Company's securityholders (other than Holders of Registrable Securities) shall have the right to include any of the Company's securities in the Shelf Registration Statement.
provided, however, that Additional Amounts on the Registrable Securities may not accrue under more than one of the foregoing clauses (i), (ii) or (iii) at any one time; provided, further, however, that (1) upon the filing of the Shelf Registration as required hereunder (in the case of clause (a)(i) of this Section 3), (2) upon the effectiveness of the Shelf Registration as required hereunder (in the case of clause (a)(ii) of this Section 3) or (3) upon the effectiveness of a Shelf Registration which had ceased to remain effective (in the case of clause (a)(iii) of this Section 3), Additional Amounts on the Registrable Securities as a result of such clause (or the relevant subclause thereof), as the case may be, shall cease to accrue. It is understood and agreed that, notwithstanding any provision to the contrary, so long as any Registrable Security is then covered by an effective Shelf Registration Statement, no Additional Amounts shall accrue on suc h Registrable Security. No Holder of Registrable Securities shall be entitled to Additional Amounts pursuant this Section 3 until such Holder is a Notice Holder and until such Holder shall have provided all information required to be provided by such Holder to the Company pursuant to Section 2(a) hereof.
In connection with the filing of any Registration Statement pursuant to Section 2 hereof, the Company shall effect such registrations to permit the resale of the securities covered thereby in accordance with the intended method or methods of disposition thereof, and pursuant thereto and in connection with any Registration Statement filed by the Company hereunder the Company shall:
Each Holder of Registrable Securities agrees by acquisition of such Registrable Securities that, upon actual receipt of any notice from the Company of the happening of any event of the kind described in Section 4(c)(ii), 4(c)(iii) or 4(c)(iv) hereof, such Holder will forthwith discontinue disposition of such Registrable Securities covered by such Registration Statement or Prospectus until such Holder's receipt of the copies of the supplemented or amended Prospectus contemplated by Section 4(j) hereof, or until it is advised in writing by the Company that the use of the applicable Prospectus may be resumed, and has received copies of any amendments or supplements thereto.
The Company agrees to indemnify and hold harmless (i) each Initial Purchaser, (ii) each Holder, (iii) each Person, if any, who controls (within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act) any of the foregoing (any of the Persons referred to in this clause (iii) being hereinafter referred to as a "controlling person"), (iv) the respective officers, directors, partners, employees, representatives and agents of each Initial Purchaser, the Holders (including predecessor Holders) or any controlling person (any person referred to in clause (i), (ii), (iii) or (iv) may hereinafter be referred to as an "Indemnified Holder"), from and against any and all losses, claims, damages, liabilities, joint or several, and judgments (including, without limitation, reasonable legal fees and other expenses incurred in connection with any suit, action or proceeding or any claim asserted) to which they become subject under the Securities Act, the Exchange Act or other Federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement or Prospectus or any amendment or supplement thereto or any related preliminary prospectus, or arise out of or are based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and agrees to reimburse each such Indemnified Person, as incurred, for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action, except insofar as such losses, claims, damages or liabilities arise out of or are based on any untrue statement or omission or alleged untrue sta tement or omission made in the Registration Statement or Prospectus, or any amendment thereof or supplement thereto or any related preliminary prospectus, in reliance upon and in conformity with information relating to any Holder furnished to the Company in writing by or on behalf of any such Holder expressly for use therein; provided, that the Company shall not be liable to any Indemnified Holder under the indemnity agreement in this Article 6 with respect to any preliminary prospectus to the extent that any such loss, claim, damage or liability of such Indemnified Holder results from the fact that such Indemnified Holder sold Registrable Securities to a Person as to whom it shall be established that there was not sent or given, at or prior to the written confirmation of such sale, a copy of the final Prospectus in any case where such delivery is required by the Securities Act if the Company had previously furnished copies thereof in sufficient quantities to such Indemnified Holder and the loss, clai m, damage or liability of such Indemnified Holder results from an untrue statement or omission of a material fact contained in the preliminary prospectus that was (i) identified to such Indemnified Holder at or prior to the earlier of the filing with the SEC or the furnishing to such Indemnified Holder of the corrected Prospectus and (ii) corrected in the final Prospectus. The Company shall notify each Indemnified Holder promptly of the institution, threat or assertion of any claim, proceeding (including any governmental investigation) or litigation in connection with the matters addressed by this Agreement which involves the Company or such Indemnified Holder.
