-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BDIsdhsnOa7bhScR71CxMb6TCsuK63BTL7YrCe4CwPGJDnA9DYwinL3THLMWshCe dzSW6HYi9bgre9HtH5ReEg== 0000950131-97-005378.txt : 19970912 0000950131-97-005378.hdr.sgml : 19970912 ACCESSION NUMBER: 0000950131-97-005378 CONFORMED SUBMISSION TYPE: S-3/A PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 19970903 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SYSTEM SOFTWARE ASSOCIATES INC CENTRAL INDEX KEY: 0000808207 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 363144515 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: S-3/A SEC ACT: SEC FILE NUMBER: 333-31271 FILM NUMBER: 97674574 BUSINESS ADDRESS: STREET 1: 500 W MADISON ST 32ND FLR CITY: CHICAGO STATE: IL ZIP: 60661 BUSINESS PHONE: 3122586000 S-3/A 1 AMENDMENT NO. 3 TO THE FORM S-3 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 3, 1997 REGISTRATION NO. 333-31271 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- AMENDMENT NO. 3 TO FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------- SYSTEM SOFTWARE ASSOCIATES, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 36-3144515 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
500 WEST MADISON STREET, 32ND FLOOR CHICAGO, ILLINOIS 60661 (312) 641-2900 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) MR. JOSEPH J. SKADRA CHIEF FINANCIAL OFFICER SYSTEM SOFTWARE ASSOCIATES, INC. 500 WEST MADISON STREET, 32ND FLOOR CHICAGO, ILLINOIS 60661 (312) 641-2900 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPIES TO: DOUGLAS R. NEWKIRK, ESQ. WILLIAM J. GRANT, JR., ESQ. SACHNOFF & WEAVER, LTD. WILLKIE FARR & GALLAGHER 30 SOUTH WACKER DRIVE, 29TH FLOOR 153 EAST 53RD STREET CHICAGO, ILLINOIS 60606 NEW YORK, NY 10022 (312) 207-1000 (212) 821-8000 --------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time to time after the effective date of this Registration Statement. If the only securities being registered on this form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. [_] If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
PROPOSED PROPOSED TITLE OF EACH CLASS OF AMOUNT MAXIMUM MAXIMUM AMOUNT OF SECURITIES TO BE TO BE OFFERING PRICE AGGREGATE REGISTRATION REGISTERED REGISTERED(1) PER UNIT(2) OFFERING PRICE(2) FEE - --------------------------------------------------------------------------------------- Convertible Subordinated Notes................. $115,000,000 100% $115,000,000 $34,848(3) - --------------------------------------------------------------------------------------- Common Stock, $.0033 par value (including Purchase Rights)...... (4) None None None
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (1) Includes $15,000,000 principal amount of Notes to be offered upon exercise of the Underwriters' over allotment option. (2) Estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457. (3) A payment of $31,364 accompanied the initial filing of this Registration Statement. The remaining $3,484 has been paid prior to the filing of this Amendment No. 3. (4) The Common Stock (plus an indeterminate number of shares of Common Stock issuable as a result of the antidilution provision of the Notes) is issuable upon conversion of the Notes. Pursuant to Rule 457(i) under the Securities Act of 1933, no registration fee is required for the Common Stock because it will be issued for no additional consideration. --------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SUBJECT TO COMPLETION, DATED SEPTEMBER 3, 1997 PROSPECTUS $100,000,000 [LOGO OF SYSTEM SOFTWARE] % CONVERTIBLE SUBORDINATED NOTES DUE 2002 ----------- The Notes to be issued by System Software Associates, Inc. ("SSA" or the "Company") will be convertible at any time, unless previously redeemed, into Common Stock, $.0033 par value per share (the "Common Stock"), of the Company at a conversion price of $ per share, subject to adjustment under certain conditions. The Company's Common Stock is traded on the Nasdaq National Market under the symbol "SSAX." On September 2, 1997, the last sale price of the Common Stock as reported on the Nasdaq National Market was $15.625 per share. Interest on the Notes will be payable semiannually on March 15 and September 15 of each year, commencing March 15, 1998. The Company has applied to list the Notes on the Nasdaq SmallCap Market under the symbol "SSAXG." The Notes will be represented by a Global Security registered in the name of a nominee of The Depository Trust Company, as Depository, and will be available for purchase in denominations of $1,000 and any integral multiple thereof. The Notes will not be redeemable at the option of the Company prior to September 20, 2000. Thereafter, the Notes will be redeemable at the option of the Company, in whole or in part, at any time and from time to time, at the redemption prices set forth herein, plus accrued interest. Upon a Change in Control, as defined herein, holders of Notes will have the right, subject to certain conditions and restrictions, to require the Company to purchase all or part of their Notes at the principal amount thereof plus accrued and unpaid interest. See "Description of Notes." The Notes will be unsecured and subordinate in right of payment to all existing and future Senior Indebtedness, as defined herein, of the Company and are effectively subordinate to all obligations of the subsidiaries of the Company. The Indenture relating to the Notes will not restrict the incurrence of Senior Indebtedness or other indebtedness of the Company or its subsidiaries. See "Description of Notes--Subordination of Notes." As of August 31, 1997, the Company had approximately $83.9 million of Senior Indebtedness, of which $68.8 million is expected to be repaid from the net proceeds to the Company from the sale of the Notes offered hereby. -------- THE NOTES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 7 OF THIS PROSPECTUS. -------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. -------- - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
UNDERWRITING PRICE TO PUBLIC (1) DISCOUNTS (2) PROCEEDS TO COMPANY (3) - ------------------------------------------------------------------------------- Per Note... $ $ $ - ------------------------------------------------------------------------------- Total(4)... $100,000,000 $ $
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1) Plus accrued interest, if any, from the date of initial issuance. (2) See "Underwriting" for a description of Representative's Warrants and indemnification arrangements with the Underwriters. (3) Before deducting estimated expenses of $750,000 payable by the Company. (4) The Company has granted to the Underwriters a 30-day option to purchase up to an additional $15,000,000 principal amount of Notes on the terms set forth above solely to cover over-allotments, if any. If all such Notes are purchased, the total Price to Public, Underwriting Discounts and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." -------- The Notes are offered by the several Underwriters, subject to prior sale, receipt and acceptance by them and subject to the right of the Underwriters to reject any order in whole or in part and certain other conditions. It is expected that delivery of the Notes will be made in book-entry form through the facilities of The Depository Trust Company on or about September , 1997. Delivery of Notes, if any, in certificated form will be made on or about such date at the office of Lazard Freres & Co. LLC in New York, New York. The activities of the Representatives are being jointly coordinated. HAMBRECHT & QUIST LAZARD FRERES & CO. LLC , 1997 ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance therewith, files periodic reports and other information with the Securities and Exchange Commission (the "Commission"). The Common Stock is listed on the Nasdaq National Market. For further information with respect to the Company, reference is hereby made to such reports and other information which can be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's Regional Offices located at Seven World Trade Center, 13th Floor, New York, New York 10048 and the Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and at the offices of Nasdaq Operations, 1735 K Street, N.W., Washington, D.C. 20006 or obtained by calling the Nasdaq Public Reference Room Disclosure Group at (800) 638-8241. Copies of such material may also be obtained at prescribed rates from the Public Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and on the Commission's Web site at http://www.sec.gov. This Prospectus constitutes a part of a Registration Statement on Form S-3 (the "Registration Statement") filed by the Company with the Commission under the Securities Act of 1933, as amended (the "Securities Act") with respect to the Notes offered hereby. In accordance with the rules and regulations of the Commission, this Prospectus omits certain of the information contained in the Registration Statement. Reference is hereby made to the Registration Statement and related exhibits and the documents incorporated herein by reference for further information with respect to the Company and the Notes. Statements contained herein or incorporated herein by reference concerning the provisions of any document are not necessarily complete and, in each instance, reference is made to the copy of such document filed as an exhibit to the Registration Statement or otherwise filed with the Commission. Each such statement is qualified in its entirety by such reference. The Registration Statement, including the exhibits and schedules thereto, is also available on the Commission's Web site at http://www.sec.gov. This Prospectus contains certain forward-looking statements that involve substantial risks and uncertainties. When used in this Prospectus, the words "anticipate," "believe," "estimate," "intend" and "expect" and similar expressions are intended to identify such forward-looking statements. The Company's actual results, performance or achievements could differ materially from the results expressed in or implied by these forward-looking statements. Factors that could cause or contribute to such differences include those discussed in "Risk Factors." Prospective investors should consider carefully these factors in addition to the other information set forth in this Prospectus. CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE NOTES OR THE COMMON STOCK ISSUABLE UPON THE CONVERSION OF THE NOTES. SUCH TRANSACTIONS MAY INCLUDE STABILIZING THE MARKET PRICE OF THE NOTES OR THE COMMON STOCK, OR BOTH, THE PURCHASE OF NOTES TO COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON NASDAQ IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING." This Prospectus includes product names, trade names and trademarks of System Software Associates, Inc. and its subsidiaries and other companies. BPCS(R), BPCS Client/Server(TM), DOCA(TM) and AgileLink 2000(TM) are trademarks of the Company. 2 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information, including "Risk Factors" and the Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, the information in this Prospectus assumes (i) no exercise of the Underwriters' over-allotment option and (ii) the issuance of 10,000 shares of Series A Preferred Stock and the Private Warrants in the Private Offering described below. All references to years or periods herein are references to the Company's fiscal years ending October 31 or the applicable periods therein. THE COMPANY System Software Associates, Inc. ("SSA" or the "Company") is a leading provider of cost-effective business enterprise information systems to the industrial sector worldwide. The Company's BPCS (Business Planning and Control System) Client/Server product line provides business process re-engineering and integration of an enterprise's operations, including multi-mode manufacturing processes, supply chain management and global financial solutions. The BPCS Client/Server product line delivers scalability, interoperability and reconfigurability in a comprehensive product suite to meet changing market demands. The distributed object computing architecture ("DOCA") of BPCS Client/Server provides the benefits of next generation technology in conformity with industry standards. The Company markets, sells and services its products to large- and intermediate-sized industrial sector firms primarily through its own world-wide sales organization and, to a much lesser extent, through a network of over 100 independent software companies ("Affiliates"). The Company has strategic relationships with major computer hardware manufacturers, such as IBM, Hewlett Packard and Digital Equipment; supply chain management software companies, such as i2 and Manugistics; and major systems integrators, such as CAP Gemini and the Big Six consulting firms. The Company's BPCS product line was initially developed for the IBM AS/400, and until 1995, most of the Company's revenues were derived from BPCS product licenses and related services sold for use on the AS/400 platform and, to a lesser extent, earlier IBM midrange computers. In 1993, the Company commenced a major development initiative to create a version of its BPCS product line for the UNIX operating system in an effort to address the non-AS/400 market. In late 1994, the Company began a major effort to re-architect its product line for the client/server, object-based environment. These efforts resulted in the initial release of Version 6.0 in April 1996 and the general release of Version 6.0 in September 1996. The Company has continued to release upgrades of Version 6.0 which have significantly improved the performance and scalability of the product while continuing to enhance functionality. The Company believes that the most recent release of Version 6.0 offers high levels of functionality and performance and that the flexibility of its DOCA architecture represents a significant advantage when compared to other enterprise software applications. BPCS Client/Server now operates across a broad array of platforms, including Hewlett-Packard HP 9000, IBM AS/400, IBM RISC System/6000 and DEC Alpha servers. The Company's UNIX version of the BPCS Client/Server product line software operates on both Informix and Oracle databases. The BPCS product line has been installed at over 8,500 clients and over 25,000 sites in over 70 countries. The Company believes that it is the leading vendor of enterprise resource planning (ERP) software for customers on the AS/400 platform. The target marketplace for the BPCS Client/Server product line is large- and medium-sized industrial sector firms. On August 29, 1997, the Company agreed, pursuant to a Securities Purchase Agreement (the "Securities Purchase Agreement"), to issue 10,000 shares of newly-designated Series A Preferred Stock and warrants to purchase 600,000 shares of Common Stock (the "Private Warrants") to an institutional investor (the "Private Investor") in a private placement (the "Private Offering"). The Series A Preferred Stock and Private Warrants will be issued to the Private Investor in exchange for a promissory note and warrants issued to the Private Investor for $10.0 million in cash on August 27, 1997. The Private Offering will close upon satisfaction of certain closing conditions but in no event later than the closing of this Offering. 3 THE OFFERING Securities Offered.............. $100,000,000 aggregate principal amount of % Convertible Subordinated Notes due 2002 (the "Notes") ($115,000,000 principal amount if the Underwriters' over-allotment option is exercised in full). Interest Payment Dates.......... March 15 and September 15 of each year, beginning March 15, 1998. Maturity Date................... September 15, 2002. Conversion...................... Convertible at the option of the holder of each Note, in whole or in part, into shares of Common Stock, $0.0033 par value per share, of the Company (the "Common Stock") at any time, unless previously redeemed or repurchased, at a conversion price of $ per share, subject to adjustment in certain events. See "Description of Notes--Conversion of Notes." Optional Redemption............. The Notes are not redeemable at the option of the Company prior to September 20, 2000. Thereafter, the Notes are redeemable at the option of the Company, in whole or in part at any time, at the prices specified herein, together with accrued and unpaid interest. See "Description of Notes--Redemption of Notes at the Option of the Company." Repurchase at Option of Holders Upon a Change in Control ...... In the event that a Change in Control (as defined herein) occurs, each holder of a Note may require the Company to repurchase all or a portion of such holder's Notes at a price equal to 100% of the principal amount thereof plus accrued and unpaid interest to the purchase date. See "Description of Notes-- Redemption of Notes at the Option of Holders Upon a Change in Control." Subordination................... The Notes are subordinate to all existing and future Senior Indebtedness (as defined herein) of the Company and effectively subordinated to all liabilities of the Company's subsidiaries. See "Description of Notes--Subordination of Notes." As of August 31, 1997, approximately $83.9 million of Senior Indebtedness was outstanding. Following this Offering and the application of the net proceeds therefrom, approximately $15.1 million of Senior Indebtedness will be outstanding. See "Use of Proceeds" and "Capitalization." The Indenture (as defined herein) will not restrict the incurrence of additional Senior Indebtedness or other indebtedness by the Company or by any of its subsidiaries. The terms of the Series A Preferred Stock, however, will prohibit the Company from incurring in excess of $40.0 million in additional Senior Indebtedness without the consent of the holders of a majority of the outstanding shares of Series A Preferred Stock. See "Risk Factors-- Subordination of Notes." 4 Use of Proceeds................. The Company will use approximately $68.8 million of the net proceeds of the Offering to repay all principal outstanding under (1) its multi-bank credit facility (the "Existing Credit Facility"), under which approximately $44.1 million in principal was outstanding as of August 31, 1997 and (2) the Company's Senior Secured Notes due November 1, 1997 (the "Senior Notes"), under which approximately $24.7 million in principal was outstanding as of August 31, 1997. The remaining net proceeds of this Offering will be used by the Company for general corporate purposes, including, but not limited to, capital expenditures and increasing working capital. See "Use of Proceeds." Book Entry...................... The Notes will be represented by a Global Security registered in the name of a nominee of The Depository Trust Company, as Depository, and will be available for purchase in denominations of $1,000 and any integral multiple thereof. Sinking Fund.................... None. Trading......................... The Company has applied to list the Notes on the Nasdaq SmallCap Market under the symbol "SSAXG." The Company's Common Stock is traded on the Nasdaq National Market under the symbol "SSAX." Risk Factors.................... An investment in the Notes involves a high degree of risk. See "Risk Factors" for a discussion of certain factors that should be considered in evaluating an investment in the Notes. 5 SUMMARY CONSOLIDATED FINANCIAL DATA (IN MILLIONS, EXCEPT PER SHARE DATA AND RATIOS)
NINE MONTHS ENDED FISCAL YEAR ENDED OCTOBER 31, JULY 31, ---------------------------------- ---------------- 1992 1993 1994 1995 1996 1996 1997 ------ ------ ------ ------ ------ ------ ------ STATEMENT OF OPERATIONS DATA: Revenues: License fees........... $178.5 $187.9 $229.7 $250.0 $226.7 $145.2 $213.4 Client services and other................. 50.3 75.5 94.6 124.1 114.1 86.2 91.6 ------ ------ ------ ------ ------ ------ ------ Total revenues.......... 228.8 263.4 324.3 374.1 340.8 231.4 305.0 Costs and expenses...... 187.8 227.3 307.9 333.0 399.6 275.5 295.9(1) ------ ------ ------ ------ ------ ------ ------ Operating income (loss). 41.0 36.1 16.4 41.1 (58.8) (44.1) 9.1 Income (loss) before income taxes and minority interest...... 41.6 35.7 15.4 40.9 (51.4) (42.5) (2.5) Net income (loss)....... $ 26.6 $ 23.4 $ 10.0 $ 26.6 $(32.8) $(27.1) $ (1.6) Earnings (loss) per share.................. $ 0.66 $ 0.57 $ 0.25 $ 0.63 $(0.76) $(0.63) $(0.04) Weighted average common and equivalent shares outstanding............ 40.5 40.7 40.5 42.2 43.0 43.1 43.7 Ratio of earnings to fixed charges (2)...... 15.3 10.4 3.7 6.5 -- (3) -- (3) -- (3) Pro forma ratio of earnings to fixed charges (4)............ -- (4) -- (4)
JULY 31, 1997 ---------------------- ACTUAL AS ADJUSTED (5) ------ --------------- BALANCE SHEET DATA: Cash and equivalents................................... $32.1 $65.1 Working capital, excluding short-term borrowings and Senior Notes payable.................................. 82.6 115.8 Intangibles: Software costs, net................................... 95.9 95.9 Cost in excess of net assets of acquired businesses, net.................................................. 20.6 20.6 ----- ----- Total intangibles...................................... 116.5 116.5 Total assets........................................... 395.0 431.2 Short-term borrowings and Senior Notes payable......... 71.8 -- Long-term obligations.................................. 13.5 112.5 Redeemable Series A Preferred Stock.................... -- 9.2 Total stockholders' equity............................. 115.8 116.3
- -------- (1) Includes a special charge of $1.7 million in the third quarter of 1997, in connection with the Settlement of the Illinois class action. See "Risk Factors--Legal Proceedings." (2) The ratio of earnings to fixed charges has been computed by dividing earnings available for fixed charges (earnings before income taxes and fixed charges) by fixed charges (interest expense, the portion of rental expense which represents interest and Series A Preferred Stock dividends). (3) Actual earnings (loss) available for fixed charges of ($38.7) million, ($34.2) million and $15.7 million were inadequate to cover fixed charges of $12.7 million, $8.3 million and $18.2 million for the year ended October 31, 1996, and the nine months ended July 31, 1996 and July 31, 1997, respectively. (4) The pro forma ratio of earnings (loss) to fixed charges assumes the Private Offering and this Offering and use of proceeds as described herein occurred on November 1, 1995 for the ratio for the year ended October 31, 1996, and on November 1, 1996 for the ratio for the nine months ended July 31, 1997. Assumes that the interest rate on the Notes is 7.5%, the net proceeds to the Company from the Private Offering and this Offering are invested in interest bearing accounts averaging 5.0% interest on an annual basis and the estimated fair values of the Representative's Warrants and the Private Warrants are $1.0 million and $0.8 million, respectively. Pro forma earnings (loss) available for fixed charges of $(36.7) million and $15.7 million were inadequate to cover pro forma fixed charges of $27.2 million and $31.2 million for the year ended October 31, 1996 and the nine months ended July 31, 1997, respectively. (5) Adjusted to reflect the Private Offering and this Offering and the application of the estimated net proceeds from the Private Offering and this Offering. Assumes that the estimated fair values of the Representative's Warrants and the Private Warrants are $1.0 million and $0.8 million, respectively. Also assumes that approximately $2.0 million ($1.3 million, after tax) in deferred charges and fees related to the Existing Credit Facility and Senior Notes are written off or paid upon repayment of such indebtedness in connection with the Private Offering and this Offering. 6 RISK FACTORS In addition to the other information in this Prospectus, the following factors should be carefully considered in evaluating an investment in the Notes offered by this Prospectus: NET LOSSES; UNCERTAINTY OF FUTURE RESULTS; POTENTIAL FUTURE CHARGES Although the Company had net income for the quarter ended July 31, 1997, the Company has experienced operating and net losses in 1996 and in the nine months ended July 31, 1997. There can be no assurance that the Company will not continue to incur operating and net losses. The Company's future operating results will depend upon a number of business factors, including the other factors discussed in these "Risk Factors," as well as general economic conditions. Furthermore, prior to a given year or other fiscal period, the Company hires sales and product development personnel and makes other fixed cost decisions which will result in increased expenses in such year or other period, based upon anticipated revenues for such year or other period. Due to the seasonality and concentration of the Company's revenues at the end of fiscal periods (particularly the fourth quarter) and the Company's cost structure, if revenue targets are not met, any or all of the Company's business, operating results and financial condition could be materially adversely affected. See "--Variability of Quarterly Operating Results; Seasonality." Since the initial release of version 6.0 of BPCS Client/Server, the Company has performed services for certain early adopter clients for which it has not been compensated (or has been only partially compensated) in order to insure such clients' successful implementation of BPCS Client/Server. In addition, in connection with certain implementations, the Company has experienced delays in payments of license fees owed and, in certain circumstances, has incurred settlement costs. The Company has established reserves related to warranty services and accounts receivable which the Company believes are adequate at present. The Company periodically reviews the adequacy of these reserves in light of its experience and, as such, may adjust the level of these and other reserves in the fourth quarter of 1997 and in future quarters. Charges related to increases in reserves could have a material adverse affect on the results of operations of the Company for the quarter in which they are taken. In connection with the Private Offering and this Offering, the Company will be required to write off certain deferred charges and pay certain fees related to the Existing Credit Facility and the Senior Notes, which would result in a charge in the fourth quarter of 1997 of approximately $2.0 million. Additionally, the Company believes that it may have to pay Bain Capital, Inc. ("Bain") a "break-up" fee of up to $3.0 million and reimburse Bain for Bain's expenses, limited to $250,000, in connection with a private offering with which the Company elected not to proceed. See "--Legal Proceedings." LEVERAGE Assuming the closing of the Private Offering and this Offering and the application of the net proceeds from the Private Offering and this Offering, on a pro forma basis as of July 31, 1997, the ratio of the Company's total debt to equity (including the Series A Preferred Stock outstanding as equity) (expressed as a percentage) would have been 89%. Annual dividends on the Series A Preferred Stock issued in the Private Offering will be $1.2 million. Annual interest expense on the Notes is estimated to be approximately $7.5 million. Approximately $15.1 million in Senior Indebtedness will remain outstanding immediately following this Offering. The degree to which the Company is leveraged could (i) adversely affect its ability to obtain additional financing, (ii) make it more vulnerable to general economic and market conditions, industry downturns and competitive pressures, (iii) impair its ability to fund research and development and respond to technological changes, and (iv) result in the dedication of a significant amount of any cash generated from operating activities to the payment of debt service and other financing obligations, thereby reducing funds available for operations, its existing markets and future business opportunities. The Company's ability to meet its debt service and other obligations will be dependent on the Company's future performance, which will be subject 7 to financial, business and other factors affecting operations of the Company, many of which are beyond its control. SUBORDINATION OF NOTES The Notes will be unsecured and subordinated in right of payment in full to all existing and future Senior Indebtedness (as defined herein) of the Company. As a result of such subordination, in the event of the Company's liquidation or insolvency, a payment default with respect to Senior Indebtedness, a covenant default with respect to Senior Indebtedness, or upon acceleration of the Notes due to an event of default, the assets of the Company will be available to pay obligations on the Notes only after all Senior Indebtedness has been paid in full. In such event, there may not be sufficient assets remaining to pay amounts due on any or all of the Notes then outstanding. The Notes are obligations exclusively of the Company. Since the operations of the Company are partially conducted through subsidiaries, the cash flow and the consequent ability of the Company to service debt, including the Notes, are partially dependent upon the earnings of its subsidiaries and the distribution of those earnings to, or upon loans or other payments of funds by those subsidiaries to, the Company. See "--Risks From International Operations." The payment of dividends and the making of loans and advances to the Company by its subsidiaries may be subject to statutory or contractual restrictions, are dependent upon the earnings of those subsidiaries and are subject to various business considerations. Any right of the Company to receive assets of any of its subsidiaries upon their liquidation or reorganization (and the consequent right of the holders of the Notes to participate in those assets) will be effectively subordinated to the claims of that subsidiary's creditors (including trade creditors), except to the extent that the Company is itself recognized as a creditor of such subsidiary, in which case the claims of the Company would still be subordinate to any security interests in the assets of such subsidiary and any indebtedness of such subsidiary senior to that held by the Company. Following the Private Offering and this Offering and the application of the net proceeds therefrom, approximately $15.1 million of Senior Indebtedness will be outstanding, including $12.0 million under the Company's floating rate convertible note due 2000 (the "Existing Convertible Note") and approximately $3.1 million in capital lease obligations payable over lease terms ranging from one to three years. See "Use of Proceeds." The Company will be permitted under the terms of the Series A Preferred Stock to incur up to approximately $40.0 million in additional Senior Indebtedness without the consent of the holders of a majority of the outstanding shares of Series A Preferred Stock. The Existing Credit Facility and the Senior Notes are secured by a lien on substantially all the assets of the Company and the stock of certain of its subsidiaries and future Senior Indebtedness may be secured to a similar extent. The Indenture does not prohibit or limit the incurrence of Senior Indebtedness or the incurrence of other indebtedness and other liabilities by the Company or its subsidiaries. The incurrence of additional indebtedness and other liabilities by the Company or its subsidiaries could adversely affect the Company's ability to pay its obligations on the Notes. To the extent permitted by the terms of the Series A Preferred Stock, the Company expects from time to time to incur additional indebtedness and other liabilities, including Senior Indebtedness, and also expects that its subsidiaries will from time to time incur additional indebtedness and other liabilities. See "Description of Notes--Subordination of Notes." COMPETITION The ERP application software market is highly competitive, rapidly changing and significantly affected by new product introductions and other market activities of industry participants. The Company's BPCS Client/Server product line is targeted at both the market for open systems, client/server ERP software solutions and the IBM AS/400 ERP market. The Company's current and prospective competitors offer a variety of products and solutions to address these markets. The Company's primary competition comes from a large number of independent software vendors and other sources including (i) companies offering products 8 that run on AS/400 and other mid-range computers, including J.D. Edwards and JBA, and (ii) companies offering products that run on UNIX-based systems in a client/server environment such as Oracle Corporation ("Oracle"), Baan Company N.V. ("Baan") and SAP AG ("SAP"). The Company also faces competition from a variety of other vendors of ERP software, including QAD. In addition, the Company faces indirect competition from suppliers of custom-developed business application software that have focused mainly on proprietary mainframe- and minicomputer-based systems with highly customized software, such as the systems consulting groups of major accounting firms and systems integrators. The Company also faces indirect competition from proprietary systems developed by the internal MIS departments of large organizations. Some of the Company's competitors have longer operating histories, greater financial, technical, marketing and other resources than the Company, greater name recognition, and a larger installed base of customers in the UNIX-based, client/server ERP market. Further, because the Company's product runs on relational database management systems ("RDBMS") and Oracle has the largest market share for RDBMS software, Oracle may have a competitive advantage in selling its application products to its RDBMS customer base. Furthermore, as the client/server computing market develops, companies with significantly greater resources than the Company could attempt to increase their presence in the ERP market by acquiring or forming strategic alliances with competitors of the Company. In the market for client/server ERP systems, the Company and its customers rely on a number of systems consulting and systems integration firms for implementation and other customer support services, as well as recommendations of the Company's product during the evaluation stage of the purchase process. Many of these third parties have similar, and usually more established, relationships with the Company's principal competitors. If the Company is unable to develop and retain effective, long-term relationships with a sufficient number of these third parties, the Company's competitive position could be materially adversely affected. See "--New Entrant into Complex Sales Environment." The Company believes that its future strength will depend in part on its ability to expand sales of the BPCS Client/Server product line. Many of the Company's competitors currently offer applications products for client/server systems. There can be no assurance that the Company will be able to compete successfully with existing or new competitors or that competition will not have a material adverse effect on the Company's business, operating results or financial condition. VARIABILITY OF QUARTERLY OPERATING RESULTS; SEASONALITY The Company's revenues and operating results have varied, sometimes substantially, from quarter to quarter. The Company anticipates that its revenues in general, and its license fee revenues, in particular, will continue to fluctuate and will be relatively difficult to forecast due to a number of reasons, many of which are beyond the Company's control. The factors affecting these fluctuations include (i) delays in sales due to the relatively long sales cycles for the Company's BPCS Client/Server product line; (ii) the size, timing and complexity of individual license transactions; (iii) customer order deferrals in anticipation of product enhancements or new product offerings by the Company or its competitors; (iv) market acceptance of new or enhanced versions of the Company's product and hardware platforms, operating systems and RDBMS with which the Company's products operate; (v) the timing of the introduction of new product functionality by the Company or its competitors; (vi) customer cancellation of major planned software implementation programs; (vii) changes in operating expenses; (viii) the publication of opinions about the Company, its products and technology by industry analysts; (ix) foreign currency exchange rate fluctuations; (x) changes in pricing policies by the Company or its competitors; (xi) delays in localizing the Company's product for new markets; and (xii) general economic factors. A significant portion of the Company's revenues in any quarter may be derived from a limited number of large, non-recurring license sales which may cause significant variations in quarterly license fees. The Company also believes that the purchase of its product is relatively discretionary and generally involves a significant commitment of a customer's capital resources. Therefore, a downturn in any potential customer's 9 business could result in order cancellations which could have a significant adverse impact on the Company's revenue and quarterly results. Moreover, declines in general economic conditions could precipitate significant reductions in corporate spending for information technology, which could result in delays or cancellations of orders for the Company's product line. The Company has experienced a seasonal pattern in its operating results, with the fourth quarter typically having the highest revenues and operating income. The Company believes that fourth quarter revenues are positively impacted by the Company's sales compensation plans. This factor, which the Company believes is common in the computer software industry, typically results in first quarter revenues in any year being lower than revenues in the immediately preceding fourth quarter. In addition, the Company's European operations generally provide lower revenues during the summer months as a result of the generally reduced economic activity in Europe during such time. This seasonal factor could materially adversely affect third quarter revenues. The Company has also historically recognized a substantial portion of its revenues from sales booked and shipped in the last month of a quarter. As a result, the magnitude of quarterly fluctuations in license fees may not become evident until late in a particular quarter. If sales forecasted from a specific customer for a particular quarter are not realized in that quarter, the Company is unlikely to be able to generate revenues from alternate sources in time to compensate for the shortfall. As a result, a lost or delayed sale could have a material adverse effect on the Company's quarterly operating results. To the extent that significant sales occur earlier than expected, operating results for subsequent quarters may be adversely affected. The Company has also historically operated with little backlog because its products are generally shipped as orders are received. As a result, revenues from license fees in any quarter are substantially dependent on orders booked and shipped in that quarter. Based upon the factors described above, the Company believes that its quarterly revenues and operating results are likely to vary significantly in the future, that period-to-period comparisons of its results of operations are not necessarily meaningful and that, as a result, such comparisons should not be relied upon as indications of future performance. Moreover, although the Company's revenues have generally increased in recent periods, there can be no assurance that the Company's revenues will grow in future periods, at past rates or at all, or that the Company will be profitable on a quarterly or annual basis. In future periods, the Company's operating results may be below the expectations of stock market analysts and investors. In such event, the price of the Common Stock could be materially adversely affected. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Quarterly Results." RISKS ASSOCIATED WITH LENGTHY SALES CYCLE Because the license of the Company's BPCS Client/Server product line generally involves a significant capital commitment by the customer (ranging from approximately $100,000 to tens of millions of dollars), the sales cycle associated with a customer's purchase of BPCS Client/Server product line is generally lengthy (with a typical duration between three and 18 months), varies from customer to customer and is subject to a number of significant risks over which the Company has little or no control. These risks include customers' budgetary constraints, timing of budget cycle, concerns about the introduction of new products by the Company or its competitors and general economic downturns which can result in delays or cancellations of information systems investments. Due in part to the strategic nature of the BPCS Client/Server product line, potential customers are typically cautious in making product acquisition decisions. The decision to license the BPCS Client/Server product line generally requires the Company to provide a significant level of education to prospective customers regarding the uses and benefits of the BPCS Client/Server product line, and the Company must frequently commit substantial presales support resources. The Company is also sometimes reliant on third parties for implementation and systems integration services, which may cause sales cycles to be lengthened or result in the loss of sales. The uncertain outcome of the Company's sales efforts and the length of its sales cycles could result in substantial fluctuations in operating results. If sales forecasted from a 10 specific customer for a particular quarter are not realized in that quarter, then the Company is unlikely to be able to generate revenue from alternative sources in time to compensate for the shortfall. As a result, and due to the relatively large size of some orders, a lost or delayed sale could have a material adverse effect on the Company's quarterly operating results. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." LEGAL PROCEEDINGS On August 20, 1997, the Company terminated its engagement of the prior underwriter of this Offering, and concurrently elected not to proceed with its private offering of securities to a group of private investors led by Bain. On August 27, 1997, Bain filed a complaint in the Superior Court of Massachusetts against the Company, Roger E. Covey and Hambrecht & Quist LLC, one of the Representatives of the Underwriters in this Offering. The complaint seeks damages from the Company in excess of $117.5 million for alleged breach of contract, breach of the implied covenant of good faith and fair dealing, misrepresentation and unfair and deceptive business acts and practices. The Company believes, based upon the advice of its counsel, that pursuant to its terms letter with Bain, the Company should have no liability to Bain beyond reimbursement of Bain's expenses, limited to $250,000, and payment of a "break-up" fee in the amount of $3.0 million. Any charge related to such expenses and "break-up" fee would likely be recorded in the Company's fourth fiscal quarter in 1997. Although the Company denies Bain's allegations and intends to vigorously defend itself against Bain's lawsuit, there can be no assurance that this action will not have a material adverse impact on the Company. In January 1997, class action lawsuits against the Company and certain of its officers were filed in state court in Illinois and in the federal court in Chicago, Illinois. The state court action alleges damages to persons who purchased the Company's Common Stock during the period from November 21, 1994 through January 7, 1997 arising from alleged violations of the Illinois securities laws and associated statutory and common law. The federal actions allege damages to persons who purchased the Company's Common Stock during the period from August 22, 1994 through January 7, 1997 arising from alleged violations of the federal securities laws and associated common laws. The lawsuits name the Company and several of its officers and directors as defendants, and allege violations of securities laws, fraud and negligence, stemming from circumstances which resulted in the restatement of the Company's financial statements for 1994 and 1995. See Note 2 of Notes to the Company's Consolidated Financial Statements for the years ended October 31, 1994, 1995 and 1996. The complaints do not specify the amounts of damages sought. The Company has executed a settlement agreement with the class plaintiffs in the Illinois state court action titled Steinberg v. SSA, 97 CH 287 (the "Settlement"). The Company has agreed to pay $1.7 million in cash and the director and officer defendants collectively have agreed to contribute 100,000 shares of Common Stock. In the quarter ended July 31, 1997, the Company recorded a $1.7 million charge related to the Settlement. The presiding judge in the Illinois case granted preliminary approval to the Settlement on June 27, 1997. A final hearing on the Settlement is scheduled for September 5, 1997. There can be no assurance that the Settlement will be approved, nor can there be any assurance that the Settlement, if approved, will legally bar the federal claims described above. In addition, even if the Settlement bars the federal claims described above, because the class period of the federal claim is slightly larger than the class period of the state claim, the Settlement may not result in the dismissal of the federal action. The failure to achieve a dismissal of any of these actions or the failure to settle them on sufficiently advantageous terms could have a material adverse effect on the business, operating results and financial condition of the Company. SEC INVESTIGATION Since October 1995, the Company has been the subject of a private investigation by the Securities and Exchange Commission. The Company believes the inquiry relates to its revenue recognition policies. The investigation is ongoing and the Company presently has no basis for determining when it is likely to conclude. In January 1997, the Company restated its fiscal 1994 financial statements to reverse $10.1 million in revenues 11 from a software contract originally recognized in the third quarter of fiscal 1994. In addition, the Company restated its fiscal 1995 financial statements to reverse $15.0 million in revenues from two related Latin American reseller agreements originally recognized in the third and fourth quarters of fiscal 1995, and $5.0 million in revenues originally recognized in the third quarter of fiscal 1995 from the last two installments of a four-installment contract. See Note 2 to the Company's Consolidated Financial Statements for the years ended October 31, 1994, 1995 and 1996. Commencing with the fourth quarter of 1996, the Company adopted a more conservative method of accounting for reseller agreements under which revenue will not be recorded under such contracts until software is sold to the end user. The adoption of this new method of accounting resulted in the reversal of approximately $33.8 million in revenues recognized in the first three quarters of fiscal 1996. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Change in Accounting Method." The Company is unable to predict at this time the scope or consequences to the Company of the Commission's investigation, or whether the actions taken by the Company that are described above address the issues being investigated by the Commission. There can be no assurance that such investigation would not have a material adverse effect on the business, financial condition or results of operations of the Company. RAPID TECHNOLOGICAL CHANGE; PRODUCT ROLLOUT DELAYS The market for the Company's software products is characterized by rapid technological advances, evolving industry standards in computer hardware and software technology, changes in customer requirements and preferences, and frequent new product introductions and enhancements. Customer requirements for products can change rapidly as a result of innovations or changes within the computer hardware and software industries, the introduction of new products and technologies (including new hardware platforms and programming languages) and the emergence, evolution or widespread adoption of industry standards. For example, increasing commercial use of the Internet may give rise to new customer requirements and new industry standards. The Company's future success will depend upon its ability to continue to enhance its current product line and to develop and introduce new product functionality that keeps pace with technological developments, satisfies increasingly sophisticated customer requirements and achieves market acceptance. In particular, the Company must continue to anticipate and respond adequately to advances in RDBMS software and desktop computer operating systems such as Windows. There can be no assurance that the Company will be successful in developing and marketing on a timely and cost-effective basis fully functional product enhancements or new product functionality that respond to technological advances by others, or that its new product functionality will achieve market acceptance. As a result of the complexities inherent in both the RDBMS and client/server environments and the broad functionality and performance demanded by customers for ERP products, major new product enhancements and new product functionality can require long development and testing periods to achieve market acceptance. The Company has, in the past, experienced delays, as is common throughout the software industry, in the scheduled introduction of new and enhanced product functionality. In addition, complex software programs such as those offered by the Company may contain undetected errors or "bugs" when first introduced or as new versions are released that are discovered only after the product has been installed and used by customers. There can be no assurance that errors will not be found in future releases of the Company's software, or that any such errors will not impair the market acceptance of the product and adversely affect the Company's business, operating results and financial condition. Problems encountered by customers implementing new releases or with performance of the Company's product can be expected to occur, given the inherent complexities of its client/server based product. In April 1996, the Company introduced the first release of Version 6.0 of its BPCS Client/Server product line to early adopter customers. These early adopters of Version 6.0 experienced difficulties in achieving full functionality and performance with respect to some aspects of Version 6.0. Since the initial release of Version 6.0 to early adopters, the Company has spent a significant amount of time, effort and expense in intensive collaborative efforts with such early adopters to increase functionality and performance of the Version 6.0 product line. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview." 12 DEPENDENCE ON AS/400 USERS Although the Company has developed new versions of its BPCS Client/Server product line for the open systems marketplace, a substantial portion of the Company's revenues relate to licenses of BPCS Client/Server for IBM AS/400 installations in the industrial sector. In fiscal 1996, over 75% of the Company's software license fee revenue was derived from the AS/400 market. Therefore, even as the Company continues to innovate and market versions of the BPCS Client/Server product line for the open systems environment, a substantial portion of the Company's future revenues will be derived from and will be dependent upon the continued widespread use of the AS/400 and the continued support of IBM's AS/400 platform and proprietary DB/2 database system. There can be no assurance that the Company's customers will continue to use or that IBM will continue to support the AS/400 and DB/2. The Company will be required and intends to continue to devote substantial resources to supporting its installed base of AS/400 customers and the versions of the BPCS Client/Server product line used by them. In order to retain its AS/400 customers, the Company may be required to adapt its BPCS Client/Server product line to conform to any changes made in the AS/400 operating system in the future. The Company's inability to adapt to future changes in the AS/400 and/or DB/2 systems, or delays in doing so, could have a material adverse effect on the Company's business, operating results and financial condition. NEW ENTRANT INTO COMPLEX SALES ENVIRONMENT The Company has only recently developed and begun to market its BPCS Client/Server product line for UNIX operating environments. The market for open systems-based applications differs in many respects from the market for AS/400-based applications, which historically had been the Company's exclusive focus. Among other things, the UNIX market is characterized by numerous database vendors, hardware vendors, systems integrators and consultants, all of whom can influence the purchase of enterprise applications such as those marketed by the Company. There can be no assurance that the Company's sales and marketing efforts will be successful in this highly complex sales environment. The Company's future success will depend in part upon the productivity of its sales and marketing force and the ability of the Company to attract, integrate, train, motivate and retain new sales and marketing personnel. Competition for sales and marketing personnel in the software industry is intense. There can be no assurance that the Company's recent and planned expenses and personnel decisions in sales and marketing will ultimately prove to be successful or that the incremental revenue generated will exceed the significant incremental costs associated with these efforts. In addition, there can be no assurance that the Company's sales and marketing organization will be able to compete successfully against the significantly more extensive and better funded sales and marketing operations of many of the Company's current and potential competitors. The Company's inability to implement successful sales and marketing efforts in the UNIX market could have a material adverse effect on the Company's business, operating results and financial condition. In the UNIX-based marketplace, the Company relies on a number of systems consulting and systems integration firms to enhance its marketing, sales and customer support efforts, particularly with respect to implementation and support of its product as well as sales lead generation and assistance in the sales process. As the Company continues to implement its strategy of focusing on the licensing of its products in the UNIX-based marketplace, the Company will become increasingly dependent upon third-party implementation providers for product implementation, end user training and sales support. Although the Company seeks to maintain close relationships with these firms, many such firms have similar, and in some cases more established, relationships with the Company's principal competitors. There can be no assurance that these third- party service firms will provide the level and quality of service required to meet the needs of the Company's end users, nor can there be any assurance that such service firms will recommend the Company's product when assisting their clients in product selection decisions. Failure by the Company to maintain its existing relationships with such third parties or the failure to maintain their support for the Company's products, could materially and adversely affect the Company's UNIX marketing efforts and could have a material adverse affect on the Company's business, operating results and financial condition. 13 RISKS FROM INTERNATIONAL OPERATIONS The Company currently operates directly and through its Affiliates in over 90 countries. In the fiscal year ended October 31, 1996 and in the nine months ended July 31, 1997, approximately 61% and 67%, respectively, of the Company's total revenues were generated from sales outside of the United States. The Company's operations are subject to risks inherent in international business activities, including, in particular, general economic conditions in each country, overlap of different tax structures, management of an organization spread over various countries, exposure to currency fluctuations, unexpected changes in regulatory requirements, compliance with a variety of foreign laws and regulations, and longer accounts receivables payment cycles in certain countries. Other risks associated with international operations include import and export licensing requirements, trade restrictions and changes in tariff rates. There can be no assurance that the geographic, time zone, language and cultural differences between the Company's international personnel and operations will not result in problems that materially adversely affect the Company's business, operation results and financial condition. The Company has in the past experienced and may continue to experience operating losses in one or more regions of the world for one or more periods. The Company's ability to manage such operational fluctuations and the failure to sustain or increase international revenue could have a material adverse effect on the Company's business, operating results and financial condition. The Company generates a significant portion of its revenues and expenses from foreign operations in currencies other than United States dollars. As a result, fluctuations in the values of the respective currencies in which the Company generates revenue and incurs expense could materially adversely affect its business, operating results and financial condition. While the Company may in the future change its pricing practices, an increase in the value of the United States dollar relative to foreign currencies could make the Company's products more expensive and, therefore, less competitive in other markets. Fluctuations in currencies relative to the United States dollar will affect period-to-period comparisons of the Company's reported results of operations. Due to the constantly changing currency exposures and the volatility of currency exchange rates, there can be no assurance that the Company will not experience currency losses in the future, nor can the Company predict the effect of exchange rate fluctuations upon future operating results. The Company does not currently undertake hedging transactions and has limited resources to cover its currency exposure. The Company may choose to hedge a portion of its currency exposure in the future as it deems appropriate. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." INABILITY TO ENFORCE THE COMPANY'S INTELLECTUAL PROPERTY RIGHTS The Company relies on a combination of the protections provided under applicable copyright and trade secret laws, as well as on confidentiality procedures and licensing arrangements, to establish and protect its rights in its software. Despite the Company's efforts, it may be possible for unauthorized third parties to copy certain portions of the Company's product or to reverse engineer or obtain and use information that the Company regards as proprietary. In addition, the laws of certain countries do not protect the Company's proprietary rights to the same extent as do the laws of the United States. Accordingly, there can be no assurance that the Company will be able to protect its proprietary software against unauthorized third-party copying or use, which could adversely affect the Company's competitive position and could have a material adverse effect on the Company's business, operating results and financial condition. CONTROL BY EXISTING STOCKHOLDER; POTENTIAL CONTROL BY PRIVATE INVESTOR Roger E. Covey, Chairman and Chief Executive Officer of the Company, currently beneficially owns approximately 31.2% of the Company's outstanding Common Stock (approximately % on a fully-diluted basis after giving effect to the Private Offering and this Offering, and assuming conversion of the Notes at an assumed conversion rate of $ per share, the conversion of the Series A Preferred Stock into Common Stock and the exercise of the Private Warrants and the Representative's Warrants). Accordingly, Mr. Covey may have the effective power to influence significantly the outcome of matters submitted for stockholder action, including the election of members of the Company's Board and the approval of significant change in 14 control transactions, and may be deemed to have control over the management and affairs of the Company. This significant equity interest in the Company may have the effect of making certain transactions more difficult absent the support of Mr. Covey and may have the effect of delaying or preventing a change in control of the Company. For so long as at least 2,500 shares of Series A Preferred Stock remain outstanding, the Company may not take certain actions without the prior written consent of the holder(s) of a majority of the outstanding shares of Series A Preferred Stock, including the payment of dividends or any other distribution with respect to the Common Stock, the incurrence of additional debt (other than the Notes, up to $40.0 million in additional Senior Indebtedness and certain other exceptions), the entering into of any merger, consolidation, sale, assignment, lease or transfer of any material portion of the Company's assets and certain other material transactions. See "Description of the Private Offering--Series A Preferred Stock--Series A Preferred Stock Covenants." The Private Investor also has the right either to designate one new member of the Company's Board of Directors or one observer who may attend board meetings. The terms of the Series A Preferred Stock may have the effect of making certain transactions more difficult absent the support of the holders of the Series A Preferred Stock or the redemption of the Series A Preferred Stock. VOLATILITY OF STOCK PRICE The market price of the Common Stock and the Notes after the Offering may be significantly affected by any or all of the factors cited herein in "Risk Factors", including quarterly fluctuations in the Company's results of operations, demand for the Company's product and services, the size, timing and structure of significant licenses by customers, market acceptance of new or enhanced versions of the Company's BPCS Client/Server product line, the publication of opinions about the Company, its products and technology by industry analysts, the entry of new competitors and technological advances by competitors, delays in sales as a result of lengthy sales cycles, changes in operating expenses, foreign currency exchange rate fluctuations, changes in pricing policies by the Company or its competitors, customer order deferrals in anticipation of product enhancements by the Company or its competitors, the timing of the release of new or enhanced versions of the Company's BPCS Client/Server product line, customer cancellation of major planned software development programs, general economic factors and other factors, many of which are beyond the Company's control. In future quarters, the Company's operating results may be below expectations of public market analysts and investors. In such event, or in the event that adverse conditions prevail or are perceived to prevail generally or with respect to the Company's business, the price of the Company's Common Stock would likely be immediately materially adversely affected. In addition, the stock market has experienced volatility that has particularly affected the market prices of equity securities of many technology companies and that often has been unrelated or disproportionate to the operating performance of such companies. These broad market fluctuations, as well as general economic, political and market conditions, such as recessions or international currency fluctuations, may adversely affect the market price of the Common Stock and the Notes. ANTI-TAKEOVER CONSIDERATIONS The Company is subject to Section 203 of the Delaware General Corporation Law which, subject to certain exceptions, prohibits a Delaware corporation from engaging in any of a broad range of business combinations with an "interested stockholder" for a period of three years following the date that such stockholder became an interested stockholder. The Company has also adopted a stockholders' rights plan, which can have a significant anti-takeover effect by inhibiting a potential offeror, the value of whose acquired shares would be substantially diluted by the operation of the plan. Upon a Change in Control as defined herein under "Description of Notes," the holders of the Notes may require the Company to redeem the Notes at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest. Upon a Change in Control, the Company will also be obligated to pay dividends on the Series A Preferred Stock at an annual rate equal to 14% multiplied by the then- applicable Liquidation Price (as defined below) for the Series A Preferred Stock. See "Description of the Private Offering--Series A Preferred Stock-- Liquidation Preference 15 and Dividends." A Change in Control under similar circumstances would most likely also constitute an event of default under any new bank credit facility to be entered into by the Company (the "New Credit Facility"). These provisions could serve to impede or prevent a change of control or have a depressive effect on the price of the Company's Common Stock and securities convertible or exchangeable into Common Stock, such as the Notes. LIMITATIONS ON REPURCHASE UPON A CHANGE IN CONTROL In the event of a Change in Control, each Noteholder may under certain circumstances require the Company to repurchase all or a portion of such holder's Notes at 100% of the principal amount thereof plus accrued and unpaid interest to the repurchase date. If a Change in Control were to occur, there can be no assurance that the Company would have sufficient funds to pay the repurchase price for all Notes tendered by the holders thereof. It is expected that the Company's repurchase of Notes, absent a waiver, would constitute a default under the terms of the New Credit Facility. In addition, the Company's repurchase of Notes as a result of the occurrence of a Change in Control may be prohibited or limited by the holders of Senior Indebtedness under the subordination provisions applicable to the Notes, or be prohibited or limited by or create an event of default under, the terms of other agreements relating to borrowings which constitute Senior Indebtedness as may be entered into, amended, supplemented or replaced from time to time. Failure of the Company to repurchase Notes at the option of the Noteholder upon a Change in Control would result in an Event of Default under the Indenture. See "Description of Notes--Redemption of Notes at the Option of Holders Upon a Change in Control." ABSENCE OF TRADING MARKETS Prior to this Offering, there has been no trading market for the Notes and there can be no assurance that a trading market will develop or, if one does develop, of its liquidity or whether it will be maintained. To the extent that an active market does not develop for the Notes the market price and a holder's ability to sell the Notes could be materially adversely affected. COMMON STOCK AVAILABLE FOR RESALE; REGISTRATION RIGHTS Sales of substantial amounts of Common Stock in the public market after this Offering could adversely affect the prevailing market price of the Common Stock, which, in turn, could adversely affect the market price of the Notes. The directors and executive officers of the Company have agreed not to offer, sell or otherwise dispose of any shares of Common Stock for a period of at least 90 days after the effective date of the Registration Statement without the prior written consent of the Representatives (as defined herein). Roger E. Covey, Chairman and Chief Executive Officer of the Company, currently beneficially owns 13,284,750 shares of Common Stock, representing approximately 31.2% of the Company's outstanding stock as of July 31, 1997. Beginning 90 days after the effective date of the Registration Statement, Mr. Covey's Common Stock will be available for sale during any three-month period under Rule 144(e) under the Securities Act without restriction up to an amount equal to the greater of (i) 1% of the Company's outstanding shares of Common Stock (426,526 as of July 31, 1997) or (ii) the average weekly trading volume of the Common Stock reported on a national securities exchange during the four calendar weeks preceding the filing of a notice of sale with the SEC (for example, approximately 10,090,000 for the four weeks ended August 29, 1997). Under certain circumstances, the holder of the Existing Convertible Note will have the right to require the Company to convert such debt into approximately 3.6 million shares of Common Stock (the "Underlying Shares"). The Company has agreed that once the Existing Convertible Note becomes convertible the Company will file a registration statement on Form S-3 to register the Underlying Shares under the Securities Act (the "Resale Registration Statement"). The Company is currently negotiating with the holder of the Existing Convertible Note to obtain a lock-up undertaking which would prohibit the offering or sale of the Underlying Shares or any interest therein for periods of between 45 and 90 days after the effective date of this Registration Statement. Upon effectiveness of the Resale Registration Statement, the Underlying Shares will generally be available for sale in the public market following the expiration of the aforementioned lock-up undertaking, if any. 16 USE OF PROCEEDS The net proceeds to the Company from this Offering are estimated to be approximately $96.3 million ($110.8 million if the Underwriters' over- allotment option is exercised in full). The Company will use approximately $68.8 million of the net proceeds of the Offering to repay all amounts outstanding under its Existing Credit Facility (which as of August 31, 1997, were approximately $44.1 million) and under its Senior Notes (which as of August 31, 1997, were approximately $24.7 million). The Existing Credit Facility and the Senior Notes currently bear interest at prime plus 2%, and mature on November 1, 1997. The Company expects to use the remainder of the net proceeds, which are estimated to be approximately $27.5 million, together with existing resources, to open new offices, retain additional skilled personnel in sales, pre-sales and research and development, for several small acquisitions, and for other working capital and general corporate purposes. The Company has no pending agreements, understandings or pending negotiations regarding any proposed acquisitions. PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY The Company's Common Stock is traded on the Nasdaq National Market under the symbol "SSAX". The following table shows the high and low closing prices of the Common Stock for the Company's fiscal quarters, as reported by the Nasdaq National Market.