Each Holder agrees, severally and not jointly, to indemnify and hold harmless the Company, each of its directors, each of its officers and each Person who controls the Company within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act to the same extent as the foregoing indemnity from the Company to each Holder, but only with reference to such losses, claims, damages or liabilities which are caused by any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with information relating to a Holder furnished to the Company in writing by such Holder expressly for use in any Registration Statement or Prospectus, or any amendment or supplement thereto or any related preliminary prospectus.
If any suit, action, proceeding (including any governmental or regulatory investigation), claim or demand shall be brought or asserted against any Person in respect of which indemnity may be sought pursuant to either of the two preceding paragraphs, such Person (the "Indemnified Person") shall promptly notify the Person or Persons against whom such indemnity may be sought (each an "Indemnifying Person") in writing of the commencement thereof; but the failure so to notify the Indemnifying Person (i) will not relieve it from liability under the two immediately preceding paragraphs unless and to the extent it did not otherwise learn of such action and such failure results in the forfeiture by the Indemnifying Person of substantial rights and defenses; and (ii) will not, in any event, relieve the Indemnifying Person from any obligations to any Indemnified Person other than the indemnification obligation provided in the two preceding paragraphs. Such Indemnifying Person, upon request of the Indemnified Person, shall retain counsel satisfactory to the Indemnified Person to represent the Indemnified Person and any others entitled to indemnification pursuant to this Section 6 that the Indemnifying Person may designate in such proceeding and shall pay the fees and expenses of such counsel related to such proceeding. In any such proceeding, any Indemnified Person shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such Indemnified Person unless (i) the use of counsel chosen by the Indemnifying Person to represent the Indemnified Person would present such counsel with a conflict of interest; (ii) the actual or potential defendants in, or targets of, any such action include both the Indemnified Person and the Indemnifying Person and the Indemnified Person shall have reasonably concluded that there may be legal defenses available to it and/or other Indemnified Person(s) which are different from or additional to those avai lable to the Indemnifying Person; (iii) the Indemnifying Person shall not have employed counsel satisfactory to the Indemnified Person to represent the Indemnified Person within a reasonable time after notice of the institution of such action; or (iv) the Indemnifying Person shall authorize the Indemnified Person to employ separate counsel at the expense of the Indemnifying Person. It is understood that an Indemnifying Person shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the fees and expenses of more than one separate firm (in addition to any local counsel) for all Indemnified Persons, and that all such fees and expenses shall be reimbursed as they are incurred. Any such separate firm for the Indemnified Holders shall be designated in writing by the Holders of the majority in Amount of Registrable Securities, and any such separate firm for the Company, its directors, respective officers and such control Persons of the Company shall be designated in writing by the Company. No Indemnifying Person shall, without the prior written consent of the Indemnified Person, effect any settlement or compromise or consent to the entry of any judgment with respect to any pending or threatened claim, action, suit or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified parties are actual or potential parties to such claim or action), unless such settlement, compromise or consent includes an unconditional release of each such Indemnified Person from all liability arising out of such claims, actions, suits or proceedings.
If the indemnification provided for in the first and second paragraphs of this Section 6 is insufficient in respect of any losses, claims, damages or liabilities referred to therein, then each Indemnifying Person under such paragraph, in lieu of indemnifying such Indemnified Person thereunder, shall contribute to the aggregate losses, claims, damages and liabilities (including legal or other expenses reasonably incurred in connection with investigating or defending the same) (collectively, "Losses") (i) in such proportion as is appropriate to reflect the relative benefits received by the Indemnifying Person on the one hand, and the Indemnified Person on the other hand, pursuant to the Purchase Agreement or from the offering of the Registrable Securities pursuant to any Shelf Registration or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above bu t also the relative fault of the Indemnifying Person on the one hand, and the Indemnified Person on the other, in connection with the statements or omissions that resulted in such Losses, as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand, and any Indemnified Holder on the other, shall be deemed to be in the same proportion as the total net proceeds from the initial offering and sale of Convertible Notes (before deducting expenses) received by the Company bear to the total net proceeds received by such Indemnified Holder from sales of Registrable Securities giving rise to such obligations. The relative fault of the parties shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or such Indemnified Holder and the parties' intent, relative knowledge, information and oppo rtunity to correct or prevent such statement or omission.
The Company and each of the Initial Purchasers agree that it would not be just and equitable if contribution pursuant to this Section 6 were determined by pro rata allocation or by any other method of allocation that does not take account of the equitable considerations referred to in the immediately preceding paragraph. Notwithstanding the provisions of this Section 6, in no event shall any Holder be required to contribute any amount in excess of the amount by which the net proceeds received by such Holder from the sale of the Registrable Securities pursuant to a Shelf Registration Statement exceeds the amount of damages which such Holder would have otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. 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. For purposes of th is Section 6, each person who controls an Initial Purchaser within the meaning of either the Securities Act or the Exchange Act and each director, officer, employee and agent of an Initial Purchaser shall have the same rights to contribution as such Initial Purchaser, and each person who controls the Company within the meaning of either the Securities Act or the Exchange Act and each officer and director of the Company shall have the same rights to contribution as the Company, subject in each case to the applicable terms and conditions set forth in this paragraph.
The remedies provided for in this Section 6 are not exclusive and shall not limit any rights or remedies that may otherwise be available to any Indemnified Person at law or in equity.
The indemnity and contribution agreements contained in this Section 6 shall remain operative and in full force and effect regardless of (i) any termination of this Agreement, (ii) any investigation made by or on behalf of any Holder or any Person controlling any Holder or by or on behalf of the Company, its officers or directors or any other Person controlling any of the Company and (iii) acceptance of and payment for any of the Registrable Securities.
The Company covenants that it will file the reports required to be filed by it under the Securities Act and the Exchange Act and the rules and regulations adopted by the SEC thereunder in a timely manner in accordance with the requirements of the Securities Act and the Exchange Act and, for so long as any Registrable Securities remain outstanding, if at any time the Company is not required to file such reports, it will, upon the request of any Holder or beneficial owner of Registrable Securities, make available such information necessary to permit sales pursuant to Rule 144A under the Securities Act. The Company further covenants that, for so long as any Registrable Securities remain outstanding, it will use its reasonable efforts to take such further action as any Holder of Registrable Securities may reasonably request, all to the extent required from time to time to enable such holder to sell Registrable Securities without registration under the Securities Act within the limitation of the exemptions pr ovided by (a) Rule 144(k) and Rule 144A under the Securities Act, as such rules may be amended from time to time, or (b) any similar rule or regulation hereafter adopted by the SEC. Notwithstanding the foregoing, nothing in this Section 7 shall be deemed to require the Company to register any of its securities pursuant to the Exchange Act.
Banc of America Securities LLC
9 West 57th Street
New York, NY 10019
Facsimile No.: (212) 847-5124
Attention: Eric Hambleton, Esq.
and
Salomon Smith Barney Inc.
388 Greenwich Street, 3rd floor
New York, NY 10013
Facsimile No.: (212) 816-7912
Attention: General Counsel
with copies to:
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, NY 10025
Facsimile No.: (212) 455-2502
Attention: Risë B. Norman, Esq.
One Computer Associates Plaza
Islandia, NY 11749
Facsimile No.: (631) 342-4873
Attention: Treasurer
with copies to:
Covington & Burling
1330 Avenue of the Americas
New York, NY 10019
Facsimile No.: (212) 841-1010
Attention: Bruce C. Bennett, Esq.