FISCAL 1997 FISCAL 1995 FISCAL 1996 (1) ------------- ------------- ------------- HIGH LOW HIGH LOW HIGH LOW ------ ------ ------ ------ ------ ------ First Quarter................... $11.75 $ 8.17 $27.67 $18.63 $14.06 $10.00 Second Quarter.................. 18.92 11.50 25.63 20.25 10.88 4.13 Third Quarter................... 19.58 12.58 24.13 11.63 9.56 5.63 Fourth Quarter.................. 30.00 15.25 13.38 8.69 16.19 8.06
-------- (1) Fourth Quarter through September 2, 1997 On September 2, 1997, the last reported sale price for the Common Stock was $15.625. Commencing in January 1991, the Company has paid an annual dividend on its Common Stock. The following table lists the dividend paid per share of Common Stock in each of the last three fiscal years:
DIVIDEND YEAR PER SHARE ---- --------- 1994............................................................ $0.08 1995............................................................ 0.08 1996............................................................ 0.10
The Company does not currently anticipate that it will resume payment of an annual dividend on its Common Stock. Covenants in the terms of the Series A Preferred Stock and the Existing Convertible Note prohibit or restrict the payment of dividends upon equity securities of the Company. The Company anticipates that the New Credit Facility will also restrict the payment of dividends by the Company. 17 CAPITALIZATION The following table sets forth the short term debt and capitalization of the Company as of July 31, 1997 and as adjusted to give effect to the Private Offering and this Offering and the application of the estimated net proceeds from the Private Offering and this Offering (assuming the Underwriters' over- allotment option is not exercised). See "Use of Proceeds." This information should be read in conjunction with the Company's Consolidated Financial Statements and the related Notes thereto appearing elsewhere in this Prospectus.
JULY 31, 1997 ---------------- AS ACTUAL ADJUSTED ------ -------- (IN MILLIONS) Short term borrowings and current maturities of Senior Notes payable............................................. $ 71.8 $ -- ====== ====== Long Term Obligations: Convertible subordinated promissory note................. $ 12.0 $ 12.0 Convertible subordinated notes, none issued actual, $100.0 million issued, as adjusted (1).................. -- 99.0 Notes payable, obligations under capital leases and other obligations................................... 1.5 1.5 ------ ------ Total Long Term Obligations............................ 13.5 112.5 ------ ------ Redeemable Series A Preferred Stock, convertible, 10,000 shares issued and outstanding, as adjusted (2)............ -- 9.2 Stockholders' Equity: Preferred Stock, $.01 par value, 100,000 shares authorized, none issued or outstanding; 10,000 shares issued as Series A Preferred Stock, as adjusted................... -- -- Common Stock, $.0033 par value, 250,000,000 shares authorized, 42,652,000 shares outstanding, actual and as adjusted................................................ 0.1 0.1 Capital in excess of par value (3)....................... 42.8 46.8 Retained earnings (4).................................... 76.9 73.4 Cumulative translation adjustment........................ (4.0) (4.0) ------ ------ Total stockholders' equity............................. 115.8 116.3 ------ ------ Total capitalization................................... $129.3 $238.0 ====== ======
- --------------------- (1) Less discount attributable to the estimated fair value of the Representative's Warrants of $1.0 million. (2) Less discount attributable to the estimated fair value of the Private Warrants of $0.8 million. (3) As adjusted includes the estimated fair value of the Private Warrants and the Representative's Warrants of $0.8 million and $1.0 million, respectively, and the beneficial conversion feature of the Series A Preferred Stock into Common Stock of $2.2 million. (4) As adjusted includes write-off or payment of approximately $2.0 million ($1.3 million, after tax) in deferred charges and fees related to the Existing Credit Facility and Senior Notes which will occur upon the repayment of such indebtedness in connection with the Private Offering and this Offering, and a reduction to reflect the estimated fair value of $2.2 million of the beneficial conversion feature of the Series A Preferred Stock into Common Stock. 18 SELECTED FINANCIAL DATA The following data have been derived from the Consolidated Financial Statements audited by Price Waterhouse LLP, independent accountants, for the fiscal years ended October 31, 1995 and 1994, and audited by KPMG Peat Marwick LLP, independent accountants, for the fiscal year ended October 31, 1996. The data set forth below are qualified by reference to the consolidated balance sheets at October 31, 1995 and 1996 and related consolidated statements of operations, cash flows and changes in stockholders' equity for the three years ended October 31, 1996 and the Notes thereto contained elsewhere in this Prospectus. The consolidated financial data as of and for the nine months ended July 31, 1996 and 1997 are unaudited but have been prepared on the same basis as the audited financial statements and, in the opinion of management, contain all adjustments, consisting only of normal recurring adjustments necessary for a fair presentation of the results of operations and financial condition for such periods. The results of operations presented below are not necessarily indicative of results to be expected for any future period.
NINE MONTHS FISCAL YEAR ENDED OCTOBER 31, ENDED JULY 31, ------------------------------------- ------------------ 1992 1993 1994 1995 1996 1996 1997 ------ ------ ------ ------ ------ ------- ------- (IN MILLIONS, EXCEPT RATIOS AND PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenues: License fees........... $178.5 $187.9 $229.7 $250.0 $226.7 $145.2 $ 213.4 Client services and other................. 50.3 75.5 94.6 124.1 114.1 86.2 91.6 ------ ------ ------ ------ ------ ------- ------- Total revenues....... 228.8 263.4 324.3 374.1 340.8 231.4 305.0 ------ ------ ------ ------ ------ ------- ------- Costs and expenses: Cost of license fees... 47.2 51.4 60.7 64.9 66.9 43.4 52.4 Cost of client services and other............. 31.6 43.5 57.2 76.8 89.0 64.9 71.8 Sales and marketing.... 56.7 63.8 90.8 87.6 103.8 71.3 66.2 Research and development........... 16.5 23.0 35.1 40.2 54.4 38.3 39.0 General and administrative........ 35.8 45.6 64.1 63.5 85.5 57.6 64.8 Special charge......... -- -- -- -- -- -- 1.7 ------ ------ ------ ------ ------ ------- ------- Total costs and expenses............ 187.8 227.3 307.9 333.0 399.6 275.5 295.9(1) ------ ------ ------ ------ ------ ------- ------- Operating income (loss). 41.0 36.1 16.4 41.1 (58.8) (44.1) 9.1 ------ ------ ------ ------ ------ ------- ------- Gain on sale of available-for-sale securities............. -- -- -- -- 13.1 3.6 -- Non-operating income (expense), net......... 0.6 (0.4) (1.0) (0.2) (5.7) (2.0) (11.6) ------ ------ ------ ------ ------ ------- ------- Income (loss) before income taxes and minority interest...... 41.6 35.7 15.4 40.9 (51.4) (42.5) (2.5) Provision (benefit) for income taxes........... 15.0 12.7 5.6 14.2 (18.6) (15.4) (0.9) ------ ------ ------ ------ ------ ------- ------- Income (loss) before minority interest...... 26.6 23.0 9.8 26.7 (32.8) (27.1) (1.6) Minority interest....... -- 0.4 0.2 (0.1) -- -- -- ------ ------ ------ ------ ------ ------- ------- Net income (loss)....... $ 26.6 $ 23.4 $ 10.0 $ 26.6 $(32.8) $ (27.1) $ (1.6) ====== ====== ====== ====== ====== ======= ======= Earnings (loss) per share.................. $ 0.66 $ 0.57 $ 0.25 $ 0.63 $(0.76) $ (0.63) $ (0.04) ====== ====== ====== ====== ====== ======= ======= Weighted average common and equivalent shares outstanding............ 40.5 40.7 40.5 42.2 43.0 43.1 43.7 ====== ====== ====== ====== ====== ======= ======= Ratio of earnings to fixed charges (2)...... 15.3 10.4 3.7 6.5 -- (3) -- (3) -- (3) Pro forma ratio of earnings to fixed charges (4)............ -- (4) -- (4)
OCTOBER 31, JULY 31, 1997 ---------------------------------- ------------------- AS 1992 1993 1994 1995 1996 ACTUAL ADJUSTED (5) ------ ------ ------ ------ ------ ------ ------------ BALANCE SHEET DATA: Cash and cash equivalents............ $ 23.4 $ 57.6 $ 60.2 $ 57.1 $ 38.1 $ 32.1 $ 65.1 Working capital, excluding short term borrowings and Senior Notes payable.......... 49.5 91.2 87.3 96.3 70.3 82.6 115.8 Intangibles: Software costs, net.... 16.8 27.3 49.3 59.0 82.8 95.9 95.9 Cost in excess of assets of acquired businesses, net....... 9.6 14.0 15.8 18.2 22.8 20.6 20.6 ------ ------ ------ ------ ------ ------ ------ Total intangibles....... 26.4 41.3 65.1 77.2 105.6 116.5 116.5 Total assets............ 200.0 280.4 333.1 393.2 384.4 395.0 431.2 Short-term borrowings and current maturities of Senior Notes payable................ -- -- -- 4.0 -- 71.8 -- Long-term obligations... 3.5 34.0 32.7 33.9 75.1 13.5 112.5 Redeemable Series A Preferred Stock........ -- -- -- -- -- -- 9.2 Total stockholders' equity................. 80.0 101.2 109.3 143.4 110.2 115.8 116.3
- ------- (1) Includes a special charge of $1.7 million in the third quarter of 1997, in connection with the Settlement of the Illinois class action. See "Risk Factors--Legal Proceedings." (2) The ratio of earnings to fixed charges has been computed by dividing earnings available for fixed charges (earnings before income taxes and fixed charges) by fixed charges (interest expense, the portion of rental expense which represents interest and Series A Preferred Stock dividends). (3) Actual earnings (loss) available for fixed charges of ($38.7) million, ($34.2) million and $15.7 million were inadequate to cover fixed charges of $12.7 million, $8.3 million and $18.2 million for the year ended October 31, 1996 and the nine months ended July 31, 1996 and July 31, 1997, respectively. (4) The pro forma ratio of earnings (loss) to fixed charges assumes the Private Offering and this Offering and use of proceeds as described herein occurred on November 1, 1995 for the ratio for the year ended October 31, 1996, and on November 1, 1996 for the ratio for the nine months ended July 31, 1997. Assumes that the interest rate on the Notes is 7.5%, the net proceeds to the Company from the Private Offering and this Offering are invested in interest bearing accounts averaging 5.0% interest on an annual basis and the estimated fair values of the Representative's Warrants and the Private Warrants are $1.0 million and $0.8 million, respectively. Pro forma earnings (loss) available for fixed charges of $(36.7) million and $15.7 million were inadequate to cover pro forma fixed charges of $27.2 million and $31.2 million for the year ended October 31, 1996 and the nine months ended July 31, 1997, respectively. (5) Adjusted to reflect the Private Offering and this Offering and the application of the estimated net proceeds from this Offering and the Private Offering. Assumes that the estimated fair values of the Representative's Warrants and the Private Warrants are $1.0 million and $0.8 million, respectively. Also assumes that approximately $2.0 million ($1.3 million, after tax) in deferred charges and fees related to the Existing Credit Facility and Senior Notes are written off or paid upon repayment of such indebtedness in connection with the Private Offering and this Offering. 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following management's discussion and analysis of financial condition and results of operations contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in this section as well as those under the caption "Risk Factors" appearing elsewhere in this Prospectus. The following discussion should be read in conjunction with the Consolidated Financial Statements of the Company and the Notes thereto included elsewhere in this Prospectus. OVERVIEW The Company is a leading provider of cost-effective business enterprise information systems to the industrial sector worldwide. The Company markets, sells and services its products to large- and intermediate-sized industrial sector firms primarily through its own world-wide sales organization and, to a lesser extent, through a network of over 100 independent software companies, which SSA refers to as its "Affiliates," and major systems integrators. The Company classifies its revenue in two broad categories: license fees and client services and other. License fee revenues are primarily derived from the licensing of the Company's BPCS Client/Server product line. Client services and other revenues are derived from implementation (installation), consulting, training and other services, such as customization, modifications and Year 2000 software conversions. SSA was founded as an MRP (Manufacturing Resource Planning) software company supplying software for IBM midrange computers. The Company believes it is the largest supplier of MRP software for IBM AS/400 installations. The Company is presently concluding a transition phase, having first released the new object- oriented version of its BPCS Client/Server product line, Version 6.0, to early adopters in April 1996. Certain difficulties attended the early releases of the UNIX version of the BPCS product line and the Company's expansion of its product development and marketing efforts beyond the IBM AS/400 platform and into the open systems marketplace. License fees increased only slightly from 1994 to 1995, and decreased from 1995 to 1996. Some early adopters experienced difficulties in achieving full functionality and performance with the early release. See "Risk Factors--Net Losses; Uncertainty of Future Results; Potential Future Charges." The general release of Version 6.0 did not occur until September 1996. In addition, the Company expended significant amounts across its organization to build a new sales and marketing and client services infrastructure to support the release of the open systems version of the BPCS Client/Server product line. Thus, in 1996, the Company's cost of client services and other, sales and marketing expense and research and development expense all increased significantly over 1995 levels. Because these investments did not generate contemporaneous increases in license fees and client services revenues, the Company reported an operating loss of ($58.8) million in 1996. As Version 6.0 improved in its functionality and performance characteristics, license fees increased. For the first nine months of 1997, license fee revenues increased 47%, total revenues increased 32% and operating income improved $53.2 million to $9.1 million from an operating loss of ($44.1) million for the same period of 1996. A net loss for the first nine months of 1997 of ($1.6) million improved $25.5 million from a net loss of ($27.1) million for the same period of 1996. The Company has expended over $200 million for research and development during the prior three fiscal years, principally for Version 6.0 of BPCS Client/Server. These expenditures, combined with the losses from operations incurred in 1996 and the first quarter of 1997, have seriously impaired the Company's liquidity, and have led to increased borrowings under the Company's Existing Credit Facility. The Private Offering and this Offering are expected to enhance the Company's liquidity. The Company includes software license fees, and any related commissions earned by the Affiliates, in license fees and cost of license fees, respectively. Software license fee revenues are recognized upon client 20 acceptance and delivery of the software to the end user, provided that no significant vendor obligations remain and collectibility is probable. Revenue and commissions from software maintenance and HelpLine agreements are deferred and recognized ratably over the term of the contract. Client services revenues are recognized as the services are performed. In accordance with Statement of Financial Accounting Standards (SFAS) No. 86, the Company expenses software development costs as they are incurred until technological feasibility is established, after which such costs are capitalized until the product is available for general release to customers. The capitalized costs generally include a portion of construction costs as well as costs incurred during final product testing prior to full product release. RESULTS OF OPERATIONS The following table presents, for the periods indicated, certain information from the Company's consolidated statements of operations as a percentage of total revenues. The Company's results of operations and balance sheets for 1994 and 1995 have been restated with respect to several software contracts. See Note 2 of Notes to Consolidated Financial Statements for the years ended October 31, 1994, 1995 and 1996. The discussion below addresses the restated financial statements.
NINE MONTHS FISCAL YEAR ENDED JULY ENDED OCTOBER 31, 31, ------------------- ------------- 1994 1995 1996 1996 1997 ----- ----- ----- ----- ----- Revenues: License fees........................... 70.8% 66.8% 66.5% 62.7% 70.0% Client services and other.............. 29.2 33.2 33.5 37.3 30.0 ----- ----- ----- ----- ----- Total revenues....................... 100.0 100.0 100.0 100.0 100.0 ----- ----- ----- ----- ----- Costs and expenses: Cost of license fees................... 18.7 17.4 19.6 18.8 17.2 Cost of client services and other...... 17.7 20.5 26.1 28.0 23.5 Sales and marketing.................... 28.0 23.4 30.4 30.8 21.7 Research and development............... 10.8 10.7 16.0 16.6 12.8 General and administrative............. 19.8 17.0 25.1 24.9 21.2 Special charge......................... -- -- -- -- 0.6 ----- ----- ----- ----- ----- Total costs and expenses............. 95.0 89.0 117.2 119.1 97.0 ----- ----- ----- ----- ----- Operating income (loss).................. 5.0 11.0 (17.2) (19.1) 3.0 ----- ----- ----- ----- ----- Gain on sale of available-for-sale securities.............................. -- -- 3.8 1.6 -- Non-operating income (expense), net...... (0.3) (0.1) (1.7) (0.9) (3.8) ----- ----- ----- ----- ----- Income (loss) before income taxes and minority interest....................... 4.7 10.9 (15.1) (18.4) (0.8) Provision (benefit) for income taxes..... 1.7 3.8 (5.5) (6.7) (0.3) ----- ----- ----- ----- ----- Income (loss) before minority interest... 3.0 7.1 (9.6) (11.7) (0.5) Minority interest........................ 0.1 -- -- -- -- ----- ----- ----- ----- ----- Net income (loss)........................ 3.1% 7.1% (9.6)% (11.7)% (0.5)% ===== ===== ===== ===== =====
Nine Months Ended July 31, 1997 Compared to the Nine Months Ended July 31, 1996 Revenues Total revenues increased 32% to $305.0 million for the first nine months of 1997 over total revenues of $231.4 million recorded during the first nine months of 1996. License Fees. License fees increased 47% to $213.4 million in the first nine months of 1997, compared to $145.2 million in the corresponding prior period, which reflected increasing market acceptance of Version 6.0, which was released for general availability in the fourth quarter of 1996. 21 Client Services. Client services and other revenues increased 6% to $91.6 million for the first nine months of 1997, from $86.2 million for the corresponding period of 1996. The increase in services revenues is attributable to an increase in the number of billable services personnel following significant investments in training in open systems and object skills accompanying the development and release of Version 6.0. Costs and Expenses Cost of License Fees. The principal components of cost of license fees are commissions paid to independent Affiliates, hardware costs, amortization of capitalized software costs and royalties paid to third parties. Cost of license fees for the first nine months of 1997 as a percentage of related license fee revenues decreased to 25% from 30% for the first nine months of 1996. The decrease was primarily attributable to a higher mix of direct channel revenues which have a lower associated cost of license fees than do indirect channel revenues. Cost of Client Services and Other. The principal components of cost of client services and other are salaries and other direct employment costs paid to the Company's client services personnel and amounts paid to independent client services professionals. Cost of client services and other as a percentage of related revenues was 78% for the first nine months of 1997 compared to 75% during the corresponding prior year period. The moderately higher costs in 1997 resulted from the allocation of technical personnel to perform warranty work and from an increase in the number of newly hired technical professionals around the world, in particular those with open systems and object skills. Sales and Marketing. Sales and marketing expenses include salaries, commissions and other direct employment costs of the Company's sales and pre- sales professionals, as well as marketing costs, which include advertising, trade shows and production of sales brochures. Sales and marketing expenses as a percentage of license fee revenues was 31% for the first nine months of 1997 compared to 49% during the corresponding prior year period. The decrease was due to increased productivity of the Company's direct sales organization and decreased marketing expenditures. In anticipation of the Company's introduction of its open systems product, the Company hired a significant number of new sales and pre-sale professionals with skills and experience in the open systems arena. In late 1996 and early 1997, a number of these professionals who had not been significantly productive were either terminated or left the Company. As a result, the Company's sales and marketing expenses decreased in the first nine months of 1997 over the corresponding prior period, even though license fees increased 47% over the same periods. Research and Development. Gross (total) research and development (R&D) expenditures in the first nine months of 1997 increased $3.7 million, or 6%, to $70.8 million in the first nine months of 1997 from $67.1 million in the corresponding prior period. The increase was due to the Company's continuing development of its distributed object computing technology and enhancements of its existing product line. The Company capitalized $31.8 million of software development costs in the first nine months of 1997, as compared to $28.8 million in the first nine months of 1996. The capitalization ratio (capitalized software as a percentage of gross R&D expenditures) in the first nine months of 1996 and 1997 was 43% and 45%, respectively. The following table sets forth R&D expenditures and related capitalized amounts for the first nine months of 1996 and 1997.
NINE MONTHS ENDED PERCENTAGE JULY 31, CHANGE ------------------ ---------- 1997 VS. 1996 1997 1996 -------- -------- ---------- (IN MILLIONS) Gross R&D expenditures........................ $ 67.1 $ 70.8 6% Less amount capitalized....................... (28.8) (31.8) 10% -------- -------- Net R&D costs................................. $ 38.3 $ 39.0 2% ======== ========
22 General and Administrative. General and administrative expenses increased $7.2 million to $64.8 million in the first nine months of 1997 from $57.6 million in the first nine months of 1996 to support the Company's growth. These expenses include increased facilities and personnel costs related to acquisitions and increased costs for computer equipment. Special Charge. The special charge of $1.7 million in the third quarter of the current year relates to the proposed settlement of the Company's class action lawsuits. See Note 3 of Notes to Consolidated Financial Statements for the period ended July 31, 1997. Operating Income (Loss). Operating income of $9.1 million in the first nine months of 1997 improved $53.2 million when compared to the operating loss of ($44.1) million in the corresponding prior period, principally due to increased software license fees and decreased sales and marketing expenses. Non-Operating Income (Expense), Net. Non-operating expense consists primarily of interest expense and fees related to the Company's Existing Credit Facility, Senior Notes, Existing Convertible Note and other long-term obligations, and amortization of the value of the Existing Convertible Note's beneficial conversion feature, less interest income earned on invested cash. Non-operating expense of $11.6 million in the first nine months of 1997 increased $9.6 million over the corresponding prior period due to higher borrowing levels under the Company's Existing Credit Facility, higher interest rates applicable to the Existing Credit Facility and the Senior Notes, interest on the Company's Existing Convertible Note, amortization of the value of the Existing Convertible Note's beneficial conversion feature and reduced interest income related to lower cash balances. Fiscal 1994 Compared to Fiscal 1995 and Fiscal 1996 Revenues Revenues increased 15% from 1994 to 1995. All regions grew in 1995, with particularly strong results in North America and Europe. Total revenues decreased 9% from 1995 to 1996. North America recorded higher revenues in 1996 while the Company's other regions were flat to down. License Fees. License fees increased 9% from 1994 to 1995 and decreased 9% in 1996. In 1995, a small decline in AS/400 revenue was offset by sales of the Company's open systems product, which was released in the second quarter of 1995. Despite the solid revenue growth in North America in 1996, a sharp decline in the European region more than offset North America's favorable results. North American license fees reflected growth in both the AS/400 and UNIX product lines. Client Services. Client services revenues increased 31% in 1995 compared to a decrease of 8% in 1996. The growth from 1994 to 1995 was related to the increase in software revenues. The decline in 1996 was due to lower productivity caused in part by allocation of resources to perform warranty work and investments in training client services professionals. As a percentage of total revenues, client services revenues increased slightly to 34% in 1996 from 33% in 1995. Costs and Expenses Cost of License Fees. Cost of license fees as a percentage of license fee revenues was 26%, 26%, and 30% in 1994, 1995, and 1996, respectively. The increase in 1996 to 30% was primarily due to increased amortization expense of capitalized software development costs and increased warranty costs. Cost of Client Services and Other. Cost of client services and other as a percentage of related revenues was 60%, 62%, and 78% in 1994, 1995, and 1996, respectively. The increase in 1996 is primarily due to lower productivity related to newly hired technical professionals around the world, in particular those with open systems and object skills, allocation of resources to perform warranty work, and investments in training. 23 Sales and Marketing. Sales and marketing expenses as a percentage of license fee revenues was 40%, 35%, and 46% in 1994, 1995, and 1996, respectively. The favorable result from 1994 to 1995 was due to increased productivity of the sales force and programs to reduce fixed expenses which began early in 1995. The higher percentage in 1996 was primarily due to decreased revenue as described above and increased expenditures to establish worldwide marketing programs, and the development of vertical industry groups in support of the Company's continuing move into the UNIX open systems client/server market. In addition, training programs for the sales force resulted in increased expenses during the year. Research and Development. Gross (total) R&D expenditures decreased 4% in 1995 versus an increase of 56% in 1996. The decline in 1995 from 1994 was primarily due to expense reduction programs which began early in 1995 and impacted R&D spending favorably by replacing contracted technical personnel with employed technical personnel. Excluding the costs of contracted technical personnel, remaining R&D expenditures increased 22% in 1995 when compared to 1994 due to increased employee costs for technical personnel. The 1996 increase was attributable to the Company's continuing development of its distributed object computing technology and enhancement of its existing products. The Company capitalized $29.0, $21.6 and $41.9 million of software development costs in fiscal 1994, 1995 and 1996, respectively. The capitalization rate in 1994, 1995, and 1996 was 45%, 35%, and 44%, respectively. The decrease from 1994 to 1995 was driven by a higher proportion of R&D spending incurred to support and maintain existing products and the completion of certain open systems products. The 1996 increase was due to construction and testing activities related to the Company's distributed object computing architecture. The following table sets forth R&D expenditures and related capitalized amounts for the periods indicated.
PERCENTAGE CHANGE FISCAL YEAR ------------ ENDED OCTOBER 31, 1995 1996 ---------------------- VS. VS. 1994 1995 1996 1994 1995 ------ ------ ------ ----- ----- (IN MILLIONS) Gross R&D expenditures.................. $ 64.1 $ 61.8 $ 96.3 (4%) 56% Less amount capitalized................. (29.0) (21.6) (41.9) (25%) 94% ------ ------ ------ Net R&D costs........................... $ 35.1 $ 40.2 $ 54.4 15% 35% ====== ====== ======
General and Administrative. General and administrative expenses declined 1% from 1994 to 1995 and increased 35% from 1995 to 1996. The increase in 1996 over 1995 was primarily due to new facilities to support the Company's worldwide expansion, increased computer equipment rent and a $9.3 million provision for doubtful accounts. The provision for doubtful accounts was $8.0, $3.3, and $9.3 million for 1994, 1995, and 1996, respectively. Operating Income (Loss). Operating income increased from $16.4 million in 1994 to $41.1 million in 1995, principally due to significantly higher total revenues and lower aggregate sales and marketing expenses in 1995. The operating loss of $58.8 million in 1996 resulted primarily from reduced total revenues and increases in every category of costs and expenses. See "-- Overview." Non-operating Expense. In 1995, higher cash balances throughout the year and higher interest rates on invested cash as well as a reduction in interest bearing notes payable resulted in decreased net interest expense. The increase in 1996 is due to higher borrowing levels under the Company's Existing Credit Facility and increased fees and interest rates related to the Company's renegotiation of its borrowing arrangements' terms and conditions in the fourth quarter of 1996. Income Taxes. The Company's effective tax expense (benefit) rate has remained relatively constant at approximately 36% in 1994, 35% in 1995 and (36%) in 1996. The benefit recorded in 1996 represents federal and state tax refunds to be received in 1997 and amounts to be realized through future utilization of net operating loss and tax credit carryforwards. 24 Impact of Inflation. To date, the Company has not experienced any significant effect from inflation. The Company's major expenses have been salaries and related costs incurred principally for product development and enhancements, sales and marketing, and administration. The Company generally has been able to meet increases in costs by increasing prices of its products and services. Foreign Currency Exposures. Sales outside of the United States account for approximately 60% of the Company's total revenue. The Company's international sales (with the exception of certain Latin American countries) are predominately invoiced and paid in foreign currencies. Consequently, the Company's revenues are impacted by the fluctuation of foreign currencies versus the U.S. Dollar. The operating income impact of such fluctuations, however, is offset to the extent expenses of the Company's international operations are incurred and paid for in local currencies. The Company generally minimizes the financial impact of foreign currency exchange transactions through the use of foreign exchange forward contracts, which generally mature within three months of origination (see Note 5 to the Consolidated Financial Statements). QUARTERLY RESULTS The following table contains selected unaudited consolidated financial results by quarter for the last eight fiscal quarters. In management's opinion, this information reflects all adjustments (which consist only of normal recurring adjustments) necessary to present the results fairly when read in conjunction with the Consolidated Financial Statements and related notes included elsewhere in this Prospectus.
THREE MONTHS ENDED ----------------------------------------------------------------------------- OCT. 31, JAN. 31, APR. 30, JULY 31, OCT. 31, JAN. 31, APR. 30, JULY 31, 1995 1996 1996 1996 1996 1997 1997 1997 -------- -------- -------- -------- -------- -------- -------- -------- (IN MILLIONS, EXCEPT PER SHARE DATA) Revenues: License fees........... $91.6 $ 48.1 $ 51.9 $ 45.2 $ 81.5 $ 65.1 $ 65.1 $83.2 Client services and other................. 31.1 28.5 30.6 27.1 27.9 27.1 33.0 31.5 ----- ------ ------ ------ ------ ------ ------ ----- Total revenues.......... 122.7 76.6 82.5 72.3 109.4 92.2 98.1 114.7 Costs and expenses...... 99.4 77.0 92.1 106.4 124.1 96.8 94.2 104.9 ----- ------ ------ ------ ------ ------ ------ ----- Operating income (loss). 23.3 (0.4) (9.6) (34.1) (14.7) (4.6) 3.9 9.8 Gain on sale of available-for-sale securities............. -- -- -- 3.6 9.5 -- -- -- Non-operating income (expense), net......... (0.1) (0.3) (0.5) (1.2) (3.7) (2.1) (4.9) (4.6) ----- ------ ------ ------ ------ ------ ------ ----- Income (loss) before income taxes........... 23.2 (0.7) (10.1) (31.7) (8.9) (6.7) (1.0) 5.2 Provision (benefit) for income taxes........... 7.9 (0.3) (3.7) (11.4) (3.2) (2.4) (0.4) 1.9 ----- ------ ------ ------ ------ ------ ------ ----- Net income (loss)....... $15.3 $ (0.4) $ (6.4) $(20.3) $ (5.7) $ (4.3) $ (0.6) $ 3.3 ===== ====== ====== ====== ====== ====== ====== ===== Earnings (loss) per share.................. $0.35 $(0.01) $(0.15) $(0.47) $(0.13) $(0.10) $(0.01) $0.08 ===== ====== ====== ====== ====== ====== ====== ===== License fees........... 75% 63% 63% 63% 74% 71% 66% 73% Client services and other................. 25 37 37 37 26 29 34 27 ----- ------ ------ ------ ------ ------ ------ ----- Total revenues.......... 100 100 100 100 100 100 100 100 Costs and expenses...... 81 101 111 147 113 105 96 91 ----- ------ ------ ------ ------ ------ ------ ----- Operating income (loss). 19 (1) (11) (47) (13) (5) 4 9 Gain on sale of available-for-sale securities............. -- -- -- 5 9 -- -- -- Non-operating income (expense), net......... 0 0 (1) (2) (3) (2) (5) (4) ----- ------ ------ ------ ------ ------ ------ ----- Income (loss) before income taxes........... 19 (1) (12) (44) (7) (7) (1) 5 Provision (benefit) for income taxes........... 7 0 (4) (16) (2) (2) 0 2 ----- ------ ------ ------ ------ ------ ------ ----- Net income (loss)....... 12% (1%) (8%) (28%) (5%) (5%) (1%) 3% ===== ====== ====== ====== ====== ====== ====== =====
The Company has experienced a seasonal pattern in its operating results, with the fourth quarter typically having the highest revenues and operating income. The Company believes that fourth quarter revenues are positively impacted by the Company's sales compensation plans. This factor, which the Company believes is 25 common in the computer software industry, typically results in first quarter revenues in any year being lower than revenues in the immediately preceding fourth quarter. In addition, the Company's European operations generally provide lower revenues during the summer months as a result of the generally reduced economic activity in Europe during such time. This seasonal factor could materially adversely affect third quarter revenues. The Company has also historically recognized a substantial portion of its revenues from sales booked and shipped in the last month of a quarter. As a result, the magnitude of quarterly fluctuations in license fees may not become evident until late in a particular quarter. If sales forecasted from a specific customer for a particular quarter are not realized in that quarter, the Company is unlikely to be able to generate revenues from alternate sources in time to compensate for the shortfall. As a result, a lost or delayed sale could have a material adverse effect on the Company's quarterly operating results. To the extent that significant sales occur earlier than expected, operating results for subsequent quarters may be adversely affected. The Company has also historically operated with little backlog because its products are generally shipped as orders are received. As a result, revenue from license fees in any quarter is substantially dependent on orders booked and shipped in that quarter. Based upon the factors described above, the Company believes that its quarterly revenues and operating results are likely to vary significantly in the future, that period-to-period comparisons of its results of operations are not necessarily meaningful and that, as a result, such comparisons should not be relied upon as indications of future performance. Moreover, although the Company's revenues have generally increased in recent periods, there can be no assurance that the Company's revenues will grow in future periods, at past rates or at all, or that the Company will be profitable on a quarterly or annual basis. In future periods, the Company's operating results may be below the expectations of stock market analysts and investors. In such event, the price of the Common Stock could be materially adversely affected. Additionally, the Company believes it may incur certain charges in the upcoming quarters which may impact reported earnings. See "Risk Factors--Net Losses; Uncertainty of Future Results; Potential Future Charges." CHANGE IN ACCOUNTING METHOD During the fourth quarter of 1996, the Company changed its method of accounting for reseller agreements so that revenue is recorded at the time of sale to the end user. During the first three quarters of 1996, revenue from reseller agreements had previously been recorded upon execution of the reseller agreement and delivery of the software. The Company believes the change in method is more conservative and provides a more meaningful measurement of its operations. The change in accounting method affected the first three quarters of 1996 as follows:
JANUARY 31, 1996 APRIL 30, 1996 JULY 31, 1996 ------------------- ------------------- ------------------- AS AS AS ORIGINALLY AS ORIGINALLY AS ORIGINALLY AS REPORTED ADJUSTED REPORTED ADJUSTED REPORTED ADJUSTED ---------- -------- ---------- -------- ---------- -------- (IN MILLIONS, EXCEPT PER SHARE DATA) License fees............ $59.3 $ 48.1 $ 71.5 $ 51.9 $ 48.2 $ 45.2 Client services and other.................. 28.5 28.5 30.6 30.6 27.1 27.1 Total revenues........ 87.8 76.6 102.1 82.5 75.3 72.3 Income (loss) before income taxes........... 4.5 (0.7) 0.4 (10.1) (29.9) (31.7) Net income (loss)....... $ 2.9 $ (0.4) $ 0.3 $ (6.4) $(19.1) $(20.3) Earnings (loss) per share.................. $0.07 $(0.01) $ 0.01 $(0.15) $(0.44) $(0.47)
26 LIQUIDITY AND CAPITAL RESOURCES At October 31, 1996 and July 31, 1997, cash and equivalents totaled $38.1 million and $32.1 million, respectively. During 1996, cash and equivalents declined $19.0 million and borrowing under the Company's Existing Credit Facility and Senior Notes on a net basis increased by $42.4 million due to the operating loss, continued significant investment in product development, payment of the Company's annual dividend, which increased 25% over the prior year ($0.10 per share versus $0.08 in the prior year), tax payments related to the Company's profitability in fiscal 1995, acquisitions of affiliates and increased operating expenses in support of the Company's strategic move into the UNIX open systems market. At October 31, 1996, $46.4 million was outstanding under the Company's $50.0 million multi-bank line of credit. At October 31, 1995, there was no outstanding balance. During 1996, the Company made its scheduled $4.0 million repayment on its Senior Notes, leaving $26.0 million outstanding at October 31, 1996. Cash and equivalents decreased $6.0 million from October 31, 1996 to July 31, 1997 and borrowings increased by $11.4 million on a net basis during the same period. Cash usage was primarily for continued significant investment in product development, an operating loss during the first three months of 1997 and interest payments. At July 31, 1997, $46.0 million was outstanding under the Company's Existing Credit Facility and $25.8 million was outstanding on the Company's Senior Notes. Outstanding letters of credit issued against the Existing Credit Facility were $0.6 million and $1.2 million at July 31, 1997 and October 31, 1996, respectively. On March 27, 1997, the Company issued the Existing Convertible Note for $12.0 million to a strategic investor to meet anticipated cash requirements. The Company issued a promissory note and warrants to the Private Investor for $10.0 million in cash on August 27, 1997, of which an aggregate of $1.9 million was paid to reduce principal under the Existing Credit Facility, $1.1 million was paid to reduce principal under the Senior Notes and a total of $1.0 million was paid in fees to the holders of the Existing Credit Facility and the Senior Notes. The remaining $6.0 million is available for working capital requirements. The Company and the Private Investor have agreed to exchange the promissory note and the warrants for 10,000 shares of Series A Preferred Stock and the Private Warrants. See "Description of the Private Offering". Management believes that, based upon its anticipated operating results, the proceeds of this Offering and the Private Offering, together with working capital, will provide sufficient liquidity to meet the Company's capital requirements for the foreseeable future. 27 BUSINESS The Company is a leading provider of cost-effective business enterprise information systems to the industrial sector worldwide. The Company's BPCS (Business Planning and Control System) Client/Server product line provides business process re-engineering and integration of an enterprise's operations, including multi-mode manufacturing processes, supply chain management and global financial solutions. The BPCS Client/Server product line delivers scalability, interoperability and reconfigurability in a comprehensive product suite to meet changing market demands. The distributed object computing architecture ("DOCA") of BPCS Client/Server provides the benefits of next generation technology in conformity with industry standards. The Company markets, sells and services its products to large- and intermediate-sized industrial sector firms primarily through its own world-wide sales organization and, to a much lesser extent, through a network of over 100 independent software companies ("Affiliates"). The Company has strategic relationships with major computer hardware manufacturers, such as IBM, Hewlett Packard and Digital Equipment; supply chain management software companies, such as i2 and Manugistics; and major systems integrators, such as CAP Gemini and the Big Six consulting firms. Effective information technology systems, capable of generating and disseminating critical information throughout an extended enterprise, can be a strategic resource for pursuing competitive advantage, allowing an organization to respond more rapidly to changing market and customer needs. Organizations rely on ERP systems to manage and integrate resources across the entire enterprise, including component procurement, inventory management, manufacturing control, sales management, supply chain management, finance and other functions. The emergence of new computer and communications technologies, the requirements for addressing Year 2000 system issues and new developments in electronic commerce are creating demand for a new generation of ERP applications that offer solutions with expanded functionality that can be implemented faster with less risk and lower cost and that are designed to accommodate future changes to all business processes. The BPCS Client/Server product line consists of over 60 integrated products designed for manufacturing, supply chain management and financial applications, as well as electronic commerce and application development tools. Historically, the Company's software was primarily designed to operate on IBM AS/400 computers. BPCS Client/Server now operates across a broad array of platforms, including Hewlett-Packard HP 9000, IBM AS/400, IBM RISC System/6000 and DEC Alpha servers. The Company's UNIX version of the BPCS Client/Server product line operates on both Informix and Oracle databases. The entire BPCS Client/Server product line is available in English, and a significant portion of the line is available in 19 other languages, including, Chinese (simplified and traditional), Dutch, French, German, Italian, Japanese, Korean, Portuguese, Swedish and Spanish. The BPCS Client/Server product line has been designed to meet localized regulatory policies and statutory requirements of many countries. The Company's BPCS product line was initially developed for the IBM AS/400, and until 1995, most of the Company's revenue was derived from BPCS product licenses and related services sold for the use on the AS/400 platform and, to a lesser extent, earlier IBM midrange computers. In 1993, the Company commenced a major development initiative to create a version of its BPCS product line for the UNIX operating system in an effort to address the non- AS/400 market. In late 1994, the Company began a major effort to re-architect its product line for the client/server, object-based environment. These efforts resulted in the initial release of Version 6.0 in April 1996 and the general release of the Version 6.0 in September 1996. The Company has continued to release upgrades of Version 6.0 which have significantly improved the performance and scalability of the product while continuing to enhance functionality. The Company believes that the most recent release of Version 6.0 offers high levels of functionality and performance and that the flexibility of its DOCA architecture represents a significant advantage when compared to other enterprise software applications. The BPCS Client/Server product line has been installed for more than 8,500 clients and more than 25,000 sites in over 70 countries worldwide, the substantial majority of which comprise the Company's installed base of AS/400 customers. The Company believes that it is the leading vendor of ERP software for customers on the AS/400. The target marketplace for the BPCS Client/Server product line is large- and intermediate-sized industrial sector firms in such diverse industries as pharmaceuticals, automotive, electronics, consumer products, forest products, and food and beverages. The Company's clients include leading firms in those industries. 28 MANAGEMENT EXECUTIVE OFFICERS, DIRECTORS AND KEY MANAGERS The following table sets forth certain information concerning the Executive Officers, Directors and other key managers of the Company as of July 31, 1997.
NAME AGE POSITION - ---- --- -------- Roger E. Covey.......... 42 Chairman of the Board of Directors and Chief Executive Officer Riz Shakir.............. 40 Executive Vice President--Research and Development Joseph J. Skadra........ 55 Vice President--Finance, Chief Financial Officer and Secretary Paul Lavallee........... 43 President--Americas Denis Bignold........... 52 President--Asia Pacific Richard Morgan-Evans.... 50 President--Europe, Middle East, Africa Andrew J. Filipowski.... 45 Director John W. Puth............ 68 Director William N. Weaver, Jr. . 62 Director
Roger E. Covey, founded the Company and since November 1, 1994 has served as Chief Executive Officer and Chairman of the Board of the Company, positions which he also held from its inception in October 1981 until August 1991, at which time he was elected as Vice-Chairman of the Board. From September 1, 1994 until October 31, 1994, he served as the Company's Vice President-- Research and Development. He holds a B.S. degree from the University of Illinois and an M.B.A. and an M.A. in Chinese Art History, both from the University of Chicago. Riz Shakir, joined the Company as Area Vice President--Architecture in June 1994, and currently serves as Executive Vice President--Research and Development. Prior to joining the Company, he was CEO of ASIC, a company specializing in building custom enterprise software solutions based on Object and Distributed Computing technologies. Mr. Shakir holds a B.Sc. degree from Imperial College of Science and Technology in London. Joseph J. Skadra, was appointed Vice President--Finance, Chief Financial Officer and Secretary of the Company on August 24, 1994. He was employed by Figgie International, Inc. from 1970 to 1994, where he held various operating and financial positions at the Vice President level. His last position at Figgie International was Senior Vice President, Finance and Controller. Mr. Skadra holds a B.S.B.A. degree from Case Western Reserve University. Paul Lavallee, was named as President--Americas in November 1996. Mr. Lavallee joined the Company in May 1995 as the General Manager, Eastern United States and became Area Vice President--North America in May 1996. Prior to joining the Company, he was President of the Eastern Subsidiary of Effective Management Systems, Inc., a supplier of ERP Systems and Manufacturing Execution Systems for UNIX and Windows/NT operating systems. Mr. Lavallee was also a founder of ASE Systems (one of the Company's earliest and largest Affiliates), an enterprise systems consulting and implementation firm which was later acquired by the Company. Mr. Lavallee has a B.S. in Accounting from Roger Williams College and an M.B.A. from Providence College. Denis Bignold, was appointed to his current position as President--Asia Pacific in November 1996. Mr. Bignold joined the Company in 1989 to run the Company's Pacific subsidiary and in 1992 became President, SSA Japan. He worked as the Global General Manager for BPCS Plant Maintenance Division in Minnesota from 1993 until late 1994 when he became Vice President of SSA Asia Pacific. Immediately prior to joining the Company he was the General Manager of Computer Power, the largest Australian-owned computer company. 29 Richard Morgan-Evans, has been President--Europe, Middle East and Africa since November 1996. Mr. Morgan-Evans joined the Company in 1987 as a Sales Director and was also a founder/director of SSA Europe. In 1988, he was named SSA Europe's general manager and in October 1994 was appointed Vice President, SSA Europe. Prior to joining the Company, he spent 12 years at IBM in Europe. Andrew J. Filipowski, has been a Director of the Company since July 1996. Mr. Filipowski has been President and Chief Executive Officer of PLATINUM technology, inc., a provider of enterprise infrastructure software products, since that company's founding in April 1987. Mr. Filipowski was a founder of DBMS, Inc., a software products and services company and served as its Chairman, President and Chief Executive Officer from 1979 until March 1987. John W. Puth, has been a Director of the Company since his appointment in April 1988. Since December 1987, Mr. Puth has served as President of J. W. Puth Associates, an industrial consulting firm. From January 1983 through December 1987, Mr. Puth was Chairman and President of Clevite Industries, Inc., a manufacturer of industrial products. From October 1975 until January 1983, Mr. Puth was President and Chief Executive Officer of Vapor Corporation. Mr. Puth is a director of Allied Products Corporation, Brockway, Standard Holdings Corporation, A.M. Castle & Co., L.B. Foster Company, Lindberg Corporation and USFreightways Corporation, as well as several privately-held corporations. He holds a B.S. degree from Lehigh University. William N. Weaver, Jr., has been a Director of the Company since December 1986 and its Assistant Secretary since March 1985. Mr. Weaver is a member of the law firm of Sachnoff & Weaver, Ltd., an Illinois professional corporation, which is counsel to the Company. Mr. Weaver has practiced law in the State of Illinois since 1964 and serves as a director of USFreightways Corporation, as well as several privately-held corporations. He holds an A.B. degree from Oberlin College and a J.D. from John Marshall Law School. The Company intends to name a Chief Operating Officer. The Private Investor has the right to designate either one new member of the Company's Board of Directors or one observer who may attend board meetings. See "Underwriting." The Company also intends to recruit a new, independent director. 30 DESCRIPTION OF NOTES The Notes will be issued pursuant to an indenture (the "Indenture") to be dated as of September , 1997 between the Company and Harris Trust and Savings Bank, as trustee (the "Trustee"). The terms of the Notes will include those stated in the Indenture and those made a part of the Indenture by reference to the Trust Indenture Act of 1939, as in effect on the date of the Indenture (the "Trust Indenture Act"). The Notes will be subject to all such terms, and prospective investors are referred to the Indenture and the Trust Indenture Act for a statement of such terms. The statements under this section relating to the Notes and the Indenture are summaries of certain terms applicable to the Notes and the Indenture, and do not purport to be complete and are qualified in their entirety by express reference to the Indenture, a copy of which is filed as an exhibit to the Registration Statement of which this Prospectus is a part, and the Trust Indenture Act. Capitalized terms used herein and not otherwise defined shall have the meanings specified in the Indenture. As used in this section, the term "Company" refers only to System Software Associates, Inc., and not to any of its subsidiaries. GENERAL The Notes will be general unsecured obligations of the Company, subordinate in right of payment to certain other obligations of the Company, and convertible into Common Stock of the Company as described below under the heading "--Conversion of Notes." The Notes will be limited to $100,000,000 aggregate principal amount ($115,000,000 aggregate principal amount if the Underwriters' over-allotment option is exercised in full). The Notes will bear interest from the date of initial issuance, at the rate per annum shown on the cover page of this Prospectus, payable semiannually on March 15 and September 15 of each year to Holders of record at the close of business on March 1 and September 1 next preceding each such interest payment date, unless redeemed, repurchased or converted earlier pursuant to the terms of the Indenture. The first interest payment date will be March 15, 1998. Interest will be computed on the basis of a 360-day year of twelve 30-day months. Principal of, and premium, if any, and interest on the Notes will be payable through the Depository (as defined below) or at the office of the paying agent, which will initially be the Trustee. Interest payments for Notes that are not held through the Depository will be mailed to each Holder's registered address. The Notes will mature on September 15, 2002. The Notes will initially be represented by a Global Security registered in the name of a nominee of The Depository Trust Company, as Depository. See "-- Book Entry, Delivery and Form." The Notes will be issued only in registered form, without coupons, in denominations of $1,000 and integral multiples thereof. Notes may be presented for conversion, exchange or registration of transfer at the office or agency maintained by the Company, which shall initially be the corporate trust office of the Trustee. No service charge is payable for any registration of transfer or exchange of Notes; provided, however, the Company may require payment by a Holder of a sum sufficient to cover any tax, assessment or other governmental charge payable in connection with any such transfer or exchange. Prior to this Offering, there has been no public trading market for the Notes. Although the Company has applied to list the Notes on the Nasdaq SmallCap Market, there can be no assurance that an active public market for the Notes will develop or, if a public market develops, that the market price will exceed the public offering price set forth on the cover page of this Prospectus. If an active public trading market for the Notes does not develop, the market prices and liquidity of the Notes may be adversely affected. Because the Notes are convertible into Common Stock, the prices at which the Notes trade in the market will likely be affected by the market price of the Company's Common Stock. CONVERSION OF NOTES The Holder of any Note will have the right, exercisable at any time, subject to prior redemption or repurchase, to convert the principal amount of such Note (or any portion thereof that is an integral multiple 31 of $1,000) into shares of Common Stock of the Company at the conversion price set forth on the cover page of this Prospectus, subject to adjustment as described below (the "Conversion Price"). The right to convert a Note called for redemption will terminate at the close of business on the Business Day immediately preceding the redemption date for such Note (unless the Company shall default in making the redemption payment when due). A Note for which a Holder has exercised the option of such Holder to require the Company to purchase the Note upon a Change in Control (as defined herein) may be converted only if such Holder's repurchase notice is withdrawn by a written notice of withdrawal delivered to the paying agent prior to the close of business on the repurchase date in accordance with the terms of the Indenture. Except as provided below, upon conversion, no payment or adjustment will be made for accrued interest on a converted Note or for dividends or distributions on shares of Common Stock issued upon conversion of a Note. If any Holder surrenders a Note for conversion between the record date for the payment of an installment of interest and the Business Day next preceding the following interest payment date, then, notwithstanding such conversion, the interest payable on such interest payment date will be paid to the registered Holder of such Note on such record date. In such event, such Note, when surrendered for conversion, must be accompanied by delivery of a check or draft payable in an amount equal to the interest payable on such interest payment date on the principal amount of the Note so converted. If a Note or portion thereof is called for redemption and the Holder elects to convert such Note after it has been called for redemption, the Holder will be entitled to receive interest on such Note for the period from the last interest payment date to the date of conversion. No fractional shares will be issued upon conversion of Notes. The Company will pay an amount of cash based on the market price of the Common Stock on the trading day prior to the date of conversion for any such fractional share interest. The initial Conversion Price is subject to adjustment (under formulae set forth in the Indenture) upon the occurrence of certain events, including: (i) the issuance of shares of Common Stock as a dividend or distribution on the Common Stock; (ii) the issuance to all holders of Common Stock of rights or warrants to subscribe for or purchase Common Stock (or securities convertible into Common Stock) at a price per share less than the then Current Market Price per share (as defined in the Indenture); (iii) the subdivision or combination of the outstanding Common Stock; (iv) the distribution to all holders of Common Stock of shares of capital stock of the Company (other than Common Stock), evidences of indebtedness or other assets (including securities, but excluding those rights, warrants, dividends and distributions referred to above and dividends and distributions paid exclusively in cash); (v) dividends or other distributions consisting exclusively of cash (excluding any cash portion of distributions referred to in clause (iv)) to all holders of Common Stock to the extent that such distributions, combined together with (A) all other such all-cash distributions made within the preceding 12 months in respect of which no adjustment has been made plus (B) any cash and the fair market value of other consideration payable in respect of any tender offers by the Company for Common Stock concluded within the preceding 12 months in respect of which no adjustment has been made, exceeds 10% of the Company's market capitalization (being the product of the then Current Market Price of the Common Stock times the number of shares of Common Stock then outstanding) on the record date for such distribution; (vi) the purchase of Common Stock pursuant to a tender offer made by the Company or any of its subsidiaries to the extent that the same involves an aggregate consideration that, together with (X) any cash and the fair market value of any other consideration payable in any other tender offer by the Company or any of its subsidiaries for Common Stock expiring within 12 months preceding such tender offer in respect of which no adjustment has been made plus (Y) the aggregate amount of any such all-cash distributions referred to in clause (v) above to all holders of Common Stock within the 12 months preceding the expiration of such tender offer in respect of which no adjustments have been made, exceeds 10% of the Company's market capitalization on the expiration of such tender offer; and (vii) payment in respect of a tender offer or exchange offer by a person other than the Company or any subsidiary and in which, as of the closing date of the offer, the Board of Directors is not recommending rejection of the offer. The adjustment referred to in clause (vii) above will only be made if (i) the tender offer or exchange offer is for an amount which increases that person's ownership of Common Stock to more than 20% of the total shares of Common Stock outstanding and (ii) the cash and value of any other consideration included in such payment per share of Common Stock exceeds the 32 Current Market Price per share of Common Stock on the business day next succeeding the last date on which tenders or exchanges may be made pursuant to such tender or exchange offer. The adjustment referred to in clause (vii) above will not be made, however, if, as of the closing of the offer, the offering documents with respect to such offer disclose a plan or an intention to cause the Company to engage in a consolidation or merger of the Company or a sale of the Company's assets, as an entirety or substantially as an entirety. In the event of a distribution which would trigger an adjustment referred to in clauses (iv) or (v) where the consideration so distributed applicable to one share of Common Stock is equal to or greater than the Current Market Price of the Common Stock on the applicable record date, the Company may, instead of making any adjustment in the Conversion Price, make proper provision so that each Holder of a Note who converts such Note (or any portion thereof) after the record date for such distribution and prior to the expiration or redemption of such rights shall be entitled to receive upon such conversion, in addition to the shares of Common Stock issuable upon conversion, the appropriate amount of such consideration. No adjustment of the Conversion Price will be made until cumulative adjustments to the Conversion Price as last adjusted amount to 1% or more. In the case of (i) any reclassification or change of the Common Stock or (ii) a consolidation, merger or combination involving the Company or a sale or conveyance to another person of the property and assets of the Company as an entirety or substantially as an entirety, in each case as a result of which holders of Common Stock shall be entitled to receive stock, other securities, other property or assets (including cash) with respect to or in exchange for such Common Stock, the holders of the Notes then outstanding will be entitled thereafter to convert such Notes into the kind and amount of shares of stock, other securities or other property or assets which they would have owned or been entitled to receive upon such reclassification, change, consolidation, merger, combination, sale or conveyance had such Notes been converted into Common Stock immediately prior to such reclassification, change, consolidation, merger, combination, sale or conveyance assuming that a holder of Notes would not have exercised any rights of election as to the stock, other securities or other property or assets receivable in connection therewith. The Company from time to time may, to the extent permitted by law, reduce the Conversion Price of the Notes by any amount for any period of at least 30 days, in which case the Company shall give at least 15 days' notice of such decrease, if the Board of Directors has made a determination that such decrease would be in the best interests of the Company, which determination shall be conclusive. The Company may, at its option, make such reductions in the Conversion Price, in addition to those set forth above, as the Board of Directors deems advisable to avoid or diminish any income tax to holders of Common Stock resulting from any dividend or distribution of stock (or rights to acquire stock) or from any event treated as such for income tax purposes. REDEMPTION OF NOTES AT THE OPTION OF THE COMPANY The Notes may not be redeemed at the Company's option prior to September 20, 2000. Thereafter, the Notes may be redeemed at the option of the Company, in whole or in part, at any time and from time to time, at the redemption prices (expressed in percentages of principal amount) set forth below, together with accrued interest to, but excluding, the date fixed for redemption. If redeemed during the twelve-month period beginning September 20,
YEAR PERCENTAGE ---- ---------- 2000........................................................... 2001 and thereafter............................................
Notice of redemption will be mailed at least 15, but not more than 60, days prior to the redemption date to each Holder of Notes to be redeemed at such Holder's registered address. Interest shall cease to accrue on Notes or portions thereof called for redemption on and after the redemption date. 33 If fewer than all the Notes are to be redeemed, the Trustee will select Notes (in principal amounts of $1,000 or integral multiples thereof) for redemption by lot or by a method the Trustee considers fair and appropriate; provided that such method is not prohibited by any stock exchange or market on which the Notes are then listed. If any Note is to be redeemed in part only, a new Note or Notes in principal amount equal to the unredeemed principal portion thereof will be issued. REDEMPTION OF NOTES AT THE OPTION OF HOLDERS UPON A CHANGE IN CONTROL In the event of a Change in Control, each Holder will have the option, subject to the terms and conditions of the Indenture, to require the Company to purchase all or any part (provided that the principal amount must be $1,000 or an integral multiple thereof) of the Holder's Notes, on the date (the "Repurchase Date") that is 30 days after the date the Company or the Trustee gives Holders of Notes notice (the "Company Notice") of the occurrence of the Change in Control, for a purchase price equal to 100% of the principal amount thereof, plus accrued and unpaid interest to, but excluding, the Repurchase Date. The Company covenants that, prior to the making of the notice to Holders provided for below, but in any event within 30 days following any Change in Control, the Company shall (i) repay in full all indebtedness under the Company's New Credit Facility or offer to repay in full all such indebtedness and to repay the indebtedness of each lender that has accepted such offer or (ii) obtain the requisite consent under the Company's New Credit Facility to permit the repurchase of the Notes pursuant to this covenant. The Company shall first comply with the covenant in the preceding sentence before it shall be required to repurchase the Notes pursuant to this covenant. The Company also covenants not to make any payment to the holders of the Series A Preferred Stock arising due to a Change in Control until expiration of the period of time in which a Holder may exercise its repurchase rights. Within 10 days after any Change in Control requiring the Company to deliver the notice to Holders provided for below, the Company shall so notify the Trustee and the lenders under the Company's New Credit Facility. On or before the 15th day after the occurrence of the Change in Control, the Company or, at the written request of the Company on or before the 10th day after receipt of such request, the Trustee, shall mail or cause to be mailed to each Holder the Company Notice, setting forth, among other things, the terms and conditions of, and the procedures required for exercise of, the Holder's right to require the purchase of such Holder's Notes. To exercise the repurchase right, a Holder must deliver written notice of such exercise to the Trustee on or before the 30th day after the date of the Company Notice, specifying the Notes with respect to which the right of repurchase is being exercised. Such notice of exercise may be withdrawn by the Holder by a written notice of withdrawal delivered to the paying agent at any time prior to the close of business on the Repurchase Date. A "Change in Control" shall be deemed to have occurred at such time after the original issuance of the Notes as (a) any Person (other than the Company, any subsidiary of the Company, or any entity Controlled (as defined herein) by the foregoing, any current officer of the Company, or any employee benefit plan of the Company or any such subsidiary) is or becomes the beneficial owner, directly or indirectly, through a purchase or other acquisition transaction or series of transactions (other than a merger or consolidation involving the Company), of shares of capital stock of the Company entitling such Person to exercise in excess of 35% of the total voting power of all shares of capital stock of the Company entitled to vote generally in the election of directors; (b) there occurs any consolidation of the Company with, or merger of the Company into, any other Person, any merger of another Person into the Company, or any sale or transfer of the assets of the Company as, or substantially as, an entirety to another Person (other than (i) any such transaction pursuant to which the holders of the Common Stock immediately prior to such transaction have, directly or indirectly, shares of capital stock of the continuing or surviving corporation immediately after such transaction which entitle such holders to exercise in excess of 50% of the total voting power of all shares 34 of capital stock of the continuing or surviving corporation entitled to vote generally in the election of directors and (ii) any merger (1) which does not result in any reclassification, conversion, exchange or cancellation of outstanding shares of Common Stock or (2) which is effected solely to change the jurisdiction of incorporation of the Company and results in a reclassification, conversion or exchange of outstanding shares of Common Stock solely into shares of common stock and separate series of common stock carrying substantially the same relative rights as the Common Stock); or (c) a change in the Board of Directors of the Company in which the individuals who constituted the Board of Directors of the Company at the beginning of the two-year period immediately preceding such change (together with any other director whose election by the Board of Directors of the Company or whose nomination for election by the stockholders of the Company was approved by a vote of at least a majority of the directors then in office either who were directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the directors then in office. The Holders' redemption right upon the occurrence of a Change in Control could, in certain circumstances, make more difficult or discourage a potential takeover of the Company, and, thus, removal of incumbent management. See "Risk Factors--Anti-Takeover Considerations." The Change in Control redemption right, however, is not the result of management's knowledge of any specific effort to accumulate shares of Common Stock or to obtain control of the Company by means of a merger, tender offer, solicitation or otherwise. Instead, the Change in Control purchase feature is a standard term contained in other similar debt offerings and the terms of such feature have resulted from negotiations between the Company and the Underwriters. The Indenture does not permit the Company's Board of Directors to waive the Company's obligation to purchase Notes at the option of a Holder in the event of a Change in Control. The Company could, however, in the future, enter into certain transactions, including highly leveraged recapitalizations, that would not constitute a Change in Control and would, therefore, not provide the Holders with the protection of requiring the Company to repurchase the Notes. The right to require the Company to repurchase Notes as a result of the occurrence of a Change in Control could create an event of default under then- existing Senior Indebtedness of the Company, as a result of which any repurchase could, absent a waiver or prior payment in full of the Senior Indebtedness, be blocked by the subordination provisions of the Notes. See "-- Subordination of Notes." Failure by the Company to repurchase the Notes when required will result in an Event of Default with respect to the Notes whether or not such repurchase is prohibited by the subordination provisions described below. SUBORDINATION OF NOTES The Notes will be subordinate and junior in right of payment to the extent set forth in the Indenture to all existing and future Senior Indebtedness of the Company, whether outstanding on the date of the Indenture or thereafter incurred. Upon (i) any payments or distribution of assets of the Company in any dissolution, winding-up, liquidation or reorganization of the Company (whether in an insolvency or bankruptcy proceeding or otherwise) or (ii) the acceleration of the Notes because of an Event of Default (which acceleration has not been rescinded in accordance with the terms of the Indenture), all amounts due or to become due upon all Senior Indebtedness or to the Trustee shall first be paid in full before any payment is made on or in respect of the Notes. Upon the occurrence of an Event of Default with respect to the failure to pay any principal of, premium, if any, or interest on any Senior Indebtedness when due (whether upon stated maturity, acceleration or otherwise), no payment or distribution shall be made to the Trustee or any Holder of Notes in respect of the Notes unless and until such default shall have been cured or waived or shall have ceased to exist. Upon the occurrence of a non-payment Event of Default with respect to certain Designated Senior Indebtedness that 35 permits the holders of such Designated Senior Indebtedness to accelerate its maturity, and following receipt by the Trustee of a written notice of default (a "Payment Blockage Notice") from a representative of the holders of such Designated Senior Indebtedness or the Company, no payment or distribution may be made to the Trustee or any Holder of Notes in respect of the Notes for a period of up to 179 days from the date of such Payment Blockage Notice if the maturity of such Designated Senior Indebtedness has not been accelerated, unless and until such default shall be cured or waived or shall have ceased to exist. The subordination provisions described herein will not prevent the occurrence of any Event of Default (as defined in the Indenture). As a result of these subordination provisions, in the event of the insolvency of the Company, Holders of the Notes may recover less ratably than general creditors of the Company. "Senior Indebtedness" means the principal of, premium, if any, and interest (including all interest accruing subsequent to the commencement of any bankruptcy or similar proceeding, whether or not a claim for post-petition interest is allowable as a claim in any such proceeding) on or in connection with, and all fees, costs, expenses and other amounts accrued or due on or in connection with, Indebtedness (as defined below) of the Company, whether outstanding on the date of this Indenture or thereafter created, incurred, assumed, guaranteed or in effect guaranteed by the Company (including all deferrals, renewals, extensions or refundings of, or amendments, modifications or supplements to, the foregoing), unless in the case of any particular Indebtedness the instrument creating or evidencing the same or the assumption or guarantee thereof expressly provides that such Indebtedness shall not be senior in right of payment to the Notes or expressly provides that such Indebtedness is pari passu with or "junior" to the Notes. Notwithstanding the foregoing, the term Senior Indebtedness shall not include any Indebtedness of the Company to any subsidiary of the Company or amounts payable with respect to the Series A Preferred Stock. "Indebtedness" means (a) the principal of and premium, if any, and interest on, and fees, costs, enforcement expenses and other reimbursement or indemnity obligations in respect of, all indebtedness or obligations of the Company for money borrowed (including purchase money obligations with original maturities in excess of one year), (b) all reimbursement obligations and other liabilities (contingent or otherwise) of the Company with respect to letters of credit, bank guarantees or bankers' acceptances, (c) all obligations and liabilities (contingent or otherwise) in respect of capitalized lease obligations of the Company or obligations under any lease or related document in which the Company is obligated to purchase leased property, (d) all obligations of the Company (contingent or otherwise) with respect to an interest rate or other swap, cap or collar agreement or other similar instrument or agreement or foreign currency hedge, exchange, purchase or similar instrument or agreement, (e) all direct or indirect guaranties or similar agreements by the Company in respect of indebtedness, obligations or liabilities of another Person of the kind described in clauses (a) through (d), (f) any indebtedness or other obligations described in clauses (a) through (d) secured by any mortgage, pledge, lien or other encumbrance existing on property which is owned or held by the Company and (g) any and all deferrals, renewals, extensions and refundings of, or amendments, modifications or supplements to, any indebtedness, obligation or liability of the kind described in clauses (a) through (f). Upon completion of this Offering, it is estimated that the principal amount of Senior Indebtedness outstanding will be approximately $15.1 million. See "Use of Proceeds." Under the terms of the Series A Preferred Stock, the Company may incur up to approximately $40.0 million of additional Senior Indebtedness without the consent of the holders of the Series A Preferred Stock. The Indenture will not limit the amount of additional indebtedness, including Senior Indebtedness, which the Company can create, incur, assume or guarantee, nor will the Indenture limit the amount of indebtedness which any Subsidiary can incur. MERGER AND CONSOLIDATION The Company may consolidate with or merge with or into any other corporation, and the Company may transfer its property and assets substantially as an entirety to any person, provided: (i) either the Company is the resulting or surviving corporation, or the successor corporation is a domestic corporation and the successor expressly assumes, by supplemental indenture executed and delivered to the Trustee, payment of the principal 36 of, premium, if any, and interest on the Notes and performance and observance of every obligation of the Company under the Indenture, and (ii) immediately before and immediately after giving effect to such transaction, no default or Event of Default shall have occurred and be continuing. COVENANTS The Indenture will contain limited covenants restricting the activities of the Company. The Indenture will provide that the Company shall not adopt any plan of liquidation which provides for, contemplates or the effectuation of which is preceded by, (i) the sale, lease, conveyance or other disposition of all or substantially all of the assets of the Company otherwise than substantially as an entirety and (ii) the distribution of all or substantially all the proceeds of such sale, lease, conveyance or other disposition and of the remaining assets of the Company, unless the Company makes provisions for satisfaction of the Company's obligation to pay principal and interest on the Notes. The Indenture will also provide that, without the consent of at least a majority in principal amount of the Notes then outstanding, the Company shall not amend, modify or alter the terms of the Private Warrants or the Series A Preferred Stock in any way that will (i) increase the amount of dividends payable on the Series A Preferred Stock or advance the dates on which such dividends are payable, (ii) advance the redemption date of the Series A Preferred Stock to a date prior to the maturity date of the Notes, or (iii) otherwise be materially adverse to the interests of the Holders of the Notes as holders of debt securities of the Company. The Indenture will also prohibit the optional redemption of the Series A Preferred Stock by the Company prior to the maturity of the Notes unless (i) such payments are made by the Company with the proceeds from the issuance of (y) Indebtedness subordinate to the Notes and bearing interest at a rate equal to or lower than the dividend rate on the Series A Preferred Stock and having a maturity date not earlier than the maturity date of the Notes or (z) equity securities accruing dividends at a rate equal to or lower than the Series A Preferred Stock and not redeemable prior to the maturity date of the Notes and (ii) the average trading price of the Common Stock during the 60 trading days immediately preceding the second business day prior to the date of the repurchase is at least 130% of the Conversion Price. EVENTS OF DEFAULT; NOTICE AND WAIVER If an Event of Default (other than an Event of Default resulting from bankruptcy, insolvency or reorganization) occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the Notes then outstanding may declare all unpaid principal of and accrued interest to the date of acceleration on the Notes then outstanding to be due and payable immediately; except that in the case of an Event of Default resulting from certain events of bankruptcy, insolvency or reorganization, all unpaid principal of and accrued interest on the Notes then outstanding shall become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Holders of Notes. Subject to certain limitations, Holders of a majority in principal amount of the then outstanding Notes may direct the Trustee in its exercise of any trust or power conferred on it. The Holders of a majority in aggregate principal amount of the Notes then outstanding may on behalf of the Holders of all Notes waive any past Default or Event of Default and its consequences (except a Default or an Event of Default in the payment of principal or interest on the Notes or arising with respect to the conversion rights of the Holders). The term "Event of Default" when used in the Indenture will mean any one of the following: (i) failure of the Company to pay interest for 30 days or principal or premium, if any, when due; (ii) failure of the Company to comply with any of its other agreements contained in the Notes or the Indenture for 30 days after notice, other than the failure of the Company to comply with (x) the restrictions on liquidation, consolidation, merger or transfer of all or substantially all of its assets, (y) the restrictions on modifying the terms of the Private Warrants or Series A Preferred Stock without the consent of the requisite Holders, or redeeming the Series A Preferred Stock, or (z) the provisions regarding the conversion of the Notes, each of which shall constitute a default upon such notice without the passage of time; (iii) default by the Company or 37 any Significant Subsidiary with respect to its obligation to pay principal of or interest on Indebtedness aggregating more than $10.0 million, or the acceleration of such Indebtedness of the Company under the terms of the instruments evidencing such Indebtedness, which has not been withdrawn within 10 days from the date of such default; (iv) redemption of the Series A Preferred Stock (other than as permitted in the manner described under "-- Covenants" above); (v) the entry by a court of competent jurisdiction of a judgment, order or decree against the Company or any Significant Subsidiary in an aggregate amount (excluding amounts covered by insurance) in excess of $1,000,000, which judgment, order or decree remains undischarged, unstayed and unsatisfied for a period of 60 consecutive days; and (vi) certain events of bankruptcy, insolvency or reorganization of the Company or any Significant Subsidiary. The Indenture will provide that the Trustee shall, within 90 days after the Trustee has knowledge of the occurrence of any default (the term "default" to include the events specified above without grace or notice) known to it, give to the Holders of Notes notice of such default, unless such default shall have been cured or waived before the giving of such notice; provided that, the Trustee may withhold from Holders notice of a default or an Event of Default (except a default or an Event of Default in the payment of principal, premium, if any, or interest) if the Trustee determines in good faith that the withholding of such notice is in the interest of the Holders of the Notes. The Indenture will provide that no Holder of a Note may pursue any remedy under the Indenture against the Company (except actions for payment of overdue principal, premium, if any, or interest or for the conversion of the Notes), unless (i) the Holder gives to the Trustee written notice of a continuing Event of Default, (ii) the Holders of at least 25% in principal amount of the outstanding Notes make a written request to the Trustee to pursue the remedy, (iii) such Holder or Holders offer to the Trustee indemnity satisfactory to the Trustee against any loss, liability or expense, (iv) the Trustee does not comply with the request within 60 days after receipt of the request and the offer of indemnity, and (v) the Trustee shall not have received a contrary direction from the Holders of a majority in principal amount of the outstanding Notes. The Indenture will provide that the Company shall deliver to the Trustee within 90 days after the end of each fiscal year of the Company, an Officer's Certificate as to the signer's knowledge of the Company's compliance with all conditions and covenants on its part contained in the Indenture and stating whether or not the signer knows of any default or Event of Default. If such signer knows of such a default or Event of Default, such certificate shall describe the default or Event of Default and the efforts to remedy the same. SATISFACTION AND DISCHARGE The Indenture will be discharged and canceled upon payment or conversion of all the Notes outstanding. At any time when all the Notes shall have become due and payable, or are by their terms to become due and payable within one year or are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption, the Company may terminate all of its obligations under the Indenture, other than its obligation to pay the principal, premium, if any, and interest on the Notes and certain other obligations (including its obligation to deliver shares of Common Stock upon conversion of any Notes), by depositing with the Trustee monies sufficient to pay at maturity or upon redemption all the principal, premium, if any, and interest due on the Notes on such date of maturity or redemption, and all other sums payable by the Company under the Indenture. AMENDMENT AND WAIVER Subject to the exceptions described below, the Company and the Trustee may supplement the Indenture or the Notes with the consent of the Holders of a majority in principal amount of the outstanding Notes. The Holders of a majority in principal amount of the Notes then outstanding may (a) waive compliance in a particular instance by the Company with any provision of the Indenture or the Notes or (b) waive any past default or Event of Default under the Indenture and its consequences, except (i) a default in the payment of interest or premium, if any, on, or the principal of, the Notes, (ii) a failure by the Company to convert any Notes into Common Stock, (iii) a default in the payment of redemption or repurchase price or (iv) a default 38 in respect of a covenant or provisions which require the consent of the Holders of all Notes then outstanding. See "--Events of Default; Notice and Waiver." Notwithstanding the foregoing, without the consent of the Holder of each Note affected thereby, the Company and the Trustee may not supplement the Indenture or the Notes to (i) extend the fixed maturity of any Note, or reduce the rate or extend the time of payment of interest thereon, or reduce the principal amount thereof or premium, if any, thereon, or reduce any amount payable on redemption thereof, or impair the right of any Holder of a Note to institute suit for the payment thereof, or make the principal thereof or interest or premium, if any, thereon payable in any coin or currency other than that provided in the Notes, or modify the provisions of the Indenture with respect to the subordination of the Notes in a manner adverse to the Holders of the Notes in any material respect, or change the obligation of the Company to repurchase any Note upon the occurrence of a Change in Control in a manner adverse to the Holder of Notes, or impair the right to convert the Notes into Common Stock in any material respect, or (ii) reduce the percentage of Notes required to consent to any supplemental indenture. BOOK ENTRY, DELIVERY AND FORM The Notes will be issued in denominations of $1,000 and integral multiples thereof and will be issued only in fully registered form. Except under the circumstances described below, the Notes will be issued in whole or in part in the form of a Global Security that will be deposited with, or on behalf of, The Depository Trust Company, New York, New York ("DTC"), or such other depository as may be subsequently designated (the "Depository"), and registered in the name of a nominee of the Depository. So long as the Depository, or its nominee, is the registered owner of a Global Security, such Depository or such nominee, as the case may be, will be considered the sole owner of the Notes represented by such Global Security for all purposes under the Indenture. Payments of principal of and premium, if any, and any interest on the Notes represented by a Global Security will be made to the Depository or its nominee, as the case may be, as the holder of such Global Security. Except as set forth below, owners of beneficial interests in a Global Security will not be entitled to have any of the individual Notes represented by such Global Security registered in their names, will not receive or be entitled to receive physical delivery of any such Notes and will not be considered the Holders thereof under the Indenture, including, without limitation, for purposes of consenting to any amendment thereof or supplement thereto. The laws of some jurisdictions require that certain purchasers of securities take physical delivery of such securities in definitive form. Such limits and such laws may impair the ability to transfer beneficial interests in a Global Security. If the Depository is at any time unwilling or unable to continue as depository and a successor depository is not appointed, the Company will issue individual certificated Notes in exchange for the Global Security in an aggregate principal amount equal to the principal amount of the Global Security. In such instance, an owner of a Note represented by a Global Security will be entitled to physical delivery of individual certificated Notes for the Note represented by such Global Security and to have such certificated Notes registered in such owner's name. Individual certificated Notes so issued will be issued as registered Notes in denominations of $1,000 and integral multiples thereof. Any person having a beneficial interest in Notes evidenced by a Global Security shall, as permitted by the terms of the Indenture, be entitled to have its interest in the Global Security be exchanged for a certificated Note upon written request to the Trustee and in accordance with the standing instructions and procedures existing between the Trustee and the Depository. DTC has confirmed to the Company, the Trustee and the Underwriters the following information: 1. DTC will act as securities depository for the Global Security. The Notes will be issued as fully-registered securities registered in the name of Cede & Co. (DTC's partnership nominee). One fully-registered Global Security will be issued for the Notes, in the aggregate principal amount of such issue, and will be deposited with DTC. 2. DTC is a limited-purpose trust company organized under the New York Banking Law, a "banking organization" within the meaning of the New York Banking Law, a member of the Federal reserve system, a "clearing corporation" within the meaning of the New York Uniform Commercial Code, and a 39 "clearing agency" registered pursuant to the provisions of Section 17A of the Exchange Act. DTC holds securities that its participants ("Participants") deposit with DTC. DTC also facilitates the settlement among Participants of securities transactions, such as transfers and pledges in deposited securities through electronic computerized/book-entry changes in Participants' accounts, thereby eliminating the need for physical movement of securities certificates. Direct Participants include securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is owned by a number of its Direct Participants and by the New York Stock Exchange, Inc., the American Stock Exchange, Inc., and the National Association of Securities Dealers, Inc. Access to the DTC system is also available to others such as securities brokers and dealers, banks, and trust companies that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ("Indirect Participants"). The rules applicable to DTC and its Participants are on file with the Commission. 3. Purchases of Notes under the DTC system must be made by or through Direct Participants, which will receive a credit for the Notes on DTC's records. The ownership interest of each actual purchaser of each Note ("Beneficial Owners") is in turn to be recorded on the Direct and Indirect Participants' records. Beneficial Owners will not receive written confirmation from DTC of their purchase, but Beneficial Owners are expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Notes are to be accomplished by entries made on the books of Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in Notes, except in the event that use of the book-entry system for the Notes is discontinued. 4. To facilitate subsequent transfers, all Notes deposited by Participants with DTC are registered in the name of DTC's partnership nominee, Cede & Co. The deposit of Notes with DTC and their registration in the name of Cede & Co. effect no change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Notes; DTC's records reflect only the identity of the Direct Participants to whose accounts such Notes are credited, which may or may not be the Beneficial Owners. The Participants will remain responsible for keeping account of their holdings on behalf of their customers. 5. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. 6. Redemption notices shall be sent to Cede & Co. If less than all of the Notes are being redeemed, DTC's practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed. 7. Neither DTC nor Cede & Co. will consent or vote with respect to the Notes. Under its usual procedures, DTC mails an Omnibus Proxy to the Company as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.'s consenting or voting rights to those Direct Participants to whose accounts the Notes are credited on the record date (identified in a listing attached to the Omnibus Proxy). 8. Principal and interest payments on the Notes will be made to DTC. DTC's practice is to credit Direct Participants' accounts on the date on which interest is payable in accordance with their respective holdings shown on DTC's records unless DTC has reason to believe that it will not receive payment on such date. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in "street name", and will be the responsibility of such Participant and not of DTC, the Underwriter or the Company, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal and interest to DTC is the responsibility of the Company or the Trustee, disbursement of such payments to Direct Participants shall be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners shall be the responsibility of Direct and Indirect Participants. 40 9. DTC may discontinue providing its services as securities depository with respect to the Notes at any time by giving reasonable notice to the Company and the Trustee. Under such circumstances, in the event that a successor securities depository is not obtained, certificated Notes are required to be printed and delivered. 10. The Company may decide to discontinue use of the system of book-entry transfers through DTC (or a successor securities depository). In that event, certificated Notes will be printed and delivered. The information in this section concerning DTC and DTC's book-entry system has been obtained from sources that the Company believes to be reliable, but the Company takes no responsibility for the accuracy thereof. None of the Company, the Trustee or any agent for payment on or registration of transfer or exchange of the Global Security will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial interests in such Global Security or for maintaining, supervising or reviewing any records relating to such beneficial interests. CONCERNING THE TRUSTEE Harris Trust and Savings Bank will be the Trustee under the Indenture. The Indenture will contain certain limitations on the rights of the Trustee, should it become a creditor of the Company, to obtain payment of claims in certain cases, or to realize on certain property received in respect of any such claim as security or otherwise. The Trustee will be permitted to engage in other transactions; provided, however, if it acquires any conflicting interest (as defined in the Indenture) and there exists a default with respect to the Notes, it must eliminate such conflict or resign. The Holders of a majority in principal amount of all outstanding Notes will have the right to direct the time, method and place of conducting any proceeding for exercising any remedy or power available to the Trustee, provided that such direction does not conflict with any rule of law or with the Indenture. The Indenture provides that in case an Event of Default shall occur and be continuing, the Trustee will be required, in the exercise of its power, to use the degree of care of a prudent person in the conduct of his own affairs. Subject to such provisions, the Trustee will be under no obligation to exercise any of its rights or powers under the Indenture at the request of any of the Holders of Notes, unless such Holders shall have offered to the Trustee indemnity satisfactory to the Trustee against any loss, liability, expense or fee. 41 DESCRIPTION OF THE PRIVATE OFFERING On August 29, 1997, the Company agreed to issue, pursuant to the Securities Purchase Agreement, 10,000 shares of Series A Preferred Stock and 600,000 Private Warrants to the Private Investor in the Private Offering. The Series A Preferred Stock and Private Warrants will be issued to the Private Investor in exchange for a promissory note and warrants issued to the Private Investor for $10.0 million in cash on August 27, 1997. The Private Offering will close upon satisfaction of certain closing conditions but in no event later than the closing of this Offering. The statements under this section are summaries of certain terms applicable to the Series A Preferred Stock and the Private Warrants, and do not purport to be complete and are qualified in their entirety by express reference to the Securities Purchase Agreement, including the exhibits thereto, a copy of which is filed as an exhibit to the Registration Statement of which this Prospectus is a part. Capitalized terms used herein shall have the same meanings specified in the Securities Purchase Agreement. SERIES A PREFERRED STOCK Liquidation Preference and Dividends The 10,000 shares of Series A Preferred Stock have an initial liquidation preference of $1,000 per share, increasing to $3,500 per share on or after the earliest of (i) August 22, 2003, (ii) a Change in Control and (iii) certain bankruptcy events (such event, a "Trigger Event") (such liquidation preference as from time to time in effect, the "Liquidation Price"). The Series A Preferred Stock accrue dividends, payable quarterly in arrears, at an annual rate of 12% of the Liquidation Price per share, which rate increases to 14% of the Liquidation Price per share upon a Trigger Event. The dividend rate will increase by 4% per annum upon the occurrence and during the continuance of any payment default or certain other material defaults under the Securities Purchase Agreement. Conversion of Series A Preferred Stock Each share of Series A Preferred Stock is convertible at the holder's option at any time into 80.4 shares of Common Stock (subject to proportional and broad-based weighted average anti-dilution). Redemption of Series A Preferred Stock The Series A Preferred Stock may be redeemed at the option of the holders thereof at any time (i) on or after August 31, 2003 or (ii) following the occurrence and continuance of a Redemption Event (as defined below) at a redemption price equal to the greater of $1,000 per share, plus accrued and unpaid dividends, or the amount that such holder would have received had such holder converted the Series A Preferred Stock into Common Stock immediately prior to the liquidation of the Company. The Series A Preferred Stock may be redeemed by the Company at any time after the occurrence of a Trigger Event at a redemption price equal to $3,500 per share, plus accrued and unpaid dividends. Series A Preferred Stock Redemption Events Upon the occurrence of certain events, including, without limitation, payment defaults, covenant defaults in the Securities Purchase Agreement, cross defaults to acceleration of other material indebtedness, bankruptcy and a Change in Control (each, a "Redemption Event"), the holders of the Series A Preferred Stock may require the Company to redeem their shares of Series A Preferred Stock at a redemption price equal to the greater of $1,000 per share, plus accrued and unpaid dividends or the amount that such holder would have received had such holder converted the Series A Preferred Stock into Common Stock immediately prior to the liquidation of the Company. Series A Preferred Stock Covenants For so long as at least 2,500 shares of Series A Preferred Stock are outstanding, the Company must comply with various covenants, including, without limitation, maintenance of fixed charge coverage ratios on a rolling four-quarter basis and total debt to capital, and restrictions on mergers, consolidations, sales of assets, liens, payment of dividends and other distributions to, and redemptions of, other classes of equity and 42 limitations on the issuance of additional debt (other than the Notes, up to $40.0 million in additional Senior Indebtedness and certain other exceptions). Transfer The Series A Preferred Stock cannot be transferred by the Private Investor until September 1, 1998. Voting Rights of Series A Preferred Stock The Series A Preferred Stock will not have any special voting rights, other than as provided by law. PRIVATE WARRANTS Pursuant to the Securities Purchase Agreement, the Company will issue to the Private Investor the Private Warrants to purchase 600,000 shares of Common Stock. Each holder of a Private Warrant is entitled to purchase shares of Common Stock at an exercise price equal to $15.125 per share. The Private Warrants are exercisable at any time until August 22, 2007, but the Private Warrants and the Common Stock issuable upon the exercise thereof cannot be transferred by the Private Investor until September 1, 1998. Following such anniversary, the Private Warrants and underlying Common Stock are immediately transferable separately from the Series A Preferred Stock. The Private Warrants contain provisions that protect the holders thereof against dilution by adjustment of the exercise price and the number of shares subject to such Private Warrants in certain events, such as the issuance or sale of equity securities by the Company at a price lower than the per share exercise price of the Private Warrants, stock and cash dividends, stock splits, mergers, a sale of all or substantially all of the Company's assets at less than market values, and other customary anti-dilution events (including, without limitation, the issuance of shares upon conversion of the Existing Convertible Note). REGISTRATION RIGHTS The Company has agreed to register the Common Stock issuable upon conversion of the Series A Preferred Stock, the Private Warrants and the Common Stock issuable upon exercise of the Private Warrants on or before September 1, 1998. 43 DESCRIPTION OF COMMON STOCK COMMON STOCK The holders of the Common Stock are entitled to one vote per share on all matters voted on by stockholders, including election of directors, and, except under certain circumstances, for the voting rights of the Series A Preferred Stock, and as otherwise required by law or provided in any resolution adopted by the Board of Directors with respect to any other series of preferred stock, the holders of shares of Common Stock exclusively possess all voting power. The Certificate of Incorporation does not provide for cumulative voting in the election of directors, which means that the holders of a majority of the shares entitled to vote at a meeting at which a quorum is present can elect all of the directors then standing for election. Subject to any preferential rights of the Series A Preferred Stock or any other outstanding series of preferred stock, the holders of Common Stock are entitled to such dividends as may be declared from time to time by the Board of Directors from funds available therefor, and upon liquidation are entitled to receive pro rata all assets of the Company available for distribution to such holders. See "Price Range of Common Stock and Dividend Policy." The holders of Common Stock have no preemptive rights and no rights to convert their shares of Common Stock into any other security. All outstanding shares of Common Stock are fully paid and nonassessable, and the shares of Common Stock issuable upon conversion of the Notes will be, upon issuance, fully paid and nonassessable. As of July 31, 1997, 42,652,000 shares of Common Stock were issued and outstanding and were held by approximately 451 holders of record. RIGHTS PLAN On April 26, 1988, the Board of Directors of the Company declared a dividend distribution of one right (a "Right") for each outstanding share of Common Stock (collectively, the "Voting Stock") payable to holders of record as of the close of business on and generally to shares of Common Stock issuable under the Company's stock option plans. One right will also attach to each share of Common Stock issued by the Company subsequent to May 5, 1988 and prior to the Distribution Date (as defined below). Each Right entitles the registered holder to purchase, after the Distribution Date, from the Company one share of Common Stock at a price of $47.00 (the "Purchase Price"). The description and terms of the Rights are set forth in a Rights Agreement, dated as of May 3, 1988 (the "Rights Agreement"), between the Company and The First National Bank of Chicago, as Rights Agent (the "Rights Agent"), as amended and supplemented. The Rights Plan is set forth in full in the Rights Agreement and the description thereof herein is qualified in its entirety by reference to such Rights Agreement. In general, the Rights become exercisable or transferable only upon the occurrence of certain events related to changes in ownership of the Voting Stock. Each Right entitles its holder to purchase from the Company one share of Common Stock, at a purchase price of $47.00 per Share, subject to adjustment. The Rights will separate from the Voting Stock and become exercisable or transferable on a distribution date (the "Distribution Date"), which will occur on the earlier of (i) a public announcement that a person or group of affiliated or associated persons (an "Acquiring Person") has acquired beneficial ownership of securities representing 20% or more of the Voting Stock of the Company or (ii) 10 days following the commencement of (or a public announcement of an intention to make) a tender or exchange offer that would result in a person or group of related persons becoming the beneficial owner of at least 30% of the outstanding Voting Stock. Upon the occurrence of these or certain other events related to changes in the ownership of the Voting Stock, each holder of a Right (other than those owned by the Acquiring Person or persons purchasing from the Acquiring Person) would be entitled to purchase shares of the Voting Stock, or an acquiring corporation's common stock, having a market value equal to two times the exercise value of the Right. The Rights expire on the earliest of (i) May 3, 1998, (ii) consummation of a merger transaction with a person or group who acquired Voting Stock pursuant to transaction approved by a majority of the disinterested members of the Company's Board of Directors, or (iii) redemption of the Rights. Subject to certain conditions, the Rights may be redeemed by the Company's Board of Directors at any time at a price of $0.01 per Right. The Rights are not currently exercisable and trade together with the shares of Voting Stock associated therewith. 44 CERTAIN FEDERAL INCOME TAX CONSIDERATIONS The following is a general discussion of certain United States federal income tax considerations relevant to holders of the Notes. This discussion is based upon the Internal Revenue Code of 1986, as amended (the "Code"), Treasury Regulations, Internal Revenue Service ("IRS") rulings and judicial decisions now in effect, all of which are subject to change (possibly with retroactive effect) or different interpretations. This discussion does not purport to deal with all aspects of federal income taxation that may be relevant to a particular investor's decision to purchase the Notes, and it is not intended to be wholly applicable to all categories of investors, some of which, such as dealers in securities, banks, insurance companies, tax-exempt organizations and non-United States persons, may be subject to special rules. In addition, this discussion is limited to persons that purchase the Notes in this Offering and hold the Notes as a "capital asset" within the meaning of Section 1221 of the Code. ALL PROSPECTIVE PURCHASERS OF THE NOTES ARE ADVISED TO CONSULT THEIR OWN TAX ADVISORS REGARDING THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE NOTES AND THE COMMON STOCK ISSUABLE UPON CONVERSION OF THE NOTES. CONVERSION OF NOTES INTO COMMON STOCK In general, no gain or loss will be recognized for federal income tax purposes on a conversion of the Notes into shares of Common Stock. However, cash paid in lieu of a fractional share of Common Stock will likely result in taxable gain (or loss), which will be capital gain (or loss), to the extent that the amount of such cash exceeds (or is exceeded by) the portion of the adjusted basis of the Note allocable to such fractional share. The adjusted basis of shares of Common Stock received on conversion will equal the adjusted basis of the Note converted, reduced by the portion of adjusted basis allocated to any fractional share of Common Stock exchanged for cash. The holding period of an investor in the Common Stock received on conversion will include the period during which the converted Notes were held. The Conversion Price of the Notes is subject to adjustment under certain circumstances. See "Description of Notes--Conversion of Notes." Section 305 of the Code and the Treasury Regulations issued thereunder may treat the holders of the Notes as having received a constructive distribution, resulting in ordinary income (subject to a possible dividends received deduction in the case of corporate holders) to the extent of the Company's current earnings and profits as of the end of the taxable year to which the constructive distribution relates and/or accumulated earnings and profits, if and to the extent that certain adjustments in the Conversion Price that may occur in limited circumstances (particularly an adjustment to reflect a taxable dividend to holders of Common Stock) increase the proportionate interest of a holder of Notes in the fully diluted Common Stock, whether or not such holder ever exercises its conversion privilege. Moreover, if there is not a full adjustment to the Conversion Price of the Notes to reflect a stock dividend or other event increasing the proportionate interest of the holders of outstanding Common Stock in the assets or earnings and profits of the Company, then such increase in the proportionate interest of the holders of the Common Stock generally will be treated as a distribution to such holders, taxable as ordinary income (subject to a possible dividends received deduction in the case of corporate holders) to the extent of the Company's current earnings and profits as of the end of the taxable year to which the constructive distribution relates and/or accumulated earnings and profit. MARKET DISCOUNT Investors acquiring Notes pursuant to this Prospectus should note that the resale of those Notes may be adversely affected by the market discount provisions of Sections 1276 through 1278 of the Code. Under the market discount rules, if a holder of a Note purchases it at market discount (i.e., at a price below its stated redemption price at maturity) in excess of a statutorily-defined de minimis amount and thereafter recognizes 45 gain upon a disposition or retirement of the Note, then the lesser of the gain recognized or the portion of the market discount that accrued on a ratable basis (or, if elected, on a constant interest rate basis) generally will be treated as ordinary income at the time of the disposition. Moreover, any market discount on a Note may be taxable to an investor to the extent of appreciation at the time of certain otherwise non-taxable transactions (e.g. gifts). Any accrued market discount not previously taken into income prior to a conversion of a Note, however, is likely to carry over to the Common Stock received on conversion and be treated as ordinary income upon a subsequent disposition of such Common Stock to the extent of any gain recognized on such disposition. In addition, absent an election to include market discount in income as it accrues, a holder of a market discount debt instrument may be required to defer a portion of any interest expense that otherwise may be deductible on any indebtedness incurred or maintained to purchase or carry such debt instrument until the holder disposes of the debt instrument in a taxable transaction. SALE, EXCHANGE OR RETIREMENT OF NOTES Each holder of Notes generally will recognize gain or loss upon the sale, exchange, redemption, repurchase, retirement or other disposition of those Notes measured by the difference (if any) between (i) the amount of cash and the fair market value of any property received (except to the extent that such cash or other property is attributable to the payment of accrued interest not previously included in income, which amount will be taxable as ordinary income) and (ii) the holder's adjusted tax basis in those Notes (including any market discount previously included in income by the holder). Each holder of Common Stock into which the Notes are converted, in general, will recognize gain or loss upon the sale, exchange, redemption, or other disposition of the Common Stock measured under rules similar to those described in the preceding sentence for the Notes. Special rules may apply to redemptions of Common Stock which may result in different treatment. Any such gain or losses recognized on the sale, exchange, redemption, repurchase, retirement or other disposition of a Note or share of a Common Stock should be capital gain or loss (except as discussed under "--Market Discount" above), and would be long-term capital gain or loss if the Note or the Common Stock had been held for more than one year at the time of the sale or exchange. Under recently enacted legislation, the maximum regular individual U.S. federal income tax rate on capital gains is 20% for property held for more than 18 months and 28% for property held for more than one year but not more than 18 months. Capital gains on the sale of property held for one year or less are subject to U.S. federal income tax at ordinary income rates. An investor's initial basis in a Note will be the cash price paid therefor. BACK-UP WITHHOLDING A holder of Notes or Common Stock may be subject to "back-up withholding" from a reportable payment at a rate of 31% if, among other things, (i) the holder fails to furnish a social security number or other taxpayer identification number ("TIN") to the Company certified under penalties of perjury within a reasonable time after the request therefor; (ii) the IRS notified the Company that the TIN furnished by the holder is incorrect; (iii) the IRS notifies the Company that backup withholding should be commenced because the holder has failed to properly report interest or dividends; or (iv) when required to do so, the holder fails to certify under penalties of perjury that such holder is not subject to backup withholding or that the TIN provided to the Company is correct. Reportable payments include interest payments, dividend payments and, under certain circumstances, principal payments on the Notes. A holder who does not provide the Company with its correct TIN also may be subject to penalties imposed by the IRS. Any amount withheld from a payment to a holder under the back-up withholding rules is creditable against the holder's federal income tax liability, provided the required information is furnished to the IRS. Back-up withholding will not apply, however, with respect to payments made to certain holders, including corporations, tax-exempt organizations and certain foreign persons, provided their exemption from back-up withholding is properly established. The Company will report to the holders of Notes and Common Stock and to the IRS the amount of any "reportable payments" for each calendar year and the amount of tax withheld, if any, with respect to such payments. 46 UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement, the Underwriters named below (the "Underwriters"), through their representatives, Hambrecht & Quist LLC and Lazard Freres & Co. LLC (the "Representatives"), have severally agreed to purchase from the Company the following respective principal amounts of Notes set forth opposite their names below at the public offering price less the underwriting discounts and commissions set forth on the cover page of this Prospectus:
PRINCIPAL AMOUNT OF UNDERWRITER NOTES ----------- ------------ Hambrecht & Quist LLC........................................ $ Lazard Freres & Co. LLC...................................... ------------ Total.................................................... $100,000,000 ============
The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent, including the absence of any material adverse change in the Company's business and the receipt of certain certificates, opinions and letters from the Company and its counsel and independent accountants. The nature of the Underwriters' obligations is such that they are committed to purchase all Notes offered hereby if any Notes are purchased. The Underwriters propose to offer the Notes directly to the public at the public offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession not in excess of % of such offering price. The Underwriters may allow, and such dealers may reallow, a concession not in excess of % of the public offering price to certain other dealers. After the public offering of the Notes, the offering price and other selling terms may be changed by the Representatives. The Company has granted to the Underwriters an option, exercisable no later than 30 days after the date of this Prospectus, to purchase up to an additional $15.0 million aggregate principal amount of Notes at the public offering price, less the underwriting discount, set forth on the cover page of this Prospectus. To the extent that the Underwriters exercise this option, each of the Underwriters will have a firm commitment to purchase approximately the same percentage of additional Notes which the principal amount of Notes to be purchased by it shown in the above table bears to the principal amount of Notes offered hereby. The Company will be obligated, pursuant to the option, to sell such Notes to the Underwriters to the extent the option is exercised. The Underwriters may exercise such option only to cover over-allotments made in connection with the sale of Notes offered hereby. The offering of the Notes is made for delivery when, as and if accepted by the Underwriters and subject to prior sale and to withdrawal, cancellation or modification of this Offering without notice. The Underwriters reserve the right to reject any order for the purchase of Notes in whole or in part. The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act, and to contribute to payments the Underwriters may be required to make in respect thereof. The Company has agreed not to offer, sell or otherwise dispose of any shares of Common Stock, or securities convertible into or exchangeable for such stock, for a period of at least 90 days after the date of this Prospectus, without the prior written consent of the Representatives, excepting the securities issued in the Private Offering or the grant or exercise of options pursuant to the Company's existing stock option and 47 purchase plans. The directors and executive officers of the Company have agreed not to offer, sell or otherwise dispose of any shares of Common Stock for a period of at least 90 days after the effective date of the Registration Statement without the prior written consent of the Representatives. The Notes are a new issue of securities with no established trading market. The Company has applied to list the Notes on the Nasdaq SmallCap Market. The Company has been advised by the Underwriters that the Underwriters plan to make a market in the Notes and Common Stock as permitted by applicable laws and regulations. The Underwriters are not obligated to make such a market and may discontinue any market trading at any time without notice. No assurance can be given therefore as to the liquidity of or trading markets for the Notes. Until the distribution of the Notes is completed, rules of the Commission may limit the ability of the Underwriters and certain selling group members to bid for and purchase the Notes and the Common Stock. As an exception to these rules, the Representatives are permitted to engage in certain transactions that stabilize the price of the Notes and the Common Stock. Such transactions consist of bids or purchases for the purpose of pegging, fixing or maintaining the price of the Notes and the Common Stock. If the Underwriters create a short position in the Notes in connection with this Offering, i.e., if they sell a greater aggregate principal amount of Notes than is set forth on the cover page of this Prospectus, the Representatives may reduce that short position by purchasing Notes in the open market. The Representatives may also elect to reduce any short position by exercising all or part of the over-allotment option described above. The Representatives may also impose a penalty bid on certain Underwriters and selling group members. This means that if the Representatives purchase Notes in the open market to reduce the Underwriters' short position or to stabilize the price of the Notes, they may reclaim the amount of the selling concession from the Underwriters and selling group members who sold those Notes as part of this Offering. In general, purchases of a security for the purpose of stabilization or to reduce a short position could cause the price of the security to be higher than it might be in the absence of such purchases. The imposition of a penalty bid might also have an effect on the price of a security to the extent that it were to discourage resales of the security. Neither the Company nor any of the Underwriters makes any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the Notes or the Common Stock. In addition, neither the Company nor any of the Underwriters makes any representation that the Representatives will engage in such transactions or that such transactions, once commenced, will not be discontinued without notice. The Underwriters and dealers may engage in passive market making transactions in the Common Stock in accordance with Rule 103 of Regulation M promulgated by the Commission. Passive market making may stabilize or maintain the market price of the Common Stock and, consequently, the Notes above independent market levels. Underwriters and dealers are not required to engage in passive market making and may end passive market making activities at any time. In consideration of certain financial advisory services, the Company has agreed to sell to Hambrecht & Quist LLC, one of the Representatives, for nominal consideration, warrants to purchase from the Company up to 750,000 shares of Common Stock (the "Representative's Warrants"). The Representative's Warrants are initially exercisable at a price equal to the closing bid price of the Common Stock on the trading day that the Notes offered hereby are priced, and may be exercised for a period of five years commencing on the first anniversary of the issuance of such Warrants. The Representative's Warrants provide for adjustment in the number of shares of Common Stock issuable upon the exercise thereof and in the exercise price of the Representative's Warrants as a result of certain events, including subdivisions and combinations of the Common Stock. The Company has agreed to file a shelf registration statement prior to the first anniversary of the issuance of the Representative's Warrants to register the shares of Common Stock issuable upon exercise of the Representative's Warrants. 48 On or prior to the closing of this Offering, the Company will issue to the Private Investor, an investment entity affiliated with Hambrecht & Quist LLC, 10,000 shares of Series A Preferred Stock and the Private Warrants in exchange for a promissory note and warrants issued to the Private Investor for $10.0 million in cash on August 27, 1997. See "Description of the Private Offering." In connection with the Private Offering, the Company has agreed, if requested by the Private Investor, to nominate for election to the Company's Board of Directors one person designated by the Private Investor. In the event the Private Investor elects not to exercise such right, the Private Investor may designate a person to receive all notices of meetings of the Company's Board of Directors and all other correspondence and communications sent by the Company to its Board of Directors and to attend all such meetings of the Company's Board of Directors. As of the date hereof, the Private Investor has not exercised its right to designate a member to serve on the Board of Directors of the Company. The Company has granted Hambrecht & Quist LLC a right of first refusal to provide investment banking services to the Company for a period of three years. 49 INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The Company incorporates herein by reference the following documents it has previously filed with the Commission (File No. 0-15322) pursuant to the Exchange Act: (a) the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1996, as amended; (b) the Company's Quarterly Reports on Form 10-Q for the fiscal quarters ended January 31, 1997 and April 30, 1997; (c) the Company's Proxy Statement for the Annual Meeting of Stockholders held on May 28, 1997; (d) the Company's Current Reports on Form 8-K filed November 8, 1996, November 15, 1996, November 20, 1996, December 12, 1996, January 10, 1997, May 1, 1997, July 15, 1997, August 14, 1997 and August 21, 1997; (e) the description of the Company's Common Stock contained in the Company's Registration Statement on Form 8-A, declared effective February 12, 1987; and (f) the description of the Company's Common Stock Purchase Rights contained in the Company's Registration Statement on Form 8-A, filed May 18, 1988. All reports and other documents filed by the Company pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to the termination of this Offering shall also be deemed to be incorporated by reference herein and to be a part hereof from the date of filing of such reports and documents. Any statement incorporated or deemed to be incorporated herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that any statement contained herein or in any other subsequently filed document which also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. Neither the Company nor the Underwriters will update this Prospectus for events occurring subsequent to the date of this Prospectus. The Company hereby undertakes to provide without charge to each person to whom a copy of this Prospectus has been delivered, upon written or oral request of such person, a copy of any or all of the foregoing documents incorporated herein by reference (other than exhibits to such documents, unless such exhibits are specifically incorporated by reference into such documents). Requests for such documents should be made to the attention of the Investor Relations Department at the principal executive offices of the Company, 500 West Madison, 32nd Floor, Chicago, Illinois 60661 or by telephone at (312) 641-2900. 50 LEGAL MATTERS The validity of the Notes will be passed upon for the Company by Sachnoff & Weaver, Ltd. ("S&W") and for the Underwriters by Willkie Farr & Gallagher. William N. Weaver, Jr., a member of the Board of Directors, is a member of S&W. S&W has acted and continues to act as counsel to the Company with regard to certain matters and has received legal fees for services rendered in connection therewith. In consideration for Mr. Weaver's services as a director, the Company has granted S&W options to purchase a total of 92,250 shares of the Company's Common Stock. In addition to his pro rata interest in the shares underlying such options, Mr. Weaver owns 300,000 shares of the Company's Common Stock. EXPERTS The consolidated financial statements of the Company as of October 31, 1996 and for the year then ended have been included herein in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein and upon the authority of said firm as experts in accounting and auditing. The consolidated financial statements as of October 31, 1995 and for the two years then ended, included in this Prospectus have been so included in reliance upon the report of Price Waterhouse LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. 51 INDEX TO FINANCIAL STATEMENTS
PAGE ---- YEARS ENDED OCTOBER 31, 1994, 1995 and 1996 Independent Auditors' Report (KPMG Peat Marwick LLP)..................... F-2 Report of Independent Accountants (Price Waterhouse LLP)................. F-3 Consolidated Balance Sheets as of October 31, 1995, as restated, and 1996.................................................................... F-4 Consolidated Statements of Operations for the years ended October 31, 1994 and 1995, as restated, and 1996.................................... F-6 Consolidated Statements of Cash Flows for the years ended October 31, 1994 and 1995, as restated, and 1996.................................... F-7 Consolidated Statements of Changes in Stockholders' Equity for the years ended October 31, 1994 and 1995, as restated, and 1996.................. F-8 Notes to Consolidated Financial Statements............................... F-9 NINE MONTHS ENDED JULY 31, 1996 and 1997 Consolidated Balance Sheets as of October 31, 1996 and July 31, 1997 (unaudited)............................................................. F-22 Consolidated Statements of Operations for the nine month periods ended July 31, 1996 and 1997 (unaudited)...................................... F-24 Consolidated Statements of Cash Flows for the nine month periods ended July 31, 1996 and 1997 (unaudited)...................................... F-25 Notes to Consolidated Financial Statements............................... F-26
F-1 INDEPENDENT AUDITORS' REPORT The Board of Directors System Software Associates, Inc. We have audited the accompanying consolidated balance sheet of System Software Associates, Inc. and its subsidiaries as of October 31, 1996, and the related consolidated statements of operations, stockholders' equity, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted accounting standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of System Software Associates, Inc. and its subsidiaries as of October 31, 1996, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP Chicago, Illinois January 7, 1997, except as to Notes 6, 7, and 11 which are as of January 29, 1997 F-2 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of System Software Associates, Inc. In our opinion, the accompanying consolidated financial statements listed in the accompanying index present fairly, after the restatement described in Note 2, in all material respects, the financial position of System Software Associates, Inc. and its subsidiaries at October 31, 1995, and the results of their operations and their cash flows for each of the two years in the period ended October 31, 1995, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. We have not audited the consolidated financial statements of System Software Associates, Inc. and its subsidiaries for any period subsequent to October 31, 1995. /s/ Price Waterhouse LLP Chicago, Illinois January 7, 1997, except as to Notes 6, 7 and 11 which are as of January 29, 1997 F-3 SYSTEM SOFTWARE ASSOCIATES, INC. CONSOLIDATED BALANCE SHEETS