All such notices and communications shall be deemed to have been duly given: when delivered by hand, if personally delivered; five Business Days after being deposited in the mail, postage prepaid, if mailed; one Business Day after being timely delivered to a next-day air courier; and when receipt is acknowledged by the addressee, if sent by facsimile.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.
COMPUTER ASSOCIATES
INTERNATIONAL, INC.
By: ___________________________________
Name:
Title:
BANC OF AMERICA SECURITIES LLC
SALOMON SMITH BARNEY INC.
ABN AMRO ROTHSCHILD LLC
MIZUHO INTERNATIONAL PLC
ROBERTSON STEPHENS, INC.
RBC DAIN RAUSCHER INC.
TOKYO-MITSUBISHI INTERNATIONAL PLC
By: Banc of America Securities llc
By: ___________________________________
Name:
Title:
By: SALOMON SMITH BARNEY INC.
By: __________________________________
Name:
Title:
$600,000,000
COMPUTER ASSOCIATES INTERNATIONAL, INC.
5% Convertible Senior Notes due 2007
PURCHASE AGREEMENT
March 13, 2002
Banc of America Securities LLC
Salomon Smith Barney Inc.
ABN AMRO Rothschild LLC
Mizuho International plc
Robertson Stephens, Inc.
RBC Dain Rauscher Inc.
Tokyo-Mitsubishi International plc
c/o Banc of America Securities LLC
9 West 57th Street
New York, New York 10019
and
Salomon Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
The Company hereby agrees with the several Purchasers as follows:
Subject to the terms and conditions and in reliance upon the representations and warranties herein set forth, the Company hereby grants an option to the several Purchasers to purchase, severally and not jointly, the Option Securities at the same percentage of the principal amount thereof as the Purchasers paid for the Firm Securities, plus accrued interest, if any, from March 18, 2002 to the settlement date for the Option Securities (the "settlement date"). The option may be exercised in whole or in part at any time on or before the 30th day after the Closing Date upon written or telegraphic notice by the Representatives to the Company setting forth the principal amount of Option Securities as to which the Purchasers are exercising the option and the settlement date; provided, however, that the Purchasers may not exercise the option if exercising the option would cause the exemption under Rule 144A under the Securities Act ("Rule 144A") to become unavailable . Delivery of the Option Securities, and payment therefor, shall be made as provided in Section 3 hereof. The principal amount of Option Securities to be purchased by each Purchaser shall be the same percentage as such Purchaser is purchasing of the Firm Securities, subject to such adjustments as the Representatives shall deem advisable.
Delivery of and payment for the Firm Securities and the Option Securities (if the option provided for in Section 3 hereof shall have been exercised on or before the third business day prior to the Closing Date) shall be made at 10:00 A.M., New York City time, on March 18, 2002, or, with respect to Option Securities only, at such time on such later date (not later than April 17, 2002) as the Representatives shall designate, in each case, which date and time may be postponed by agreement between the Representatives and the Company or as provided in Section 9 hereof (such date and time of delivery and payment for the Offered Securities being herein called the "Closing Date"). Delivery of the Offered Securities shall be made to the Representatives for the respective accounts of the several Purchasers against payment by the several Purchasers through the Representatives of the purchase price thereof to or upon the order of the Company by wire transfer payable in same-day funds to the account s pecified by the Company. Delivery of the Offered Securities shall be made through the facilities of The Depository Trust Company unless the Representatives shall otherwise instruct.
If the option provided for in Section 3 hereof is exercised after the third business day prior to the Closing Date, the Company will deliver the Option Securities (at the expense of the Company) to the Representatives on the date specified by the Representatives (which shall be within three business days after exercise of said option), for the respective accounts of the several Purchasers, against payment by the several Purchasers through the Representatives of the purchase price thereof to or upon the order of the Company by wire transfer payable in same-day funds to the account specified by the Company. If settlement for the Option Securities occurs after the Closing Date, the Company will deliver to the Representatives on the settlement date, and the obligation of the Purchasers to purchase the Option Securities shall be conditioned upon receipt of, supplemental options, certificates and letters confirming as of such date the options, certificates and letters delivered on the Closing Date pursuant to S ection 6 hereof.