OCTOBER 31, --------------- 1995 ASSETS RESTATED 1996 ------ -------- ------ (IN MILLIONS) Current Assets: Cash and equivalents......................................... $ 57.1 $ 38.1 Accounts receivable, less allowance for doubtful accounts of $12.5 and $16.5............................................. 184.6 163.6 Income taxes receivable...................................... -- 4.4 Deferred income taxes........................................ 7.0 10.1 Prepaid expenses and other current assets.................... 21.3 25.5 ------ ------ Total current assets....................................... 270.0 241.7 ------ ------ Property and Equipment: Data processing equipment.................................... 30.9 37.3 Furniture and office equipment............................... 14.1 18.7 Leasehold improvements....................................... 7.8 9.0 Transportation equipment..................................... 2.8 2.3 ------ ------ 55.6 67.3 Less--Accumulated depreciation and amortization.............. 31.3 39.5 ------ ------ Total property and equipment............................... 24.3 27.8 ------ ------ Other Assets: Software costs, less accumulated amortization of $41.1 and $61.1....................................................... 59.0 82.8 Cost in excess of net assets of acquired businesses, less accumulated amortization of $6.0 and $8.7................... 18.2 22.8 Deferred income taxes........................................ -- 1.2 Investments in associated companies.......................... 16.5 2.2 Miscellaneous................................................ 5.2 5.9 ------ ------ Total other assets......................................... 98.9 114.9 ------ ------ Total Assets............................................... $393.2 $384.4 ====== ======
See accompanying Notes to Consolidated Financial Statements. F-4 SYSTEM SOFTWARE ASSOCIATES, INC. CONSOLIDATED BALANCE SHEETS
OCTOBER 31, ----------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY 1995 RESTATED 1996 ------------------------------------ ------------------ ---------------- (IN MILLIONS, EXCEPT SHARE DATA) Current Liabilities: Current maturities of senior notes payable................................ $ 4.0 $ -- Accrued commissions and royalties....... 28.7 26.3 Accounts payable and other accrued liabilities............................ 46.9 62.5 Accrued compensation and related benefits............................... 23.5 23.8 Deferred revenue........................ 61.7 58.8 Income taxes payable.................... 12.9 -- ---------------- ---------------- Total current liabilities............. 177.7 171.4 ---------------- ---------------- Long-Term Obligations..................... 33.9 75.1 ---------------- ---------------- Deferred Revenue.......................... 27.3 27.7 ---------------- ---------------- Deferred Income Taxes..................... 9.9 -- ---------------- ---------------- Minority Interest in Consolidated Subsidiaries............................. 1.0 -- ---------------- ---------------- Stockholders' Equity: Preferred stock, $.01 par value, 100,000 shares authorized, none issued or outstanding............................ -- -- Common stock, $.0033 par value, 60,000,000 shares authorized, 42,094,500 and 42,577,000 shares issued................................. 0.1 0.1 Capital in excess of par value.......... 26.1 32.8 Retained earnings....................... 115.5 78.5 Unrealized gain on available-for-sale securities............................. 2.5 -- Cumulative translation adjustment....... (0.8) (1.2) ---------------- ---------------- Total stockholders' equity............ 143.4 110.2 Commitments and Contingencies (Note 11). -- -- ---------------- ---------------- Total Liabilities and Stockholders' Equity............................... $ 393.2 $ 384.4 ================ ================
See accompanying Notes to Consolidated Financial Statements. F-5 SYSTEM SOFTWARE ASSOCIATES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED OCTOBER 31, ------------------------------------------ 1994 1995 RESTATED RESTATED 1996 ------------- ------------- ------------ (IN MILLIONS, EXCEPT PER SHARE DATA) Revenues: License fees..................... $ 229.7 $ 250.0 $ 226.7 Client services and other........ 94.6 124.1 114.1 ------------ ------------ ------------ Total revenues................. 324.3 374.1 340.8 ------------ ------------ ------------ Costs and expenses: Cost of license fees............. 60.7 64.9 66.9 Cost of client services and other........................... 57.2 76.8 89.0 Sales and marketing.............. 90.8 87.6 103.8 Research and development......... 35.1 40.2 54.4 General and administrative....... 64.1 63.5 85.5 ------------ ------------ ------------ Total costs and expenses....... 307.9 333.0 399.6 ------------ ------------ ------------ Operating income (loss)............ 16.4 41.1 (58.8) ------------ ------------ ------------ Gain on sale of available-for-sale securities........................ -- -- 13.1 Non-operating income (expense), net............................... (1.0) (0.2) (5.7) ------------ ------------ ------------ Income (loss) before income taxes and minority interest............. 15.4 40.9 (51.4) Provision (benefit) for income taxes............................. 5.6 14.2 (18.6) ------------ ------------ ------------ Income (loss) before minority interest.......................... 9.8 26.7 (32.8) Minority interest.................. 0.2 (0.1) -- ------------ ------------ ------------ Net income (loss).................. $ 10.0 $ 26.6 $ (32.8) ============ ============ ============ Earnings (loss) per share.......... $ 0.25 $ 0.63 $ (0.76) ============ ============ ============ Weighted average common and equivalent shares outstanding..... 40.5 42.2 43.0 ============ ============ ============
See accompanying Notes to Consolidated Financial Statements. F-6 SYSTEM SOFTWARE ASSOCIATES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED OCTOBER 31, ------------------------ 1994 1995 RESTATED RESTATED 1996 -------- -------- ------ (IN MILLIONS) Cash Flows From Operating Activities: Net income (loss).................................. $ 10.0 $ 26.6 $(32.8) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization of property and equipment....................................... 8.4 7.9 9.2 Amortization of other assets..................... 11.0 17.3 23.0 Provision for doubtful accounts.................. 8.0 3.3 9.3 Gain on sale of available-for-sale securities.... -- -- (13.1) Deferred income taxes............................ 4.1 (2.6) (14.2) Deferred revenue................................. 28.2 7.3 (2.5) Minority interest................................ (0.2) 0.1 -- Changes in operating assets and liabilities, net of acquisitions: Accounts receivable............................ (23.4) (32.3) 12.6 Prepaid expenses and other current assets...... (0.2) (0.3) (2.1) Miscellaneous assets........................... -- (3.3) 2.4 Accrued commissions and royalties.............. (5.7) 0.3 (6.8) Accounts payable and other accrued liabilities. 16.8 1.0 8.0 Accrued compensation and related benefits...... 5.6 1.8 -- Income taxes................................... (4.2) 12.2 (14.2) ------ ------ ------ Net cash provided by (used in) operating activities.................................. 58.4 39.3 (21.2) ------ ------ ------ Cash Flows From Investing Activities: Purchases of property and equipment................ (14.7) (5.3) (11.4) Software costs..................................... (31.2) (25.1) (43.8) Purchase of available-for-sale securities.......... -- (5.4) -- Investments and acquisitions, net of cash acquired. (1.2) (6.1) (4.5) Proceeds from sale of available-for-sale securities........................................ -- -- 23.2 Proceeds from sales of assets...................... 1.9 1.7 -- Other.............................................. (0.4) 0.3 (0.1) ------ ------ ------ Net cash flows used in investing activities.. (45.6) (39.9) (36.6) ------ ------ ------ Cash Flows From Financing Activities: Principal payments under financing obligations..... (3.8) (3.5) (5.7) Amount borrowed under line of credit, net.......... -- -- 46.4 Proceeds from exercise of stock options............ 0.5 4.1 2.1 Dividends paid..................................... (3.2) (3.2) (4.2) ------ ------ ------ Net cash provided by (used in) financing activities.................................. (6.5) (2.6) 38.6 ------ ------ ------ Effect of exchange rate changes on cash.............. (3.7) 0.1 0.2 ------ ------ ------ Net increase (decrease) in cash and equivalents...... 2.6 (3.1) (19.0) Cash and equivalents: Beginning of year.................................. 57.6 60.2 57.1 ------ ------ ------ End of year........................................ $ 60.2 $ 57.1 $ 38.1 ====== ====== ======
See accompanying Notes to Consolidated Financial Statements. F-7 SYSTEM SOFTWARE ASSOCIATES, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
UNREALIZED GAIN ON TREASURY TOTAL COMMON STOCK CAPITAL IN AVAILABLE- CUMULATIVE STOCK STOCK- ------------- EXCESS OF RETAINED FOR-SALE TRANSLATION ------------- HOLDERS' SHARES AMOUNT PAR VALUE EARNINGS SECURITIES ADJUSTMENT SHARES AMOUNT EQUITY ------ ------ ---------- -------- ---------- ----------- ------ ------ -------- (IN MILLIONS, EXCEPT PER SHARE DATA) Balance October 31, 1993................... 27.3 $0.1 $19.9 $85.0 $-- $(1.3) (0.4) $(2.5) $101.2 ---- ---- ----- ----- ---- ----- ---- ----- ------ Shares issued upon exercise of employee stock options.......... 0.1 0.5 0.5 Tax benefit of stock options exercised...... 0.3 0.3 Foreign currency translation adjustment. 0.5 0.5 Dividends paid--$0.08 per share.............. (3.2) (3.2) Net income.............. 10.0 10.0 ---- ---- ----- ----- ---- ----- ---- ----- ------ Balance October 31, 1994, Restated......... 27.4 0.1 20.7 91.8 -- (0.8) (0.4) (2.5) 109.3 ---- ---- ----- ----- ---- ----- ---- ----- ------ Shares issued upon exercise of employee stock options.......... 0.5 4.1 4.1 Tax benefit of stock options exercised...... 2.8 2.8 Foreign currency translation adjustment. -- -- Dividends paid--$0.08 per share.............. (3.2) (3.2) Shares issued in business combinations.. 0.2 (1.5) 0.3 0.4 2.5 1.3 Unrealized gain on available-for-sale securities............. 2.5 2.5 Net income.............. 26.6 26.6 Shares issued in three- for-two split.......... 14.0 ---- ---- ----- ----- ---- ----- ---- ----- ------ Balance October 31, 1995, Restated......... 42.1 0.1 26.1 115.5 2.5 (0.8) -- -- 143.4 ---- ---- ----- ----- ---- ----- ---- ----- ------ Shares issued upon exercise of employee stock options.......... 0.3 2.1 2.1 Tax benefit of stock options exercised...... 1.2 1.2 Foreign currency translation adjustment. (0.4) (0.4) Dividends paid--$0.10 per share.............. (4.2) (4.2) Shares issued in business combinations.. 0.2 3.4 3.4 Sale of available-for- sale securities........ (2.5) (2.5) Net loss................ (32.8) (32.8) ---- ---- ----- ----- ---- ----- ---- ----- ------ Balance October 31, 1996................... 42.6 $0.1 $32.8 $78.5 $ -- ($1.2) -- $ -- $110.2 ==== ==== ===== ===== ==== ===== ==== ===== ======
See accompanying Notes to Consolidated Financial Statements. F-8 SYSTEM SOFTWARE ASSOCIATES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1--OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES: Nature of operations System Software Associates, Inc. (the "Company" or "SSA") is a leading provider of cost-effective business information systems to the industrial sector worldwide. SSA's integrated product line BPCS (Business Planning and Control System) provides business process reengineering and integration of all operations, including configurable manufacturing processes, supply chain management, and global finance solutions. SSA's object-oriented interoperable tool set AS/SET (Application System/Solution Engineering Technology) allows the production of platform independent client/server applications. The Company supports its clients primarily through a worldwide network of branch offices. The Company markets, sells, and services its products to intermediate size and large companies through its own sales organization and a network of approximately 90 independent software companies (the "Affiliates"). Principles of consolidation The consolidated financial statements include the accounts of System Software Associates, Inc. and its majority owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Foreign currency translation The functional currencies for substantially all of the Company's foreign subsidiaries are their local currencies. The foreign subsidiaries' balance sheets are translated at the year end rates of exchange and their results of operations at weighted average rates of exchange for the year. Translation adjustments resulting from this process are recorded directly in stockholders' equity and will be included in the determination of net income (loss) only upon sale or liquidation of the subsidiaries, which is not contemplated at this time. Foreign exchange transaction losses aggregating $0.8 million, $0.7 million, and $0.4 million are included in general and administrative expenses for 1994, 1995, and 1996, respectively. Revenue recognition The license fees generated and related commissions earned by the independent Affiliates are included in license fees and cost of license fees, respectively. Software license fees are recognized upon client acceptance and delivery of the software product to the end user. Revenues and commissions from software maintenance and HelpLine agreements are deferred and recognized ratably over the term of the contract. Client services revenues are recorded when such services are provided. Concentrations of credit risk with respect to accounts receivable are limited due to a large customer base and its geographic dispersion. The principal components of cost of license fees are commissions paid to independent Affiliates, hardware costs, amortization of capitalized software costs, and royalties paid to third parties. The principal components of cost of client services and other are salaries paid to the Company's client services personnel and amounts paid to independent client services professionals. Accrued Affiliate and salesman commissions are not paid until the related accounts receivable balances have been collected. Property and equipment Property and equipment are stated at cost. Depreciation is computed using various methods over the estimated useful lives of the related assets. Leasehold improvements are amortized over the shorter of the life of the assets or related leases. Gains or losses resulting from sales or retirements are recorded as F-9 SYSTEM SOFTWARE ASSOCIATES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) incurred, at which time related costs and accumulated depreciation are removed from the accounts. Maintenance and repairs are charged to expense as incurred. Depreciation and amortization of property and equipment was $8.4 million, $7.9 million, and $9.2 million in 1994, 1995, and 1996, respectively. Software costs Purchased software is capitalized and stated at cost. The Company capitalizes software development costs in accordance with Statement of Financial Accounting Standards (SFAS) No. 86. Amortization of capitalized costs is computed on a straight line basis using an estimated useful life of five years or in proportion to current and anticipated revenues, whichever provides the greater amortization. Capitalized software costs are summarized as follows:
OCTOBER 31, -------------- 1995 1996 ------ ------ (IN MILLIONS) Purchased software........................................ $ 8.7 $ 9.5 Internally developed software............................. 91.4 134.4 ------ ------ 100.1 143.9 Less--Accumulated amortization............................ (41.1) (61.1) ------ ------ Net capitalized software costs.......................... $ 59.0 $ 82.8 ====== ======
Amortization of capitalized software costs charged to cost of license fees aggregated $9.2 million, $14.9 million, and $20.0 million during 1994, 1995, and 1996, respectively. Research and development Research and development expenses, principally the design and development of software products (exclusive of costs capitalized under SFAS No. 86), are expensed as incurred. Cost in excess of net assets of acquired businesses The excess of cost over the fair value of the net identifiable assets of acquired businesses is amortized on a straight-line basis, typically over a seven-year period. Amortization expense was $1.8 million, $2.2 million, and $2.7 million in 1994, 1995, and 1996, respectively. Fair value of financial instruments The fair value of cash and equivalents, receivables, accounts and income taxes payable, and accrued expenses approximates their carrying values. The fair value of forward contracts was not significant at October 31, 1995 and 1996. It was not practical to determine the fair value of short-term borrowings and Senior Notes at October 31, 1996 as the Company was not in compliance with certain covenants at that date, or the fair value of investments in associated companies at October 31, 1996 as there are no quoted market prices for these investments. Earnings per share Earnings per share for 1994 and 1995 have been computed using the weighted average number of common shares and common share equivalents outstanding during the periods. Weighted average shares outstanding have been adjusted to reflect as outstanding, for such periods, all shares issuable under stock F-10 SYSTEM SOFTWARE ASSOCIATES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) options using the treasury stock method and the November 28, 1995 three-for- two stock split. The loss per share for 1996 has been computed using only the weighted average number of shares outstanding. Use of estimates Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. Statements of cash flows For purposes of reporting cash flows, the Company considers highly liquid investments with an original maturity of three months or less to be cash equivalents. Interest income earned on cash equivalents aggregated $1.8 million, $2.0 million, and $1.1 million during 1994, 1995, and 1996, respectively. Supplemental information is as follows:
YEAR ENDED OCTOBER 31, -------------- 1994 1995 1996 ---- ---- ---- (IN MILLIONS) Non-cash investing and financing activities: Leases capitalized......................................... $1.9 -- $0.6 Liabilities assumed in connection with investments and acquisitions.............................................. $1.9 $8.7 $1.2 Shares issued in business combinations..................... -- $1.3 $3.4 Cash paid during the year for: Interest................................................... $3.1 $2.2 $4.0 Income taxes............................................... $3.4 $5.0 $9.5
NOTE 2--RESTATEMENT OF PRIOR YEARS' RESULTS OF OPERATIONS: The Company has restated its consolidated financial statements for the years ended October 31, 1994 and 1995 for revenues from software contracts entered into during those periods. In the third quarter of 1994, the Company entered into a software license contract for $10.1 million. Due to problems identified during the implementation of certain of the software products, a dispute arose. This dispute was settled in fiscal 1996. The investigation surrounding the dispute identified that certain uncertainties existed as of October 31, 1994 which made the collectibility of the revenue uncertain at that date. Accordingly, the fiscal 1994 consolidated financial statements have been restated to reverse the revenue and certain of the costs associated with the contract. The impact of these adjustments on the Company's consolidated financial results as originally reported is summarized below:
YEAR ENDED OCTOBER 31, 1994 --------------------------------------- AS ORIGINALLY REPORTED AS RESTATED -------------------- ------------------ (IN MILLIONS, EXCEPT PER SHARE DATA) Total Revenue................... $ 334.4 $ 324.3 Income Before Income Taxes and Minority Interest.............. $ 23.8 $ 15.4 Net Income...................... $ 15.4 $ 10.0 Earnings Per Share.............. $ 0.38 $ 0.25 Stockholders' Equity............ $ 114.7 $ 109.3
F-11 SYSTEM SOFTWARE ASSOCIATES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The fiscal 1995 restatement reflects the reversal of revenues for three contracts entered into during that year. During the third quarter of 1995, the Company recognized $5.0 million in revenues from the final two installment payments of a four installment payment contract. Subsequently, it was determined that such revenue was recorded prior to the completion of contractual terms which would allow for the revenue to be recognized. During the third and fourth quarters of fiscal 1995, the Company entered into reseller agreements of $10.0 and $5.0 million, respectively. Subsequently, the Company determined that the payment terms for the contracts were not fixed. Accordingly, the fiscal 1995 consolidated financial statements have been restated to reverse the revenue and certain of the costs associated with the contracts. The impact of these adjustments on the Company's consolidated financial results as originally reported is summarized below:
YEAR ENDED OCTOBER 31, 1995 -------------------------------------- AS ORIGINALLY REPORTED AS RESTATED ------------------- ------------------ (IN MILLIONS, EXCEPT PER SHARE DATA) Total Revenue.................... $ 394.4 $ 374.1 Income Before Income Taxes and Minority Interest............... $ 52.4 $ 40.9 Net Income....................... $ 34.1 $ 26.6 Earnings Per Share............... $ 0.81 $ 0.63 Stockholders' Equity............. $ 156.3 $ 143.4
NOTE 3--BUSINESS COMBINATIONS: During the past three years the Company has expanded its global coverage and strengthened its product offerings through various acquisitions. The following table summarizes all acquisitions which were accounted for under the purchase method and, accordingly, resulted in allocations of the purchase prices to the net assets acquired based upon their estimated fair values as of the acquisition dates. The accompanying consolidated statements of operations reflect the results of operations of the acquired companies since the acquisition dates. Proforma results of operations are not presented as the acquisitions were not significant. These transactions typically involved the Company acquiring a majority interest or additional interest in an existing independent Affiliate.
YEAR ENDED OCTOBER 31, ---------------------------------------------------------------------- (IN MILLIONS) 1994 1995 1996 - ------------------------ ------------------------ ------------------------ -------------------- SSA DAT GmbH (49%) (a) SSA Ontario Corporation NofTek NW, Inc. Ocean Information Sys- SSA Services Pty., Ltd. (SSA Northwest) (c) tems (b) Castillo Informatica Sdn Bhd (SSA Malaysia) BPCS Division of Exigent (SSA Iberica) (c) SSA Italia (20%) (a) Computer Group Vector Systems Anal- Certain assets of ysis SSA North Cen- Transtech, tral (c) Inc. Aggregate consideration........... $2.7 $6.5 $8.0 Goodwill................ $2.3 $6.3 $7.2
- --------------------- (a) Acquired the remaining 49% of SSA Germany and a 20% interest in SSA Italia in 1994. (b) Acquired the remaining 15% interest in SSA Services Pty., Ltd. (SSA Australia and New Zealand) in 1995. (c) Acquired the remaining interests of 90% in SSA Northwest, 27% in SSA Iberica and 81% in SSA North Central in 1996. F-12 SYSTEM SOFTWARE ASSOCIATES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) During 1995, the Company issued 586,000 shares of common stock, with an aggregate fair value of $21.9 million, for all outstanding common stock of three companies: Softwright Systems Limited, a leading provider of business object technology and systems in Europe specializing in object technology, multimedia, and other leading edge applications, and two of the Company's independent affiliates, SSA Northeast and Priority Systems, Inc. The combinations were accounted for as poolings of interest. The results of operations were included in the Company's consolidated financial statements from the dates of combinations, as the operations for all periods prior to the combinations were not material in relation to the Company's consolidated financial statements. NOTE 4--INVESTMENTS IN ASSOCIATED COMPANIES: In July 1995, the Company entered into a strategic alliance relationship with Harbinger Corporation pursuant to which the Company sold its EDI software assets (net book value of $2.3 million) to Harbinger and was granted a license by Harbinger to market and sell AS/400, UNIX, and PC-based EDI software products (there was no gain or loss recognized on the sale). Minimum royalties amounting to $1.4 million and $5.8 million were accrued in 1995 and paid by the Company to Harbinger during 1996. The Company received as consideration 550,000 shares of Harbinger Common Stock and 4,000,000 shares of Harbinger Zero Coupon Preferred Stock. The Zero Coupon Preferred Stock vests at the rate of up to 1,000,000 shares per year beginning in 1997 based upon achieving certain performance targets, and must be redeemed by Harbinger upon vesting for $1.00 per share in cash or, at the option of the Company, an equivalent amount of Harbinger Common Stock. In August 1995, the Company purchased an additional 450,000 shares of Harbinger Common Stock. At October 31, 1995, the investment in Harbinger Corporation Common Stock was classified as available- for-sale and reported at its fair value of $14 million. The adjustment to fair value in 1995 generated a $2.5 million unrealized gain, net of $1.4 million deferred tax and was excluded from earnings and reported in a separate component of shareholders' equity. During 1996 the Company sold all of its shares of Harbinger Common Stock. The proceeds from the sales were $23.2 million, which resulted in a gain of $8.4 million, net of $4.7 million in taxes. The Company also owns minority interests in several of its affiliates and accounts for these investments under the cost method if the Company owns less than 20% and the equity method if ownership is more than 20% of each associated company. The Company does not exercise control over the operations of these companies. NOTE 5--FINANCIAL INSTRUMENTS: The Company uses forward exchange contracts for the primary purpose of reducing its exposure to fluctuations in foreign currency exchange rates. The instruments are employed to manage transactional exposure. While these financial instruments are subject to the risk that market rates may change subsequent to the acquisition of the financial instrument, such changes would generally be offset by opposite effects on the items being managed. The Company's financial instruments typically mature within three months of origination and are transacted at rates which reflect the market rate at the date of the contract. As of October 31, 1996, the Company had forward contracts for the purchase and sale of European and other currencies, with purchases totaling $3.2 million and sales totaling $26.8 million. These contracts matured on or before November 5, 1996. NOTE 6--LINE OF CREDIT: At October 31, 1995 the Company had a $50 million, multi-bank line of credit which was to mature in June, 1997. At the option of the Company, borrowings under the agreement bore interest at the Prime Rate or LIBOR plus a margin. The margin on LIBOR ranged from 3/4% to 3%, and was based on the F-13 SYSTEM SOFTWARE ASSOCIATES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) cumulative amount borrowed and the leverage ratio of the Company at the time of the borrowings. Certain of the Company's majority-owned subsidiaries were eligible to borrow under the agreement, either in U.S. or local currency. Available borrowings were reduced by outstanding letters of credit, and 10% of the face amount of outstanding foreign currency hedge contracts once the Company's total foreign currency hedges exceed $50 million. The Company was required to pay a commitment fee equal to 1/8% of the unused portion of the commitment. The agreement contained covenants that were essentially the same as those of the senior notes described in Note 7, and also included a covenant based on the Company's quick ratio. As a result of operating losses during 1996, the Company was unable to maintain compliance with certain of the financial covenants within the agreement and technical defaults occurred. The Company obtained waivers of the defaults through February 1, 1997, and in January 1997 amended certain terms and conditions of the agreement whereby all defaults were waived and the maturity date on the line of credit was extended to November 1, 1997. Other significant provisions of the amendment include the following: Additional borrowings and new letters of credit are precluded and the line of credit is to be collateralized with substantially all of the Company's domestic assets and a portion of the stock of certain of the Company's foreign subsidiaries. Upon delivery of the collateral, the interest rate on outstanding borrowings changes from the current default rate of prime +2% to prime +1% (increasing to Prime +3% upon a subsequent default), and letter of credit fees will be 2% per annum (3% upon a subsequent default). The existing financial covenants have been replaced with covenants that require the Company to maintain and report a weekly minimum cash balance, maintain a minimum net worth and limit its quarterly capital expenditures. Additionally, the Company has agreed to issue warrants at fair market value at the time of issuance to the banks to purchase an aggregate of 500,000 shares of the Company's common stock. The warrants will be freely transferable and can be exercised at any time within five years of the issue date. The Company is required to make a mandatory prepayment pro- rata to the banks and Senior Noteholders of 100% of the proceeds of any debt or equity offering up to the amount of unpaid indebtedness outstanding to the banks and the Noteholders. At October 31, 1996, borrowings under the line of credit of $46.4 million were classified as long-term. Outstanding letters of credit issued against the line of credit at October 31, 1996 were $1.2 million. The weighted average interest rate on outstanding borrowings during 1996 was 7.78%. There were no borrowings under the line of credit during 1995 and 1994, except for $10 million borrowed and repaid in October 1994. NOTE 7--LONG-TERM OBLIGATIONS: Long-term obligations consist of the followings:
YEAR ENDED OCTOBER 31, ----------- 1995 1996 ----- ----- (IN MILLIONS) Multi-bank line of credit (see Note 6)....................... $ -- $46.4 Senior Notes payable......................................... 30.0 26.0 Notes payable and other obligations.......................... 9.8 1.2 Obligations under capital leases............................. 1.7 3.6 ----- ----- 41.5 77.2 Less--Current maturities..................................... 7.6 2.1 ----- ----- $33.9 $75.1 ===== =====
F-14 SYSTEM SOFTWARE ASSOCIATES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) At October 31, 1996, Senior Notes payable consisted of $4 million senior notes and $22 million senior notes originally due September 15, 1997 and September 15, 1998, respectively, with the original interest rates of 6.23% and 6.69%, respectively. The notes contained covenants including minimum net worth, fixed charge coverage and leverage ratios. As a result of operating losses during 1996, the Company was unable to maintain compliance with the fixed charge financial covenant of the notes and technical defaults occurred. The Company obtained waivers of the defaults through February 1, 1997, and in January 1997 amended certain terms and conditions of the Senior Notes whereby all defaults were waived and the maturity dates were changed to November 1, 1997. Under an intercreditor arrangement with the Company's banks and as described in Note 6, the notes have been collateralized with certain of the Company's assets and mandatory prepayments are required from the proceeds of any debt or equity offering. Interest due on the notes was changed from semi-annual to monthly payment dates. Upon delivery of collateral, the interest rates on each of the notes changes from the current default rates of 8.23% and 8.69%, respectively, to prime +1% (increasing to prime +3% upon a subsequent default). The existing financial covenants have been amended to be the same as the new covenants contained in the Company's line of credit described in Note 6. Additionally, the Senior Noteholders will be issued warrants to purchase 275,000 shares of the Company's common stock under the same terms as the warrants issued to the banks as described in Note 6. At October 31, 1996, the Senior Notes of $26 million were classified as long-term. At October 31, 1996, notes payable and other obligations consist of commitments made in connection with investments and acquisitions which mature as follows: $0.6 million in 1997, and $0.6 million in 1998. Capital lease obligations represent the present value of future payments under leases for transportation and data processing equipment. The recorded cost of these assets aggregated $5.6 million and $5.6 million at October 31, 1995 and 1996, respectively; accumulated amortization thereon aggregated $3.3 million and $3.4 million, respectively. Amortization of assets under capital leases is included in depreciation and amortization expense. The following is a schedule of future minimum lease payments under capital lease obligations, together with the present value of minimum lease payments at October 31, 1996:
YEAR ENDED OCTOBER 31, (IN MILLIONS) AMOUNT ------------------------------------ ------ 1997............................................................... $1.8 1998............................................................... 1.6 1999............................................................... 0.6 2000............................................................... 0.1 ---- Total minimum lease payments....................................... 4.1 Less--Amount representing interest................................. 0.5 ---- Present value of minimum lease payments............................ 3.6 Less--Current maturities........................................... 1.5 ---- $2.1 ====
Interest expense was $2.8 million, $2.2 million, and $4.7 million during 1994, 1995, and 1996, respectively. F-15 SYSTEM SOFTWARE ASSOCIATES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 8--INCOME TAXES: Deferred income taxes arise from temporary differences between the income tax basis of assets and liabilities and their reported amounts in the consolidated financial statements. Pretax income (loss) from continuing operations was taxed in the following jurisdictions:
YEAR ENDED OCTOBER 31, ---------------------- 1994 1995 1996 ---------------------- (IN MILLIONS) Domestic.......................................... $ 7.7 $ 31.4 $ (57.6) Foreign........................................... 7.7 9.5 6.2 ------ ------ -------- $ 15.4 $ 40.9 $ (51.4) ====== ====== ========
The provision for income taxes consists of the following:
YEAR ENDED OCTOBER 31, -------------------------- 1994 1995 1996 ------- ------- -------- (IN MILLIONS) Current: Federal..................................... $ (4.9) $ 8.9 $ (8.3) State....................................... 0.1 0.7 (2.8) Foreign..................................... 6.3 7.2 5.3 ------- ------- -------- 1.5 16.8 (5.8) ------- ------- -------- Deferred: Federal..................................... 4.7 (2.8) (11.5) State....................................... 0.4 (0.1) (0.8) Foreign..................................... (1.0) 0.3 (0.5) ------- ------- -------- 4.1 (2.6) (12.8) ------- ------- -------- $ 5.6 $ 14.2 $ (18.6) ======= ======= ========
In addition to taxes incurred on foreign operations, the Company is subject to and includes foreign taxes on net remittances from foreign Affiliates as a component in its provision for foreign income taxes. No domestic provision has been recorded for unremitted earnings of foreign subsidiaries as it is anticipated that any U.S. income taxes on distributions of earnings not permanently reinvested will be offset by foreign tax credits. A reconciliation of taxes based on the federal statutory rate and the Company's actual provision is as follows:
YEAR ENDED OCTOBER 31, -------------------------- 1994 1995 1996 ------- ------- -------- (IN MILLIONS) Income tax at the federal statutory rate...... $ 4.5 $ 14.3 $(18.0) State income taxes, net of federal benefit.... 0.1 0.6 (1.3) Foreign Sales Corporation, net................ (0.4) (0.1) -- Foreign operating losses...................... 1.7 0.6 (0.3) Research and development tax credit........... (2.1) (1.3) (1.2) Meals and entertainment....................... 0.1 0.4 1.1 Other, net.................................... 1.7 (0.3) 1.1 ------- ------- -------- $ 5.6 $ 14.2 $ (18.6) ======= ======= ========
F-16 SYSTEM SOFTWARE ASSOCIATES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The net deferred tax balance is comprised of (asset) liability:
YEAR ENDED OCTOBER 31, ------------- 1995 1996 ----- ------ (IN MILLIONS) Revenues (net of commissions) recognized for tax purposes in advance of financial reporting............................. $(3.2) $ (3.3) Capitalization of software costs for financial reporting purposes................................................... 15.6 24.7 Provision for doubtful accounts............................. (3.7) (5.0) Rent expense for financial reporting purposes............... (1.6) (1.4) Expense recognized for financial reporting purposes in advance of tax............................................. (1.2) (3.0) Deferred gain............................................... (1.7) (1.6) Unrealized equity gain...................................... 1.4 -- Domestic credit carryforwards............................... (1.4) (1.4) Foreign carryforwards....................................... (4.0) (3.6) Foreign tax credit carryforwards............................ -- (11.0) Research and development credit carryforwards............... -- (2.6) Domestic net operating loss carryforwards................... -- (11.7) Valuation allowance......................................... 3.2 8.3 Other, net.................................................. (0.5) 0.3 ----- ------ $ 2.9 $(11.3) ===== ======
At October 31, 1996, the Company has approximately $6.0 million of foreign net operating loss carryforwards, $31.1 million of domestic net operating loss carryforwards, and $15.0 million of tax credit carryforwards. At October 31, 1995 and October 31, 1996, the Company recorded valuation allowances related to these items of $3.2 million and $8.3 million, respectively. The Company recognizes certain deferred tax assets based upon Management's assessment that these assets will "more likely than not" be recognized in the future in accordance with SFAS 109, "Accounting for Income Taxes". This assessment is based primarily on estimates of future operating results. Of the $6.0 million of foreign net operating loss carryforwards, $3.0 million expire in varying amounts through the fiscal year ending October 31, 2003 and $3.0 million may be carried forward indefinitely. The $31.1 million in domestic net operating loss carryforwards expire on October 31, 2011. The $15.0 million of tax credit carryforwards expire in varying amounts through the fiscal year ending October 31, 2011. During 1994, 1995, and 1996 certain employees disposed of shares acquired through the exercise of stock options that allowed the Company to record additional compensation expense for tax purposes measured as the difference between the fair value of the stock and the option price at the date of exercise. The aggregate tax benefit to the Company of $0.3 million, $2.8 million, and $1.2 million, respectively, has been credited to capital in excess of par value. NOTE 9--STOCKHOLDERS' EQUITY: The Company has certain stock option plans and a long-term incentive plan under which options to purchase shares of the Company's common stock, stock appreciation rights, restricted stock, and cash awards may be granted to key employees and non-employees of the Company and its Affiliates. The plans provide that an aggregate of 6,356,250 common shares be available for grant, subject to adjustments for F-17 SYSTEM SOFTWARE ASSOCIATES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) stock splits, stock dividends, mergers, or other changes in capitalization. Options become exercisable in varying periods (typically 5 years) and are priced by the Board of Directors, but may not be less than 50% of the fair market value of the shares at the date of grant. All options granted during 1994, 1995, and 1996 were granted at fair market value. The following is a summary of stock option activity:
AVAILABLE OPTION PRICE FOR GRANT UNEXERCISED EXERCISABLE PER SHARE ---------- ----------- ----------- --------------- Balance, October 31, 1993.. 1,199,362 1,258,760 428,688 $ 1.38 -- 24.75 ---------- ---------- -------- --------------- Granted.................... (571,500) 571,500 11.75 -- 16.75 Becoming exercisable....... 280,293 4.64 -- 24.75 Cancelled.................. 54,900 (54,900) 6.00 -- 15.13 Exercised.................. (97,900) (97,900) 2.89 -- 12.38 ---------- ---------- -------- --------------- Balance, October 31, 1994.. 682,762 1,677,460 611,081 1.38 -- 24.75 ---------- ---------- -------- --------------- Granted.................... (498,000) 498,000 12.25 -- 27.13 Becoming exercisable....... 338,367 6.00 -- 24.75 Cancelled.................. 154,467 (154,467) 6.00 -- 19.67 Exercised.................. (497,946) (497,946) 1.56 -- 19.50 Reflect three-for-two stock split..................... 169,615 761,524 225,751 ---------- ---------- -------- --------------- Balance, October 31, 1995.. 508,844 2,284,571 677,253 0.92 -- 18.09 ---------- ---------- -------- --------------- Granted.................... (1,468,001) 1,468,001 9.81 -- 24.08 Becoming exercisable....... 393,822 4.00 -- 18.08 Cancelled.................. 1,384,237 (1,384,237) (191,211) 4.00 -- 24.08 Exercised.................. (275,906) (275,906) 1.93 -- 13.89 ---------- ---------- -------- --------------- Balance, October 31, 1996.. 425,080 2,092,429 603,958 $ 0.92 -- 13.89 ========== ========== ======== ===============
During 1988, the Board of Directors approved a stockholder rights plan designed to deter coercive takeover tactics and to prevent an acquiror from gaining control of the Company without offering a fair price to all of the Company's stockholders. At that time, the Company declared a distribution of one right for each share of common stock outstanding (effected as a stock dividend) to stockholders of record as of May 5, 1988, and generally to shares issuable under the Company's stock option plans. Each right entitles the registered holder to purchase from the Company one share of common stock at a purchase price of $47. Each right is exercisable ten days after the acquisition of 20% or more of the Company's voting stock, or the commencement of a tender or exchange offer under which the offeror would own 30% or more of the Company's stock. In the event of a proposed takeover satisfying certain additional conditions, the rights could be exercised by all holders other than the takeover bidder at an exercise price of half of the current market price of the Company's common stock. This would have the effect of significantly diluting the holdings of the takeover bidder. These rights expire on May 3, 1998. F-18 SYSTEM SOFTWARE ASSOCIATES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 10--FOREIGN INFORMATION: Information regarding geographic areas for the years ended October 31, 1994, 1995, and 1996 is as follows:
UNITED EUROPE STATES MIDDLE EAST OTHER ELIMINATIONS TOTAL ------ ----------- ------ ------------ ------ (IN MILLIONS) Year Ended October 31, 1994 Sales to unaffiliated customers.................. $155.5 $119.4 $ 82.6 $(33.2) $324.3 Operating income............ $ 14.0 $ 1.9 $ 0.5 $ 16.4 Identifiable assets......... $199.1 $101.4 $ 84.0 $(51.4) $333.1 ====== ====== ====== ====== ====== Year Ended October 31, 1995 Sales to unaffiliated customers.................. $173.7 $148.1 $ 92.0 $(39.7) $374.1 Operating income............ $ 28.5 $ 9.3 $ 3.3 $ 41.1 Identifiable assets......... $225.2 $130.2 $ 87.3 $(49.5) $393.2 ====== ====== ====== ====== ====== Year Ended October 31, 1996 Sales to unaffiliated customers.................. $164.9 $113.8 $ 95.0 $(32.9) $340.8 Operating loss.............. $(17.4) $(26.6) $(14.8) $(58.8) Identifiable assets......... $234.9 $ 98.6 $107.2 $(56.3) $384.4 ====== ====== ====== ====== ======
The sales and operating income (loss) amounts reflected above include intercompany royalties. United States sales by geographical areas during the years ended October 31, 1994, 1995, and 1996 are as follows:
FOREIGN --------------------------------- EUROPE ASIA CANADA UNITED STATES MIDDLE EAST PACIFIC LATIN AMERICA TOTAL ------------- ----------- ------- ------------- ------ (IN MILLIONS) Year Ended October 31, 1994................... $119.1 $16.6 $9.9 $9.9 $155.5 Year Ended October 31, 1995................... $147.3 $14.3 $5.4 $6.7 $173.7 Year Ended October 31, 1996................... $143.1 $13.0 $4.3 $4.5 $164.9
NOTE 11--COMMITMENTS AND CONTINGENCIES: The Company leases its office space and certain equipment under noncancelable operating leases that expire at various dates through 2015. Rent expense under such leases aggregated approximately $9.0 million, $15.7 million, and $24.1 million during 1994, 1995, and 1996, respectively. Minimum annual rental commitments under noncancelable operating leases for periods subsequent to October 31, 1996 are as follows: $23.1 million in 1997, $17.8 million in 1998, $12.5 million in 1999, $9.9 million in 2000, $8.6 million in 2001, and $42.3 million in 2002 and thereafter. In January 1997, class action lawsuits were filed in state court in Illinois and in the federal court in Chicago, Illinois against the Company and certain of its officers. The federal actions allege damages to persons who purchased the Company's common stock during the period August 22, 1994 through January 7, 1997 arising from alleged violations of the federal securities laws and associated common laws. The state court action alleges damages to persons who purchased the Company's common stock during the period November 21, 1994 through January 7, 1997 arising from alleged violations of the Illinois securities laws and associated common and statutory law. Although the outcome of these proceedings cannot be determined with certainty, management intends to defend the actions vigorously, and, in consultation with its legal counsel, believes that the allegations are without merit and that the final outcomes should not have a material adverse effect on the Company's operations or financial position. The Company is also subject to other legal proceedings and claims which arise in the normal course of business. Although the outcome of these proceedings cannot be determined with certainty, management believes that the final outcomes of these proceedings should not have a material adverse effect on the Company's operations or financial position. F-19 SYSTEM SOFTWARE ASSOCIATES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED) On November 20, 1995, the Company filed an action against Owens-Illinois ("Owens") in Illinois state court seeking damages based on Owens' failure to make payments required under a July 29, 1994 contract (the "Contract") between the parties. On the same day the Company filed suit against Owens, Owens filed a lawsuit in Illinois state court for recision of the Contract and for damages. On April 18, 1996, the Company and Owens jointly announced that they had settled the lawsuits and, as a result, both lawsuits were dismissed. Terms of the settlement were not disclosed. In late November, 1995, two class action suits were filed in the federal court in Chicago, Illinois, against the Company and certain of its officers, alleging damages to persons who purchased the Company's common stock during the period August 21, 1995 through November 22, 1995. The plaintiffs subsequently dismissed each of these suits voluntarily, without liability to the Company. On February 22, 1991, a class action lawsuit was filed in the federal court in Chicago, Illinois, against the Company, its Chairman and Chief Executive Officer, and its former Chief Financial Officer. On July 2, 1993, after a two week trial, the jury returned a verdict in favor of all defendants on all counts. On August 10, 1994, the 7th Circuit Court in Chicago affirmed the jury verdict. F-20 [THIS PAGE INTENTIONALLY LEFT BLANK] F-21 SYSTEM SOFTWARE ASSOCIATES, INC. CONSOLIDATED BALANCE SHEETS
OCTOBER 31, JULY 31, ASSETS 1996 1997 ------ ----------- ----------- (IN MILLIONS) (UNAUDITED) Current Assets: Cash and equivalents................................. $ 38.1 $ 32.1 Accounts receivable, less allowance for doubtful accounts of $16.5 and $16.5......................... 163.6 169.9 Income taxes receivable.............................. 4.4 3.8 Deferred income taxes................................ 10.1 11.0 Prepaid expenses and other current assets............ 25.5 29.3 ------ ------ Total current assets............................... 241.7 246.1 ------ ------ Property and Equipment: Data processing equipment............................ 37.3 39.7 Furniture and office equipment....................... 18.7 17.0 Leasehold improvements............................... 9.0 9.8 Transportation equipment............................. 2.3 1.5 ------ ------ 67.3 68.0 Less--Accumulated depreciation and amortization...... 39.5 43.5 ------ ------ Total property and equipment....................... 27.8 24.5 ------ ------ Other Assets: Software costs, less accumulated amortization of $61.1 and $81.6..................................... 82.8 95.9 Cost in excess of net assets of acquired businesses, less accumulated amortization of $8.7 and $11.0..... 22.8 20.6 Deferred income taxes................................ 1.2 1.5 Investments in associated companies.................. 2.2 1.5 Miscellaneous........................................ 5.9 4.9 ------ ------ Total other assets................................. 114.9 124.4 ------ ------ Total Assets....................................... $384.4 $395.0 ====== ======
See accompanying Notes to Consolidated Financial Statements. F-22 SYSTEM SOFTWARE ASSOCIATES, INC. CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' OCTOBER 31, JULY 31, EQUITY 1996 1997 ----------------------------- ------------------ ------------------ (IN MILLIONS, EXCEPT PER SHARE DATA) (UNAUDITED) Current Liabilities: Short-term borrowings and current maturities of senior notes payable......................... $ -- $ 71.8 Accrued commissions and royalties....................... 26.3 24.1 Accounts payable and other accrued liabilities............. 62.5 63.0 Accrued compensation and related benefits........................ 23.8 20.6 Deferred revenue................. 58.8 55.8 ------------------ ------------------ Total current liabilities...... 171.4 235.3 ------------------ ------------------ Long-Term Obligations............ 75.1 13.5 ------------------ ------------------ Deferred Revenue................. 27.7 30.4 ------------------ ------------------ Stockholders' Equity: Preferred stock, $.01 par value, 100,000 shares authorized, none issued or outstanding...... -- -- Common stock, $.0033 par value, 60,000,000 and 250,000,000 shares authorized, 42,577,000 and 42,652,000 shares issued.... 0.1 0.1 Capital in excess of par value... 32.8 42.8 Retained earnings................ 78.5 76.9 Cumulative translation adjustment...................... (1.2) (4.0) ------------------ ------------------ Total stockholders' equity..... 110.2 115.8 ------------------ ------------------ Total Liabilities and Stockholders' Equity.......... $384.4 $395.0 ================== ==================
See accompanying Notes to Consolidated Financial Statements. F-23 SYSTEM SOFTWARE ASSOCIATES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED JULY 31, -------------------------------------- 1996 1997 ------------------ ------------------ (IN MILLIONS, EXCEPT PER SHARE DATA) (UNAUDITED) Revenues: License fees......................... $ 145.2 $ 213.4 Client services and other............ 86.2 91.6 ------------------ ------------------ Total revenues..................... 231.4 305.0 ------------------ ------------------ Costs and Expenses: Cost of license fees................. 43.4 52.4 Cost of client services and other.... 64.9 71.8 Sales and marketing.................. 71.3 66.2 Research and development............. 38.3 39.0 General and administrative........... 57.6 64.8 Special charge....................... -- 1.7 ------------------ ------------------ Total costs and expenses........... 275.5 295.9 ------------------ ------------------ Operating income (loss)................ (44.1) 9.1 Gain on sale of available-for-sale securities............................ 3.6 -- Non-operating income (expense), net.... (2.0) (11.6) ------------------ ------------------ Income (loss) before income taxes...... (42.5) (2.5) Provision (benefit) for income taxes... (15.4) (0.9) ------------------ ------------------ Net income (loss)...................... $ (27.1) $ (1.6) ================== ================== Earnings (loss) per share.............. $ (0.63) $ (0.04) ================== ================== Dividends per share.................... $ 0.10 $ -- ================== ================== Weighted average common and equivalent shares outstanding.................... 43.1 43.7 ================== ==================
See accompanying Notes to Consolidated Financial Statements. F-24 SYSTEM SOFTWARE ASSOCIATES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED JULY 31, ------------------ 1996 1997 -------- -------- (IN MILLIONS) (UNAUDITED) Cash Flows From Operating Activities: Net income (loss)........................................ $ (27.1) $ (1.6) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization of property and equipment.. 6.5 6.8 Amortization of other assets............................. 16.8 26.0 Provision for doubtful accounts.......................... 3.5 3.3 Gain on sale of available-for-sale securities............ (3.6) -- Deferred income taxes.................................... (0.3) (1.2) Deferred revenue......................................... 3.0 2.5 Changes in operating assets and liabilities, net of acquisitions: Accounts receivable.................................... (4.9) (14.1) Prepaid expenses and other current assets.............. (4.8) 2.7 Miscellaneous assets................................... 1.5 1.0 Accrued commissions and royalties...................... (7.0) (1.7) Accounts payable and other accrued liabilities......... (0.9) 0.3 Accrued compensation and related benefits.............. (5.1) (3.2) Income taxes........................................... (23.0) 0.6 -------- -------- Net cash provided by (used in) operating activities.. (45.4) 21.4 -------- -------- Cash Flows From Investing Activities: Purchases of property and equipment...................... (8.5) (2.9) Software costs........................................... (31.1) (33.7) Investments and acquisitions, net of cash acquired....... (4.5) -- Proceeds from sale of available-for-sale securities...... 9.0 -- -------- -------- Net cash flows used in investing activities.......... (35.1) (36.6) -------- -------- Cash Flows From Financing Activities: Amount borrowed (repaid) under bank line of credit, net.. 46.4 (0.4) Principal payments under other financing obligations..... (1.5) (1.8) Proceeds from exercise of stock options.................. 2.0 0.2 Net proceeds from convertible subordinated promissory note.................................................... -- 12.0 Dividends paid........................................... (4.2) -- -------- -------- Net cash provided by financing activities............ 42.7 10.0 -------- -------- Effect of exchange rate changes on cash.................... (0.1) (0.8) -------- -------- Net decrease in cash and equivalents................. (37.9) (6.0) Cash and equivalents: Beginning of year...................................... 57.1 38.1 -------- -------- End of period.......................................... $ 19.2 $ 32.1 ======== ========
See accompanying Notes to Consolidated Financial Statements. F-25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1--BASIS OF PRESENTATION: The consolidated financial statements include the accounts of System Software Associates, Inc. and its majority owned subsidiaries ("SSA" or "the Company"). Except for the consolidated balance sheet at October 31, 1996, the financial information included herein is unaudited. However, such information reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of results for the interim periods. Results shown for interim periods are not necessarily indicative of the results to be obtained for a full fiscal year. These interim financial statements should be read in conjunction with the audited financial statements and notes thereto included elsewhere in this Prospectus. NOTE 2--LONG-TERM OBLIGATIONS: On March 27, 1997, the Company issued a convertible subordinated promissory note to a strategic investor in the amount of $12 million, bearing interest at the prime rate plus 1% and convertible into common stock of the Company at the lesser of $3.33 per share or 80% of the fair market value of the stock at the time of conversion. The loan is due in three years and is not convertible during the first year, except in the event of prepayment. The convertible subordinated promissory note has a beneficial conversion feature because the fair market value of the Company's stock was in excess of its per share conversion price at the issuance date. The value of the beneficial conversion feature of $8.9 million was reflected as an increase in additional paid in capital and other current assets and will be amortized as interest expense over the one year period beginning the date of issuance. NOTE 3--LEGAL PROCEEDINGS: On August 20, 1997, the Company terminated its engagement of the prior underwriter of this Offering, and concurrently elected not to proceed with its private offering of securities to a group of private investors led by Bain Capital, Inc. ("Bain"). On August 27, 1997, Bain filed a complaint in the Superior Court of Massachusetts against the Company, Roger E. Covey and Hambrecht & Quist LLC, one of the Representatives of the Underwriters in this Offering. The complaint seeks damages from the Company in excess of $117.5 million for alleged breach of contract, breach of the implied covenant of good faith and fair dealing, misrepresentation and unfair and deceptive business acts and practices. The Company believes, based upon advice of its counsel, that pursuant to its terms letter with Bain, the Company should have no liability to Bain beyond reimbursement of Bain's expenses, limited to $250,000, and payment of a "break-up" fee in the amount of $3.0 million. Any charge related to such reimbursement of expenses and "break-up" fee would likely be recorded in the Company's fourth fiscal quarter in 1997. Although the Company denies Bain's allegations and intends to vigorously defend itself against Bain's lawsuit, there can be no assurance that this action will not have a material adverse impact on the Company. In January 1997, class action lawsuits were filed in state court in Illinois and in the federal court in Chicago, Illinois against the Company and certain of its officers. The federal actions allege damages to persons who purchased the Company's common stock during the period August 22, 1994 through January 7, 1997 arising from alleged violations of the federal securities laws and associated common laws. The state court action alleges damages to persons who purchased the Company's common stock during the period November 21, 1994 through January 7, 1997 arising from alleged violations of the Illinois securities laws and associated common and statutory law. The Company has executed a settlement agreement with the class plaintiffs in the Illinois state court action titled Steinberg v. SSA. 97 CH 287 (the "Settlement"). The Company has agreed to pay $1.7 million in cash and the director and officer defendants collectively have agreed to contribute 100,000 shares of Common Stock. The presiding judge in the Illinois case granted preliminary approval to the Settlement on June 27, 1997. A final hearing on the Settlement is scheduled for September 5, 1997. The Company recorded a special F-26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) charge of $1.7 million in the third quarter of 1997 for the Settlement. There can be no assurance that the Settlement will be approved, nor can there be any assurance that the Settlement, if approved, will legally bar the federal claims described above. In addition, even if the Settlement bars the federal claims described above, because the class period of the federal claim is slightly larger than the class period of the state claim, the Settlement may not result in the dismissal of the federal action. The failure to achieve dismissal of any of these actions or the failure to settle them on sufficiently advantageous terms could have a material adverse effect on the business, operating results and financial condition of the Company. The Company is also subject to other legal proceedings and claims which arise in the normal course of business. Although the outcome of these proceedings cannot be determined with certainty, management believes that the final outcomes of these proceedings should not have a material adverse effect on the Company's operations or financial position. F-27 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR- MATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PRO- SPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS UNLAWFUL. NEITHER THE DELIV- ERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE HEREUNDER SHALL, UNDER ANY CIR- CUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AF- FAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. ----------- TABLE OF CONTENTS
PAGE ---- Available Information..................................................... 2 Prospectus Summary........................................................ 3 Risk Factors.............................................................. 7 Use of Proceeds........................................................... 17 Price Range of Common Stock and Dividend Policy........................... 17 Capitalization............................................................ 18 Selected Financial Data................................................... 19 Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................... 20 Business.................................................................. 28 Management................................................................ 29 Description of Notes...................................................... 31 Description of the Private Offering....................................... 42 Description of Common Stock............................................... 44 Certain Federal Income Tax Considerations................................. 45 Underwriting.............................................................. 47 Incorporation of Certain Documents by Reference........................... 50 Legal Matters............................................................. 51 Experts................................................................... 51 Index to Financial Statements............................................. F-1
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- $100,000,000 [SSA LOGO] % CONVERTIBLE SUBORDINATED NOTES DUE 2002 -------------- PROSPECTUS -------------- HAMBRECHT & QUIST LAZARD FRERES & CO. LLC , 1997 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. Set forth below is an estimate of the approximate amount of fees and expenses (other than underwriting discounts and commissions) payable in connection with the issuance and distribution of the Notes pursuant to the Prospectus contained in this Registration Statement. SEC filing fee for Registration Statement....................... $ 34,848 NASD filing fee................................................. 11,850 Nasdaq listing fee.............................................. 10,000* Accountants fees and expenses................................... 175,000* Blue Sky fees and expenses...................................... 10,000* Legal fees and expenses......................................... 295,000* Printing and engraving.......................................... 200,000* Miscellaneous expenses.......................................... 13,302* -------- Total....................................................... $750,000 ========
- -------- *Estimated Amount All of the expenses listed above will be borne by the Registrant. ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The By-laws of the Registrant provide that the Registrant shall indemnify its officers and directors to the fullest extent permitted by applicable law. Section 145 of the Delaware General Corporation Law (the "DGCL") provides, in general, that each director and officer of a corporation may be indemnified against expenses (including attorneys' fees, judgments, fines and amounts paid in settlement) actually and reasonably incurred in connection with the defense or settlement of any threatened, pending or completed legal proceedings in which he is involved by reason of the fact that he is or was a director or officer if he acted in good faith and in a manner that he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, if he had no reasonable cause to believe that his conduct was unlawful. If the legal proceeding, however, is by or in the right of the corporation, the director or officer may not be indemnified in respect of any claim, issue or matter as to which he shall have been adjudged to be liable for negligence or misconduct in the performance of his duty to the company unless a court determines otherwise. The Certificate of Incorporation of the Registrant, as amended to date, provides that the personal liability of the directors of the Registrant shall be eliminated to the fullest extent permitted by applicable law. The DGCL permits a corporation's certificate of incorporation to provide that no director of the corporation shall be personally liable to the corporation or its stockholders for monetary damages for any breach of his fiduciary duty as a director; provided, however, that such provision shall not apply to any liability of a director (1) for any breach of a director's duty of loyalty to the corporation or its stockholders, (2) for acts or omissions that are not in good faith or involve intentional misconduct or a knowing violation of the law, (3) under Section 174 of the DGCL or (4) for any transaction from which the director derived an improper personal benefit. II-1 ITEM 16. EXHIBITS. 1 Form of Underwriting Agreement 3.1 Certificate of Incorporation (incorporated by reference into the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1987) 3.2 Amendment to Certificate of Incorporation filed June 6, 1997* 3.3 By-laws of the Company (incorporated by reference into the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1989) 3.4 Certificate of Designations for Series A Preferred Stock** 4.1 Form of Indenture between the Company and Harris Trust and Savings Bank, as Trustee 4.2 Form of Note (included in Exhibit 4.1) 4.3 Securities Purchase Agreement for the Series A Preferred Stock and the New Private Warrants between the Company and the Private Investor** 4.4 New Private Warrant** 4.5 Registration Rights Agreement between the Company and the Private Investor** 4.6 Form of Representative's Warrant Agreement (including form of Representative's Warrants)** 5 Opinion of Sachnoff & Weaver, Ltd. regarding the legality of the securities being registered* 12 Statement re: computation of ratios 23.1 Consent of Price Waterhouse LLP 23.2 Consent of KPMG Peat Marwick LLP 23.3 Consent of Sachnoff & Weaver, Ltd. (included in Exhibit 5)* 24 Powers of attorney* 25 Statement of eligibility of trustee* 99.1 Note Purchase Agreement, dated March 27, 1997, for purchase of $12 million Floating Rate Convertible Notes due 2000* 99.2 Form of Floating Rate Convertible Note due 2000* 99.3 Amended and Restated Secured Credit Agreement, dated as of February 28, 1997, among the Company, Bank of America National Trust & Savings Association and certain financial institutions* 99.4 Amended and Restated Note Agreement, dated as of February 28, 1997, for the purchase of $26 million Senior Secured Notes due November 1, 1997 among the Company, Principal Mutual Life Insurance Company and Massachusetts Mutual Life Insurance Company*
- --------------------- * Previously filed. ** To be filed by amendment. ITEM 17. UNDERTAKINGS. (a) The undersigned Registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, II-2 the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for the indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (c) The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE REQUIREMENTS FOR FILING ON FORM S-3 AND HAS DULY CAUSED THIS AMENDMENT NO. 3 TO THE REGISTRATION STATEMENT ON FORM S-3 TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CHICAGO, STATE OF ILLINOIS, ON SEPTEMBER 2, 1997. System Software Associates, Inc. /s/ Joseph J. Skadra By___________________________________ Joseph J. Skadra, Vice Presidentand Chief Financial Officer PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE --------- ----- ---- /s/ Roger E. Covey* Chief Executive Officer and September 2, 1997 ____________________________________ Chairman of the Board of Roger E. Covey Directors (Principal Executive Officer) /s/ Joseph J. Skadra Chief Financial Officer, September 2, 1997 ____________________________________ Vice President--Finance Joseph J. Skadra and Secretary (Principal Financial and Accounting Officer) /s/ Andrew J. Filipowski* Director September 2, 1997 ____________________________________ Andrew J. Filipowski /s/ John W. Puth* Director September 2, 1997 ____________________________________ John W. Puth /s/ William N. Weaver, Jr.* Director September 2, 1997 ____________________________________ William N. Weaver, Jr.
/s/ Joseph J. Skadra *By____________________________ Joseph J. Skadra,Attorney-in- fact II-4 EX-1 2 FORM OF UNDERWRITING AGREEMENT EXHIBIT 1 WF&G DRAFT ---------- 8/28/97 ------- $100,000,000 SYSTEM SOFTWARE ASSOCIATES, INC. __% CONVERTIBLE SUBORDINATED NOTES DUE 2002/1/ UNDERWRITING AGREEMENT ---------------------- September __, 1997 HAMBRECHT & QUIST LLC, LAZARD FRERES & CO. LLC As Representative of the several Underwriters c/o Hambrecht & Quist LLC One Bush Street San Francisco, CA 94104 Ladies and Gentlemen: System Software Associates, Inc., a Delaware corporation (the "Company"), ------- proposes to issue and sell $100,000,000 aggregate principal amount of its __% Convertible Subordinated Notes due 2002 (the "Firm Notes") (said $100,000,000 ---------- aggregate principal amount of Firm Notes being herein called the "Underwritten ------------ Notes"). The Company proposes to grant to the Underwriters (as hereinafter - ----- defined) an option to purchase up to an additional $15,000,000 aggregate principal amount of such Notes (the "Option Notes" and, together with the ------------ Underwritten Notes, the "Notes"). The Notes are more fully described in the ----- Registration Statement and the Prospectus hereinafter mentioned. The Company hereby confirms the agreements made with respect to the purchase of the Notes by the several underwriters, for whom you _______________________ /1/ Plus an option to purchase from the Company up to $15,000,000 aggregate principal amount of such Notes to cover over-allotments. are acting as representatives (the "Representatives"), named in Schedule I -------------- hereto (collectively, the "Underwriters", which term shall also include any ------------ underwriter purchasing Notes pursuant to Section 2(b) hereof). You represent ------------ and warrant that you have been authorized by each of the other Underwriters to enter into this Agreement on its behalf and to act for it in the manner herein provided. The Notes are to be issued pursuant to the provisions of an Indenture dated as of September __, 1997 (the "Indenture") between the Company and Harris Trust and ----------- Savings Bank, as trustee (the "Trustee"). --------- 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby represents and warrants to each of the Underwriters as follows: (a) A registration statement on Form S-3 (File No. 333-31272) with respect to the Notes and the shares of Common Stock of the Company, $.0033 par value per share (the "Common Stock"), issuable upon conversion of the Notes ------------- has been prepared by the Company in conformity with the requirements of the Securities Act of 1933, as amended, (the "Act") and the Rules and --- Regulations (the "Rules and Regulations") promulgated by the Securities and --------------------- Exchange Commission (the "Commission") under the Act and has been filed ---------- with the Commission under the Act. The Company has complied with the conditions for the use of Form S-3. Copies of such registration statement, including any amendments thereto, the preliminary prospectuses (meeting the requirements of the Rules and Regulations) contained therein and the exhibits, financial statements and schedules, as finally amended and revised, have heretofore been delivered by the Company to you. Such registration statement, together with any registration statement filed by the Company pursuant to Rule 462(b) of the Act, herein referred to as the "Registration Statement," which shall be deemed to include all information ---------------------- omitted therefrom in reliance upon Rule 430A and contained in the Prospectus referred to below, has become effective under the Act and no post-effective amendment to the Registration Statement has been filed as of the date of this Agreement. "Prospectus" means (i) the form of prospectus ---------- first filed by the Company with the Commission pursuant to Rule 424(b), or (ii) the last preliminary prospectus included in the Registration Statement filed prior to the time it becomes effective or filed pursuant to Rule 424(a) under the Act that is delivered by the Company to the Underwriters for delivery to purchasers of the Notes, together with the term sheet or abbreviated term sheet filed with the Commission pursuant to Rule 424(b)(7) of the Act. Each preliminary prospectus included in the Registration Statement prior to the time it becomes effective is herein referred to as a "Preliminary Prospectus." Any reference herein to the Registration ----------------------- Statement, any Preliminary Prospectus or the Prospectus shall be deemed to refer to and include the documents incorporated by reference therein, as to the date of such Preliminary Prospectus or Prospectus, as the case may be, and, in the case of any reference herein to any Prospectus, also shall be deemed to include any documents incorporated by reference therein, and any supplements or amendments thereto, filed with the Commission after the date of filing of the Prospectus under Rules 424(b) or 430A, and prior to the termination of the offering of the Notes by the Underwriters. (b) The Commission has not issued any order preventing or suspending the use of any Preliminary Prospectus. When the Registration Statement becomes effective and at all times subsequent thereto up to and at the Closing Date (hereinafter defined) and any later date on which Option Notes are to be purchased, (i) the Registration Statement and Prospectus, and any amendments or supplements thereto, will conform in all material respects to the requirements of the Act and the Rules and Regulations, and (ii) neither the Registration Statement nor the Prospectus, nor any amendment or supplement thereto, will include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they are made, not misleading; provided, however, that none of the representations and warranties contained in this subparagraph shall apply to information contained in or omitted from the Registration Statement or the Prospectus or any such amendment or supplement in reliance upon, and in conformity with, (i) written information furnished to the Company by any Underwriter, directly or through you, specifically for use in the preparation thereof or (ii) that part of the Registration Statement which constitutes the statement of Eligibility and Qualification of the Trustee (Form T-1) under the Trust Indenture Act of 1939, as amended. (c) Except as set forth on Schedule 1(c), the Company and each of its subsidiaries have been duly incorporated and are validly existing as corporations in good standing under the laws of their respective jurisdictions of incorporation, with full power and authority (corporate and other) to own, lease and operate their properties and conduct their business as described in the Registration Statement; except for the pledge of stock of certain subsidiaries of the Company pursuant to the Amended and Restated Secured Credit Agreement, dated as of February 28, 1997 (the "Amended and Restated Credit Agreement") and the Collateral Agency ------------------------------------- Agreement and security documents executed thereunder (the "Collateral ---------- Documents"), each among the Company, Bank of America National Trust and --------- Savings Association and the other financial institutions party thereto or as set forth on Schedule 1(c), the Company owns all of the voting stock of its subsidiaries free and clear of all liens, charges and encumbrances; the Company and each of its subsidiaries have taken all necessary or required actions in order to qualify to do business in each of the several jurisdictions in which the Company and its subsidiaries owns or leases property or conducts business, except where the failure to take any such actions, in the aggregate, would not have a material adverse effect on the business, condition (financial or otherwise), properties or prospects of the Company and its subsidiaries, taken as a whole (a "Material Adverse ---------------- Effect"); the Company and each of its subsidiaries hold all licenses, ------ certificates and permits from foreign, state, federal and other regulatory authorities which are material to the conduct of their respective businesses, all of which are valid and in full force and effect in all material respects; the Company and each of its subsidiaries are not (i) in violation of their respective charter or By-laws or (ii) except as set forth in the Prospectus, in default in the performance or observance of any obligation, agreement, covenant or condition contained in any indenture, mortgage, deed of trust, loan agreement, bond, debenture, note agreement or other evidence of indebtedness or in any other material lease, contract, joint venture or other agreement or instrument to which the Company or any subsidiary is a party or by which they or any of their properties may be bound or (iii) in violation of any law, order, rule, regulation, writ, injunction or decree of any government, governmental instrumentality or court, domestic or foreign, other than such defaults or violations which singularly or in the aggregate would not reasonably be expected to have a Material Adverse Effect. (d) The outstanding shares of Common Stock of the Company have been duly authorized and validly issued and are fully paid and non-assessable; the Notes to be issued and sold by the Company have been duly authorized and, when issued and paid for as contemplated herein, will be validly issued and outstanding, and valid and binding obligations of the Company, enforceable in accordance with their terms and will be entitled to the benefits of the Indenture, except (i) as may be limited by the effects of bankruptcy, insolvency, reorganization, receivership, moratorium and other similar laws affecting the rights and remedies of creditors generally and (ii) as may be limited by general principles of equity, whether applied by a court of law or equity; the shares of Common Stock of the Company issuable upon conversion of the Notes have been duly authorized and reserved for issuance upon such conversion, and when issued upon conversion in accordance with the terms of the Indenture, will have been validly issued and will be fully paid and non-assessable. No person or entity holds a right to require, or participate in, the registration under the Act of the Notes or shares of Common Stock of the Company issuable upon conversion of the Notes. No person or entity has any preemptive or other right of participation or first refusal with respect to any of the Notes or the Common Stock to be issued upon conversion of the Notes or the issue or sale thereof by the Company. Each approval, consent, order, authorization, designation, declaration or filing by or with any regulatory, administrative or other governmental body necessary in connection with the execution and delivery by the Company of this Agreement and the consummation of the transactions herein contemplated (except such additional steps as may be required by the Commission, the National Association of Securities Dealers, Inc. (the "NASD") or may be necessary to qualify the Notes for public offering by the ---- Underwriters under state securities or Blue Sky laws) has been obtained or made and is in full force and effect. No approval or authorization of any shareholder is required for the issuance and sale of the Notes by the Company or in order for the Company to consummate the transactions described in the Registration Statement. (e) The Notes and the authorized capital stock of the Company conform with the statements concerning them set forth and incorporated by reference in the Registration Statement in all material respects. (f) The historical consolidated financial statements of the Company and its subsidiaries, together with the related notes and schedules, included in the Registration Statement present fairly the consolidated financial position and the results of operations and cash flows of the Company and its consolidated subsidiaries, at the indicated dates and for the indicated periods. Such financial statements and related schedules have been prepared in accordance with generally accepted principles of accounting ("GAAP"), consistently applied throughout the periods involved, and all ---- adjustments necessary for a fair presentation of results for such periods have been made. Except as set forth in the Registration Statement, the pro forma financial statements set forth in the Registration Statement fairly present the information required to be presented therein, and such statements meet the requirements of the Act and have been prepared in accordance with GAAP consistently applied throughout the periods involved. The summary financial and statistical data included in the Registration Statement present fairly the information shown therein and have been compiled on a basis consistent with the financial statements presented therein. The Company and its subsidiaries have no material contingent obligations which are not disclosed in the Company's financial statements which are included in the Registration Statement. (g) The Company has full corporate power and authority to enter into this Agreement and the Indenture and to perform its obligations hereunder and thereunder (including to issue, sell and deliver the Notes and the Common Stock upon conversion of the Notes). This Agreement has been (and the Indenture will be on the Closing Date) duly authorized, executed and delivered by the Company and is (and the Indenture will be on the Closing Date) the legal, valid and binding agreements on the part of the Company enforceable in accordance with their respective terms, except (i) as rights to indemnity and contribution which may be limited by applicable law, (ii) enforcement may be limited by applicable bankruptcy, insolvency, reorganization, receivership, moratorium and other similar laws affecting the rights of creditors generally and (iii) as may be limited by general principles of equity, whether applied by a court of law or equity. The performance of this Agreement and the Indenture and the consummation of the transactions contemplated herein and therein will not result in a breach or violation of any of the terms and provisions of, or constitute a default under, (i) any indenture, mortgage, deed of trust, loan agreement, bond, debenture, note agreement or other evidence of indebtedness, or any other material lease, contract, joint venture or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which the property of the Company or any of its subsidiaries is bound, or (ii) the Company's or any of its subsidiaries' charters or By-laws, or (iii) any statute or any order, rule or regulation of any court or governmental agency or body having jurisdiction over the Company or any of its subsidiaries or over the properties of the Company or any of its subsidiaries. (h) Except as set forth in the Prospectus, there is no pending or, to the Company's knowledge, threatened action, suit, claim or proceeding against the Company, any of its subsidiaries or any of their respective officers, directors, properties, assets or rights before any court or governmental agency or body or otherwise which, if adversely determined, would reasonably be expected to have a Material Adverse Effect or adversely affect the consummation of the transactions contemplated hereby; and there are no contracts or documents of the Company or any of its subsidiaries which are required to be described in the Prospectus or to be filed as exhibits to the Registration Statement by the Act or by the Rules and Regulations which have not been accurately described in all material respects in the Prospectus and/or filed as exhibits to the Registration Statement. (i) KPMG Peat Marwick LLP and Price Waterhouse LLP, who have examined certain of the consolidated financial statements, together with the related schedules and notes of the Company, filed with the Commission as a part of the Registration Statement, are independent accountants within the meaning of the Act and the Rules and Regulations. (j) Subsequent to the respective dates as of which information is given in the Registration Statement and Prospectus, and except as may be otherwise stated in the Prospectus, there has not been (i) any material adverse change in the condition (financial or otherwise), business, properties or prospects of the Company and its subsidiaries, taken as a whole, (ii) any transaction which is material to the Company and its subsidiaries, taken as a whole, except transactions in the ordinary course of business, (iii) any obligation which is material to the Company and its subsidiaries (taken as a whole), direct or contingent, incurred by the Company or its subsidiaries, except obligations incurred in the ordinary course of business, (iv)+any change which is material to the Company and its subsidiaries, taken as a whole, in the capital stock or outstanding indebtedness of the Company or its subsidiaries, or (v) any dividend or distribution of any kind declared, paid or made on the capital stock of the Company or its subsidiaries. (k) Except as set forth in the Registration Statement, (i) the Company and its subsidiaries have good and marketable title to all properties and assets described in the Prospectus as owned by them, free and clear of any liens, charges, encumbrances or restrictions, other than the liens granted pursuant to the Amended and Restated Credit Agreement and the Collateral Documents and such liens, charges, encumbrances or restrictions that are not significant in relation to the business of the Company and its subsidiaries when taken in the aggregate, and (ii) the material agreements to which the Company and its subsidiaries are a party are valid and enforceable by the Company and its subsidiaries (as applicable), except as enforcement may be limited by applicable bankruptcy, insolvency, reorganization, receivership, moratorium and other similar laws affecting the rights of creditors generally and as may be limited by general principals of equity, whether applied by a court of law or equity, and, to the Company's knowledge, the other contracting party or parties thereto are not in material breach or material default under any of such agreements. (l) The Company and its subsidiaries have filed all necessary foreign, federal and state income and franchise tax returns and have paid or adequately reserved for on the Company's books all taxes shown thereon as due, and the Company has no knowledge of any tax deficiency which has been or might be asserted against the Company or its subsidiaries which could reasonably be expected to have a Material Adverse Effect; to the Company's knowledge, all tax liabilities are adequately provided for on the books of the Company and its subsidiaries. (m) The Company and its subsidiaries maintain insurance of the types and in amounts generally deemed adequate for their respective business and consistent with insurance coverage maintained by similar companies in similar businesses, including, but not limited to, insurance covering real and personal property owned or leased by the Company and its subsidiaries against theft, damage, destruction, acts of vandalism and all other risks customarily insured against, all of which insurance is in full force and effect. (n) To the Company's knowledge, no labor disturbance by the employees of the Company and its subsidiaries exists or is imminent. (o) The Company and its subsidiaries own, or possess adequate rights to use, all patents, patent rights, inventions, trade secrets, know-how, trademarks, service marks, trade names, copyrights, contractual franchises, authorizations and other rights described or referred to in the Prospects as owned or used by it or which are material and necessary for the conduct of their businesses; neither the Company nor any of its subsidiaries has received any notice of infringement of or conflict with asserted rights of others with respect to any patents, patent rights, inventions, trade secrets, know-how, trademarks, service marks, trade names, copyrights, contractual franchises, authorizations or other rights which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would reasonably be expected to have a Material Adverse Effect. (p) Neither the Company nor, to the Company's knowledge, any of its affiliates, has taken or may take, directly or indirectly, any action designed to cause or result in, or which has constituted or which might reasonably be expected to constitute, the stabilization or manipulation of the price of the shares of Common Stock or Notes to facilitate the sale or resale of the Notes. (q) The Company is not, and after giving effect to the issuance of the Notes will not be, an "investment company" within the meaning of the Investment Company Act of 1940, as amended, and the Company will not, as a result of the consummation of the transactions contemplated by this Agreement, be subject to regulation under said Act. (r) Upon the execution and delivery of the Indenture by the parties thereto, the Indenture will be duly qualified under, and conform in all material respects to the requirements of, the Trust Indenture Act of 1939, as amended. (s) The Company is in compliance in all material respects with all presently applicable provisions of the Employee Retirement Income Securities Act of 1974, as amended, including the regulations and published interpretations thereunder ("ERISA"); no "reportable event" (as defined in ----- ERISA) has occurred with respect to any "pension plan" (as defined in ERISA) for which the Company would have any liability; the Company has not incurred and does not expect to incur liability under (i)+Title IV of ERISA with respect to termination of, or withdrawal from, any "pension plan" or (ii)+Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended, including the regulations and published interpretations thereunder (the "Code"); and each "pension plan" for which the Company would have any ---- liability that is intended to be qualified under Section 401(a) of the Code is so qualified in all material respects and nothing has occurred, whether by action or by failure to act, which would cause the loss of such qualification. 2. PURCHASE OF THE NOTES BY THE UNDERWRITERS. (a) On the basis of the representations and warranties and subject to the terms and conditions herein set forth, the Company agrees to issue and sell $100,000,000 aggregate principal amount of the Underwritten Notes to the several Underwriters and each of the Underwriters agrees to purchase from the Company the principal amount of Underwritten Notes set forth opposite its name in Schedule I hereof at a purchase price of ___% of their - ---------- principal amount, plus interest, if any, subject to adjustments in accordance with paragraph (b) of this Section 2. In making this Agreement, each Underwriter --------- is contracting severally and not jointly; except as provided in paragraphs (b) and (c) of this Section 2, the agreement of each Underwriter is to purchase only --------- the respective principal amount of the Underwritten Notes specified in Schedule I. (b) If for any reason one or more of the Underwriters shall fail or refuse (otherwise than for a reason sufficient to justify the termination of this Agreement under the provisions of Section 7 or 8 hereof) to purchase and pay for --------- - the aggregate principal amount of Notes agreed to be purchased by such Underwriter or Underwriters, the Company shall immediately give notice thereof to you, and the non-defaulting Underwriters shall have the right within 24 hours after the receipt by you of such notice to purchase, or procure one or more other Underwriters to purchase, in such proportions as may be agreed upon between you and such purchasing Underwriter or Underwriters and upon the terms herein set forth, all or any portion of the aggregate principal amount of Notes which such defaulting Underwriter or Underwriters agreed to purchase. If the non-defaulting Underwriters fail so to make such arrangements with respect to all such Notes and portion, the aggregate principal amount of Notes which each non-defaulting Underwriter is otherwise obligated to purchase under this Agreement shall be automatically increased on a pro rata basis to absorb the remaining Notes and portion which the defaulting Underwriter or Underwriters agreed to purchase; provided, however, that the non-defaulting Underwriters shall not be obligated to purchase the Notes and portion which the defaulting Underwriter or Underwriters agreed to purchase if the aggregate principal amount of such Notes exceeds 10% of the total aggregate principal amount of the Notes which all Underwriters agreed to purchase hereunder. If the aggregate principal amount of the Notes which the defaulting Underwriter or Underwriters agreed to purchase shall not be purchased or absorbed in accordance with the two preceding sentences, the Company shall have the right, within 24 hours next succeeding the 24-hour period above referred to, to make arrangements with other underwriters or purchasers satisfactory to you for purchase of such Notes and portion on the terms herein set forth. In any such case, either you or the Company shall have the right to postpone the Closing Date determined as provided in Section 4 --------- hereof for not more than seven business days after the date originally fixed as the Closing Date pursuant to said Section 4 in order that any --------- necessary changes in the Registration Statement, the Prospectus or any other documents or arrangements may be made. If neither the non-defaulting Underwriters nor the Company shall make arrangements within the 24-hour periods stated above for the purchase of all of the Notes which the defaulting Underwriter or Underwriters agreed to purchase hereunder, this Agreement shall be terminated without further act or deed and without any liability on the part of the Company to any non-defaulting Underwriter and without any liability on the part of any non-defaulting Underwriter to the Company. Nothing in this paragraph (b), and no action taken hereunder, shall relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. (c) On the basis of the representations, warranties and covenants herein contained, and subject to the terms and conditions herein set forth, the Company grants an option to the several Underwriters to purchase, severally and not jointly, up to $15,000,000 aggregate principal amount of Option Notes from the Company at the same price per Note as the Underwriters shall pay for the Underwritten Notes. Said option may be exercised only to cover over-allotments in the sale of the Underwritten Notes by the Underwriters and may be exercised in whole or in part at any time (but not more than once) on or before the thirtieth day after the date of this Agreement upon written or telegraphic notice by you to the Company setting forth the aggregate principal amount of Option Notes as to which the several Underwriters are exercising the option. Delivery of certificates for the Option Notes, and payment therefor, shall be made as provided in Section 4 hereof. The aggregate principal amount of Option --------- Notes to be purchased by each Underwriter shall be the same percentage of the aggregate principal amount of Option Notes to be purchased by the several Underwriters as such Underwriter is purchasing of the Underwritten Notes, as adjusted by you in such manner as you deem advisable to avoid fractional Notes. 3. OFFERING BY UNDERWRITERS. (a) The terms of the initial public offering by the Underwriters of the Notes to be purchased by them shall be as set forth in the Prospectus. The Firm Notes are to be initially offered to the public at 100% of their principal amount, plus interest, if any. The Underwriters may from time to time change the public offering price after the closing of the initial public offering and increase or decrease the concessions and discounts to dealers as they may determine. To the extent, if at all, that any Option Notes are purchased pursuant to Section 2 --------- hereof, the Underwriters will offer them to the public on the foregoing terms. (b) The information set forth in the last paragraph on the front cover page and under "Underwriting" in the Registration Statement, any Preliminary Prospectus and the Prospectus relating to the Notes filed by the Company (insofar as such information relates to the Underwriters) constitutes the only information furnished by the Underwriters to the Company for inclusion in the Registration Statement, any Preliminary Prospectus, and the Prospectus, and you on behalf of the respective Underwriters represent and warrant to the Company that the statements made therein are correct. 4. DELIVERY OF AND PAYMENT FOR THE NOTES. (a) Delivery of the aggregate principal amount of the Underwritten Notes and the Option Notes (if the option granted by Section 2(c) hereof shall have been ----------- exercised not later than 9:00 A.M., Chicago time, on the business day preceding the Closing Date), and payment therefor, shall be made at the offices of Sachnoff & Weaver, Ltd., 30 South Wacker Drive, 29th Floor, Chicago, Illinois 60606-7484, at 9:00 a.m., Chicago time, on the third business day after the date of this Agreement, or at such time on such other day, not later than seven full business days after such third business day, as shall be agreed upon in writing by the Company and you. The date and hour of such delivery and payment (which may be postponed as provided in Section 2(b) hereof) are herein called the ------------ "Closing Date". (As used herein, "business day" means a day on which the New ------------ ------------ York Stock Exchange is open for trading and on which banks in New York are open for business and not permitted by law or executive order to be closed). (b) If the option granted by Section 2(c) hereof shall be exercised after 9:00 ------------ a.m., Chicago time, on the business day preceding the Closing Date, delivery of certificates for the Option Notes, and payment therefor, shall be made at the office Sachnoff & Weaver, Ltd., 30 South Wacker Drive, 29th Floor, Chicago, Illinois 60606-7484, at 9:00 a.m., Chicago time, on the third business day after the exercise of such option (the "Option Closing Date" ). ------------------- (c) Payment for the Notes purchased from the Company shall be made by wire transfer of immediately available funds to an account or accounts designated by the Company to the Representative within two business days prior to the Closing Date. Such payment shall be made upon delivery of the Notes to you for the respective accounts of the several Underwriters against receipt therefor signed by you. The Notes to be delivered to you shall be registered in the name of Cede & Co., as nominee of The Depository Trust Company, or at the request of you, delivered in such denominations and in such registrations as the Representative requests in writing not later than the second full business day prior to the Closing Date in the case of Underwritten Notes, and at least one business day prior to the purchase thereof, in the case of the Option Notes. Such Notes will be made available for inspection by the Company at the offices of Sachnoff & Weaver, Ltd., 30 South Wacker Drive, 29th Floor, Chicago, Illinois 60606-7484 at least one business day prior to the Closing Date or, in the case of the Option Notes, by 3:00 p.m., New York time, on the business day preceding the date of purchase. It is understood that you, individually and not on behalf of the Underwriters, may (but shall not be obligated to) make payment to the Company for Notes to be purchased by any Underwriter whose wire shall not have been received by you on the Closing Date or any later date on which Option Notes are purchased for the account of such Underwriter. Any such payment by you shall not relieve such Underwriter from any of its obligations hereunder. 5. FURTHER AGREEMENTS OF THE COMPANY. The Company covenants and agrees as follows: (a) The Company will (i) prepare and timely file with the Commission under Rule 424(b) a Prospectus containing information previously omitted at the time of effectiveness of the Registration Statement in reliance on Rule 430A and (ii) not file any amendment to the Registration Statement or supplement to the Prospectus of which you shall not previously have been advised and furnished with a copy or to which you shall have reasonably objected in writing or which is not in compliance with the Act or the Rules and Regulations of the Commission. (b) The Company will promptly notify each Underwriter in the event of (i) the request by the Commission for amendment of the Registration Statement or for supplement to the Prospectus or for any additional information, (ii) the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement, (iii) the institution or notice of intended institution of any action or proceeding for that purpose, (iv) the receipt by the Company of any notification with respect to the suspension of the qualification of the Notes for sale in any jurisdiction, or (v) the receipt by it of notice of the initiation or threatening of any proceeding for such purpose. The Company will make every reasonable effort to prevent the issuance of such a stop order and, if such an order shall at any time be issued, to obtain the withdrawal thereof at the earliest possible moment. (c) The Company will (i) on or before the Closing Date, deliver to you a signed copy of the Registration Statement as originally filed and of each amendment thereto filed prior to the time the Registration Statement becomes effective and, promptly upon the filing thereof, a signed copy of each post-effective amendment, if any, to the Registration Statement (together with, in each case, all exhibits thereto unless previously furnished to you) and will also deliver to you, for distribution to the Underwriters, a sufficient number of additional conformed copies of each of the foregoing (but without exhibits) so that one copy of each may be distributed to each Underwriter, (ii) as promptly as possible deliver to you and send to the several Underwriters, at such office or offices as you may designate, as many copies of the Prospectus as you may reasonably request, and (iii) thereafter from time to time during the period in which a prospectus is required by law to be delivered by an Underwriter or dealer, likewise send to the Underwriters as many additional copies of the Prospectus and as many copies of any supplement to the Prospectus and of any amended prospectus, filed by the Company with the Commission, as you may reasonably request for the purposes contemplated by the Act. (d) If at any time during the period in which a prospectus is required by law to be delivered by an Underwriter or dealer any event relating to or affecting the Company, or of which the Company shall be advised in writing by you, shall occur as a result of which it is necessary, in the opinion of counsel for the Company or of counsel for the Underwriters, to supplement or amend the Prospectus in order to make the Prospectus not misleading in the light of the circumstances existing at the time it is delivered to a purchaser of the Notes, the Company will forthwith prepare and file with the Commission a supplement to the Prospectus or an amended prospectus so that the Prospectus as so supplemented or amended will not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances existing at the time such Prospectus is delivered to such purchaser, not misleading. If, after the initial public offering of the Notes by the Underwriters and during such period, the Underwriters shall propose to vary the terms of offering thereof by reason of changes in general market conditions or otherwise, you will advise the Company in writing of the proposed variation, and, if in the opinion either of counsel for the Company or of counsel for the Underwriters such proposed variation requires that the Prospectus be supplemented or amended, the Company will forthwith prepare and file with the Commission a supplement to the Prospectus or an amended prospectus setting forth such variation. The Company authorizes the Underwriters and all dealers to whom any of the Notes may be sold by the several Underwriters to use the Prospectus, as from time to time amended or supplemented, in connection with the sale of the Notes in accordance with the applicable provisions of the Act and the applicable rules and regulations thereunder for such period. (e) Prior to the filing thereof with the Commission, the Company will submit to you, for your information, a copy of any post-effective amendment to the Registration Statement and any supplement to the Prospectus or any amended prospectus proposed to be filed. 16 (f) The Company will cooperate, when and as requested by you, in the qualification of the Notes for offer and sale under the securities or blue sky laws of such jurisdictions as you may designate and, during the period in which a prospectus is required by law to be delivered by an Underwriter or dealer, in keeping such qualifications in good standing under said securities or blue sky laws; provided, however, that the Company shall not be obligated to file any general consent to service of process or to qualify as a foreign corporation in any jurisdiction in which it is not so qualified. The Company will, from time to time, prepare and file such statements, reports, and other documents as are or may be required to continue such qualifications in effect for so long a period as you may reasonably request for distribution of the Notes. (g) During a period of five years commencing with the date hereof, the Company will furnish to you, and to each Underwriter who may so request in writing, copies of all periodic and special reports furnished to stockholders of the Company and of all information, documents and reports filed with the Commission. (h) Not later than the 45th day following the end of the fiscal quarter first occurring after the first anniversary of the date hereof, the Company will make generally available to its security holders an earnings statement in accordance with Section 11(a) of the Act and Rule 158 thereunder. (i) The Company agrees to pay all costs and expenses incident to the performance of its obligations under this Agreement, including all costs and expenses incident to (i) the preparation, printing and filing with the Commission and the NASD of the Registration Statement, any Preliminary Prospectus and the Prospectus, (ii) the furnishing to the Underwriters of copies of any Preliminary Prospectus and of the several documents required by paragraph (c) of this Section 5 to be so furnished, (iii) the printing --------- of this Agreement and related documents delivered to the Underwriters, (iv) the preparation, printing and filing of all supplements and amendments to the Prospectus referred to in paragraph (d) of this Section 5, (v) the --------- furnishing to you and the Underwriters of the reports and information referred to in paragraph (g) of this Section 5 and (vi) the 17 printing and issuance of the Notes, including the Trustee's fees. (j) The Company agrees to reimburse you, for the account of the several Underwriters, for blue sky fees and related disbursements (including counsel fees and disbursements and cost of printing memoranda for the Underwriters) paid by or for the account of the Underwriters or their counsel in qualifying the Notes under state securities or blue sky laws and in the review of the offering by the NASD. (k) No offering, sale, short sale or other disposition of any Common Stock of the Company or other securities convertible into or exchangeable for Common Stock or derivative of Common Stock will be made for a period of 90 days after the date of this Agreement, directly or indirectly, by the Company otherwise than hereunder or with the prior written consent of Hambrecht & Quist LLC, except that the Company may, without such consent, (i) issue shares to directors pursuant to the Company's restricted stock plan, (ii) grant options pursuant to the Company's existing stock option plans, and (iii) issue shares upon the exercise of options and warrants or the conversion of securities outstanding on the date of this Agreement. (l) The Company will use its best efforts to list, subject to notice of issuance, the Notes on The Nasdaq SmallCap Market and the Common Stock issuable upon conversion of the Notes on The Nasdaq National Market. (m) The Company has caused each executive officer and director of the Company and the holder of the Existing Subordinated Note to furnish to you, on or prior to the date of this Agreement, a letter or letters, in form and substance satisfactory to the Representative, pursuant to which each such person shall agree not to offer, sell, sell short or otherwise dispose of any shares of Common Stock or other capital stock of the Company, or any other securities convertible, exchangeable or exercisable for shares of Common Stock or derivative of shares of Common Stock owned by such person or request the registration for the offer or sale of any of the foregoing (or as to which such person has the right to direct the disposition of) for a period of 90 days after the date of this Agreement, directly or 18 indirectly, except with the prior written consent of Hambrecht & Quist LLC ("Lockup Agreements"). ----------------- (n) The Company will apply the net proceeds from the sale of the Notes for the purposes set forth in the Prospectus. (o) The Company is familiar with the Investment Company Act of 1940, as amended, and has in the past conducted its affairs, and will in the future conduct its affairs, in such a manner to ensure that the Company was not and will not be an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended, and the rules and regulations thereunder. 6. INDEMNIFICATION AND CONTRIBUTION. (a) The Company agrees to indemnify and hold harmless each Underwriter and each person (including each partner or officer thereof) who controls any Underwriter within the meaning of Section 15 of the Act from and against any and all losses, claims, damages or liabilities, joint or several, to which such indemnified parties or any of them may become subject under the Act, the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or the common ------------ law or otherwise, and the Company agrees to reimburse each such Underwriter and controlling person for any legal or other expenses (including, except as otherwise hereinafter provided, reasonable fees and disbursements of counsel) incurred by the respective indemnified parties in connection with defending against any such losses, claims, damages or liabilities or in connection with any investigation or inquiry of, or other proceeding which may be brought against, the respective indemnified parties, in each case arising out of or based upon (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (including the Prospectus as part thereof and any Rule 462(b) registration statement) or any post-effective amendment thereto (including any Rule 462(b) registration statement), or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) any untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus or the Prospectus (as amended or as supplemented if the Company shall have filed with the Commission any amendment thereof or supplement thereto) or the omission or alleged 19 omission to state therein a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading or (iii) any pre-existing agreement, understanding or relationship between the Company and any other third party relating to the public offering of securities pursuant to the Registration Statement; provided, however, that (1) the indemnity agreements of the Company contained in this paragraph (a) shall not apply to any such losses, claims, damages, liabilities or expenses if such statement or omission was made in reliance upon and in conformity with information furnished as herein stated or otherwise furnished in writing to the Company by or on behalf of any Underwriter for use in any Preliminary Prospectus or the Registration Statement or the Prospectus or any such amendment thereof or supplement thereto and (2) the indemnity agreements contained in this paragraph (a) with respect to any Preliminary Prospectus shall not inure to the benefit of any Underwriter from whom the person asserting any such losses, claims, damages, liabilities or expenses purchased the Notes which is the subject thereof (or to the benefit of any person controlling such Underwriter) if at or prior to the written confirmation of the sale of such Notes a copy of the Prospectus (or the Prospectus as amended or supplemented) was not sent or delivered to such person (excluding the documents incorporated therein by reference) and the untrue statement or omission of a material fact contained in such Preliminary Prospectus was corrected in the Prospectus (or the Prospectus as amended or supplemented) unless the failure is the result of noncompliance by the Company with paragraph (c) of Section 5 hereof. The --------- indemnity agreements of the Company contained in this paragraph (a) and the representations and warranties of the Company contained in Section 1 hereof --------- shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any indemnified party and shall survive the delivery of and payment for the Notes. (b) Each Underwriter severally agrees to indemnify and hold harmless the Company, each of its officers who signs the Registration Statement on his own behalf or pursuant to a power of attorney, each of its directors, each other Underwriter and each person (including each partner or officer thereof) who controls the Company or any such other Underwriter within the meaning of Section 15 of the Act, from and against any and all losses, claims, damages or liabilities, joint or several, to which such indemnified parties or any of them may become subject under the Act, the Exchange Act, or the common law or otherwise 20 and to reimburse each of them for any legal or other expenses (including, except as otherwise hereinafter provided, reasonable fees and disbursements of counsel) incurred by the respective indemnified parties in connection with defending against any such losses, claims, damages or liabilities or in connection with any investigation or inquiry of, or other proceeding which may be brought against, the respective indemnified parties, in each case arising out of or based upon (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (including the Prospectus as part thereof and any Rule 462(b) registration statement) or any post-effective amendment thereto (including any Rule 462(b) registration statement) or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading or (ii) any untrue statement or alleged untrue statement of a material fact contained in the Prospectus (as amended or as supplemented if the Company shall have filed with the Commission any amendment thereof or supplement thereto) or the omission or alleged omission to state therein a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, if such statement or omission was made in reliance upon and in conformity with information furnished as herein stated or otherwise furnished in writing to the Company by or on behalf of such indemnifying Underwriter for use in the Registration Statement or the Prospectus or any such amendment thereof or supplement thereto. The indemnity agreement of each Underwriter contained in this paragraph (b) shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any indemnified party and shall survive the delivery of and payment for the Notes. (c) Each party indemnified under the provision of paragraphs (a) and (b) of this Section 6 agrees that, upon the service of a summons or other initial legal --------- process upon it in any action or suit instituted against it or upon its receipt of written notification of the commencement of any investigation or inquiry of, or proceeding against, it in respect of which indemnity may be sought on account of any indemnity agreement contained in such paragraphs, it will promptly give written notice (the "Notice") of such service or notification to the party or ------ parties from whom indemnification may be sought hereunder. No indemnification provided for in such paragraphs shall be available to any party who shall fail so to give the Notice if the party to whom such Notice was not given was unaware of the action, suit, 21 investigation, inquiry or proceeding to which the Notice would have related and was prejudiced by the failure to give the Notice, but the omission so to notify such indemnifying party or parties of any such service or notification shall not relieve such indemnifying party or parties from any liability which it or they may have to the indemnified party for contribution or otherwise than on account of such indemnity agreement. Any indemnifying party shall be entitled at its own expense to participate in the defense of any action, suit or proceeding against, or investigation or inquiry of, an indemnified party. Any indemnifying party shall be entitled, if it so elects within a reasonable time after receipt of the Notice by giving written notice (the "Notice of Defense") to the indemnified ----------------- party, to assume (alone or in conjunction with any other indemnifying party or parties) the entire defense of such action, suit, investigation, inquiry or proceeding, in which event such defense shall be conducted, at the expense of the indemnifying party or parties, by counsel chosen by such indemnifying party or parties and reasonably satisfactory to the indemnified party or parties; provided, however, that (i) if the indemnified party or parties reasonably determine that there may be a conflict between the positions of the indemnifying party or parties and of the indemnified party or parties in conducting the defense of such action, suit, investigation, inquiry or proceeding or that there may be legal defenses available to such indemnified party or parties different from or in addition to those available to the indemnifying party or parties, then counsel for the indemnified party or parties shall be entitled to conduct the defense to the extent reasonably determined by such counsel to be necessary to protect the interests of the indemnified party or parties and (ii) in any event, the indemnified party or parties shall be entitled to have counsel chosen by such indemnified party or parties participate in, but not conduct, the defense. If, within a reasonable time after receipt of the Notice, an indemnifying party gives a Notice of Defense and the counsel chosen by the indemnifying party or parties is reasonably satisfactory to the indemnified party or parties, the indemnifying party or parties will not be liable under paragraphs (a) through (c) of this Section 6 for any legal or other expenses --------- subsequently incurred by the indemnified party or parties in connection with the defense of the action, suit, investigation, inquiry or proceeding, except that (A) the indemnifying party or parties shall bear the legal and other expenses incurred in connection with the conduct of the defense as referred to in clause (i) of the proviso to the preceding sentence and (B) the indemnifying 22 party or parties shall bear such other expenses as it or they have authorized to be incurred by the indemnified party or parties. If, within a reasonable time after receipt of the Notice, no Notice of Defense has been given, the indemnifying party or parties shall be responsible for any legal or other expenses incurred by the indemnified party or parties in connection with the defense of the action, suit, investigation, inquiry or proceeding. (d) If the indemnification provided for in this Section 6 is unavailable or --------- insufficient to hold harmless an indemnified party under paragraph (a) or (b) of this Section 6, then each indemnifying party, in lieu of indemnifying such --------- indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of the losses, claims, damages or liabilities referred to in paragraph (a) or (b) of this Section 6 (i) in such proportion as --------- is appropriate to reflect the relative benefits received by each indemnifying party from the offering of the Notes 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 but also the relative fault of each indemnifying party in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, or actions in respect thereof, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Underwriters shall be deemed to be in the same respective proportions as the total net proceeds from the offering of the Notes received by the Company and the total underwriting discount received by the Underwriters, as set forth in the table on the cover page of the Prospectus, bear to the aggregate public offering price of the Notes. Relative fault 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 each indemnifying party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The parties agree that it would not be just and equitable if contributions pursuant to this paragraph (d) were to be determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take into account the equitable considerations referred to in the first sentence of this 23 paragraph (d). The amount paid by an indemnified party as a result of the losses, claims, damages or liabilities, or actions in respect thereof, referred to in the first sentence of this paragraph (d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigation, preparing to defend or defending against any action or claim which is the subject of this paragraph (d). Notwithstanding the provisions of this paragraph (d), no Underwriter shall be required to contribute any amount in excess of the underwriting discount applicable to the Notes purchased by such Underwriter. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations in this paragraph (d) to contribute are several in proportion to their respective underwriting obligations and not joint. Each party entitled to contribution agrees that upon the service of a summons or other initial legal process upon it in any action instituted against it in respect of which contribution may be sought, it will promptly give written notice of such service to the party or parties from whom contribution may be sought, but the omission so to notify such party or parties of any such service shall not relieve the party from whom contribution may be sought from any obligation it may have hereunder or otherwise (except as specifically provided in paragraph (c) of this Section 6). --------- (e) The Company will not, without the prior written consent of each Underwriter, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnification may be sought hereunder (whether or not such Underwriter or any person who controls such Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act is a party to such claim, action, suit or proceeding) unless such settlement, compromise or consent includes an unconditional release of such Underwriter and each such controlling person from all liability arising out of such claim, action, suit or proceeding. 7. TERMINATION. This Agreement may be terminated by you at any time prior to the Closing Date by giving written notice to the Company if after the date of this Agreement trading in the Company's Common Stock shall have been suspended, or if there 24 shall have occurred (i) the engagement in hostilities or an escalation of major hostilities by the United States or the declaration of war or a national emergency by the United States on or after the date hereof, (ii) any outbreak of hostilities or other national or international calamity or crisis or change in economic or political conditions if the effect of such outbreak, calamity, crisis or change in economic or political conditions in the financial markets of the United States would, in the Underwriters' judgment, make the offering or delivery of the Notes impracticable, (iii) suspension of trading in securities generally or a material adverse decline in value of securities generally on the New York Stock Exchange, the American Stock Exchange, Nasdaq, or limitations on prices (other than limitations on hours or numbers of days of trading) for securities on either such exchange or system, (iv) the enactment, publication, decree or other promulgation of any federal or state statute, regulation, rule or order of, or the commencement of any legal proceeding or investigation by any governmental or third party before any court, legislative body, agency or other governmental authority which in the Underwriters' opinion materially and adversely affects or will materially or adversely affect the business or operations of the Company or the offering of the Notes, (v) declaration of a banking moratorium by either federal or New York State authorities or (vi) the taking of any action by any federal, state or local government or agency in respect of its monetary or fiscal affairs which in the Underwriters' opinion has a material adverse effect on the securities markets in the United States. If this Agreement shall be terminated pursuant to this Section 7, there shall be no liability of the Company to the Underwriters --------- and no liability of the Underwriters to the Company; provided, however, that in the event of any such termination the Company agrees to indemnify and hold harmless the Underwriters from all costs or expenses incident to the performance of the obligations of the Company under this Agreement, including all costs and expenses referred to in paragraphs (i) and (j) of Section 5 hereof. --------- 8. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the several Underwriters to purchase and pay for the Notes shall be subject to the performance by the Company of all its obligations to be performed hereunder at or prior to the Closing Date, or any later date on which Option Notes are to be purchased, as the case may be, and to the following further conditions: 25 (a) The Registration Statement shall have become effective; and no stop order suspending the effectiveness thereof shall have been issued and no proceedings therefor shall be pending or threatened by the Commission. (b) The legality and sufficiency of the sale of the Notes hereunder and the validity and form of the security representing the Notes, all corporate proceedings and other legal matters incident to the foregoing, and the form of the Registration Statement and of the Prospectus (except as to the financial statements contained therein), shall have been approved at or prior to the Closing Date by Willkie Farr & Gallagher, counsel for the Underwriters. (c) The Representatives shall have received on the Closing Date and on the Option Closing Date, if any, the opinion of Sachnoff & Weaver, Ltd., counsel for the Company, dated the Closing Date or the Option Closing Date, as the case may be, addressed to the Underwriters and with reproduced copies or signed counterparts thereof for each of the Underwriters, to the effect that: (i)++Each of the Company and its subsidiaries incorporated in the United States that are identified on Schedule II hereto (the "U.S. ---- Subsidiaries") is validly existing as a corporation in good standing under ------------ the laws of its respective jurisdiction of incorporation; (ii)++The Company and each of its U.S. Subsidiaries have the requisite corporate power to own, lease and operate their respective businesses as described in the Prospectus; and the Company and each of its U.S. Subsidiaries are duly qualified to do business as a foreign corporation and are in good standing in all jurisdictions in the United States in which the Company and its U.S. Subsidiaries are required to be qualified, except where the failure so to qualify would not reasonably be expected to have a Material Adverse Effect; (iii)++The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectus under the caption "Capitalization" as of the dates stated therein; and the issued and outstanding shares of capital stock of the Company have been duly and validly authorized and issued, are fully paid and nonassessable, and have not, to 26 such counsel's knowledge, been issued in violation of any preemptive right granted by the Company or any right of first refusal granted by the Company; (iv) Except as described in or contemplated by the Prospectus or in this Agreement, to the knowledge of such counsel, there are no outstanding securities of the Company convertible or exchangeable into or evidencing the right to purchase or subscribe for any shares of capital stock of the Company and there are no outstanding or authorized options, warrants or rights of any character obligating the Company to issue any shares of its capital stock or any securities convertible or exchangeable into or evidencing the right to purchase or subscribe for any shares of such stock; and except as described in the Prospectus or in this Agreement, to the knowledge of such counsel, no holder of any securities of the Company or any other person has the right, contractual or otherwise, which has not been satisfied or effectively waived, to cause the Company to sell or otherwise issue to them, or to permit them to underwrite the sale of, shares of Common Stock or other securities of the Company or the right to have any shares of Common Stock or other securities of the Company included in the Registration Statement or the right, as a result of the filing of the Registration Statement, to require registration under the Act of any shares of Common Stock or other securities of the Company; (v) The Registration Statement, the Prospectus and each amendment or supplement thereto and document incorporated by reference therein comply as to form in all material respects with the requirements of the Act or the Exchange Act, as applicable, and the applicable rules and regulations thereunder (except that such counsel need express no opinion as to the financial statements and related schedules therein); (vi) Such counsel does not know of any contracts or documents required to be filed as exhibits to or incorporated by reference in the Registration Statement or described in the Registration Statement or the Prospectus which are not so filed, incorporated by reference or described as required, and such contracts and documents as are summarized in the Registration Statement or the 27 Prospectus are accurately summarized in all material respects; (vii) The Company is not, and will not become, as a result of the consummation of the transactions contemplated by this Agreement, and application of the net proceeds therefrom as described in the Prospectus, required to register as an investment company under the Investment Company Act of 1940, as amended; (viii)++The Indenture (i)+has been duly authorized by all necessary corporate action on the part of the Company and has been duly executed and delivered by the Company, and, assuming due authorization, execution and delivery by the Trustee, is a valid and binding agreement of the Company, enforceable against the Company in accordance with its terms, except (y) as may be limited by the effects of bankruptcy, insolvency, reorganization, receivership, moratorium and other similar laws affecting the rights and remedies of creditors generally and (z) as may be limited by general principles of equity, whether applied by a court of law or equity and (ii)+has been duly qualified under, and conforms to the requirements of, the Trust Indenture Act of 1939, as amended, in all material respects; (ix)++The Company has all requisite corporate power and authority to enter into this Agreement and the Indenture and to issue, sell and deliver to the Underwriters the Notes to be issued and sold by it hereunder; (x)++This Agreement has been duly authorized by all necessary corporate action on the part of the Company and has been duly executed and delivered by the Company and, assuming due authorization, execution and delivery by you, is a valid and binding agreement of the Company, enforceable against the Company in accordance with its terms, except insofar as indemnification and contribution provisions may be limited by applicable law or equitable principles, and except as enforceability may be limited by bankruptcy, insolvency, reorganization, receivership, moratorium and other similar laws affecting the rights and remedies of creditors generally and by general principles of equity, whether applied by a court of law or equity; 28 (xi)++The Registration Statement has become effective under the Act and, to such counsel's knowledge, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or, to such counsel's knowledge, are contemplated under the Act; (xii)++The terms and provisions of the Notes and capital stock of the Company conform in all material respects to the descriptions thereof contained in the Registration Statement and Prospectus, and the information in the Prospectus under the captions "Description of Notes," "Description of the Private Offering" and "Description of Common Stock," has been reviewed by such counsel and accurately summarizes the matters described therein in all material respects; (xiii)++Assuming the application of the net proceeds of the offering as contemplated by the Prospectus, the performance of the Company's obligations under the Indenture and this Agreement and the consummation of the transactions contemplated herein will not result in the breach or violation of any of the terms and provisions, or constitute a default under, (a) any indenture, mortgage, deed of trust, loan agreement, bond, debenture, note agreement or other evidence of indebtedness, or any material lease, contract, joint venture or other agreement or instrument to which the Company or any of its U.S. Subsidiaries is a party or by which the property of the Company or any of its U.S. Subsidiaries is bound, other than such breaches or violations that would not, singularly or in the aggregate, reasonably be expected to have a Material Adverse Effect, (b) the Company's or any of its U.S. Subsidiaries' charter or by-laws, (c) any applicable statute, rule or regulation, other than such breaches or violations that would not, singularly or in the aggregate, reasonably be expected to have a Material Adverse Effect, or (d) to such counsel's knowledge, any order, writ or decree of any court or governmental agency or body having jurisdiction over the Company, any of its U.S. Subsidiaries or over any of their respective properties or operations; (xiv)++No authorization, approval or consent of any governmental authority or agency is necessary in connection with consummation of the transactions herein contemplated, 29 except such as have been obtained under the Act or such as may be required under state or other securities or Blue Sky laws or by the NASD in connection with the purchase and distribution of the Notes by the Underwriters; (xv)++To such counsel's knowledge, except as described in the Prospectus, there are no legal or governmental proceedings pending or threatened of a character that are required to be disclosed in the Registration Statement by the Act or the applicable Rules and Regulations, other than those disclosed therein; (xvi)++To such counsel's knowledge, neither the Company nor any of its U.S. Subsidiaries is presently in breach of, or in default under, any indenture, mortgage, deed of trust, loan agreement, bond, debenture, note agreement or other evidence of indebtedness or any other material lease, joint venture, contract, agreement or instrument to which the Company or any of its U.S. Subsidiaries is a party or by which any of their respective properties is bound, other than such breaches or defaults that would not, singularly or in the aggregate, reasonably be expected to have a Material Adverse Effect; (xvii)++The Notes, assuming they are in the form of the specimen received by such counsel, are in due and proper form; the Notes, including the Option Notes, if any, to be sold by the Company pursuant to this Agreement have been duly authorized and when executed and authenticated in accordance with the provisions of the Indenture and delivered and paid for as contemplated by this Agreement will be validly issued and outstanding, and valid and binding obligations of the Company, enforceable against the Company in accordance with their terms and will be entitled to the benefits of the Indenture, except as enforcement may be limited by applicable bankruptcy, insolvency, reorganization, receivership, moratorium and other similar laws affecting the rights of creditors generally and as may be limited by general principals of equity, whether applied by a court of law or equity; the shares of Common Stock of the Company issuable upon conversion of the Notes in accordance with the terms of the Indenture will have been validly issued and will be fully paid and non-assessable; and no preemptive rights of shareholders granted by the Company exist with respect to any of the Notes (including 30 the shares of Common Stock issuable upon conversion thereof) or the issue and sale thereof; and (xviii) Upon delivery of certificates for the Notes to be sold by the Company under this Agreement and the payment therefor as contemplated by this Agreement, valid marketable title to the Notes represented thereby will have been acquired by the Underwriters, free and clear of all security interests, liens, encumbrances, claims or equities whatsoever, assuming for the purpose that the Underwriters purchased the same in good faith without notice of any adverse claims. In addition to the matters set forth above, such opinion shall also include a statement to the effect that nothing has come to the attention of such counsel which leads them to believe that the Registration Statement, as of the time it became effective under the Act (but after giving effect to changes incorporated pursuant to Rule 430A under the Act), contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Prospectus or any amendment or supplement thereto, on the date it was filed pursuant to the Rules and Regulations and the Registration Statement and the Prospectus, or any amendment or supplement thereto, as of the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading (except that such counsel need express no view as to financial statements, schedules and other financial information included therein). Counsel rendering the foregoing opinion may rely as to questions of law not involving the laws of the United States or the States of Illinois or the General Corporation Law of the State of Delaware upon opinions of local counsel, and as to questions of fact upon representations or certificates of officers of the Company and of government officials, in which case their opinion is to state that they are so doing and that they have no knowledge of any material misstatement or inaccuracy in such opinions, representations or certificate. Copies of any opinion, representation or 31 certificate so relied upon shall be delivered to you, as Representative of the Underwriters, and to Underwriters' counsel. (d) The Representatives shall have received from Willkie Farr & Gallagher, counsel for the Underwriters, an opinion dated the Closing Date or the Option Closing Date, as the case may be, substantially to the effect specified in subparagraphs (v), (viii), (x), (xi) and (xvii) of Paragraph (c) of this Section 8. In addition to the matters set forth above, such --------- opinion shall also include a statement to the effect that nothing has come to the attention of such counsel which leads them to believe that the Registration Statement, as of the time it became effective under the Act (but after giving effect to changes incorporated pursuant to Rule 430A under the Act), contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Prospectus or any amendment or supplement thereto, on the date it was filed pursuant to the Rules and Regulations and the Registration Statement and the Prospectus, or any amendment or supplement thereto, as of the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading (except that such counsel need express no view as to financial statements, schedules and other financial information included therein). With respect to such statement, Willkie Farr & Gallagher may state that their belief is based upon the procedures set forth therein, but is without independent check and verification. (e) You shall have received, on each of the dates hereof, the Closing Date and the Option Closing Date, as the case may be, a letter dated the date hereof, the Closing Date or the Option Closing Date, as the case may be, in form and substance satisfactory to you, of KPMG Peat Marwick LLP and Price Waterhouse LLP confirming that they are independent public accountants within the meaning of the Act and the applicable published Rules and Regulations thereunder and stating that in their opinion the financial statements and schedules examined by them and included in the Registration Statement comply in form in all material respects with the 32 applicable accounting requirements of the Act and the related published Rules and Regulations; and containing such other statements and information as is ordinarily included in accountants' "comfort letters" to Underwriters with respect to the financial statements and certain financial and statistical information contained in the Registration Statement and Prospectus. (f) The Representatives shall have received on the Closing Date or the Option Closing Date, as the case may be, a certificate or certificates of the Chief Executive Officer and the Principal Financial and Accounting Officer of the Company to the effect that, as of the Closing Date or the Option Closing Date, as the case may be, each of them severally represents as follows: (i)++The Registration Statement has become effective under the Act and no stop order suspending the effectiveness of the Registration Statement has been issued, and no proceedings for such purpose have been taken or are, to such officer's knowledge, contemplated by the Commission. (ii)++Such officer does not know of any litigation instituted or threatened against the Company of a character required to be disclosed in the Registration Statement which is not so disclosed; such officer does not know of any material contract required to be filed as an exhibit to the Registration Statement which is not so filed; and the representations and warranties of the Company contained in Section 1 hereof are true and --------- correct as of the Closing Date or the Option Closing Date, as the case may be, in all material respects (or in all respects in the case of those representations and warranties that are already qualified as to materiality). (iii)++Such officer has examined the Registration Statement and the Prospectus and, in such officer's opinion, as of the effective date of the Registration Statement, the statements contained in the Registration Statement, including any document incorporated by reference therein, were true and correct in all material respects, and such Registration Statement and Prospectus or any document incorporated by reference therein did not omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading and, in such officer's opinion, since the effective date of the Registration Statement, no event has occurred which should have been set forth in a supplement to or an amendment of the Prospectus which has not been so set forth in such supplement or amendment. (g) The Company shall have furnished to the Representative such further certificates and documents confirming the representations and warranties contained herein and related matters as the Representative may reasonably have requested. (h) The Firm Notes and Option Notes, if any, and the Common Stock issuable upon conversion of the Notes, have been approved for designation upon notice of issuance on The Nasdaq SmallCap Market and The Nasdaq National Market, respectively. (i) All filings required to have been made pursuant to the Rules and Regulations under the Act have been made. (j) Since the respective dates as of which information is given in the Registration Statement and Prospectus, there has not been any material adverse change or any development involving a prospective adverse change in or affecting the condition, financial or otherwise, of the Company or the earnings, business affairs, properties, management or business prospects of the Company whether or not arising in the ordinary course of business. (k) The Company shall have delivered to you the Lockup Agreements. The opinions and certificates mentioned in this Agreement shall be deemed to be in compliance with the provisions hereof only if they are in all material respects reasonably satisfactory to the Representative and to Willkie Farr & Gallagher, counsel for the Underwriters. In case any of the conditions specified in this Section 8 shall not be --------- fulfilled, this Agreement may be terminated by you by giving notice to the Company. Any such termination shall be without liability of the Company to the Underwriters and without liability of the Underwriters to the Company; provided, however, that (i) in the event of such termination, the Company agrees to indemnify and hold harmless the Underwriters from all costs or expenses incident to the performance of the obligations of the Company under this Agreement, including all costs and expenses referred to in paragraphs (i) and (j) of Section 5 hereof, and (ii) if this Agreement is terminated by you --------- because of any refusal, inability or failure on the part of the Company to perform any agreement herein, to fulfill any of the conditions herein, or to comply with any provision hereof other than by reason of a default by any of the Underwriters, the Company will reimburse the Underwriters severally upon demand for all out-of-pocket expenses (including reasonable fees and disbursements of counsel) that shall have been incurred by them in connection with the transactions contemplated hereby. 