"The Securities covered hereby have not been registered under the Securities Act of 1933, as amended (the "Securities Act"), and may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons as part of their distribution at any time, except in accordance with Regulation S (or Rule 144A if available) under the Securities Act. Terms used above have the meanings given to them by Regulation S."
Terms used in this subsection (b) have the meanings given to them by Regulation S.
The Purchasers propose to offer the Offered Securities to investors initially at the offering price to investors set forth in the final Offering Document.
except in all cases set forth in clauses (B) and (C) above for changes, increases or decreases which the Offering Document or Exchange Act Reports disclose have occurred or may occur or which are described in such letter; and
The Company will furnish the Purchasers with such conformed copies of such opinions, certificates, letters and documents as the Purchasers reasonably request. The Representatives may in their sole discretion waive on behalf of the Purchasers compliance with any conditions to the obligations of the Purchasers hereunder.
Banc of America Securities LLC
9 West 57th Street
40th Floor
New York, New York 10019
Facsimile: 212-847-5124
Attention: Eric Hambleton
Salomon Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
Facsimile: 212-816-7912
Attention: General Counsel
ABN AMRO Rothschild LLC
55 East 52nd Street
New York, New York 10055
Facsimile: 212-409-1233
Attention: Legal Department
Mizuho International plc
Bracken House
One Friday Street
London EC4M 9JA
England
Facsimile: 44-20-7090-6997
Attention: Brian Lanaghan
Robertson Stephens
555 California Street
Suite 2600
San Francisco, California 94104
Facsimile: 415-693-3378
Attention: Richard Hukari
RBC Capital Markets
60 South 6th Street
P.O. Box 1160 (MS 90Y2)
Minneapolis, Minnesota 55440-1160
Facsimile : 612-371-2818
Attention: Dan Westerhouse
Tokyo-Mitsubishi International plc
Legal Department
6 Broadgate
London EC2M 2AA
England
Facsimile: 44-20-7577-2872
Attention: Steve Towells
Each party hereto hereby submits to the non-exclusive jurisdiction of the federal and state courts in the Borough of Manhattan in The City of New York in any suit or proceeding arising out of or relating to this Agreement or the transactions contemplated hereby.
If the foregoing is in accordance with the Purchasers' understanding of our agreement, kindly sign and return to us one of the counterparts hereof, whereupon it will become a binding agreement between the Company and the several Purchasers in accordance with its terms.
Very truly yours,
Computer Associates International, Inc.
By /s/ Ira Zar
Name: Ira Zar
Title: Executive Vice President and
Chief Financial Officer
The foregoing Purchase Agreement
is hereby confirmed and accepted
as of the date first above written.
Banc of America Securities LLC
Salomon Smith Barney Inc.
ABN AMRO Rothschild LLC
Mizuho International plc
Robertson Stephens, Inc.
RBC Dain Rauscher Inc.
Tokyo-Mitsubishi International plc
By Banc of America Securities LLC
By /s/ Trevor Ganshaw
Name: Trevor Ganshaw
Title: Managing Director
By Salomon Smith Barney Inc.
By /s/ Douglas Blagdon
Name: Douglas Blagdon
Title: Managing Director
SCHEDULE I
Purchasers |
Principal Amount of |
Banc of America Securities LLC $284,400,000 |
|
Salomon Smith Barney Inc. 284,400,000 |
|
ABN AMRO Rothschild LLC 7,800,000 |
|
Mizuho International plc 7,800,000 |
|
Robertson Stephens, Inc. 7,800,000 |
|
RBC Dain Rauscher Inc. 3,900,000 |
|
Tokyo-Mitsubishi International plc 3,900,000 |
|
Total $600,000,000 |
SCHEDULE II
List of persons subject to the lock-up agreements
Executive Officers and Directors
Name |
Position |
Charles B. Wang |
Chairman of the Board of Directors |
Sanjay Kumar |
President, Chief Executive Officer and Director |
Russell M. Artzt |
Executive Vice President-Research and Development and Director |
Willem F.P. de Vogel |
Director |
Roel Pieper |
Director |
The Honorable Alfonse M. D'Amato |
Director |
Shirley Strum Kenny |
Director |
Richard A. Grasso |
Director |
Lewis S. Ranieri |
Director |
Ira Zar |
Executive Vice President-Finance and Chief Financial Officer |
Stephen Richards |
Executive Vice President and General Manager-Sales |
Gary Quinn |
Executive Vice President-Sales Support |
Steven M. Woghin |
Senior Vice President and General Counsel |
Michael A. McElroy |
Senior Vice President and Secretary |
Mary Stravinskas |
Vice President and Treasurer |
EXHIBIT A
Selling Restrictions for Offers and
Sales outside the United States
(1) (a) The Offered Securities and the Common Stock issuable upon conversion thereof have not been registered under the Securities Act and may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons except in accordance with Regulation S under the Securities Act or pursuant to an exemption from the registration requirements of the Securities Act or unless registered under the Securities Act. Each Purchaser, severally and not jointly, represents and agrees that, except as otherwise permitted by Section 4(a)(i) of the Agreement to which this is an exhibit, it has offered and sold the Offered Securities, and will offer and sell the Offered Securities, (i) as part of their distribution at any time; and (ii) otherwise until one year after the later of the commencement of the offering and the Closing Date, only in accordance with Rules 903 or 904 of Regulation S or pursuant to an effective registration statement under the Securities Act. Accordingly, each Purcha ser represents and agrees that neither it, nor any of its Affiliates nor any person acting on its or their behalf has engaged or will engage in any directed selling efforts with respect to the Offered Securities, and that it and they have complied and will comply with the offering restrictions requirement of Regulation S under the Securities Act. Each Purchaser, severally and not jointly, agrees that it will not engage, directly or indirectly, in hedging transactions with regard to the Offered Securities or the shares of Common Stock issuable upon conversion thereof prior to the expiration of one year after the later of the commencement of the offering and the Closing Date unless in compliance with the Securities Act. Each Purchaser, severally and not jointly, agrees that, at or prior to the confirmation of sale of Offered Securities (other than a sale of Offered Securities pursuant to Section 4(a)(i) of the Agreement to which this is an exhibit or pursuant to an effective registration statement under the Se curities Act), it shall have sent to each distributor, dealer or person receiving a selling concession, fee or other remuneration that purchases Offered Securities from it during the one-year distribution compliance period a confirmation or notice to substantially the following effect:
"The Securities covered hereby and the shares of Common Stock issuable upon conversion thereof have not been registered under the U.S. Securities Act of 1933 (the "Act") and may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons (i) as part of their distribution at any time or (ii) otherwise until on year after the later of the commencement of the offering and March 18, 2002, except in either case in accordance with Regulation S or Rule 144A under the Act or pursuant to an effective registration statement under the Act. Hedging transactions with regard to the Securities or the shares of Common Stock issuable upon conversion of the Securities may not be conducted, directly or indirectly, prior to the expiration of one year after the later of the commencement of the offering and March 18, 2002 unless in compliance with the Act. Terms used above have the meanings given to them by Regulation S."
(b) Each Purchaser also represents and agrees that it has not entered and will not enter into any contractual arrangement with any distributor with respect to the distribution of the Offered Securities, except with its Affiliates or with the prior written consent of the Company.
(c) Terms used in this section have the meanings given to them by Regulation S.
(2) Each Purchaser severally represents and agrees that (i) it is a person outside the United Kingdom or it is a person of a kind described in Article 19(5) or Article 49(2) of the Financial Services and Markets Act 2000 (Financial Promotions) Order 2001; (ii) it has not offered or sold and, prior to the expiry of a period of six months from the Closing Date, will not offer or sell any Offered Securities to persons in the United Kingdom except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses or otherwise in circumstances which have not resulted and will not result in an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995; (iii) it has only communicated or caused to be communicated and will only communicate or cause to be communicated any invitation or inducement to engage in investment activity (within the meaning of section 21 of the Financial Services and Markets Act 2000 (the "FSMA")) received by it in connection with the issue or sale of any Offered Securities in circumstances in which section 21(1) of the FSMA does not apply to the Company; and (iv) it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the Offered Securities in, from or otherwise involving the United Kingdom.