9. REIMBURSEMENT OF CERTAIN EXPENSES. In addition to its other obligations under Section 6 of this Agreement, the Company hereby agrees to reimburse on a --------- quarterly basis the Underwriters for all reasonable legal and other expenses incurred in connection with investigating or defending any claim, action, investigation, inquiry or other proceeding arising out of or based upon any statement or omission, or any alleged statement or omission, described in paragraph (a) of Section 6 of this Agreement, notwithstanding the absence of a --------- judicial determination as to the propriety and enforceability of the obligations under this Section 9 and the possibility that such payments might later be held --------- to be improper; provided, however, that (i) to the extent any such payment is ----------------- ultimately held to be improper, the persons receiving such payments shall promptly refund them and (ii) such persons shall provide to the Company, upon request, reasonable assurances of their ability to effect any refund, when and if due. 10. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This agreement shall inure to the benefit of the Company and the several Underwriters and, with respect to the provisions of Section 6 hereof, the several parties (in addition to the Company --------- and the several Underwriters) indemnified under the provisions of said Section 6, and their respective personal representatives, successors and - --------- assigns. Nothing in this Agreement is intended or shall be construed to give to any other person, firm or corporation any legal or equitable remedy or claim under or in respect of this Agreement or any provision herein contained. The term "successors and assigns" as herein used shall not include any purchaser, as such purchaser, of any of the Notes from any of the several Underwriters. 11. NOTICES. Except as otherwise provided herein, all communications hereunder shall be in writing and, if to the Underwriters, shall be mailed, telecopied or delivered to Hambrecht & Quist LLC, One Bush Street, San Francisco, California 94104; and if to the Company, shall be mailed, telecopied or delivered to it at its office, System Software Associates, Inc., 500 West Madison Street, 32nd Floor, Chicago, Illinois 60661, Attention: Roger E. Covey, Chief Executive Officer. All notices given by telecopy shall be promptly confirmed by letter. 12. MISCELLANEOUS. The reimbursement, indemnification and contribution agreements contained in this Agreement and the representations, warranties and covenants in this Agreement shall remain in full force and effect regardless of (a) any termination of this Agreement, (b) any investigation made by or on behalf of any Underwriter or controlling person thereof, or by or on behalf of the Company or their respective directors or officers, and (c) delivery and payment for the Notes under this Agreement; provided, however, that if this ----------------- agreement is terminated prior to the Closing Date, the provisions of paragraphs (k) and (l) of Section 5 hereof shall be of no further force or effect. --------- This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York. Please sign and return to the Company the enclosed duplicates of this letter, whereupon this letter will become a binding agreement between the Company and the several Underwriters in accordance with its terms. Very truly yours, SYSTEM SOFTWARE ASSOCIATES, INC. By:______________________________ Roger E. Covey Chief Executive Officer The foregoing Agreement is hereby confirmed and accepted as of the date first above written. HAMBRECHT & QUIST LLC, LAZARD FRERES & CO. LLC As Representatives of the several Underwriters By Hambrecht & Quist LLC By __________________________ Managing Director Acting on behalf of the several Underwriters, including themselves, named in Schedule I hereto. SCHEDULE I UNDERWRITERS
PRINCIPAL AMOUNT OF FIRM NOTES UNDERWRITER TO BE PURCHASED - ----------- ------------------------ Hambrecht & Quist LLC Lazard Freres & Co. LLC TOTAL.............................. $100,000,000
SCHEDULE II U.S. SUBSIDIARIES
JURISDICTION OF --------------- NAME INCORPORATION - ---- ------------- Astral International Corporation Massachusetts SSA Caribbean, Inc. Delaware SSA Japan Corporation Delaware SSA Pacific Rim Corporation Delaware System Software Associates (Japan) LLC Delaware
SCHEDULE 1(C) EXCEPTIONS TO SECTION 1(C) REPRESENTATION INACTIVE SUBSIDIARIES
JURISDICTION OF --------------- NAME INCORPORATION - ---- ------------- SSA North Central Minnesota NofTek, N.W., Inc. d/b/a SSA Oregon Northwest, Inc. Priority Systems, Inc. Texas Knight Enterprises, Inc. Nevada
EX-4.1 3 FORM OF INDENTURE WF&G DRAFT ---------- 8/28/97 ------- _______________________________________________________________________________ INDENTURE Dated as of SEPTEMBER __, 1997 between SYSTEM SOFTWARE ASSOCIATES, INC. and HARRIS TRUST AND SAVINGS BANK, as Trustee ___% Convertible Subordinated Notes due 2002 ________________________________________________________________________________ CROSS-REFERENCE TABLE*
INDENTURE TIA SECTION SECTION - ----------- ----------- (S) 310(a)(1)................................................ 8.9 (a)(2)................................................ 8.9 (a)(3)................................................ N.A.** (a)(4)................................................ N.A. (a)(5)................................................ 8.9 (b)................................................... 8.8; 8.9; 8.10 (c)................................................... N.A. (S) 311(a)................................................... 8.13 (b)................................................... 8.13 (c)................................................... N.A. (S) 312(a)................................................... 6.1 (b)................................................... 6.2 (c)................................................... 6.2 (S) 313(a)................................................... 6.3 (b)(1)................................................ N.A. (b)(2)................................................ 6.3 (c)................................................... 6.3; 17.3 (d)................................................... 6.3 (S) 314(a)................................................... 5.8; 6.4; 17.3 (b)................................................... N.A. (c)(1)................................................ 17.5 (c)(2)................................................ 17.5 (c)(3)................................................ N.A. (d)................................................... N.A. (e)................................................... 17.5 (f)................................................... N.A. (S) 315(a)................................................... 8.1(a) (b)................................................... 7.8; 17.3 (c)................................................... 8.1 (d)................................................... 8.1 (e)................................................... 7.9 (S) 316(a)(last sentence).................................... 9.4 (a)(1)................................................ 7.7 (a)(2)................................................ N.A. (b)................................................... 7.7 (c)................................................... 10.4; 15.5(h)(4) (S) 317(a)(1)................................................ 7.5 (a)(2)................................................ 7.5 (b)................................................... 8.5; 13.2 (S) 318(a)................................................... 17.7
* This Cross-Reference Table shall not, for any purpose, be deemed a part of this Indenture. ** N.A. means Not Applicable. -i- TABLE OF CONTENTS
Page ---- ARTICLE I. DEFINITIONS......................................... 1 Section 1.1. Definitions............................... 1 Affiliate................................. 2 Board of Directors........................ 2 Business Day.............................. 2 Change in Control......................... 2 Closing Price............................. 2 Commission................................ 2 Common Stock.............................. 2 Company................................... 3 Controlled................................ 3 Conversion Price.......................... 3 Corporate Trust Office.................... 3 Current Market Price...................... 3 Custodian................................. 3 default................................... 3 Defaulted Interest........................ 3 Depository................................ 4 Designated Senior Indebtedness............ 4 Exchange Act.............................. 4 Expiration Time........................... 4 Event of Default.......................... 4 Global Security........................... 4 Indebtedness.............................. 4 Indenture................................. 5 Initial Purchasers........................ 5 Junior Notes.............................. 5 New Preferred Stock....................... 5 New Securities............................ 5 Officers' Certificate..................... 5 Opinion of Counsel........................ 6 outstanding............................... 6 Payment Blockage Notice................... 6 Person.................................... 6 Predecessor Security...................... 6 Purchased Shares.......................... 7 Record Date............................... 7 Representative............................ 7 Responsible Officer....................... 7 Repurchase Date........................... 7 Repurchase Price.......................... 7 Securities Act............................ 7 Security or Securities.................... 7 Security register......................... 8 Securityholder or holder.................. 8 Senior Indebtedness....................... 8 Significant Subsidiary.................... 8 Subsidiary................................ 8 Trading Day............................... 9
(i)
Trigger Event............................ 9 Trust Indenture Act...................... 9 Trustee.................................. 9 U.S. Government Obligations.............. 9 Warrants................................. 9 ARTICLE II. ISSUE, DESCRIPTION, EXECUTION, REGISTRATION AND EXCHANGE OF SECURITIES.......................... 9 Section 2.1. Designation, Amount and Issue of Securities.................................... 9 Section 2.2. Form of Note.................................... 10 Section 2.3. Date and Denomination of Securities Payments of Interest.......................... 11 Section 2.4. Execution of Securities......................... 13 Section 2.5. Exchange and Registration of Transfer of Securities; Depository..................... 13 Section 2.6. Mutilated, Destroyed, Lost or Stolen Securities.................................... 17 Section 2.7. Temporary Securities............................ 18 Section 2.8. Cancellation of Securities Paid, Etc. .......... 19 ARTICLE III. REDEMPTION OF SECURITIES............................... 19 Section 3.1. Redemption Prices............................... 19 Section 3.2. Notice of Redemption; Selection of Securities.................................... 19 Section 3.3. Payment of Securities Called for Redemption.................................... 21 Section 3.4. Conversion Arrangement on Call for Redemption.................................... 22 ARTICLE IV. SUBORDINATION OF SECURITIES............................ 23 Section 4.1. Agreement of Subordination...................... 23 Section 4.2. Payments to Securityholders..................... 23 Section 4.3. Subrogation of Securities....................... 26 Section 4.4. Authorization to Effect Subordination........... 27 Section 4.5. Notice to Trustee............................... 28 Section 4.6. Trustee's Relation to Senior Indebtedness....... 29 Section 4.7. No Impairment of Subordination.................. 29 Section 4.8. Certain Conversions Deemed Payment.............. 29 Section 4.9. Article Applicable to Paying Agents............. 30 Section 4.10. Senior Indebtedness Entitled to Rely............ 30 ARTICLE V. PARTICULAR COVENANTS OF THE COMPANY.................... 30 Section 5.1. Payment of Principal, Premium and Interest...................................... 30 Section 5.2. Maintenance of Office or Agency................. 31 Section 5.3. Appointments to Fill Vacancies in Trustee's Office................................ 31 Section 5.4. Provisions as to Paying Agent................... 32 Section 5.5. Corporate Existence............................. 33 Section 5.6. Amendments to Junior Notes, Warrants or New Preferred Stock........................ 33 Section 5.7. Stay, Extension and Usury Laws.................. 33 Section 5.8. Compliance Certificate.......................... 34
(ii) Section 5.9. No Prepayment of Junior Notes at the Option of the Company.......................................... 34 Section 5.10. No Repurchase of Warrants.............................. 34 Section 5.11. Liquidation............................................ 34 Section 5.12. Notice of Defaults..................................... 35 Section 5.13. Payment of Taxes and Other Claims...................... 35 Section 5.14. Further Instruments and Acts........................... 35 ARTICLE VI. SECURITYHOLDERS' LISTS AND REPORTS BY THE COMPANY AND TRUSTEE................................................... 36 Section 6.1. Securityholders' Lists................................. 36 Section 6.2. Preservation and Disclosure of Lists................... 36 Section 6.3. Reports by Trustee..................................... 37 Section 6.4. Reports by Company..................................... 37 ARTICLE VII. REMEDIES OF THE TRUSTEE AND SECURITYHOLDERS ON AN EVENT OF DEFAULT................................................ 37 Section 7.1. Events of Default...................................... 37 Section 7.2. Payments of Securities on Default; Suit Therefor....... 40 Section 7.3. Application of Monies Collected by Trustee............. 42 Section 7.4. Proceedings by Securityholder.......................... 43 Section 7.5. Proceedings by Trustee................................. 44 Section 7.6. Remedies Cumulative and Continuing..................... 44 Section 7.7. Direction of Proceedings and Waiver of Defaults by Majority of Securityholders.......................... 44 Section 7.8. Notice of Defaults..................................... 45 Section 7.9. Undertaking to Pay Costs............................... 45 ARTICLE VIII. CONCERNING THE TRUSTEE...................................... 46 Section 8.1. Duties and Responsibilities of Trustee................. 46 Section 8.2. Reliance on Documents, Opinions, Etc................... 47 Section 8.3. No Responsibility for Recitals, Etc.................... 48 Section 8.4. Trustee, Paying Agents, Conversion Agents or Registrar May Own Securities......................... 49 Section 8.5. Monies to Be Held in Trust............................. 49 Section 8.6. Compensation and Expenses of Trustee................... 49 Section 8.7. Officers' Certificate as Evidence...................... 50 Section 8.8. Conflicting Interests of Trustee....................... 50 Section 8.9. Eligibility of Trustee................................. 50 Section 8.10. Resignation or Removal of Trustee...................... 50 Section 8.11. Acceptance by Successor Trustee........................ 52 Section 8.12. Succession by Merger, Etc.............................. 53 Section 8.13. Limitation on Rights of Trustee as Creditor............ 53 ARTICLE IX. CONCERNING THE SECURITYHOLDERS.............................. 53 Section 9.1. Action by Securityholders.............................. 53 Section 9.2. Proof of Execution by Securityholders.................. 54 Section 9.3. Who Are Deemed Absolute Owners......................... 54 Section 9.4. Company-Owned Security Disregarded..................... 54 Section 9.5. Revocation of Consents: Future Holders Bound........... 53
(iii) ARTICLE X. SECURITYHOLDERS' MEETINGS................................... 56 Section 10.1. Purpose of Meetings.................................... 56 Section 10.2. Call of Meetings by Trustee............................ 56 Section 10.3. Call of Meetings by Company or Securityholders......... 57 Section 10.4. Qualifications for Voting.............................. 57 Section 10.5. Regulations............................................ 57 Section 10.6. Voting................................................. 58 Section 10.7. No Delay of Rights by Meeting.......................... 58 ARTICLE XI. SUPPLEMENTAL INDENTURES..................................... 59 Section 11.1. Supplemental Indentures Without Consent of Securityholders...................................... 59 Section 11.2. Supplemental Indentures with Consent of Securityholders...................................... 60 Section 11.3. Effect of Supplemental Indenture....................... 61 Section 11.4. Notation on Security................................... 61 Section 11.5. Evidence of Compliance of Supplemental Indenture to Be Furnished Trustee................................. 62 ARTICLE XII. CONSOLIDATION, MERGER, SALE, CONVEYANCE AND LEASE........... 62 Section 12.1. Company May Consolidate Etc. on Certain Terms.......... 62 Section 12.2. Successor Corporation to Be Substituted................ 62 Section 12.3. Opinion of Counsel to Be Given Trustee................. 63 ARTICLE XIII. SATISFACTION AND DISCHARGE OF INDENTURE..................... 63 Section 13.1. Discharge of Indenture................................. 63 Section 13.2. Deposited Monies to Be Held in Trust by Trustee........ 64 Section 13.3. Paying Agent to Repay Monies Held...................... 64 Section 13.4. Return of Unclaimed Monies............................. 65 Section 13.5. Reinstatement.......................................... 65 ARTICLE XIV. IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS................................................. 65 Section 14.1. Indenture and Securities Solely Corporate Obligations.......................................... 65 ARTICLE XV. CONVERSION OF SECURITIES.................................... 66 Section 15.1. Right to Convert....................................... 66 Section 15.2. Exercise of Conversion Privilege; Issuance of Common Stock on Conversion; No Adjustment for Interest or Dividends............................................ 66 Section 15.3. Cash Payments in Lieu of Fractional Shares............. 68 Section 15.4. Conversion Price....................................... 68 Section 15.5. Adjustment of Conversion Price......................... 68 Section 15.6. Effect of Reclassification, Consolidation, Merger or Sale................................................. 79 Section 15.7. Taxes on Shares Issued................................. 81
(iv) Section 15.8. Reservation of Shares to Be Fully Paid; Compliance with Governmental Requirements; Listing of Common Stock........................................... 81 Section 15.9. Responsibility of Trustee.............................. 81 Section 15.10. Notice to Holders Prior to Certain Actions............. 82 ARTICLE XVI. REPURCHASE OF SECURITIES AT OPTION OF THE HOLDER UPON CHANGE IN CONTROL......................................... 83 Section 16.1. Right to Require Repurchase............................ 83 Section 16.2. Notices: Method of Exercising Repurchase Right, Etc.... 84 Section 16.3. Certain Definitions.................................... 86 Section 16.4. Change in Control...................................... 86 Section 16.5. Consolidation, Merger, Etc............................. 87 ARTICLE XVII. MISCELLANEOUS PROVISIONS.................................... 88 Section 17.1. Provisions Binding on Company's Successors............. 88 Section 17.2. Official Acts by Successor Corporation................. 88 Section 17.3. Addresses for Notices, Etc............................. 88 Section 17.4. Governing Law.......................................... 89 Section 17.5. Evidence of Compliance with Conditions Precedent Certificates to Trustee.............................. 89 Section 17.6. Legal Holidays......................................... 89 Section 17.7. Trust Indenture Act.................................... 90 Section 17.8. No Security Interest Created........................... 90 Section 17.9. Benefits of Indenture.................................. 90 Section 17.10. Table of Contents, Headings, Etc....................... 90 Section 17.11. Authenticating Agent................................... 90 Section 17.12. Execution in Counterparts.............................. 91
(v) INDENTURE, dated as of September __ 1997, between System Software Associates, Inc., a Delaware corporation (hereinafter sometimes called the "Company," as more fully set forth in Section 1.1), and Harris Trust and Savings - -------- ----------- Bank, as trustee hereunder (hereinafter sometimes called the "Trustee," as more ------- fully set forth in Section 1.1). ----------- W I T N E S S E T H: WHEREAS, for its lawful corporate purposes, the Company has duly authorized the issue of its ___% Convertible Subordinated Notes due September 15, 2002 (hereinafter sometimes called the "Securities"), in an aggregate principal ---------- amount not to exceed $100,000,000 ($115,000,000 if the over-allotment option is exercised in full) and, to provide the terms and conditions upon which the Securities are to be authenticated, issued and delivered, the Company has duly authorized the execution and delivery of this Indenture; and WHEREAS, the Securities, the certificate of authentication to be borne by the Securities, a form of assignment, a form of option to elect repurchase upon a Change in Control (as defined in Section 16.4) and a form of conversion notice ------------ to be borne by the Securities are to be substantially in the forms hereinafter provided for; and WHEREAS, all acts and things necessary to make the Securities, when executed by the Company and authenticated and delivered by the Trustee or a duly authorized authenticating agent, as in this Indenture provided, the valid, binding and legal obligations of the Company, and to constitute these presents a valid agreement according to its terms, have been done and performed, and the execution of this Indenture and the issue hereunder of the Securities have in all respects been duly authorized. NOW, THEREFORE, THIS INDENTURE WITNESSETH: That in order to declare the terms and conditions upon which the Securities are, and are to be, authenticated, issued and delivered, and in consideration of the premises and of the purchase and acceptance of the Securities by the holders thereof, the Company covenants and agrees with the Trustee for the equal and proportionate benefit of the respective holders from time to time of the Securities (except as otherwise provided below), as follows: ARTICLE I DEFINITIONS Section 1.1. Definitions. The terms defined in this Section 1.1 (except as ----------- herein otherwise expressly provided or unless the context otherwise requires) for all purposes of this Indenture and of any indenture supplemental hereto shall have the respective meanings specified in this Section 1.1. All other ----------- terms used in this Indenture that are defined in the Trust Indenture Act or which are by reference therein defined in the Securities Act (except as herein otherwise expressly provided or unless the context otherwise requires) shall have the meanings assigned to such terms in said Trust Indenture Act and in said Securities Act as in force at the date of the execution of this Indenture. The words "herein," "hereof," "hereunder," and words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision. The terms defined in this Article include the plural as well as the singular. Affiliate: The term "Affiliate" of any specified Person shall mean 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 or cause the direction of 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. ---------- Board of Directors: The term "Board of Directors" shall mean the Board of ------------------ ------------------ Directors of the Company or a committee of such Board duly authorized to act for it hereunder. Business Day: The term "Business Day" means each Monday, Tuesday, ------------ ------------ Wednesday, Thursday and Friday which is not a day on which the banking institutions in Chicago, Illinois and New York, New York are authorized or obligated by law or executive order to close or be closed. Change in Control: The term "Change in Control" shall have the meaning ----------------- ----------------- specified in Section 16.4. ------------ Closing Price: The term "Closing Price" shall have the meaning specified ------------- ------------- in Section 15.5(h)(1). ------------------ Commission: The term "Commission" shall mean the Securities and Exchange ---------- ---------- Commission. Common Stock: The term "Common Stock" shall mean any stock of any class of ------------ ------------ the Company which has no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company and which is not subject to redemption by the Company. Subject to the provisions of Section 15.6, however, shares issuable on ------------ conversion of Securities shall include only shares of the class designated as common stock of the Company at the date of this Indenture or shares of any class or classes resulting from any reclassification or reclassifications thereof and which have no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation, dissolution or -2- winding up of the Company and which are not subject to redemption by the Company, provided that, if at any time there shall be more than one such ------------- resulting class, the shares of each such class then so issuable shall be substantially in the proportion which the total number of shares of such class resulting from all such reclassifications bears to the total number of shares of all such classes resulting from all such reclassifications. Company: The term "Company" shall mean System Software Associates, Inc., a ------- ------- Delaware corporation, and, subject to the provisions of Article XII, shall ----------- include its successors and assigns. Controlled: The term "Controlled" shall mean ownership or control of more ---------- ---------- than 50% of the voting power of such entity. Conversion Price: The term "Conversion Price" shall have the meaning ---------------- ---------------- specified in Section 15.4. ------------ Corporate Trust Office: The term "Corporate Trust Office" or other similar ---------------------- ---------------------- term shall mean the office of the Trustee at which at any particular time its corporate trust business shall be principally administered, which office is, at the date as of which this Indenture is dated, located at 311 West Monroe Street, 12th Floor, Chicago, Illinois 60606 Attention: Indenture Trust Department, (System Software Associates, Inc., __% Convertible Subordinated Notes due 2002). Current Market Price: The term "Current Market Price" shall have the -------------------- -------------------- meaning specified in Section 15.5(h)(2). ------------------ Custodian: The term "Custodian" shall mean Harris Trust and Savings Bank, --------- as custodian with respect to the Securities in global form, or any successor entity thereto. default: The term "default" shall mean any event that is, or after notice ------- ------- or passage of time, or both, would be, an Event of Default. Defaulted Interest: The term "Defaulted Interest" shall have the meaning ------------------ ------------------ specified in Section 2.3. ----------- Depository: The term "Depository" means, with respect to the Securities ---------- issuable or issued in whole or in part in global form, the person specified in Section 2.5 as the Depository with respect to such Securities, until a successor shall have been appointed and become such pursuant to the applicable provisions of this Indenture, and thereafter "Depository" shall mean or include such successor. Designated Senior Indebtedness: The term "Designated Senior Indebtedness" ------------------------------ ------------------------------ means any particular Senior Indebtedness in which the instrument creating or evidencing the same or the assumption or guarantee thereof (or related agreements or documents to which the -3- Company is a party) expressly provides that such Senior Indebtedness shall be "Designated Senior Indebtedness" for purposes of the Indenture (provided that such instrument, agreement or other document may place limitations and conditions on the right of such Senior Indebtedness to exercise the rights of Designated Senior Indebtedness). Exchange Act: The term "Exchange Act" shall mean the Securities Exchange ------------ ------------ Act of 1934, as amended, and the rules and regulations promulgated thereunder, as in effect from time to time. Expiration Time: The term "Expiration Time" shall have the meaning --------------- --------------- specified in Section 15.5(f). --------------- Event of Default: The term "Event of Default" shall mean any event ---------------- ---------------- specified in Section 7.1(a), (b), (c), (d), (e), (f) or (g). -------------- --- --- --- --- --- ---- Global Security: The term "Global Security" shall have the meaning --------------- --------------- specified in Section 2.5. Indebtedness: The term "Indebtedness" means, with respect to any Person, ------------ ------------ and without duplication, (a) the principal of and premium, if any, and interest on, and fees, costs, enforcement expenses, collateral protection expenses and other reimbursement or indemnity obligations in respect of all indebtedness or obligations of the Company to any Person, including, but not limited to, banks and other lending institutions, for money borrowed that is evidenced by a Security, bond, Note, loan agreement, or similar instrument or agreement (including purchase money obligations with original maturities in excess of one year and noncontingent reimbursement obligations in respect of amounts paid under letters of credit), (b) all reimbursement obligations and other liabilities (contingent or otherwise) of such Person with respect to letters of credit, bank guarantees or bankers' acceptances, (c) all obligations and liabilities (contingent or otherwise) in respect of leases of such Person required, in conformity with generally accepted accounting principles, to be accounted for as capitalized lease obligations on the balance sheet of such Person and all obligations and other liabilities (contingent or otherwise) under any lease or related document (including a purchase agreement) in connection with the lease of real property which provides that such Person is contractually obligated to purchase or cause a third party to purchase the leased property and thereby guarantee a minimum residual value of the leased property to the lessor and the obligations of such Person under such lease or related document to purchase or to cause a third party to purchase such leased property, (d) all obligations of such Person (contingent or otherwise) with respect to an interest rate or other swap, cap or collar agreement or other similar instrument or agreement or foreign currency hedge, exchange, purchase or similar instrument or agreement, (e) all direct or indirect guaranties or similar agreements by such -4- Person in respect of, and obligations or liabilities (contingent or otherwise) of such Person to purchase or otherwise acquire or otherwise assure a creditor against loss in respect of indebtedness, obligations or liabilities of another Person of the kind described in clauses (a) through (d), (f) any indebtedness or other obligations described in clauses (a) through (d) secured by any mortgage, pledge, lien or other encumbrance existing on property which is owned or held by such Person, regardless of whether the indebtedness or other obligation secured thereby shall have been assumed by such Person and (g) any and all deferrals, renewals, extensions and refundings of, or amendments, modifications or supplements to, any indebtedness, obligation or liability of the kind described in clauses (a) through (f). Indenture: The term "Indenture" shall mean this instrument as originally --------- --------- executed or, if amended or supplemented as herein provided, as so amended or supplemented. Initial Purchasers: The term "Initial Purchasers" means Hambrecht & Quist ------------------ ------------------ LLC and Lazard Freres & Co. LLC. New Preferred Stock: The term "New Preferred Stock" shall mean the shares ------------------- ------------------- of Series A Preferred Stock of the Company issuable on or prior to the date hereof. New Securities: The term "New Securities" shall have the meaning specified -------------- -------------- in Section 15.5(d). --------------- Officers' Certificate: The term "Officers' Certificate," when used with --------------------- --------------------- respect to the Company, shall mean a certificate signed by both (a) the President, the Chief Executive Officer, Executive or Senior Vice President or any Vice President (whether or not designated by a number or numbers or word or words added before or after the title "Vice President") and (b) the Treasurer or any Assistant Treasurer or Secretary or any Assistant Secretary of the Company. Opinion of Counsel: The term "Opinion of Counsel" shall mean an opinion in ------------------ ------------------ writing signed by legal counsel, who may be an employee of or counsel to the Company, or other counsel acceptable to the Trustee. outstanding: The term "outstanding," when used with reference to ----------- ----------- Securities, shall, subject to the provisions of Section 9.4, mean, as of any ----------- particular time, all Securities authenticated and delivered by the Trustee under this Indenture, except (a) Securities theretofore canceled by the Trustee or delivered to the Trustee for cancellation; -5- (b) Securities, or portions thereof, for the redemption of which monies in the necessary amount shall have been deposited in trust with the Trustee or with any paying agent (other than the Company) or shall have been set aside and segregated in trust by the Company (if the Company shall act as its own paying agent); provided that, if such Securities are to be -------- ---- redeemed prior to the maturity thereof, notice of such redemption shall have been given as in Article III provided, or provision satisfactory to ----------- the Trustee shall have been made for giving such notice; (c) Securities in lieu of which, or in substitution for which, other Securities shall have been authenticated and delivered pursuant to the terms of Section 2.6 unless proof satisfactory to the Trustee is presented ----------- that any such Securities are held by bona fide holders in due course; and (d) Securities converted into Common Stock pursuant to Article XV and ---------- Securities deemed not outstanding pursuant to Article III. ----------- Payment Blockage Notice: The term "Payment Blockage Notice" has the ----------------------- ----------------------- meaning specified in Section 4.2. ----------- Person: The term "Person" shall mean a corporation, an association, a ------ ------ partnership, an individual, a joint venture, a joint stock company, a limited liability company, a trust, an unincorporated organization or a government or an agency or a political subdivision thereof. Predecessor Security: The term "Predecessor Security" of any particular -------------------- -------------------- Security shall mean 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 2.6 in ----------- lieu of a lost, destroyed or stolen Security shall be deemed to evidence the same debt as the lost, destroyed or stolen Security that it replaces. Purchased Shares: The term "Purchased Shares" has the meaning specified in ---------------- ---------------- Section 15.5(f). - --------------- Record Date: The term "Record Date" shall have the meaning specified in ----------- ----------- Section 15.5(h)(4). - ------------------ Representative: The term "Representative" means the (a) indenture trustee -------------- -------------- or other trustee, agent or representative for any Senior Indebtedness or (b) with respect to any Senior Indebtedness that does not have any such trustee, agent or other representative, (i) in the case of such Senior Indebtedness issued pursuant to an agreement providing for voting arrangements as among the holders or owners of such Senior Indebtedness, any holder or owner of such Senior Indebtedness acting with the consent of the required persons necessary to bind such holders or owners of such -6- Senior Indebtedness and (ii) in the case of all other such Senior Indebtedness, the holder or owner of such Senior Indebtedness. Responsible Officer: The term "Responsible Officer," when used with ------------------- ------------------- respect to the Trustee, shall mean an officer of the Trustee in the Corporate Trust Office assigned and duly authorized by the Trustee to administer the corporate trust matters hereunder. Repurchase Date: The term "Repurchase Date" shall have the meaning --------------- --------------- specified in Section 16.1. ------------ Repurchase Price: The term "Repurchase Price" shall have the meaning ---------------- ---------------- specified in Section 16.1. ------------ Securities Act: The term "Securities Act" shall mean the Securities Act of -------------- -------------- 1933, as amended, and the rules and regulations promulgated thereunder. Security or Securities: The terms "Security" or "Securities" shall mean -------- ---------- -------- ---------- any of the ___% Convertible Subordinated Notes of the Company, due September 15, 2002, authenticated and delivered under this Indenture. Security register: The term "Security register" shall have the meaning ----------------- ----------------- specified in Section 2.5. ----------- Securityholder or holder: The terms "Securityholder" or "holder" as -------------- ------ -------------- ------ applied to any Security, or other similar terms (but excluding the term "beneficial holder"), shall mean any person in whose name at the time a particular Security is registered on the Security registrar's books. Senior Indebtedness: The term "Senior Indebtedness" means the principal ------------------- ------------------- of, premium, if any, interest (including all interest accruing subsequent to the commencement of any bankruptcy or similar proceeding, whether or not a claim for post-petition interest is allowable as a claim in any such proceeding) on or in connection with, and all fees, costs, expenses and other amounts accrued or due on or in connection with, Indebtedness of the Company, whether outstanding on the date of this Indenture or thereafter created, incurred, assumed, guaranteed or in effect guaranteed by the Company (including all deferrals, renewals, extensions or refundings of, or amendments, modifications or supplements to, the foregoing), unless in the case of any particular Indebtedness the instrument creating or evidencing the same or the assumption or guarantee thereof expressly provides that such Indebtedness shall not be senior in right of payment to the Securities or expressly provides that such Indebtedness is "pari passu" with or "junior" to the Securities. Notwithstanding the foregoing, the term Senior Indebtedness shall not include any Indebtedness of the Company to any Subsidiary of the Company or amounts payable with respect to New Preferred Stock. -7- Significant Subsidiary: The term "Significant Subsidiary" means a ---------------------- ---------------------- corporation or other entity of the Company within the meaning of Rule 1-02 under Regulation S-X promulgated by the Securities and Exchange Commission. Subsidiary: The term "Subsidiary" means, with respect to any Person, (i) ---------- ---------- any corporation, association or other business entity of which more than 50% of the total voting power of shares of capital stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by such Person or one or more Subsidiaries of such Person (or a combination thereof) and (ii) any partnership (a) the sole general partner or managing general partner of which is such Person or a Subsidiary of such Person or (b) the only general partners of which are such Person or one or more Subsidiaries of such Person (or any combination thereof). Trading Day: The term "Trading Day" shall have the meaning specified in ----------- ----------- Section 15.5(h)(5). - ------------------ Trigger Event: The term "Trigger Event" shall have the meaning specified ------------- ------------- in Section 15.5(d). --------------- Trust Indenture Act: The term "Trust Indenture Act" shall mean the Trust ------------------- ------------------- Indenture Act of 1939, as amended, as it was in force at the date of execution of this Indenture, except as provided in Sections 11.3, 15.6 and 16.5; provided, ------------- ---- ---- -------- however, that in the event the Trust Indenture Act of 1939 is amended after the - ------- date hereof, the term "Trust Indenture Act" shall mean, to the extent required by such amendment, the Trust Indenture Act of 1939 as so amended. Trustee: The term "Trustee" shall mean Harris Trust and Savings Bank, and ------- ------- its successors and any corporation resulting from or surviving any consolidation or merger to which it or its successors may be a party and any successor trustee at the time serving as successor trustee hereunder. U.S. Government Obligations: The term "U.S. Government Obligations" means --------------------------- --------------------------- direct non-callable obligations of, or non-callable obligations guaranteed by, the United States of America for the payment of which guarantee or obligation the full faith and credit of the United States is pledged. Warrants: The term "Warrants" shall mean the warrants to purchase shares -------- -------- of Common Stock issued to the holders of the New Preferred Stock. The definitions of certain other terms are as specified in Article XV and ---------- Article XVI. - ----------- -8- ARTICLE II ISSUE, DESCRIPTION, EXECUTION, REGISTRATION AND EXCHANGE OF SECURITIES Section 2.1. Designation, Amount and Issue of Securities. The Securities ------------------------------------------- shall be designated as "__% Convertible Subordinated Notes due 2002." Securities not to exceed the aggregate principal amount of $100,000,000 (or $115,000,000 if the over-allotment option set forth in Section 3 of the Underwriting Agreement, dated September __, 1997 (as amended from time to time by the parties thereto) by and between the Company and the Initial Purchasers is exercised in full) upon the execution of this Indenture, or (except pursuant to Sections 2.5, 2.6, 3.3, 15.2 and 16.2 hereof) from time to time thereafter, may - ------------ ---- ---- ----- ---- be executed by the Company and delivered to the Trustee for authentication, and the Trustee shall thereupon authenticate and deliver said Securities to or upon the written order of the Company, signed by its (a) President, Executive or Senior Vice President or any Vice President (whether or not designated by a number or numbers or word or words added before or after the title "Vice President") and (b) Treasurer or Assistant Treasurer or its Secretary or any Assistant Secretary, without any further action by the Company hereunder. Section 2.2. Form of Note. The Securities and the Trustee's certificate of ------------ authentication to be borne by such Securities shall be substantially in the form set forth in Exhibit A, which is incorporated in and made a part of this --------- Indenture. Any of the Securities may have such letters, numbers or other marks of identification and such notations, legends and endorsements as the officers executing the same may approve (execution thereof to be conclusive evidence of such approval) and as are not inconsistent with the provisions of this Indenture, or as may be required to comply with any law or with any rule or regulation made pursuant thereto or with any rule or regulation of any securities exchange or automated quotation system on which the Securities may be listed, or to conform to usage. Any Security in global form shall represent such of the outstanding Securities as shall be specified therein and shall provide that it shall represent the aggregate amount of outstanding Securities from time to time endorsed thereon and that the aggregate amount of outstanding Securities represented thereby may from time to time be increased or reduced to reflect transfers or exchanges permitted hereby. Any endorsement of a Security in global form to reflect the amount of any increase or decrease in the amount of outstanding Securities represented thereby shall be made by the Trustee or the Custodian, at the direction of the Trustee, in such manner and upon instructions given by the holder of such Securities in accordance with this Indenture. Payment of -9- principal of and interest and premium, if any, on any Security in global form shall be made to the holder of such Security. The terms and provisions contained in the Form of Note attached as Exhibit ------- A hereto shall constitute, and are hereby expressly made, a part of this - - Indenture and, to the extent applicable, the Company and the Trustee, by their execution and delivery of this Indenture, expressly agree to such terms and provisions and to be bound thereby. Neither the Company nor the Trustee shall have any responsibility for any defect in the CUSIP number that appears on any Security, check, advice of payment or redemption notice, and any such document may contain a statement to the effect that CUSIP numbers have been assigned by an independent service for convenience of reference and that neither the Company nor the Trustee shall be liable for any inaccuracy in such numbers. Section 2.3 Date and Denomination of Securities Payments of Interest. The -------------------------------------------------------- Securities shall be issuable in registered form without coupons in denominations of $1,000 principal amount and integral multiples thereof. Every Security shall be dated the date of its authentication and shall bear interest from the applicable date in each case as specified on the face of the Form of Note attached as Exhibit A hereto. Interest on Securities shall be paid in arrears --------- on each March 15 and September 15 commencing March 15, 1998 and ending on March 15, 2002, unless redeemed, repurchased or converted earlier pursuant to the terms of this Indenture. Interest on the Securities shall be computed on the basis of a 360-day year comprised of twelve 30-day months. The person in whose name any Security (or its Predecessor Security) is registered at the close of business on any record date with respect to any interest payment date (including any Security that is converted after the record date and on or before the interest payment date) shall be entitled to receive the interest payable on such interest payment date notwithstanding the cancellation of such Security upon any transfer, exchange or conversion subsequent to the record date and on or prior to such interest payment date; provided, that in the case of any Security, or portion thereof, called for - -------- redemption on a redemption date or repurchased in connection with a Change in Control on a Repurchase Date that is after a record date and prior to (but excluding) the next succeeding interest payment date, interest shall not be paid to the person in whose name the Security, or portion thereof, is registered on the close of business on such record date and the Company shall have no obligation to pay interest on such Security or such portion except to the extent required to be paid upon redemption or repurchase of such Security or portion thereof pursuant to Section 3.3 or 16.1 hereof. Interest may, at the option of ----------- ---- the Company, be paid by check mailed to the address of such person on the Security register; provided that, with respect to any holder of Securities with -------- an aggregate principal amount -10- equal to or in excess of $5,000,000 at the request of such holder in writing to the Company at least five (5) days prior to the date set for payment of interest (who shall then furnish written notice to such effect to the Trustee), interest on such holder's Securities shall be paid by wire transfer in immediately available funds in accordance with the wire transfer instructions supplied by such holder to the Trustee and paying agent (if different from the Trustee). The term "interest payment date" shall mean March 15 and September 15 of each year commencing on March 15, 1998. The term "record date" with respect to any interest payment date shall mean the March 1 or September 1 preceding said March 15 or September 15, respectively. Any interest on any Security which is payable, but is not punctually paid or duly provided for, on any said March 15 or September 15 (herein called "Defaulted Interest") shall forthwith cease to be payable to the Securityholder - ------------------- on the relevant record date by virtue of his having been such Securityholder and such Defaulted Interest shall be paid by the Company, at its election in each case, as provided in clause (1) or (2) below. (1) The Company may elect to make payment of any Defaulted Interest to the Persons in whose names the Securities (or their respective Predecessor Securities) are registered at the close of business on a special record date for the payment of such Defaulted Interest, which shall be fixed in the following manner. The Company shall notify the Trustee in writing of the amount of Defaulted Interest to be paid on each Security and the date of the payment (which shall be not less than twenty-five (25) days after the receipt by the Trustee of such notice, unless the Trustee shall consent to an earlier date), and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest as in this clause provided. Thereupon the Trustee shall fix a special record date for the payment of such Defaulted Interest which shall be not more than fifteen (15) days and not less than ten (10) days prior to the date of the proposed payment and not less than ten (10) days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company of such special record date and, in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Interest and the special record date therefor to be mailed, first-class postage prepaid, to each Securityholder at his address as it appears in the Security register, not less than ten (10) days prior to such special record date. Notice of the proposed payment of such Defaulted Interest and the special record date therefor having been so mailed, such Defaulted Interest -11- shall be paid to the Persons in whose names the Securities (or their respective Predecessor Securities) were registered at the close of business on such special record date and shall no longer be payable pursuant to the following clause (2). (2) The Company may make payment of any Defaulted Interest in any other lawful manner not inconsistent with the requirements of any securities exchange and automated quotation system on which the Securities may be listed or designated for listing, and upon such notice as may be required by such exchange and automated quotation system, if, after notice given by the Company to the Trustee of the proposed payment pursuant to this clause, such manner of payment shall be deemed practicable by the Trustee. Section 2.4. Execution of Securities. The Securities shall be signed in ----------------------- the name and on behalf of the Company by the facsimile signature of its President, any Executive or Senior Vice President or any Vice President (whether or not designated by a number or numbers or word or words added before or after the title "Vice President") and attested by the facsimile signature of its -------------- Treasurer or Assistant Treasurer or its Secretary or any of its Assistant Secretaries (which may be printed, engraved or otherwise reproduced thereon, by facsimile or otherwise). Only such Securities as shall bear thereon a certificate of authentication substantially in the form set forth on the Form of Note attached as Exhibit A hereto, manually executed by the Trustee (or an --------- authenticating agent appointed by the Trustee as provided by Section 17.11), ------------- shall be entitled to the benefits of this Indenture or be valid or obligatory for any purpose. Such certificate by the Trustee (or such an authenticating agent) upon any Security executed by the Company shall be conclusive evidence that the Security so authenticated has been duly authenticated and delivered hereunder and that the holder is entitled to the benefits of this Indenture. In case any officer of the Company who shall have signed any of the Securities shall cease to be such officer before the Securities so signed shall have been authenticated and delivered by the Trustee, or disposed of by the Company, such Securities nevertheless may be authenticated and delivered or disposed of as though the person who signed such Securities had not ceased to be such officer of the Company and any Security may be signed on behalf of the Company by such persons as, at the actual date of the execution of such Security, shall be the proper officers of the Company, although at the date of the execution of this Indenture any such person was not such an officer. Section 2.5. Exchange and Registration of Transfer of Securities; ---------------------------------------------------- Depository. The Company shall cause to be kept at the Corporate Trust Office a - ---------- register (the register maintained in such office and in any other office or agency of the Company designated pursuant to Section 5.2 being herein ----------- sometimes -12- collectively referred to as the "Security register") in which, subject to such ----------------- reasonable regulations as it may prescribe, the Company shall provide for the registration of Securities and of transfers of Securities. The Security register shall be in written form or in any form capable of being converted into written form within a reasonably prompt period of time. The Trustee is hereby appointed "Security registrar" for the purpose of registering Securities and ------------------ transfers of Securities as herein provided. The Company may appoint one or more co-registrars in accordance with Section 5.2. ----------- Upon surrender for registration of transfer of any Security to the Security registrar or any co-registrar, and satisfaction of the requirements for such transfer set forth in this Section 2.5, 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. Securities may be exchanged for other Securities of any authorized denominations and of a like aggregate principal amount, upon surrender of the Securities to be exchanged at any such office or agency maintained by the Company pursuant to Section 5.2. Whenever any Securities are so surrendered for ----------- exchange, the Company shall execute, and the Trustee shall authenticate and deliver, the Securities which the Securityholder making the exchange is entitled to receive bearing registration numbers not contemporaneously outstanding. 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. All Securities presented or surrendered for registration of transfer or for exchange, redemption, repurchase or conversion shall (if so required by the Company or the Security registrar) be duly endorsed, or be accompanied by a written instrument or instruments of transfer in form satisfactory to the Company and the Trustee, and the Securities shall be duly executed by the Securityholder thereof or his attorney duly authorized in writing. 