EXHIBIT B
[Form of Lock-Up Agreement]
March 13, 2002
Banc of America Securities LLC
Salomon Smith Barney Inc.
as Representatives of the Initial
Purchasers (the "Initial Purchasers") to be
named in the Purchase Agreement referred to below
c/o Banc of America Securities LLC
9 West 57th Street
New York, New York 10019
and
Salomon Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
Re: Proposed Offering by Computer Associates International, Inc.
Dear Sirs:
The undersigned, an executive officer and/or director of Computer Associates International, Inc., a Delaware corporation (the "Company"), understands that Banc of America Securities LLC, Salomon Smith Barney Inc. and the other Initial Purchasers propose to enter into a Purchase Agreement (the "Purchase Agreement") with the Company providing for the offering of Convertible Senior Notes of the Company. In recognition of the benefit that such an offering will confer upon the undersigned as a stockholder and/or an officer and/or director of the Company, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the undersigned agrees with you and each other Initial Purchaser that the undersigned will not, and will cause any trust in respect of which the undersigned exercises sole investment authority not to, offer, sell, contract to sell, pledge or otherwise dispose of, or file (or participate in the filing of) a registration statement with the Securities and Exchange Commission (the "Commission") in respect of, or establish or increase a put equivalent position or liquidate or decrease a call equivalent position within the meaning of Section 16 of the Securities and Exchange Act of 1934, as amended, and the rules and regulations of the Commission promulgated thereunder with respect to, any shares of capital stock of the Company or any securities convertible or exercisable or exchangeable for such capital stock, or publicly announce an intention to effect any such transaction, for a period of 90 days after the date of the Purchase Agreement without the prior written consent of Banc of America Securities LLC and Salomon Smith Barney Inc.; provided, however, that (i) the undersigned may participate in the filing of any registration statement which the Company is permitted to file pursuant to the Purchase Agreement, (ii) this agreement shall not apply to securities of the Company acquired by the undersigned subsequent to t he date hereof pursuant to open-market transactions, (iii) this agreement shall not apply to transactions in securities of the Company which have been pledged by the undersigned as security in transactions effective prior to the date hereof, or to secure lines of credit existing prior to the date hereof or replacing lines of credit existing prior to the date hereof, (iv) this agreement shall not apply to securities of the Company held by any "charitable trust" as such term is defined under Section 501(c)(3) of the Internal Revenue Code; and (v) this agreement shall not apply to any "cashless exercise" of options in securities of the Company or any "net exercise" of options in securities of the Company, provided, however, that no such transaction shall involve the sale of securities of the Company into the open market.
If for any reason the Purchase Agreement shall be terminated prior to the Closing Date (as defined in the Purchase Agreement) or if the Purchase Agreement is not executed on or prior to March 18, 2002, the agreement set forth above shall likewise be terminated.
This agreement shall be governed by and construed in accordance with the laws of the State of New York. References herein to "capital stock" of the Company include, without limitation, common stock of the Company.
Very truly yours,
Signature:
Print Name:
Consent of Independent Auditors
The Board of Directors and Stockholders
Computer Associates International, Inc.:
We consent to incorporation by reference in the registration statements (Nos. 333-32942, 333-31284, 333-83147, 333-80883, 333-79727, 333-62055, 333-19071, 333-04801, 33-64377, 33-53915, 33-53572, 33-34607, 33-18322, 33-20797, 2-92355, 2-87495 and 2-79751) on Form S-8 of Computer Associates International, Inc. of our report dated May 10, 2002, relating to the consolidated balance sheets of Computer Associates International, Inc. and subsidiaries as of March 31, 2002 and 2001, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended March 31, 2002, and the related financial statement schedule, which report appears in the March 31, 2002, annual report on Form 10-K of Computer Associates International, Inc.
/s/ KPMG LLP
New York, New York
May 14, 2002