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, assessment or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Securities. Neither the Company nor the Trustee nor any Security registrar nor any co-registrar shall be required to exchange or register a transfer of (a) any Securities for a period of fifteen (15) days next preceding any selection of Securities to be redeemed or (b) any Securities or portions thereof called for redemption -13- pursuant to Article III or (c) any Securities or portion thereof surrendered for ----------- conversion pursuant to Article XV. So long as the Securities are eligible for book-entry settlement with the Depository the Securities shall be represented by a Security in global form and registered in the name of the Depository or the nominee of the Depository (the "Global Security"). The transfer and exchange of beneficial interests in the --------------- Global Security, which does not involve the issuance of a Security in certificated form, shall be effected through the Depository, in accordance with this Indenture and the procedures of the Depository therefor. At any time at the request of the beneficial holder of an interest in the Global Security to obtain a Security in certificated form, such beneficial holder shall be entitled to obtain a Security in certificated form upon written request to the Trustee and the Custodian in accordance with the standing instructions and procedures existing between the Custodian and Depository for the issuance thereof. Upon receipt of any such request, the Trustee, or the Custodian at the direction of the Trustee, will cause, in accordance with the standing instructions and procedures existing between the Depository and the Custodian, the aggregate principal amount of the Security to be reduced by the principal amount of the Security in certificated form issued upon such request to such beneficial holder and, following such reduction, the Company will execute and the Trustee will authenticate and deliver to such beneficial holder (or its nominee) a Security or Securities in certificated form in the appropriate aggregate principal amount in the name of such beneficial holder (or its nominee) and bearing such restrictive legends as may be required by this Indenture. Any transfer of a beneficial interest in the Global Security which cannot be effected through book-entry settlement must be effected by the delivery to the transferee (or its nominee) of a Security or Securities in certificated form registered in the name of the transferee (or its nominee) on the books maintained by the Security registrar. With respect to any such transfer, the Trustee, or the Custodian at the direction of the Trustee, will cause, in accordance with the standing instructions and procedures existing between the Depository and the Custodian, the aggregate principal amount of the Global Security to be reduced by the principal amount of the respective beneficial interest in the Global Security being transferred and, following such reduction, the Company will execute and the Trustee will authenticate and deliver to the transferee (or such transferee's nominee, as the case may be), a Security or Securities in certificated form in the appropriate aggregate principal amount in the name of such transferee (or its nominee). Any Global Security may be endorsed with or have incorporated in the text thereof such legends or recitals or changes not inconsistent with the provisions of this Indenture as may be -14- required by the Custodian, the Depository or with the rules and regulations of any securities exchange or automated quotation system upon which the Securities may be listed or traded or to conform with any usage with respect thereto, or to indicate any special limitations or restrictions to which any particular Securities are subject. Notwithstanding any other provisions of this Indenture, a Global Security may not be transferred as a whole or in part except by the Depository to a nominee of the Depository or by a nominee of the Depository to the Depository or another nominee of the Depository or by the Depository or any such nominee to a successor Depository or a nominee of such successor Depository. The Depository shall be a clearing agency registered under the Exchange Act. The Company initially appoints The Depository Trust Company to act as Depository with respect to the Global Security. Initially, the Global Security shall be issued to the Depository, registered in the name of Cede & Co., as the nominee of the Depository, and deposited with the Custodian for Cede & Co. The Trustee is hereby authorized and requested to execute and deliver a Letter of Representation to the Depository and, in connection with any successor nominee for the Depository or any successor Depository, enter into comparable arrangements, and shall have the same rights with respect to its actions thereunder as it has with respect to its actions under this Indenture. If at any time the Depository for the Global Security notifies the Company that it is unwilling or unable to continue as Depository for the Security, the Company may appoint a successor Depository with respect to such Security. If a successor Depository is not appointed by the Company within ninety (90) days after the Company receives such notice, the Company will execute, and the Trustee, upon receipt of an Officers' Certificate for the authentication and delivery of Securities, will authenticate and deliver, Securities in certificated form, in an aggregate principal amount equal to the principal amount of the Global Security, in exchange for the Global Security. If a Security in certificated form is issued in exchange for any portion of a Global Security after the close of business at the office or agency where such exchange occurs on any Record Date and before the opening of business at such office or agency on the next succeeding Interest Payment Date, interest will not be payable on such Interest Payment Date in respect of such Security, but will be payable on such Interest Payment Date only to the person to whom interest in respect of such portion of such Global Security is payable in accordance with the provisions of this Indenture. Securities in certificated form issued in exchange for all or a part of a Global Security pursuant to this Section 2.5 shall be registered in such names and in such authorized denominations as the Depository, pursuant to instructions from its direct or -15- indirect participants or otherwise, shall instruct the Trustee in writing. Upon execution and authentication, the Trustee shall deliver such Securities in certificated form to the persons in whose names such Securities in certificated form are so registered. At such time as all interests in a Global Security have been redeemed, repurchased, converted, canceled, exchanged for Securities in certificated form, or transferred to a transferee who receives Securities in certificated form, such Global Security shall, upon receipt thereof, be canceled by the Trustee in accordance with standing procedures and instructions existing between the Depository and the Custodian. At any time prior to such cancellation, if any interest in a Global Security is exchanged for Securities in certificated form, redeemed, converted, repurchased or canceled, or transferred to a transferee who receives Securities in certificated form therefor or any Security in certificated form is exchanged or transferred for part of a Global Security, the principal amount of such Global Security shall, in accordance with the standing procedures and instructions existing between the Depository and the Custodian, be appropriately reduced or increased, as the case may be, and an endorsement shall be made on such Global Security, by the Trustee or the Custodian, at the direction of the Trustee, to reflect such reduction or increase. Section 2.6. Mutilated, Destroyed, Lost or Stolen Securities. In case any ----------------------------------------------- Security shall become mutilated or be destroyed, lost or stolen, the Company in its discretion may execute, and upon its written request the Trustee or an authenticating agent appointed by the Trustee shall authenticate and deliver, a new Security, bearing a number not contemporaneously outstanding, in exchange and substitution for the mutilated Security, or in lieu of and in substitution for the Security so destroyed, lost or stolen. In every case the applicant for a substituted Security shall furnish to the Company, to the Trustee and, if applicable, to such authenticating agent such security or indemnity as may be required by them to save each of them harmless for any loss, liability, cost or expense caused by or connected with such substitution, and, in every case of destruction, loss or theft, the applicant also shall furnish to the Company, to the Trustee and, if applicable, to such authenticating agent evidence to their satisfaction of the destruction, loss or theft of such Security and of the ownership thereof. The Trustee or such authenticating agent may authenticate any such substituted Security and deliver the same upon the receipt of such security or indemnity as the Trustee, the Company and, if applicable, such authenticating agent may require. Upon the issuance of any substituted Security, 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 connected therewith. In case any Security which has matured or is about to mature or has been called for redemption or -16- is about to be converted into Common Stock shall become mutilated or be destroyed, lost or stolen, the Company may, instead of issuing a substitute Security, pay or authorize the payment of or convert or authorize the conversion of the same (without surrender thereof except in the case of a mutilated Security), as the case may be, if the applicant for such payment or conversion shall furnish to the Company, to the Trustee and, if applicable, to such authenticating agent such security or indemnity as may be required by them to save each of them harmless for any loss, liability, cost or expense caused by or connected with such substitution, and, in case of destruction, loss or theft, evidence satisfactory to the Company, the Trustee and, if applicable, any paying agent or conversion agent of the destruction, loss or theft of such Security and of the ownership thereof. Every substitute Security issued pursuant to the provisions of this Section ------- 2.6 by virtue of the fact that any Security is destroyed, lost or stolen shall - --- constitute an additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Security shall be found at any time, and shall be entitled to all the benefits of (but shall be subject to all the limitations set forth in) this Indenture equally and proportionately with any and all other Securities duly issued hereunder. To the extent permitted by law, all Securities shall be held and owned upon the express condition that the foregoing provisions are exclusive with respect to the replacement or payment or conversion of mutilated, destroyed, lost or stolen Securities and shall preclude any and all other rights or remedies notwithstanding any law or statute existing or hereafter enacted to the contrary with respect to the replacement or payment or conversion of negotiable instruments or other securities without their surrender. Section 2.7. Temporary Securities. Pending the preparation of Securities -------------------- in certificated form, the Company may execute and the Trustee or an authenticating agent appointed by the Trustee shall, upon the written request of the Company, authenticate and deliver temporary Securities (printed, typewritten or lithographed). Temporary Securities shall be issuable in any authorized denomination, and substantially in the form of the Securities in certificated form, but with such omissions, insertions and variations as may be appropriate for temporary Securities, all as may be determined by the Company. Every such temporary Security shall be executed by the Company and authenticated by the Trustee or such authenticating agent upon the same conditions and in substantially the same manner, and with the same effect, as the Securities in certificated form. Without unreasonable delay the Company will execute and deliver to the Trustee or such authenticating agent Securities in certificated form (other than in the case of Securities in global form) and thereupon any or all temporary Securities (other than in the case of Securities in global form) may be surrendered in exchange therefor, at each office or agency maintained by the Company pursuant to Section 5.2 and the Trustee or such ----------- -17- authenticating agent shall authenticate and deliver in exchange for such temporary Securities an equal aggregate principal amount of Securities in certificated form. Such exchange shall be made by the Company at its own expense and without any charge therefor. Until so exchanged, the temporary Securities shall in all respects be entitled to the same benefits and subject to the same limitations under this Indenture as Securities in certificated form authenticated and delivered hereunder. Section 2.8. Cancellation of Securities Paid, Etc. All Securities surrendered for the purpose of payment, redemption, repurchase, conversion, exchange or registration of transfer, shall, if surrendered to the Company or any paying agent or any Security registrar or any conversion agent, be surrendered to the Trustee and promptly canceled by it, or, if surrendered to the Trustee, shall be promptly canceled by it, and no Securities shall be issued in lieu thereof except as expressly permitted by any of the provisions of this Indenture; provided that, any Security or portion thereof surrendered for -------- repurchase shall only be canceled at such time as such Security or portion thereof has been repurchased pursuant to Article XVI hereof. The Trustee shall ----------- destroy canceled Securities (unless the Company directs it to do otherwise) and, after such destruction, shall, if requested by the Company, deliver a certificate of such destruction to the Company. 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 cancellation. ARTICLE III REDEMPTION OF SECURITIES Section 3.1. Redemption Prices. The Company may not redeem the Securities ----------------- prior to September 20, 2000. At any time on or after September 20, 2000, the Company may, at its option from time to time, redeem all or any part of the Securities on any date prior to maturity, upon notice as set forth in Section ------- 3.2, and at the optional redemption prices set forth in the Form of Note - --- attached as Exhibit A hereto, together with accrued interest to, but excluding, --------- the date fixed for redemption. Section 3.2. Notice of Redemption; Selection of Securities. In case the --------------------------------------------- Company shall desire to exercise the right to redeem all or, as the case may be, any part of the Securities pursuant to Section 3.1, it shall fix a date for ----------- redemption and it or, at its request, the Trustee in the name of and at the expense of the Company, shall mail or cause to be mailed a notice of such redemption at least fifteen (15) and not more than sixty (60) days prior to the date fixed for redemption to the holders of Securities so to be redeemed as a whole or in part at their last addresses as the same appear on the Security register (provided that if the Company shall give such notice, it shall also -------- give -18- written notice, and written notice of the Securities to be redeemed, to the Trustee). Such mailing shall be by first class mail. The notice if mailed in the manner herein provided shall be conclusively presumed to have been duly given, whether or not the holder receives such notice. In any case, failure to give such notice by mail or any defect in the notice to the holder of any Security designated for redemption as a whole or in part shall not affect the validity of the proceedings for the redemption of any other Security. Each such notice of redemption shall specify the aggregate principal amount of Securities to be redeemed, the date fixed for redemption, the redemption price at which Securities are to be redeemed, the place or places of payment, that payment will be made upon presentation and surrender of such Securities, that interest accrued to, but excluding, the date fixed for redemption will be paid as specified in said notice, and that on and after said date interest thereon or on the portion thereof to be redeemed will cease to accrue. Such notice shall also state the current Conversion Price and the date on which the right to convert such Securities or portions thereof into Common Stock will expire. If fewer than all the Securities are to be redeemed, the notice of redemption shall identify the Securities to be redeemed. In case any Security is to be redeemed in part only, the notice of redemption shall state the portion of the principal amount thereof to be redeemed and shall state that on and after the date fixed for redemption, upon surrender of such Security, a new Security or Securities in principal amount equal to the unredeemed portion thereof will be issued. On or prior to the redemption date specified in the notice of redemption given as provided in this Section 3.2, the Company will deposit with the Trustee ----------- or with one or more paying agents (or, if the Company is acting as its own paying agent, set aside, segregate and hold in trust as provided in Section 5.4) ----------- an amount of money sufficient to redeem on the redemption date all the Securities (or portions thereof) so called for redemption (other than those theretofore surrendered for conversion into Common Stock) at the appropriate redemption price, together with accrued interest to, but excluding, the date fixed for redemption; provided that, if such payment is made on the redemption -------- date it must be received by the Trustee or paying agent, as the case may be, by 10:00 a.m. Chicago time, on such date. If any Security called for redemption is converted pursuant hereto, any money deposited with the Trustee or any paying agent or so segregated and held in trust for the redemption of such Security shall be paid to the Company upon its written request, or, if then held by the Company, shall be discharged from such trust. If fewer than all the Securities are to be redeemed, the Company will give the Trustee written notice in the form of an Officers' Certificate not fewer than forty-five (45) days (or such shorter period of time as may be acceptable to the Trustee) prior to the redemption date as to the aggregate principal amount of Securities to be redeemed. -19- If fewer than all the Securities are to be redeemed, the Trustee shall select the Securities or portions thereof to be redeemed (in principal amounts of $1,000 or integral multiples thereof) by lot or, in its discretion, on a pro rata basis with such adjustments up to $1,000 in order to retain the minimum denominations of the Securities. If any Security selected for partial redemption is converted in part after such selection, the converted portion of such Security shall be deemed (so far as may be) to be the portion to be selected for redemption. The Securities (or portions thereof) so selected shall be deemed duly selected for redemption for all purposes hereof, notwithstanding that any such Security is converted as a whole or in part before the mailing of the notice of redemption. Upon any redemption of less than all Securities, the Company and the Trustee may (but need not) treat as outstanding any Securities surrendered for conversion during the period of fifteen (15) days next preceding the mailing of a notice of redemption and may (but need not) treat as outstanding any Security authenticated and delivered during such period in exchange for the unconverted portion of any Security converted in part during such period. Section 3.3. Payment of Securities Called for Redemption. If notice of ------------------------------------------- redemption has been given as above provided, the Securities or portion of Securities with respect to which such notice has been given shall, unless converted into Common Stock pursuant to the terms hereof, become due and payable on the date and at the place or places stated in such notice at the applicable redemption price, together with interest accrued to (but excluding) the date fixed for redemption, and on and after said date (unless the Company shall default in the payment of such Securities at the redemption price, together with interest accrued to said date) interest on the Securities or portion of Securities so called for redemption shall cease to accrue and such Securities shall cease after the close of business on the Business Day immediately preceding the date fixed for redemption to be convertible into Common Stock and, except as provided in Sections 8.5 and 13.4, to be entitled to any benefit or ------------ ---- security under this Indenture, and the holders thereof shall have no right in respect of such Securities except the right to receive the redemption price thereof and unpaid interest to (but excluding) the date fixed for redemption. On presentation and surrender of such Securities at a place of payment in said notice specified, the said Securities or the specified portions thereof shall be paid and redeemed by the Company at the applicable redemption price, together with interest accrued thereon to (but excluding) the date fixed for redemption; provided that, if the applicable redemption date is an interest payment date, - -------- the semi-annual payment of interest becoming due on such date shall be payable to the holders of such Securities registered as such on the relevant record date instead of the holders surrendering such Securities for redemption on such date. -20- Upon presentation of any Security redeemed in part only, the Company shall execute and the Trustee shall authenticate and deliver to the holder thereof, at the expense of the Company, a new Security or Securities, of authorized denominations, in principal amount equal to the unredeemed portion of the Securities so presented. Notwithstanding the foregoing, the Trustee shall not pay the redemption price of any Securities or mail any notice of optional redemption during the continuance of a default in payment of interest or premium on the Securities or of any Event of Default of which, in the case of any Event of Default other than under Sections 7.1(a) or 7.1(b), a Responsible Officer of the Trustee has --------------- ------ knowledge. If any Security called for redemption shall not be so paid upon surrender thereof for redemption, the principal and premium, if any, shall, until paid or duly provided for, bear interest from the date fixed for redemption at the rate borne by the Security and such Security shall remain convertible into Common Stock until the principal and premium, if any, shall have been paid or duly provided for. Section 3.4. Conversion Arrangement on Call for Redemption. In connection --------------------------------------------- with any redemption of Securities, the Company may arrange for the purchase and conversion of any Securities by an agreement with one or more investment bankers or other purchasers to purchase such Securities by paying to the Trustee in trust for the Securityholders, on or before the date fixed for redemption, an amount not less than the applicable redemption price, together with interest accrued to (but excluding) the date fixed for redemption, of such Securities. Notwithstanding anything to the contrary contained in this Article III, the ----------- obligation of the Company to pay the redemption price of such Securities, together with interest accrued to (but excluding) the date fixed for redemption, shall be deemed to be satisfied and discharged to the extent such amount is so paid by such purchasers. If such an agreement is entered into (a copy of which shall be filed with the Trustee prior to the date fixed for redemption), 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 XV) surrendered by such purchasers for ---------- conversion, all as of immediately prior to the close of business on the date fixed for redemption (and the right to convert any such Securities shall be extended through such time), subject to payment of the above amount as aforesaid. At the written direction of the Company, the Trustee shall hold and dispose of any such amount paid to it in the same manner as it would monies deposited with it by the Company for the redemption of Securities. Without the Trustee's prior written consent, no arrangement between the Company and such purchasers for the purchase and conversion of any Securities shall increase or otherwise affect any of the powers, duties, responsibilities or obligations of the Trustee as set forth in this Indenture, and -21- 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 to which the Trustee has not consented in writing, including the costs and expenses, including reasonable legal fees, incurred by the Trustee in the defense of any claim or liability arising out of or in connection with the exercise or performance of any of its powers, duties, responsibilities or obligations under this Indenture. ARTICLE IV. SUBORDINATION OF SECURITIES Section 4.1. Agreement of Subordination. The Company covenants and -------------------------- agrees, and each holder of Securities issued hereunder by his acceptance thereof likewise covenants and agrees, that all Securities shall be issued subject to the provisions of this Article IV and each Person holding any Security, whether ---------- upon original issue or upon transfer, assignment or exchange thereof, accepts and agrees to be bound by such provisions. The payment of the principal of, premium, if any, and interest on all Securities (including, but not limited to, the redemption price with respect to the Securities called for redemption in accordance with Section 3.2 or submitted ----------- for repurchase in accordance with Section 16.2, as the case may be, as provided ------------ in the Indenture) issued hereunder shall, to the extent and in the manner hereinafter set forth, be subordinated and subject in right of payment to the prior payment in full of all Senior Indebtedness, whether outstanding at the date of this Indenture or thereafter incurred. No provision of this Article IV shall prevent the occurrence of any default ---------- or Event of Default hereunder. Section 4.2. Payments to Securityholders. No payment shall be made with --------------------------- respect to the principal of, or premium, if any, or interest on the Securities (including, but not limited to, the redemption price with respect to the Securities to be called for redemption in accordance with Section 3.2 or ----------- submitted for repurchase in accordance with Section 16.2, as the case may be, as ------------ provided in the Indenture), except payments and distributions made by the Trustee as permitted by the first or second paragraph of Section 4.5, if: ----------- (1) a default in the payment of principal, premium, interest, rent or other obligations due on any Senior Indebtedness occurs and is continuing (or, in the case of Senior Indebtedness for which there is a period of grace, in the event of such a default that continues beyond the period of grace, if any, specified in the instrument or lease -22- evidencing such Senior Indebtedness), unless and until such default shall have been cured or waived or shall have ceased to exist; or (2) a default, other than a payment default, on any Designated Senior Indebtedness occurs and is continuing that then permits holders of such Designated Senior Indebtedness to accelerate its maturity and the Trustee receives a written notice of the default (a "Payment Blockage Notice") from ----------------------- a Representative or the Company. If the Trustee receives any Payment Blockage Notice pursuant to clause (2) above, no subsequent Payment Blockage Notice shall be effective for purposes of this Section unless and until (A) at least 365 days shall have elapsed since the initial effectiveness of the immediately prior Payment Blockage Notice, and (B) all scheduled payments of principal, premium, if any, and interest on the Securities that have come due have been paid in full in cash. No nonpayment default that existed or was continuing on the date of delivery of any Payment Blockage Notice to the Trustee shall be, or be made, the basis for a subsequent Payment Blockage Notice. The Company may and shall resume payments on and distributions in respect of the Securities upon the earlier of: (3) the date upon which the default is cured or waived or ceases to exist, or (4) in the case of a default referred to in clause (2) above, 179 days pass after notice is received if the maturity of such Designated Senior Indebtedness has not been accelerated, unless this Article IV otherwise prohibits the payment or distribution at the ---------- time of such payment or distribution. Upon any payment by the Company, or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to creditors upon any dissolution or winding up or liquidation or reorganization of the Company, whether voluntary or involuntary or in bankruptcy, insolvency, receivership or other proceedings, all amounts due or to become due upon all Senior Indebtedness shall first be paid in full in cash or other payment satisfactory to the holders of such Senior Indebtedness, or payment thereof in accordance with its terms provided for in cash or other payment satisfactory to the holders of such Senior Indebtedness, before any payment is made on account of the principal of, premium, if any, or interest on the Securities (except payments made pursuant to Article XIII from monies deposited with the Trustee ------------ pursuant thereto prior to commencement of proceedings for such dissolution, winding up, liquidation or reorganization) and upon any such dissolution or winding up or liquidation or reorganization of the Company or bankruptcy, insolvency, receivership or other -23- proceeding, any payment by the Company, or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to which the holders of the Securities or the Trustee would be entitled, except for the provision of this Article IV, shall (except as aforesaid) be paid by the Company ---------- or by any receiver, trustee in bankruptcy, liquidating trustee, agent or other Person making such payment or distribution, or by the holders of the Securities or by the Trustee under this Indenture if received by them or it, directly to the holders of Senior Indebtedness (pro rata to such holders on the basis of the respective amounts of Senior Indebtedness held by such holders, or as otherwise required by law or a court order) or their representative or representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing any Senior Indebtedness may have been issued, as their respective interests may appear, to the extent necessary to pay all Senior Indebtedness in full, in cash or other payment satisfactory to the holders of such Senior Indebtedness, after giving effect to any concurrent payment or distribution to or for the holders of Senior Indebtedness, before any payment or distribution or provision therefor is made to the holders of the Securities or to the Trustee. For purposes of this Article IV, the words, "cash, property or securities" ---------- shall not be deemed to include shares of stock of the Company as reorganized or readjusted, or securities of the Company or any other corporation provided for by a plan of reorganization or readjustment, the payment of which is subordinated at least to the extent provided in this Article IV with respect to ---------- the Securities to the payment of all Senior Indebtedness which may at the time be outstanding; provided that, (i) the Senior Indebtedness is assumed by the new -------- ---- corporation, if any, resulting from any reorganization or readjustment, and (ii) the rights of the holders of Senior Indebtedness (other than leases which are not assumed by the Company or the new corporation, as the case may be) are not, without the consent of such holders, altered by such reorganization or readjustment. The consolidation of the Company with, or the merger of the Company into, another corporation or the liquidation or dissolution of the Company following the conveyance or transfer of its property as an entirety, or substantially as an entirety, to another corporation upon the terms and conditions provided for in Article XII shall not be deemed a dissolution, ----------- winding up, liquidation or reorganization for the purposes of this Section 4.2 ----------- if such other corporation shall, as a part of such consolidation, merger, conveyance or transfer, comply with the conditions stated in Article XII. ----------- In the event of the acceleration of the Securities because of an Event of Default, no payment or distribution shall be made to the Trustee or any holder of Securities in respect of the principal of, premium, if any, or interest on the Securities (including, but not limited to, the redemption price with respect to the Securities called for redemption in accordance with Section 3.2 or ----------- submitted for repurchase in accordance with Section 16.2, as the case may be, ------------ -24- as provided in the Indenture), except payments and distributions made by the Trustee as permitted by the first or second paragraph of Section 4.5, until all ----------- Senior Indebtedness has been paid in full in cash or other payment satisfactory to the holders of Senior Indebtedness or such acceleration is rescinded in accordance with the terms of this Indenture. If payment of the Securities is accelerated because of an Event of Default, the Company shall promptly notify holders of Senior Indebtedness of the acceleration unless there are no payment obligations of the Company thereunder and all obligations thereunder to extend credit have been terminated or expired. In the event that, notwithstanding the foregoing provisions, any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities (including, without limitation, by way of setoff or otherwise), prohibited by the foregoing, shall be received by the Trustee or the holders of the Securities before all Senior Indebtedness is paid in full in cash or other payment satisfactory to the holders of such Senior Indebtedness, or provision is made for such payment thereof in accordance with its terms in cash or other payment satisfactory to the holders of such Senior Indebtedness, such payment or distribution shall be held in trust for the benefit of and shall be paid over or delivered to the holders of Senior Indebtedness or their representative or representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing any Senior Indebtedness may have been issued, as their respective interests may appear, as calculated by the Company, for application to the payment of all Senior Indebtedness remaining unpaid to the extent necessary to pay all Senior Indebtedness in full in cash or other payment satisfactory to the holders of such Senior Indebtedness, after giving effect to any concurrent payment or distribution to or for the holders of such Senior Indebtedness. Nothing in this Section 4.2 shall apply to claims of, or payments to, the ----------- Trustee under or pursuant to Section 8.6. This Section 4.2 shall be subject to ----------- ----------- the further provisions of Section 4.5, and the right to rescind and annul ----------- acceleration of the notice pursuant to Section 7.1. ----------- Section 4.3. Subrogation of Securities. Subject to the payment in full of ------------------------- all Senior Indebtedness, the rights of the holders of the Securities shall be subrogated to the extent of the payments or distributions made to the holders of such Senior Indebtedness pursuant to the provisions of this Article IV (equally ---------- and ratably with the holders of all indebtedness of the Company which by its express terms is subordinated to other indebtedness of the Company to substantially the same extent as the Securities are subordinated and is entitled to like rights of subrogation) to the rights of the holders of Senior Indebtedness to receive payments or distributions of cash, property or securities of the Company applicable to the Senior Indebtedness until the principal, premium, if any, and interest on the Securities shall be paid in full and, for the purposes of such -25- subrogation, no payments or distributions to the holders of the Senior Indebtedness of any cash, property or securities to which the holders of the Securities or the Trustee would be entitled except for the provisions of this Article IV, and no payment pursuant to the provisions of this Article IV, to or - ---------- ---------- for the benefit of the holders of Senior Indebtedness by holders of the Securities or the Trustee, shall, as between the Company, its creditors other than holders of Senior Indebtedness, and the holders of the Securities, be deemed to be a payment by the Company to or on account of the Senior Indebtedness and no payments or distributions of cash, property or securities to or for the benefit of the holders of the Securities pursuant to the subrogation provisions of this Article IV, which would otherwise have been paid to the ---------- holders of Senior Indebtedness shall be deemed to be a payment by the Company to or for the account of the Securities. It is understood that the provisions of this Article IV are and are intended solely for the purposes of defining the ---------- relative rights of the holders of the Securities, on the one hand, and the holders of the Senior Indebtedness, on the other hand. Nothing contained in this Article IV or elsewhere in this Indenture or in ---------- the Securities is intended to or shall impair, as among the Company, its creditors other than the holders of Senior Indebtedness, and the holders of the Securities, the obligation of the Company, which is absolute and unconditional, to pay to the holders of the Securities the principal of (and premium, if any) and interest on the Securities as and when the same shall become due and payable in accordance with their terms, or is intended to or shall affect the relative rights of the holders of the Securities and creditors of the Company other than the holders of the Senior Indebtedness, nor shall anything herein or therein prevent the Trustee or the holder of any Security from exercising all remedies otherwise permitted by applicable law upon default under this Indenture, subject to the rights, if any, under this Article IV of the holders of Senior ---------- Indebtedness in respect of cash, property or securities of the Company received upon the exercise of any such remedy. Upon any payment or distribution of assets of the Company referred to in this Article IV, the Trustee, subject to the provisions of Section 8.1, and the ---------- ----------- holders of the Securities shall be entitled to rely upon any order or decree made by any court of competent jurisdiction in which such bankruptcy, dissolution, winding up, liquidation or reorganization proceedings are pending, or a certificate of the receiver, trustee in bankruptcy, liquidating trustee, agent or other person making such payment or distribution, delivered to the Trustee or to the holders of the Securities, for the purpose of ascertaining the persons entitled to participate in such distribution, the holders of the Senior Indebtedness and other indebtedness of the Company, the amount thereof or payable thereon and all other facts pertinent thereto or to this Article IV. ---------- -26- Section 4.4. Authorization to Effect Subordination. Each holder of a ------------------------------------- Security by the holder's acceptance thereof authorizes and directs the Trustee on the holder's behalf to take such action as may be necessary or appropriate to effectuate the subordination as provided in this Article IV and appoints the ---------- Trustee to act as the holder's attorney-in-fact for any and all such purposes. If the Trustee does not file a proper proof of claim or proof of debt in the form required in any proceeding referred to in the third paragraph of Section ------- 7.2 hereof at least 30 days before the expiration of the time to file such - --- claim, the holders of any Senior Indebtedness or their representatives are hereby authorized to file an appropriate claim for and on behalf of the holders of the Securities. Section 4.5. Notice to Trustee. The Company shall give prompt written ----------------- notice in the form of an Officers' Certificate to a Responsible Officer of the Trustee and to any paying agent of any fact known to the Company which would prohibit the making of any payment of monies to or by the Trustee or any paying agent in respect of the Securities pursuant to the provisions of this Article ------- IV. Notwithstanding the provisions of this Article IV or any other provision of - -- ---------- this Indenture, the Trustee shall not be charged with knowledge of the existence of any facts which would prohibit the making of any payment of monies to or by the Trustee in respect of the Securities pursuant to the provisions of this Article IV, unless and until a Responsible Officer of the Trustee shall have - ---------- received written notice thereof at the Corporate Trust Office from the Company (in the form of an Officers' Certificate) or a Representative or a holder or holders of Senior Indebtedness or from any trustee thereof and before the receipt of any such written notice, the Trustee, subject to the provisions of Section 8.1, shall be entitled in all respects to assume that no such facts - ----------- exist; provided that, if on a date not fewer than two Business Days prior to the -------- ---- date upon which by the terms hereof any such monies may become payable for any purpose (including, without limitation, the payment of the principal of, or premium, if any, or interest on any Security) the Trustee shall not have received, with respect to such monies, the notice provided for in this Section ------- 4.5, then, anything herein contained to the contrary notwithstanding, the - --- Trustee shall have full power and authority to receive such monies and to apply the same to the purpose for which they were received, and shall not be affected by any notice to the contrary which may be received by it on or after such prior date. Notwithstanding anything in this Article IV to the contrary, nothing shall ---------- prevent any payment by the Trustee to the Securityholders of monies deposited with it pursuant to Section 13.1, and any such payment shall not be subject to ------------ the provisions of Section 4.1 or 4.2. ----------- --- The Trustee, subject to the provisions of Section 8.1, shall be entitled to ----------- rely on the delivery to it of a written notice by a Representative or a person representing himself to be a holder of -27- Senior Indebtedness (or a trustee on behalf of such holder) to establish that such notice has been given by a Representative or a holder of Senior Indebtedness or a trustee on behalf of any such holder or holders. In the event that the Trustee determines in good faith that further evidence is required with respect to the right of any person as a holder of Senior Indebtedness to participate in any payment or distribution pursuant to this Article IV, the ---------- Trustee may request such person to furnish evidence to the reasonable satisfaction of the Trustee as to the amount of Senior Indebtedness held by such person, the extent to which such person is entitled to participate in such payment or distribution and any other facts pertinent to the rights of such person under this Article IV, and if such evidence is not furnished, the Trustee ---------- may defer any payment to such person pending judicial determination as to the right of such person to receive such payment. Section 4.6. Trustee's Relation to Senior Indebtedness. The Trustee in ----------------------------------------- its individual capacity shall be entitled to all the rights set forth in this Article IV in respect of any Senior Indebtedness at any time held by it, to the - ---------- same extent as any other holder of Senior Indebtedness, and nothing in Section ------- 8.13 or elsewhere in this Indenture shall deprive the Trustee of any of its - ---- rights as such holder. With respect to the holders of Senior Indebtedness, the Trustee undertakes to perform or to observe only such of its covenants and obligations as are specifically set forth in this Article IV, and no implied covenants or ---------- obligations with respect to the holders of Senior Indebtedness shall be read into this Indenture against the Trustee. The Trustee shall not be deemed to owe any fiduciary duty to the holders of Senior Indebtedness and, subject to the provisions of Section 8.1, the Trustee shall not be liable to any holder of ----------- Senior Indebtedness if it shall pay over or deliver to holders of Securities, the Company or any other person money or assets to which any holder of Senior Indebtedness shall be entitled by virtue of this Article IV or otherwise. ---------- Section 4.7. No Impairment of Subordination. No right of any present or ------------------------------ future holder of any Senior Indebtedness to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Company or by any act or failure to act, in good faith, by any such holder, or by any noncompliance by the Company with the terms, provisions and covenants of this Indenture, regardless of any knowledge thereof which any such holder may have or otherwise be charged with. Section 4.8 Certain Conversions Deemed Payment. For the purposes of this ---------------------------------- Article IV only, (1) the issuance and delivery of junior securities upon - ---------- conversion of Securities in accordance with Article XV shall not be deemed to ---------- constitute a payment or distribution on account of the principal of (or premium, if any) or interest on Securities or on account of the purchase or other acquisition of Securities, and (2) the payment, issuance or -28- delivery of cash (except in satisfaction of fractional shares pursuant to Section 15.2), property or securities (other than junior securities) upon - ------------ conversion of a Security shall be deemed to constitute payment on account of the principal of such Security. For the purposes of this Section 4.8, the term ----------- "junior securities" means (a) shares of any stock of any class of the Company, ----------------- or (b) securities of the Company which are subordinated in right of payment to all Senior Indebtedness which may be outstanding at the time of issuance or delivery of such securities to substantially the same extent as, or to a greater extent than, the Securities are so subordinated as provided in this Article. Nothing contained in this Article IV or elsewhere in this Indenture or in the ---------- Securities is intended to or shall impair, as among the Company, its creditors other than holders of Senior Indebtedness and the Securityholders, the right, which is absolute and unconditional, of the Holder of any Security to convert such Security in accordance with Article XV. ---------- Section 4.9. Article Applicable to Paying Agents. If at any time any ----------------------------------- paying agent other than the Trustee shall have been appointed by the Company and be then acting hereunder, the term "Trustee" as used in this Article shall ------- (unless the context otherwise requires) be construed as extending to and including such paying agent within its meaning as fully for all intents and purposes as if such paying agent were named in this Article in addition to or in place of the Trustee; provided, however, that the first paragraph of Section 4.5 -------- ------- ----------- shall not apply to the Company or any Affiliate of the Company if it or such Affiliate acts as paying agent. Section 4.10. Senior Indebtedness Entitled to Rely. The holders of Senior ------------------------------------ Indebtedness (including, without limitation, Designated Senior Indebtedness) shall have the right to rely upon this Article IV, and no amendment or ---------- modification of the provisions contained herein shall diminish the rights of such holders unless such holders shall have agreed in writing thereto. ARTICLE V. PARTICULAR COVENANTS OF THE COMPANY Section 5.1. Payment of Principal, Premium and Interest. The Company ------------------------------------------ covenants and agrees that it will duly and punctually pay or cause to be paid the principal of and premium, if any, and interest on each of the Securities at the places, at the respective times and in the manner provided herein and in the Securities. Each installment of interest on the Securities due on any semi- annual interest payment date may be paid by mailing checks for the interest payable to or upon the written order of the holders of Securities entitled thereto as they shall appear on the Security register; provided, that, with -------- respect to any holder of Securities with an aggregate principal amount equal to or in excess of $5,000,000, at the request of such holder in writing to the Company at least five (5) days prior to the date -29- set for payment of interest (who shall then furnish notice to such effect to the Trustee), interest on such holder's Securities shall be paid by wire transfer in immediately available funds in accordance with the wire transfer instructions supplied by such holder to the Trustee and paying agent (if different from the Trustee). Section 5.2. Maintenance of Office or Agency. The Company will maintain ------------------------------- in Chicago, Illinois, an office or agency where the Securities may be surrendered for registration of transfer or exchange or for presentation for payment or for conversion or redemption and where notices and demands to or upon the Company in respect of the Securities and this Indenture may be served. The Company will give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency not designated or appointed by the Trustee. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office or the office or agency of the Trustee in Chicago, Illinois. The Company may also from time to time designate one or more other offices or agencies where the Securities may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided -------- that, no such designation or rescission shall in any manner relieve the Company - ---- of its obligation to maintain an office or agency in Chicago, Illinois, for such purposes. The Company will give prompt written notice to the holders of any such designation or rescission and of any change in the location of any such other office or agency. The Company hereby initially designates the Trustee as paying agent, Security registrar, Custodian and conversion agent, and each of the Corporate Trust Office of the Trustee and the office or agency of the Trustee in Chicago, Illinois as the office or agency of the Company for each of the aforesaid purposes. The Trustee agrees to mail, or cause to be mailed, the notices set forth in Section 8.10(a) and the third paragraph of Section 8.11. - --------------- ------------ Section 5.3. Appointments to Fill Vacancies in Trustee's Office. The -------------------------------------------------- Company, whenever necessary to avoid or fill a vacancy in the office of Trustee, will appoint, in the manner provided in Section 8.10, a Trustee, so that there ------------ shall at all times be a Trustee hereunder. Section 5.4. Provisions as to Paying Agent. ----------------------------- (a) If the Company shall appoint a paying agent other than the Trustee, or if the Trustee shall appoint such a paying agent, it will cause such paying agent to execute and deliver to the Trustee an instrument in which such agent -30- shall agree with the Trustee, subject to the provisions of this Section ------- 5.4: --- (1) that it will hold all sums held by it as such agent for the payment of the principal of and premium, if any, or interest on the Securities (whether such sums have been paid to it by the Company or by any other obligor on the Securities) in trust for the benefit of the holders of the Securities; (2) that it will give the Trustee notice of any failure by the Company (or by any other obligor on the Securities) to make any payment of the principal of and premium, if any, or interest on the Securities when the same shall be due and payable; and (3) that at any time during the continuance of an Event of Default, upon request of the Trustee, it will forthwith pay to the Trustee all sums so held in trust. The Company shall, on or before each due date of the principal of, premium, if any, or interest on the Securities, deposit with the paying agent a sum sufficient to pay such principal, premium, if any, or interest, and (unless such paying agent is the Trustee) the Company will promptly notify the Trustee of any failure to take such action; provided that, if -------- ---- such deposit is made on the due date, such deposit shall be received by the paying agent by 10:00 a.m. (Chicago time), on such date. (b) If the Company shall act as its own paying agent, it will, on or before each due date of the principal of, premium, if any, or interest on the Securities, set aside, segregate and hold in trust for the benefit of the holders of the Securities a sum sufficient to pay such principal, premium, if any, or interest so becoming due and will notify the Trustee of any failure to take such action and of any failure by the Company (or any other obligor under the Securities) to make any payment of the principal of, premium, if any, or interest on the Securities when the same shall become due and payable. (c) Anything in this Section 5.4 to the contrary notwithstanding, ----------- the Company may, at any time, for the purpose of obtaining a satisfaction and discharge of this Indenture, or for any other reason, pay or cause to be paid to the Trustee all sums held in trust by the Company or any paying agent hereunder as required by this Section 5.4, such sums to be held by ----------- the Trustee upon the trusts herein contained and upon such payment by the Company or any paying agent to the Trustee, the Company or such paying agent shall be released from all further liability with respect to such sums. -31- (d) Anything in this Section 5.4 to the contrary notwithstanding, the ----------- agreement to hold sums in trust as provided in this Section 5.4 is subject ----------- to Sections 13.3 and 13.4. ------------- ---- Section 5.5. Corporate Existence. Subject to Article XII, the Company ------------------- ----------- will do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence. Section 5.6. Amendments to Warrants or New Preferred Stock. ---------------------------------------------- Without the consent of at least a majority in principal amount of the Securities then outstanding, the Company shall not amend, modify or alter the terms of the Warrants or the New Preferred Stock in any way that will (i) increase the amount of dividends payable on the New Preferred Stock or advance dates on which such dividends are payable, (ii) advance the redemption date of the New Preferred Stock to a date prior to the maturity date of the Securities, or (iii) otherwise be materially adverse to the interests of the holders of the Securities as the holders of debt securities of the Company. Section 5.7. Stay, Extension and Usury Laws. The Company covenants (to ------------------------------ the extent that it may lawfully do so) that it shall not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law or other law which would prohibit or forgive the Company from paying all or any portion of the principal of, premium, if any, or interest on the Securities as contemplated herein, wherever enacted, now or at any time hereafter in force, or which may affect the covenants or the performance of this Indenture and the Company (to the extent it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it will not, by resort to any such law, 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 has been enacted. Section 5.8. Compliance Certificate. The Company shall deliver to the ---------------------- Trustee within 90 days after the end of each fiscal year of the Company (beginning with the fiscal year ending October 31, 1997) an Officers' Certificate as to the signer's knowledge of the Company's compliance with all conditions and covenants on its part contained in this Indenture and stating whether or not the signers know of any Event of Default that occurred during such period. If they do, such Officers' Certificate shall describe the Event of Default and its status and the Company's efforts to remedy the same. Section 5.9. No Redemption of New Preferred Stock at the Option of the --------------------------------------------------------- Company. The Company shall not redeem the New Preferred Stock prior to the - ------- maturity date of the Securities unless (i) such payments are made by the -32- Company with the proceeds from the issuance of (y) Indebtedness subordinate to the Notes and bearing interest at a rate equal to or lower than the dividend rate on the Series A Preferred Stock and having a maturity date not earlier than the maturity date of the Notes or (z) equity securities accruing dividends at a rate equal to or lower than the Series A Preferred Stock and not redeemable prior to the maturity date of the Notes and (ii) the average Closing Price of the Common Stock during the sixty (60) Trading Days immediately preceding the second Business Day prior to the date of such prepayment is at least equal to 130% of the Conversion Price. Section 5.10. No Repurchase of Warrants. The Company shall not repurchase ------------------------- any of the Warrants or any rights associated therewith for so long as any Securities are outstanding. Section 5.11. Liquidation. Subject to the provisions of Article IV, so far ----------- ---------- as they may be applicable hereto, the Board of Directors or the stockholders of the Company may not adopt a plan of liquidation which plan provides for, contemplates or the effectuation of which is preceded by (a) the sale, lease, conveyance or other disposition of all or substantially all of the assets of the Company otherwise than substantially as an entirety (Article XII of this ----------- Indenture being the Article which governs any such sale, lease, conveyance or other disposition substantially as an entirety), and (b) the distribution of all or substantially all of the proceeds of such sale, lease, conveyance or other disposition and of the remaining assets of the Company to the holders of the capital stock of the Company, unless the Company shall in connection with the adoption of such plan make provision for, or agree that prior to making any liquidating distributions it will make provision for, the satisfaction of the Company's obligations hereunder and under the Securities as to the payment of the principal and interest. The Company shall be deemed to make provision for such payments only if (1) the Company irrevocably deposits in trust with the Trustee money or U.S. Government Obligations maturing as to principal and interest in such amounts and at such times as are sufficient, without consideration of any reinvestment of such interest, to pay the principal of and interest on the Securities then outstanding to maturity and to pay all other sums payable by it hereunder, or (2) there is an express assumption of the due and punctual payment of the Company's obligations hereunder and under the Securities and the performance and observance of all covenants and conditions to be performed by the Company hereunder, by the execution and delivery of a supplemental indenture in form satisfactory to the Trustee, by a person who acquires, or will acquire (otherwise than pursuant to a lease) a portion of the assets of the Company, and which person will have assets (immediately after the acquisition) and aggregate earnings (for such person's four full fiscal quarters immediately preceding such acquisition) equal to not less than the assets of the Company (immediately preceding such acquisition) and the aggregate earnings of the Company (for its four full fiscal quarters immediately preceding the acquisition), respectively, and which is a corporation organized under the laws of the United States, any State thereof or the District of Columbia; provided, -------- -33- however, that the Company shall not make any liquidating distribution until - ------- after the Company shall have certified to the Trustee with an Officers' Certificate at least five days prior to the making of any liquidating distribution that it has complied with the provisions of this Section 5.11. ------------ Section 5.12. Notice of Defaults. In the event that Indebtedness of the ------------------ Company in an aggregate amount in excess of $10,000,000 is declared due and payable before its maturity because of the occurrence of any default under such Indebtedness, the Company will promptly give written notice to the Trustee of such declaration or of the occurrence of any event which, with the giving of notice or the passage of time, or both, would entitle the holder or holders of such Indebtedness to declare such Indebtedness due and payable before its maturity. Section 5.13. Payment of Taxes and Other Claims. The Company will pay or --------------------------------- discharge or cause to be paid or discharged, before the same shall become delinquent, (1) all material taxes, assessments and governmental charges levied or imposed upon the Company, directly or by reason of its ownership of any Subsidiary or upon the income, profits or property of the Company, and (2) all material lawful claims for labor, materials and supplies, which, if unpaid, might by law become a lien upon the property of the Company; provided, however, -------- ------- that the Company shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings and for which adequate provision has been made. Section 5.14. Further Instruments and Acts. Upon request of the Trustee, ---------------------------- the Company will execute and deliver such further instruments and do such further acts as may be reasonably necessary or proper to carry out more effectively the purposes of this Indenture. ARTICLE VI. SECURITYHOLDERS' LISTS AND REPORTS BY THE COMPANY AND TRUSTEE Section 6.1. Securityholders' Lists. The Company covenants and agrees that ---------------------- it will furnish or cause to be furnished to the Trustee, semiannually, not more than fifteen (15) days after each March 15 and September 15 in each year beginning with March 15, 1998, and at such other times as the Trustee may request in writing, within thirty (30) days after receipt by the Company of any such request (or such lesser time as the Trustee may reasonably request in order to enable it to timely provide any notice to be provided by it hereunder), a list in such form as the Trustee may reasonably require of the names and addresses of the holders of Securities as of a date not more than fifteen (15) days (or such other date as the Trustee may reasonably request in -34- order to so provide any such notices) prior to the time such information is furnished, except that no such list need be furnished so long as the Trustee is acting as Security registrar. Section 6.2. Preservation and Disclosure of Lists. ------------------------------------ (a) The Trustee shall preserve, in as current a form as is reasonably practicable, all information as to the names and addresses of the holders of Securities contained in the most recent list furnished to it as provided in Section 6.1 or maintained by the Trustee in its capacity as Security ----------- registrar, if so acting. The Trustee may destroy any list furnished to it as provided in Section 6.1 upon receipt of a new list so furnished. ----------- (b) The rights of Securityholders to communicate with other holders of Securities with respect to their rights under this Indenture or under the Securities, and the corresponding rights and duties of the Trustee, shall be as provided by the Trust Indenture Act. (c) Every Securityholder, by receiving and holding the same, agrees with the Company and the Trustee that neither the Company nor the Trustee nor any agent of either of them shall be held accountable by reason of any disclosure of information as to names and addresses of holders of Securities made pursuant to the Trust Indenture Act. Section 6.3. Reports by Trustee. ------------------ (a) Within 60 days after September 15 of each year commencing with the year 1998, the Trustee shall transmit to holders of Securities such reports dated as of September 15 of the year in which such reports are made concerning the Trustee and its actions under this Indenture as may be required pursuant to the Trust Indenture Act at the times and in the manner provided pursuant thereto. (b) A copy of such report shall, at the time of such transmission to holders of Securities, be filed by the Trustee with each stock exchange and automated quotation system upon which the Securities are listed and with the Company. The Company will notify the Trustee in writing within a reasonable time when the Securities are listed on any stock exchange and automated quotation system. Section 6.4. Reports by Company. The Company shall file with the Trustee ------------------ (and the Commission if at any time the Indenture becomes qualified under the Trust Indenture Act), and transmit to holders of Securities, 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 -35- Commission pursuant to Section 13 or 15(d) of the Exchange Act shall be filed with the Trustee within fifteen (15) days after the same are so required to be filed with the Commission. ARTICLE VII. REMEDIES OF THE TRUSTEE AND SECURITYHOLDERS ON AN EVENT OF DEFAULT Section 7.1. Events of Default. In case one or more of the following ----------------- Events of Default (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) shall have occurred and be continuing: (a) default in the payment of any installment of interest upon any of the Securities as and when the same shall become due and payable, and continuance of such default for a period of thirty (30) days, whether or not such payment is permitted under Article IV hereof; or ---------- (b) default in the payment of the principal of or premium, if any, on any of the Securities as and when the same shall become due and payable either at maturity or in connection with any redemption pursuant to Article ------- III or repurchase pursuant to Article XVI, by acceleration or otherwise, --- ----------- whether or not such payment is permitted under Article IV hereof; or ---------- (c) failure on the part of the Company duly to observe or perform (i) any of its obligations under Section 5.6, 5.9, 5.10, 5.11, 12.1 or 15.1 of ----------- --- ---- ---- ---- ---- this Indenture (immediately upon the giving of notice described below, without the passage of time) or (ii) any other of the covenants or agreements on the part of the Company in the Securities or in this Indenture (other than a covenant or agreement a default in whose performance or whose breach is elsewhere in this Section 7.1 specifically ----------- dealt with) continued for a period of thirty (30) days after the date on which written notice of such failure, requiring the Company to remedy the same, shall have been given to the Company by the Trustee, or to the Company and a Responsible Officer of the Trustee by the holders of at least 25 percent (25%) in aggregate principal amount of the Securities at the time outstanding determined in accordance with Section 9.4; or ----------- (d) failure on the part of the Company or any Significant Subsidiary with respect to its obligation to pay principal of or interest on indebtedness for borrowed money in excess of $10 million beyond any applicable grace period; or -36- (e) default by the Company with respect to any indebtedness for borrowed money of the Company, which default results in acceleration of any such indebtedness which is in an amount of in excess of $10 million without such indebtedness having been discharged, or such acceleration having been rescinded or annulled for a period of ten (10) days or redemption of the New Preferred Stock at any time (other than as permitted by Section 5.9); or (f) the Company or any Significant Subsidiary shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due within the meaning of the bankruptcy law; or (g) an involuntary case or other proceeding shall be commenced against the Company or any Significant Subsidiary seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of seventy-five (75) consecutive days; or (h) the entry by a court having jurisdiction in the premises of a final judgment, decree or order against the Company or any Significant Subsidiary which shall require the payment by the Company or any of its Significant Subsidiaries of an amount (to the extent not covered by insurance) in excess of $1 million at any one time and the continuance of any such judgment, decree or order unstayed, unpaid, undismissed or bonded pending appeal and in effect for a period of sixty (60) consecutive days which is not being contested in good faith by appropriate proceedings; then, and in each and every such case (other than an Event of Default specified in Section 7.1(f) or (g)), unless the principal of all of the Securities shall -------------- --- have already become due and payable, either the Trustee or the holders of not less than 25 percent (25%) in aggregate principal amount of the Securities then outstanding hereunder determined in accordance with Section 9.4, by notice in ----------- writing to the Company (and to the Trustee if given by Securityholders), may declare the principal of all the Securities and the interest accrued thereon to be due and payable immediately, and upon any such declaration the same -37- shall become and shall be immediately due and payable, anything in this Indenture or in the Securities contained to the contrary notwithstanding. If an Event of Default specified in Section 7.1(f) or (g) occurs, the principal of all -------------- - the Securities and the interest accrued thereon shall be immediately and automatically due and payable without necessity of further action. This provision, however, is subject to the condition that if, at any time after the principal of the Securities shall have been so declared due and payable, and before any judgment or decree for the payment of the monies due shall have been obtained or entered as hereinafter provided, the Company shall pay or shall deposit with the Trustee a sum sufficient to pay all matured installments of interest upon all Securities and the principal of and premium, if any, on any and all Securities which shall have become due otherwise than by acceleration (with interest on overdue installments of interest (to the extent that payment of such interest is enforceable under applicable law) and on such principal and premium, if any, at the rate borne by the Securities, to the date of such payment or deposit) and amounts due to the Trustee pursuant to Section 8.6, and ----------- if any and all defaults under this Indenture, other than the nonpayment of principal of and premium, if any, and accrued interest on Securities which shall have become due by acceleration, shall have been cured or waived pursuant to Section 7.7, then and in every such case the holders of a majority in aggregate - ----------- principal amount of the Securities then outstanding determined in accordance with Section 9.4, by written notice to the Company and to the Trustee, may waive ----------- all defaults or Events of Default and rescind and annul such declaration and its consequences but no such waiver or rescission and annulment shall extend to or shall affect any subsequent default or Event of Default, or shall impair any right consequent thereon. The Company shall notify a Responsible Officer of the Trustee, promptly upon becoming aware thereof, of any Event of Default. In case the Trustee shall have proceeded to enforce any right under this Indenture and such proceedings shall have been discontinued or abandoned because of such waiver or rescission and annulment or for any other reason or shall have been determined adversely to the Trustee, then and in every such case the Company, the holders of Securities, and the Trustee shall be restored respectively to their several positions and rights hereunder, and all rights, remedies and powers of the Company, the holders of Securities, and the Trustee shall continue as though no such proceeding had been taken. Section 7.2 Payments of Securities on Default; Suit Therefor. The Company ------------------------------------------------ covenants that (a) in case default shall be made in the payment of any installment of interest upon any of the Securities as and when the same shall become due and payable, and such default shall have continued for a period of thirty (30) days, or (b) in case default shall be made in the payment of the principal of or premium, if any, on any of the Securities as and when the same shall have become due and payable, whether at -38- maturity of the Securities or in connection with any redemption or repurchase, under this Indenture, by declaration or otherwise, then, upon demand of the Trustee, the Company will pay to the Trustee, for the benefit of the holders of the Securities, the whole amount that then shall have become due and payable on all such Securities for principal and premium, if any, or interest, or both, as the case may be, with interest upon the overdue principal and premium, if any, and (to the extent that payment of such interest is enforceable under applicable law) upon the overdue installments of interest at the rate borne by the Securities and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including compensation to the Trustee, its agents, attorney and counsel, and any expenses or liabilities incurred by the Trustee hereunder. Until such demand by the Trustee, the Company may pay the principal of and premium, if any, and interest on the Securities to the registered holders, whether or not the Securities are overdue. In case the Company shall fail forthwith to pay such amounts upon such demand, the Trustee, in its own name and as trustee of an express trust, shall be entitled and empowered to institute any actions or proceedings at law or in equity for the collection of the sums so due and unpaid, and may prosecute any such action or proceeding to judgment or final decree, and may enforce any such judgment or final decree against the Company or any other obligor on the Securities and collect in the manner provided by law out of the property of the Company or any other obligor on the Securities wherever situated the monies adjudged or decreed to be payable. In the case there shall be pending proceedings for the bankruptcy or for the reorganization of the Company or any other obligor on the Securities under Title 11 of the United States Code, or any other applicable law, or in case a receiver, assignee or trustee in bankruptcy or reorganization, liquidator, sequestrator or similar official shall have been appointed for or taken possession of the Company or such other obligor, the property of the Company or such other obligor, or in the case of any other judicial proceedings relative to the Company or such other obligor upon the Securities, or to the creditors or property of the Company or such other obligor, the Trustee, irrespective of whether the principal of the Securities shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand pursuant to the provisions of this Section 7.2, shall ----------- be entitled and empowered, by intervention in such proceedings or otherwise, to file and prove a claim or claims for the whole amount of principal, premium, if any, and interest owing and unpaid in respect of the Securities, and, in case of any judicial proceedings, to file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee and of the Securityholders allowed in such judicial proceedings relative to the Company or any other obligor on the Securities, its or their creditors, or its or their property, and to collect and receive any monies or other -39- property payable or deliverable on any such claims, and to distribute the same after the deduction of any amounts due the Trustee under Section 8.6 and any ----------- receiver, assignee or trustee in bankruptcy or reorganization, liquidator, custodian or similar official is hereby authorized by each of the Securityholders to make such payments to the Trustee, and, in the event that the Trustee shall consent to the making of such payments directly to the Securityholders, to pay to the Trustee any amount due it for reasonable compensation, expenses, advances and disbursements, including counsel fees incurred by it up to the date of such distribution. To the extent that such payment of reasonable compensation, expenses, advances and disbursements out of the estate in any such proceedings shall be denied for any reason, payment of the same shall be secured by a lien on, and shall be paid out of, any and all distributions, dividends, monies, securities and other property which the holders of the Securities may be entitled to receive in such proceedings, whether in liquidation or under any plan of reorganization or arrangement or otherwise. All rights of action and of asserting claims under this Indenture, or under any of the Securities, may be enforced by the Trustee without the possession of any of the Securities, or the production thereof at any trial or other proceeding relative thereto, and any such suit or proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, be for the ratable benefit of the holders of the Securities. In any proceedings brought by the Trustee (and in any proceedings involving the interpretation of any provision of this Indenture to which the Trustee shall be a party), the Trustee shall be held to represent all the holders of the Securities, and it shall not be necessary to make any holders of the Securities parties to any such proceedings. Section 7.3. Application of Monies Collected by Trustee. Any monies ------------------------------------------ collected by the Trustee pursuant to this Article VII shall be applied in the ----------- order following, at the date or dates fixed by the Trustee for the distribution of such monies, upon presentation of the several Securities, and stamping thereon 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 ----- ------- 8.6; --- Second: subject to the provisions of Article IV, in case the ------ ---------- principal of the outstanding Securities shall not have become due and be unpaid, to the payment of interest on the Securities in default in the order of the maturity of the installments of such interest, with interest (to the extent -40- that such interest has been collected by the Trustee) upon the overdue installments of interest at the rate borne by the Securities, such payments to be made ratably to the persons entitled thereto; Third: subject to the provisions of Article IV, in case the principal ----- ---------- of the outstanding Securities shall have become due, by declaration or otherwise, and be unpaid, to the payment of the whole amount then owing and unpaid upon the Securities for principal and premium, if any, and interest, with interest on the overdue principal and premium, if any, and (to the extent that such interest has been collected by the Trustee) upon overdue payments of interest at the rate borne by the Securities and in case such monies shall be insufficient to pay in full the whole amounts so due and unpaid upon the Securities, then to the payment of such principal and premium, if any, and interest without preference or priority of principal and premium, if any, over interest, or of interest over principal and premium, if any, or of any installment of interest over any other installment of interest, or of any Security over any other Security, ratably to the aggregate of such principal and premium, if any, and accrued and unpaid interest; and Fourth: subject to the provisions of Article IV, to the payment of ------ ---------- the remainder, if any, to the Company or any other person lawfully entitled thereto. Section 7.4. Proceedings by Securityholder. No holder of any Security ----------------------------- shall have any right by virtue of or by availing of any provision of this Indenture to institute any suit, action or proceeding in equity or at law upon or under or with respect to this Indenture, or for the appointment of a receiver, trustee, liquidator, custodian or other similar official, or for any other remedy hereunder, unless such holder previously shall have given to the Trustee written notice of an Event of Default and of the continuance thereof, as hereinbefore provided, and unless also the holders of not less than 25 percent (25%) in aggregate principal amount of the Securities then outstanding determined in accordance with Section 9.4 shall have made written request upon ----------- the Trustee to institute such action, suit or proceeding in its own name as Trustee hereunder and shall have offered to the Trustee such reasonable indemnity as it may require against the costs, expenses and liabilities to be incurred therein or thereby, and the Trustee for sixty (60) days after its receipt of such notice, request and offer of indemnity, shall have neglected or refused to institute any such action, suit or proceeding and no direction inconsistent with such written request shall have been given to the Trustee pursuant to Section 7.7, it being understood and intended, and being expressly ----------- covenanted by the taker and holder of every Security with every other taker and holder and the Trustee, that no one or more holders of Securities shall have any right in any manner whatever by virtue of or by availing of any provision of this Indenture to affect, disturb or -41- prejudice the rights of any other holder of Securities, or to obtain or seek to obtain priority over or preference to any other such holder, or to enforce any right under this Indenture, except in the manner herein provided and for the equal, ratable and common benefit of all holders of Securities (except as otherwise provided herein). For the protection and enforcement of this Section ------- 7.4, each and every Securityholder and the Trustee shall be entitled to such - --- relief as can be given either at law or in equity. Notwithstanding any other provision of this Indenture and any provision of any Security, the right of any holder of any Security to receive payment of the principal of and premium, if any, and interest on such Security, on or after the respective due dates therefor, or to institute suit for the enforcement of any such payment on or after such respective dates against the Company shall not be impaired or affected without the consent of such holder. Anything in this Indenture or the Securities to the contrary notwithstanding, the holder of any Security, without the consent of either the Trustee or the holder of any other Security, in his own behalf and for his own benefit, may enforce, and may institute and maintain any proceeding suitable to enforce, his rights of conversion as provided herein. Section 7.5. Proceedings by Trustee. In case of an Event of Default the ---------------------- Trustee may in its discretion proceed to protect and enforce the rights vested in it by this Indenture by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any of such rights, either by suit in equity or by action at law or by proceeding in bankruptcy or otherwise, whether for the specific enforcement of any covenant or agreement contained in this Indenture or in aid of the exercise of any power granted in this Indenture, or to enforce any other legal or equitable right vested in the Trustee by this Indenture or by law. Section 7.6. Remedies Cumulative and Continuing. Except as provided in the ---------------------------------- last paragraph of Section 2.6, all powers and remedies given by this Article VII ----------- ----------- to the Trustee or to the Securityholders shall, to the extent permitted by law, be deemed cumulative and not exclusive of any thereof or of any other powers and remedies available to the Trustee or the holders of the Securities, by judicial proceedings or otherwise, to enforce the performance or observance of the covenants and agreements contained in this Indenture, and no delay or omission of the Trustee or of any holder of any of the Securities to exercise any right or power accruing upon any default or Event of Default occurring and continuing as aforesaid shall impair any such right or power, or shall be construed to be a waiver of any such default or any acquiescence therein and, subject to the provisions of Section 7.4, every power and remedy given by this Article VII or ----------- ----------- by law to the Trustee or to the Securityholders -42- may be exercised from time to time, and as often as shall be deemed expedient, by the Trustee or by the Securityholders. Section 7.7. Direction of Proceedings and Waiver of Defaults by Majority ----------------------------------------------------------- of Securityholders. The holders of a majority in aggregate principal amount of - ------------------ the Securities at the time outstanding determined in accordance with Section 9.4 ----------- 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, however, that (a) such direction shall -------- ------- not be in conflict with any rule of law or with this Indenture, and (b) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction. The holders of a majority in aggregate principal amount of the Securities at the time outstanding determined in accordance with Section 9.4 may on behalf of the holders of all of the ----------- Securities waive any past default or Event of Default hereunder and its consequences except (i) a default in the payment of interest or premium, if any, on, or the principal of, the Securities, (ii) a failure by the Company to convert any Securities into Common Stock, (iii) a default in the payment of redemption price pursuant to Article III or repurchase price pursuant to Article ----------- ------- XVI or (iv) a default in respect of a covenant or provisions hereof which under - --- Article XI cannot be modified or amended without the consent of the holders of - ---------- all Securities then outstanding. Upon any such waiver the Company, the Trustee and the holders of the Securities shall be restored to their former positions and rights hereunder but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon. Whenever any default or Event of Default hereunder shall have been waived as permitted by this Section 7.7, said default or Event of Default shall for all purposes of the ----------- Securities and this Indenture be deemed to have been cured and to be not continuing but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon. Section 7.8. Notice of Defaults. The Trustee shall, within ninety (90) ------------------ days after a Responsible Officer has knowledge of the occurrence of a default, mail to all Securityholders, as the names and addresses of such holders appear upon the Security register, notice of all defaults known to a Responsible Officer, unless such defaults shall have been cured or waived before the giving of such notice and provided that, except in the case of default in the payment of the principal of, or premium, if any, or interest on any of the Securities, the Trustee shall be protected in withholding such notice if and so long as a trust committee of directors and/or officers of the Trustee in good faith determine that the withholding of such notice is in the interests of the Securityholders. Section 7.9. Undertaking to Pay Costs. All parties to this Indenture ------------------------ agree, and each holder of any Security by his -43- acceptance thereof shall be deemed to have agreed, that any court may, in its discretion, require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; provided that, -------- ---- the provisions of this Section 7.9 (to the extent permitted by law) shall not ----------- apply to any suit instituted by the Trustee, to any suit instituted by any Securityholder, or group of Securityholders, holding in the aggregate more than ten percent (10%) in principal amount of the Securities at the time outstanding determined in accordance with Section 9.4, or to any suit instituted by any ----------- Securityholder for the enforcement of the payment of the principal of or premium, if any, or interest on any Security on or after the due date therefor or to any suit for the enforcement of the right to convert any Security in accordance with the provisions of Article XV or to require the Company to ---------- repurchase any Security in accordance with Article XVI. ----------- ARTICLE VIII. CONCERNING THE TRUSTEE Section 8.1. Duties and Responsibilities of Trustee. The Trustee, prior to -------------------------------------- the occurrence of an Event of Default and after the curing of all Events of Default which may have occurred, undertakes to perform such duties and only such duties as are specifically set forth in this Indenture. In case an Event of Default has occurred (which has not been cured or waived) the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of his own affairs. No provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act or its own willful misconduct, except that (a) prior to the occurrence of an Event of Default and after the curing or waiving of all Events of Default which may have occurred: (1) the duties and obligations of the Trustee shall be determined solely by the express provisions of this Indenture and the Trust Indenture Act, and the Trustee shall not be liable except for the performance of such duties and obligations as are specifically set forth in this Indenture and no implied covenants or obligations shall be read into this Indenture or the Trust Indenture Act against the Trustee; and -44- (2) in the absence of bad faith and willful misconduct on the part of the Trustee, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture but, in the case of any such certificates or opinions which by any provisions hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Indenture; (b) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer or Officers of the Trustee, unless the Trustee was negligent in ascertaining the pertinent facts; (c) the Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the holders of not less than a majority in principal amount of the Securities at the time outstanding determined as provided in Section 9.4 ----------- relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture; and (d) whether or not therein provided, every provision of this Indenture relating to the conduct or affecting the liability of, or affording protection to, the Trustee as trustee, paying agent, Security registrar, Custodian or conversion agent shall be subject to the provisions of this Section. None of the provisions contained in this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur personal financial liability in the performance of any of its duties or in the exercise of any of its rights or powers. Section 8.2. Reliance on Documents, Opinions, Etc. Except as otherwise ------------------------------------- provided in Section 8.1: ----------- (a) the Trustee may rely and shall be protected in acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, bond, Note, Security, coupon or other paper or document believed by it in good faith to be genuine and to have been signed or presented by the proper party or parties; (b) any request, direction, order or demand of the Company mentioned herein shall be sufficiently evidenced by an Officers' Certificate (unless other evidence in respect thereof be herein specifically prescribed) and any -45- resolution of the Board of Directors may be evidenced to the Trustee by a copy thereof certified by the Secretary or an Assistant Secretary of the Company; (c) the Trustee may consult with counsel and any advice or Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken or omitted by it hereunder in good faith and in accordance with such advice or Opinion of Counsel; (d) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request, order or direction of any of the Securityholders pursuant to the provisions of this Indenture, unless such Securityholders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which may be incurred therein or thereby; (e) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, note or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the Company, personally or by agent or attorney; provided, however, that if the payment within a reasonable time to the -------- ------- Trustee of the costs, expenses or liabilities likely to be incurred by it in the making of such investigation is, in the opinion of the Trustee, not reasonably assured to the Trustee by the security afforded to it by the terms of this Indenture, the Trustee may require reasonable indemnity against such expenses or liability as a condition to so proceeding and the reasonable expenses of every such examination shall be paid by the Company or, if paid by the Trustee or any predecessor Trustee, shall be repaid by the Company upon demand; (f) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed by it with due care hereunder; and (g) the Trustee shall not be deemed to have notice of an Event of Default or of any event or conditions which, with the giving of notice, the passage of time, or both, might constitute an Event of Default unless (i) the Trustee has received written notice thereof from the Company or any -46- Securityholder or (ii) a Responsible Officer of the Trustee shall have actual knowledge thereof. Section 8.3. No Responsibility for Recitals, Etc. The recitals contained ------------------------------------ herein and in the Securities (except in the Trustee's certificate of authentication) shall be taken as the statements of the Company, and the Trustee assumes no responsibility for the correctness of the same. 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 any Securities or the proceeds of any Securities authenticated and delivered by the Trustee in conformity with the provisions of this Indenture. Section 8.4. Trustee, Paying Agents, Conversion Agents or Registrar May ---------------------------------------------------------- Own Securities. The Trustee, any paying agent, any conversion agent or Security - -------------- registrar, in its individual or any other capacity, may become the owner or pledgee of Securities with the same rights it would have if it were not Trustee, paying agent, conversion agent or Security registrar. Section 8.5. Monies to Be Held in Trust. Subject to the provisions of -------------------------- Section 13.4, all monies received by the Trustee shall, until used or applied as - ------------ herein provided, be held in trust for the purposes for which they were received. 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 may be agreed from time to time by the Company and the Trustee. Section 8.6. Compensation and Expenses of Trustee. The Company covenants ------------------------------------ and agrees to pay to the Trustee from time to time, and the Trustee shall be entitled to, reasonable compensation for all services rendered by it hereunder in any capacity (which shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust), and the Company will pay or reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances reasonably incurred or made by the Trustee in accordance with any of the provisions of this Indenture (including the reasonable compensation and the expenses and disbursements of its counsel and of all persons not regularly in its employ), except any such expense, disbursement or advance as may arise from its negligence or willful misconduct or bad faith. The Company also covenants to indemnify the Trustee in any capacity under this Indenture and its agents and any authenticating agent for, and to hold them harmless against, any loss, liability or expense incurred without negligence or willful misconduct or bad faith on the part of the Trustee or such agent or authenticating agent, as the case may be, and arising out of or in connection with the acceptance or administration of this trust or in any other capacity hereunder, including the costs and expenses of defending themselves against -47- any claim of liability in the premises. All indemnifications and releases from liability granted hereunder to the Trustee shall extend to its officers, directors, employees, agents, successors and assigns. The obligations of the Company under this Section 8.6 to compensate or indemnify the Trustee and to pay ----------- or reimburse the Trustee for expenses, disbursements and advances shall be secured by a lien prior to that of the Securities upon all property and funds held or collected by the Trustee as such, except funds held in trust for the benefit of the holders of particular Securities. The obligation of the Company under this Section shall survive the satisfaction and discharge of this Indenture and the resignation or removal of the Trustee. When the Trustee and its agents and any authenticating agent incur expenses or render services after an Event of Default specified in Section 7.1(f) or (g) -------------- --- occurs, the expenses and the compensation for the services are intended to constitute expenses of administration under any bankruptcy, insolvency or similar laws. Section 8.7. Officers' Certificate as Evidence. Except as otherwise --------------------------------- provided in Section 8.1, wherever in the administration of the provisions of ----------- this Indenture the Trustee shall deem it necessary or desirable that a matter be proved or established prior to taking or omitting any action hereunder, such matter (unless other evidence in respect thereof be herein specifically prescribed) may, in the absence of negligence or willful misconduct or bad faith on the part of the Trustee, be deemed to be conclusively proved and established by an Officers' Certificate delivered to the Trustee. Section 8.8. Conflicting Interests of Trustee. If the Trustee has or -------------------------------- shall acquire a conflicting interest within the meaning of the Trust Indenture Act, if required by 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 8.9. Eligibility of Trustee. 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 which shall have (or, in the case of a corporation included in a bank holding company system, the related bank holding company shall have) 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 any 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. -48- Section 8.10. Resignation or Removal of Trustee. --------------------------------- (a) The Trustee may at any time resign by giving written notice of such resignation to the Company and to the holders of Securities. Upon receiving such notice of resignation, the Company shall promptly appoint a successor trustee by written instrument, in duplicate, executed by order of the Board of Directors, one copy of which instrument shall be delivered to the resigning Trustee and one copy to the successor trustee. If no successor trustee shall have been so appointed and have accepted appointment within sixty (60) days after the mailing of such notice of resignation to the Securityholders, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor trustee, or any Securityholder who has been a bona fide holder of a Security or Securities for at least six months may, subject to the provisions of Section 7.9, on behalf of himself and all others similarly situated, ----------- petition any such court for the appointment of a successor trustee. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, appoint a successor trustee. (b) In case at any time any of the following shall occur: (1) the Trustee shall fail to comply with Section 8.8 after ----------- written request therefor by the Company or by any Securityholder who has been a bona fide holder of a Security or Securities for at least six months; or (2) the Trustee shall cease to be eligible in accordance with the provisions of Section 8.9 and shall fail to resign after written ----------- request therefor by the Company or by any such Securityholder; or (3) the Trustee shall become incapable of acting, or shall be adjudged a bankrupt or insolvent, or a receiver of the Trustee or of its property shall be appointed, or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then, in any such case, the Company may remove the Trustee and appoint a successor trustee by written instrument, in duplicate, executed by order of the Board of Directors, one copy of which instrument shall be delivered to the Trustee so removed and one copy to the successor trustee, or, subject to the provisions of Section 7.9, any Securityholder who has been a bona ----------- fide holder of a Security or Securities for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the -49- removal of the Trustee and the appointment of a successor trustee. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, remove the Trustee and appoint a successor trustee. (c) The holders of a majority in aggregate principal amount of the Securities at the time outstanding may at any time remove the Trustee and nominate a successor trustee which shall be deemed appointed as successor trustee, unless within ten (10) days after notice to the Company of such nomination, the Company objects thereto, in which case the Trustee so removed or any Securityholder, upon the terms and conditions and otherwise as in Section 8.10(a) provided, may petition any court of competent --------------- jurisdiction for an appointment of a successor trustee. (d) Any resignation or removal of the Trustee and appointment of a successor trustee pursuant to any of the provisions of this Section 8.10 ------------ shall become effective upon acceptance of appointment by the successor trustee as provided in Section 8.11. ------------ Section 8.11. Acceptance by Successor Trustee. Any successor trustee ------------------------------- appointed as provided in Section 8.10 shall execute, acknowledge and deliver to ------------ the Company and to its predecessor trustee an instrument accepting such appointment hereunder, and thereupon the resignation or removal of the predecessor trustee shall become effective and such successor trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, duties and obligations of its predecessor hereunder, with like effect as if originally named as trustee herein but, nevertheless, on the written request of the Company or of the successor trustee, the trustee ceasing to act shall, upon payment of any amounts then due it pursuant to the provisions of Section ------- 8.6, execute and deliver an instrument transferring to such successor trustee - --- all the rights and powers of the trustee so ceasing to act. Upon request of any such successor trustee, the Company shall execute any and all instruments in writing for more fully and certainly vesting in and confirming to such successor trustee all such rights and powers. Any trustee ceasing to act shall, nevertheless, retain a lien upon all property and funds held or collected by such trustee as such, except for funds held in trust for the benefit of holders of particular Securities, to secure any amounts then due it pursuant to the provisions of Section 8.6. ----------- No successor trustee shall accept appointment as provided in this Section ------- 8.11 unless at the time of such acceptance such successor trustee shall be - ---- qualified under the provisions of Section 8.8 and be eligible under the ----------- provisions of Section 8.9. ----------- Upon acceptance of appointment by a successor trustee as provided in this Section 8.11, the Company (or the former trustee, at the written direction of - ------------ the Company) shall mail or cause to be -50- mailed notice of the succession of such trustee hereunder to the holders of Securities at their addresses as they shall appear on the Security register. If the Company fails to mail such notice within ten (10) days after acceptance of appointment by the successor trustee, the successor trustee shall cause such notice to be mailed at the expense of the Company. Section 8.12. Succession by Merger, Etc. Any corporation into which the -------------------------- Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all of the corporate trust business of the Trustee (including any trust created by this Indenture), shall be the successor to the Trustee hereunder without the execution or filing of any paper or any further act on the part of any of the parties hereto, provided that in the case of any corporation succeeding to all or substantially all of the corporate trust business of the Trustee such corporation shall be qualified under the provisions of Section 8.8 and eligible ----------- under the provisions of Section 8.9. ----------- In case at the time such successor to the Trustee shall succeed to the trusts created by this Indenture, any of the Securities shall have been authenticated but not delivered, any such successor to the Trustee may adopt the certificate of authentication of any predecessor trustee or authenticating agent appointed by such predecessor trustee, and deliver such Securities so authenticated and in case at that time any of the Securities shall not have been authenticated, any successor to the Trustee or an authenticating agent appointed by such successor trustee may authenticate such Securities either in the name of any predecessor trustee hereunder or in the name of the successor trustee and in all such cases such certificates shall have the full force of the Securities and this Indenture; provided, however, that the right to adopt the certificate of -------- ------- authentication of any predecessor Trustee or authenticate Securities in the name of any predecessor Trustee shall apply only to its successor or successors by merger, conversion or consolidation. Section 8.13. Limitation on Rights of Trustee as Creditor. 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 the claims against the Company (or any such other obligor). ARTICLE IX. CONCERNING THE SECURITYHOLDERS Section 9.1. Action by Securityholders. When in this Indenture it is ------------------------- provided that the holders of a specified percentage in aggregate principal amount of the Securities may take any action (including the making of any demand or request, -51- the giving of any notice, consent or waiver or the taking of any other action), the fact that at the time of taking any such action, the holders of such specified percentage have joined therein may be evidenced (a) by any instrument or any number of instruments of similar tenor executed by Securityholders in person or by agent or proxy appointed in writing, or (b) by the record of the holders of Securities voting in favor thereof at any meeting of Securityholders duly called and held in accordance with the provisions of Article X, or (c) by a --------- combination of such instrument or instruments and any such record of such a meeting of Securityholders. Whenever the Company or the Trustee solicits the taking of any action by the holders of the Securities, the Company or the Trustee may fix in advance of such solicitation, a date as the record date for determining holders entitled to take such action. The record date shall be not more than fifteen (15) days prior to the date of commencement of solicitation of such action. Section 9.2. Proof of Execution by Securityholders. Subject to the ------------------------------------- provisions of Sections 8.1, 8.2 and 10.5, proof of the execution of any ------------ ---- ---- instrument by a Securityholder or his agent or proxy shall be sufficient if made in accordance with such reasonable rules and regulations as may be prescribed by the Trustee or in such manner as shall be satisfactory to the Trustee. The holding of Securities shall be proved by the registry of such Securities or by a certificate of the Security registrar. The record of any Securityholders' meeting shall be proved in the manner provided in Section 10.6. ------------ Section 9.3. Who Are Deemed Absolute Owners. The Company, any other ------------------------------ obligor on the Securities, the Trustee, any authenticating agent, any paying agent, any conversion agent and any Security registrar may deem the person in whose name such Security shall be registered upon the Security register to be, and may treat him as, the absolute owner of such Security (whether or not such Security shall be overdue and notwithstanding any notation of ownership or other writing thereon) for the purpose of receiving payment of or on account of the principal of, premium, if any, and interest on such Security, for conversion of such Security and for all other purposes and neither the Company nor any other obligor on the Securities nor the Trustee nor any paying agent nor any conversion agent nor any authenticating agent nor any Security registrar shall be affected by any notice to the contrary. All such payments so made to any holder for the time being, or upon his order, shall be valid, and, to the extent of the sum or sums so paid, effectual to satisfy and discharge the liability for monies payable upon any such Security. Section 9.4. Company-Owned Security Disregarded. In determining whether ---------------------------------- the holders of the requisite aggregate principal amount of Securities have concurred in any direction, -52- consent, waiver or other action under this Indenture, Securities which are owned by the Company or any other obligor on the Securities or by any person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company or any other obligor on the Securities shall be disregarded and deemed not to be outstanding for the purpose of any such determination; provided that, for the purposes of determining whether the -------- Trustee shall be protected in relying on any such direction, consent, waiver or other action, only Securities which a Responsible Officer knows are so owned shall be so disregarded. Securities so owned which have been pledged in good faith may be regarded as outstanding for the purposes of this Section 9.4 if the ----------- pledgee shall establish to the satisfaction of the Trustee the pledgee's right to vote such Securities and that the pledgee is not the Company, any other obligor on the Securities or a person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company or any such other obligor. In the case of a dispute as to such right, any decision by the Trustee taken upon the advice of counsel shall be full protection to the Trustee. Upon request of the Trustee, the Company shall furnish to the Trustee promptly an Officers' Certificate listing and identifying all Securities, if any, known by the Company to be owned or held by or for the account of any of the above-described persons and, subject to Section 8.1, the Trustee shall be ----------- entitled to accept such Officers' Certificate as conclusive evidence of the facts therein set forth and of the fact that all Securities not listed therein are outstanding for the purpose of any such determination. Section 9.5. Revocation of Consents: Future Holders Bound. At any time -------------------------------------------- prior to (but not after) the evidencing to the Trustee, as provided in Section ------- 9.1, of taking of any action by the holders of the percentage in aggregate - --- principal amount of the Securities specified in this Indenture in connection with such action, any holder of a Security which is shown by the evidence to be included in the Securities the holders of which have consented to such action may, by filing written notice with the Trustee at its Corporate Trust Office and upon proof of holding as provided in Section 9.2, revoke such action so far as ----------- it such Security. Except as aforesaid, any such action taken by the holder of any Security shall be conclusive and binding upon such holder and upon all future holders and owners of such Security and of any Securities issued in exchange or substitution therefor, irrespective of whether any notation in regard thereto is made upon such Security or any Security issued in exchange or substitution therefor. ARTICLE X SECURITYHOLDERS' MEETINGS Section 10.1. Purpose of Meetings. A meeting of Securityholders may be ------------------- called at any time and from time to time -53- pursuant to the provisions of this Article X for any of the following purposes: --------- (a) to give any notice to the Company or to the Trustee or to give any directions to the Trustee permitted under this Indenture, or to consent to the waiving of any default or Event of Default hereunder and its consequences, or to take any other action authorized to be taken by Securityholders pursuant to any of the provisions of Article VII; ----------- (b) to remove the Trustee and nominate a successor trustee pursuant to the provisions of Article VIII; ------------ (c) to consent to the execution of an indenture or indentures supplemental hereto pursuant to the provisions of Section 11.2; or ------------ (d) to take any other action authorized to be taken by or on behalf of the holders of any specified aggregate principal amount of the Securities under any other provision of this Indenture or under applicable law. Section 10.2. Call of Meetings by Trustee. The Trustee may at any time --------------------------- call a meeting of Securityholders to take any action specified in Section 10.1, ------------ to beat such time and at such place at a location within ten (10) miles of the Corporate Trust Office or the principal executive office of the Company, as the Trustee shall determine. Notice of every meeting of the Securityholders, setting forth the time and the place of such meeting and in general terms the action proposed to be taken at such meeting and the establishment of any record date pursuant to Section 9.1, shall be mailed to holders of Securities at their as ----------- they shall appear on the Security register. Such notice shall also be mailed to the Company. Such notices shall be mailed not less than fifteen (15) nor more than ninety (90) days prior to the date fixed for the meeting. Any meeting of Securityholders shall be valid without notice if the holders of all Securities then outstanding are present in person or by proxy or if notice is waived before or after the meeting by the holders of all Securities outstanding, and if the Company and the Trustee are either present by duly authorized representatives or have, before or after the meeting, waived notice. Section 10.3. Call of Meetings by Company or Securityholders. In case at ---------------------------------------------- any time the Company, pursuant to a resolution of its Board of Directors, or the holders of at least ten percent (10%) in aggregate principal amount of the Securities then outstanding, shall have requested the Trustee to call a meeting of Securityholders, by written request setting forth in reasonable detail the action proposed to be taken at the meeting, and the Trustee shall not have mailed the notice of such meeting -54- within ten (10) days after receipt of such request, then the Company or such Securityholders may determine the time and the place at any location within 10 miles of the Corporate Trust Office or the principal executive offices of the Company for such meeting and may call such meeting to take any action authorized in Section 10.1, by mailing notice thereof provided in Section 10.2. ------------ ------------ Section 10.4. Qualifications for Voting. To be entitled to vote at any ------------------------- meeting of Securityholders a person shall (a) be a holder of one or more Securities on the record date pertaining to such meeting or (b) be a person appointed by an instrument in writing as proxy by a holder of one or more Securities. The only persons who shall be entitled to be present or to speak at any meeting of Securityholders shall be the persons entitled to vote at such meeting and their counsel and any representatives of the Trustee and its counsel and any representatives of the Company and its counsel. Section 10.5. Regulations. Notwithstanding any other provisions of this ----------- Indenture, the Trustee may make such reasonable regulations as it may deem advisable for any meeting of Securityholders, in regard to proof of the holding of Securities and of the appointment of proxies, and in regard to the appointment and duties of inspectors of votes, the submission and examination of proxies, certificates and other evidence of the right to vote, and such other matters concerning the conduct of the meeting as it shall think fit. The Trustee shall, by an instrument in writing, appoint a temporary chairman of the meeting, unless the meeting shall have been called by the Company or by Securityholders as provided in Section 10.3, in which case the ------------ Company or the Securityholders calling the meeting, as the case may be, shall in like manner appoint a temporary chairman. A permanent chairman and a permanent secretary of the meeting shall be elected by vote of the holders of a majority in principal amount of the Securities represented at the meeting and entitled to vote at the meeting. Subject to the provisions of Section 9.4, at any meeting each ----------- Securityholder or proxyholder shall be entitled to one vote for each $1,000 principal amount of Securities held or represented by such Securityholder; provided, however, that no vote shall be cast or counted at any meeting in - -------- ------- respect of any Security challenged as not outstanding and ruled by the chairman of the meeting to be not outstanding. The chairman of the meeting shall have no right to vote other than by virtue of Securities held by him or instruments in writing as aforesaid duly designating him as the proxy to vote on behalf of other Securityholders. Any meeting of Securityholders duly called pursuant to the provisions of Section 10.2 or 10.3 may be adjourned from time to time by the ------------ ---- holders of a majority of the aggregate principal amount of Securities represented at the meeting, whether or not constituting a quorum, and the meeting may be held as so adjourned without further notice. -55- Section 10.6. Voting. The vote upon any resolution submitted to any ------ meeting of Securityholders shall be by written ballot on which shall be subscribed the signatures of the holders of Securities or of their representatives by proxy and the principal amount of the Securities held or represented by them. The permanent chairman of the meeting shall appoint two inspectors of votes who shall count all votes cast at the meeting for or against any resolution and who shall make and file with the secretary of the meeting their verified written reports in duplicate of all votes cast at the meeting. A record in duplicate of the proceedings of each meeting of Securityholders shall be prepared by the secretary of the meeting and there shall be attached to said record the original reports of the inspectors of votes on any vote by ballot taken thereat and affidavits by one or more persons having knowledge of the facts setting forth a copy of the notice of the meeting and showing that said notice was mailed as provided in Section 10.2. The record shall show the ------------ principal amount of the Securities voting in favor of or against any resolution. The record shall be signed and verified by the affidavits of the permanent chairman and secretary of the meeting and one of the duplicates shall be delivered to the Company and the other to the Trustee to be preserved by the Trustee, the latter to have attached thereto the ballots voted at the meeting. Any record so signed and verified shall be conclusive evidence of the matters therein stated. Section 10.7. No Delay of Rights by Meeting. Nothing in this Article X ----------------------------- --------- contained shall be deemed or construed to authorize or permit, by reason of any call of a meeting of Securityholders or any rights expressly or impliedly conferred hereunder to make such call, any hindrance or delay in the exercise of any right or rights conferred upon or reserved to the Trustee or to the Securityholders under any of the provisions of this Indenture or of the Securities. ARTICLE XI. SUPPLEMENTAL INDENTURES Section 11.1. Supplemental Indentures Without Consent of Securityholders. ---------------------------------------------------------- The Company, when authorized by the resolutions of the Board of Directors, and the Trustee may from time to time and at any time enter into an indenture or indentures supplemental hereto for one or more of the following purposes: (a) to make provision with respect to the conversion rights of the holders of Securities pursuant to the requirements of Section 15.6 or the ------------ repurchase obligations of the Company pursuant to the requirements of Section 16.5; ------------ -56- (b) subject to Article IV, to convey, transfer, assign, mortgage or ---------- pledge to the Trustee as security for the Securities, any property or assets; (c) to evidence the succession of another corporation to the Company, or successive successions, and the assumption by the successor corporation of the covenants, agreements and obligations of the Company pursuant to Article XII; ----------- (d) to add to the covenants of the Company such further covenants, restrictions or conditions as the Board of Directors and the Trustee shall consider to be for the benefit of the holders of Securities, and to make the occurrence, or the occurrence and continuance, of a default in any such additional covenants, restrictions or conditions a default or an Event of Default permitting the enforcement of all or any of the several remedies provided in this Indenture as herein set forth; provided, however, that in -------- ------- respect of any such additional covenant, restriction or condition such supplemental indenture may provide for a particular period of grace after default (which period may be shorter or longer than that allowed in the case of other defaults) or may provide for an immediate enforcement upon such default or may limit the remedies available to the Trustee upon such default; (e) to provide for the issuance under this Indenture of Securities in coupon form (including Securities registrable as to principal only) and to provide for exchangeability of such Securities with the Securities issued hereunder in fully registered form and to make all appropriate changes for such purpose; (f) to cure any ambiguity or to correct or supplement any provision contained herein or in any supplemental indenture which may be defective or inconsistent with any other provision contained herein or in any supplemental indenture, or to make such other provisions in regard to matters or questions arising under this Indenture which shall not materially adversely affect the interests of the holders of the Securities; (g) to evidence and provide for the acceptance of appointment hereunder by a successor Trustee with respect to the Securities; or (h) to modify, eliminate or add to the provisions of this Indenture to such extent as shall be necessary to effect the qualification of this Indenture under the Trust Indenture Act, or under any similar federal statute hereafter enacted. -57- The Trustee is hereby authorized to join with the Company in the execution of any such supplemental indenture, to make any further appropriate agreements and stipulations which may be therein contained and to accept the conveyance, transfer and assignment of any property thereunder, but the Trustee shall not be obligated to, but may in its discretion, enter into any supplemental indenture which affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. Any supplemental indenture authorized by the provisions of this Section ------- 11.1 may be executed by the Company and the Trustee without the consent of the - ---- holders of any of the Securities at the time outstanding, notwithstanding any of the provisions of Section 11.2. ------------ Section 11.2. Supplemental Indentures with Consent of Securityholders. ------------------------------------------------------- With the consent (evidenced as provided in Article IX) of the holders of not ---------- less than a majority in aggregate principal amount of the Securities at the time outstanding determined in accordance with Section 9.4, the Company, ----------- when authorized by the resolutions of the Board of Directors, and the Trustee may from time to time and at any time 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 any supplemental indenture or of modifying in any manner the rights of the holders of the Securities; provided, however, that no such supplemental -------- ------- indenture shall (i) extend the fixed maturity of any Security, or reduce the rate or extend the time of payment of interest thereon, or reduce the principal amount thereof or premium, if any, thereon, or reduce any amount payable on redemption thereof, or impair the right of any Securityholder to institute suit for the payment thereof, or make the principal thereof or interest or premium, if any, thereon payable in any coin or currency other than that provided in the Securities, or modify the provisions of this Indenture with respect to the subordination of the Securities in a manner adverse to the Securityholders in any material respect, or change the obligation of the Company to repurchase any Security upon the occurrence of a Change in Control in a manner adverse to the holder of Securities, or impair the right to convert the Securities into Common Stock in any material respect, without the consent of the holder of each Security so affected, or (ii) reduce the aforesaid percentage of Securities, the holders of which are required to consent to any such supplemental indenture, without the consent of the holders of all Securities then outstanding. Upon the request of the Company, accompanied by a copy of the resolutions of the Board of Directors certified by its Secretary or an Assistant Secretary authorizing the execution of any such supplemental indenture, and upon the filing with the Trustee of evidence of the consent of Securityholders as aforesaid, the Trustee shall join with the Company in the execution of such supplemental indenture unless such supplemental indenture affects -58- the Trustee's own rights, duties or immunities under this Indenture or otherwise, in which case the Trustee may in its discretion, but shall not be obligated to, enter into such supplemental indenture. It shall not be necessary for the consent of the Securityholders under this Section 11.2 to approve the particular form of any proposed supplemental - ------------ indenture, but it shall be sufficient if such consent shall approve the substance thereof. Section 11.3. Effect of Supplemental Indenture. Any supplemental indenture -------------------------------- executed pursuant to the provisions of this Article XI shall comply with the ---------- Trust Indenture Act, as then in effect. Upon the execution of any supplemental indenture pursuant to the provisions of this Article XI, this Indenture shall be ---------- and be deemed to be modified and amended in accordance therewith and the respective rights, limitation of rights, obligations, duties and immunities under this Indenture of the Trustee, the Company and the holders of Securities shall thereafter be determined, exercised and enforced hereunder subject in all respects to such modifications and amendments and all the terms and conditions of any such supplemental indenture shall be and be deemed to be part of the terms and conditions of this Indenture for any and all purposes. Section 11.4. Notation on Security. Securities authenticated and delivered -------------------- after the execution of any supplemental indenture pursuant to the provisions of this Article XI may bear a notation in form approved by the Trustee as to any ---------- matter provided for in such supplemental indenture. If the Company or the Trustee shall so determine, new Securities so modified as to conform, in the opinion of the Trustee and the Board of Directors, to any modification of this Indenture contained in any such supplemental indenture may, at the Company's expense, be prepared and executed by the Company, authenticated by the Trustee (or an authenticating agent duly appointed by the Trustee pursuant to Section ------- 17.11) and delivered in exchange for the Securities then outstanding, upon - ----- surrender of such Securities then outstanding. Section 11.5. Evidence of Compliance of Supplemental Indenture to Be ------------------------------------------------------ Furnished Trustee. The Trustee, subject to the provisions of Sections 8.1 and - ----------------- ------------ 8.2, may receive an Officers' Certificate and an Opinion of Counsel as - --- conclusive evidence that any supplemental indenture executed pursuant hereto complies with the requirements of this Article XI. ---------- ARTICLE XII CONSOLIDATION, MERGER, SALE, CONVEYANCE AND LEASE Section 12.1. Company May Consolidate Etc. on Certain Terms. Subject to --------------------------------------------- the provisions of Section 12.2, nothing contained in this Indenture or in any of ------------ the Securities shall prevent any consolidation or merger of the Company with or into -59- any other corporation or corporations (whether or not affiliated with the Company), or successive consolidations or mergers in which the Company or its successor or successors shall be a party or parties, or shall prevent any sale, conveyance or lease (or successive sales, conveyances or leases) of the property of the Company, substantially as an entirety, to any other corporation (whether or not affiliated with the Company), authorized to acquire and operate the same and which, in each case, shall be organized under the laws of the United States of America, any state thereof or the District of Columbia; provided, that upon -------- any such consolidation, merger, sale, conveyance or lease, (i) the due and punctual payment of the principal of and premium, if any, and interest on all of the Securities, according to their tenor, and the due and punctual performance and observance of all of the covenants and conditions of this Indenture to be performed by the Company, shall be expressly assumed, by supplemental indenture satisfactory in form to the Trustee, executed and delivered to the Trustee by the corporation (if other than the Company) formed by such consolidation, or into which the Company shall have been merged, or by the corporation which shall have acquired or leased such property, and such supplemental indenture shall provide for the applicable conversion rights set forth in Section 15.6. and (ii) ------------ immediately before and immediately after giving effect to such transaction, no default or Event of Default shall have occurred and be continuing. Section 12.2. Successor Corporation to Be Substituted. In case of any such --------------------------------------- consolidation, merger, sale, conveyance or lease and upon the assumption by the successor corporation, by supplemental indenture, executed and delivered to the Trustee and satisfactory in form to the Trustee, of the due and punctual payment of the principal of and premium, if any, and interest on all of the Securities and the due and punctual performance of all of the covenants and conditions of this Indenture to be performed by the Company, such successor corporation shall succeed to and be substituted for the Company, with the same effect as if it had been named herein as such. Such successor corporation thereupon may cause to be signed, and may issue either in its own name or in the name of the Company any or all of the Securities issuable hereunder which theretofore shall not have been signed by the Company and delivered to the Trustee and, upon the order of such successor corporation instead of the Company and subject to all the terms, conditions and limitations in this Indenture prescribed, the Trustee shall authenticate and shall deliver, or cause to be authenticated and delivered, any Securities which previously shall have been signed and delivered by the officers of the Company to the Trustee for authentication, and any Securities which such successor corporation thereafter shall cause to be signed and delivered to the Trustee for that purpose. All the Securities so issued shall in all respects have the same legal rank and benefit under this Indenture as the Securities theretofore or thereafter issued in accordance with the terms of this Indenture as though all of such Securities had been issued at the date of the execution hereof. In the event of any such -60- consolidation, merger, sale or conveyance (but not in the event of any such lease), the person named as the "Company" in the first paragraph of this Indenture or any successor which shall thereafter have become such in the manner prescribed in this Article XII shall be released from ----------- its liabilities as obligor and maker of the Securities and from its obligations under this Indenture. In case of any such consolidation, merger, sale, conveyance or lease, such changes in phraseology and form (but not in substance) may be made in the Securities thereafter to be issued as may be appropriate. Section 12.3. Opinion of Counsel to Be Given Trustee. The Trustee, -------------------------------------- subject to Sections 8.1 and 8.2, shall receive an Officers' Certificate and an ------------ --- Opinion of Counsel as conclusive evidence that any such consolidation, merger, sale, conveyance or lease and any such assumption complies with the provisions of this Article XII. ----------- ARTICLE XIII SATISFACTION AND DISCHARGE OF INDENTURE Section 13.1. Discharge of Indenture. When (a) the Company shall deliver to ---------------------- the Trustee for cancellation all Securities theretofore authenticated (other than any Securities which have been destroyed, lost or stolen and in lieu of or in substitution for which other Securities shall have been authenticated and delivered) and not theretofore canceled, or (b) all the Securities not theretofore canceled or delivered to the Trustee for cancellation shall have become due and payable, or are by their terms to become due and payable within one year or are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption, and the Company shall deposit with the Trustee, in trust, monies sufficient to pay at maturity or upon redemption of all of the Securities (other than any Securities which shall have been mutilated, destroyed, lost or stolen and in lieu of or in substitution for which other Securities shall have been authenticated and delivered) not theretofore canceled or delivered to the Trustee for cancellation, including principal and premium, if any, and interest due or to become due to such date of maturity or redemption date, as the case may be, and if in either case the Company shall also pay or cause to be paid all other sums payable hereunder by the Company, then this Indenture shall cease to be of further effect (except as to (i) remaining rights of registration of transfer, substitution and exchange and conversion of Securities, (ii) rights hereunder of Securityholders to receive payments of principal of and premium, if any, and interest on, the Securities and the other rights, duties and obligations of Securityholders, as beneficiaries hereof with respect to the amounts, if any, so deposited with the Trustee and (iii) the rights, obligations and immunities of the -61- Trustee hereunder), and the Trustee, on demand of the Company accompanied by an Officers' Certificate and an Opinion of Counsel as required by Section 17.5 ------------ and at the cost and use of the Company, shall execute proper instruments acknowledging satisfaction of and discharging this Indenture; the Company, however, hereby agreeing to reimburse the Trustee for any costs or expenses thereafter reasonably and properly incurred by the Trustee and to compensate the Trustee for any services thereafter reasonably and properly rendered by the Trustee in connection with this Indenture or the Securities. Section 13.2. Deposited Monies to Be Held in Trust by Trustee. Subject to ----------------------------------------------- Section 13.4, all monies deposited with the Trustee pursuant to Section 13.1 and - ------------ ------------ not in violation of Article IV shall be held in trust for the sole benefit of ---------- the Securityholders and not to be subject to the subordination provisions of Article IV, and such monies shall be applied by the Trustee to the payment, - ---------- either directly or through any paying agent (including the Company if acting as its own paying agent), to the holders of the particular Securities for the payment or redemption of which such monies have been deposited with the Trustee, of all sums due and to become due thereon for principal and interest and premium, if any. Section 13.3. Paying Agent to Repay Monies Held. Upon the satisfaction and --------------------------------- discharge of this Indenture, all monies then held by any paying agent for the Securities (other than the Trustee) shall, upon written request of the Company, be repaid to the Company or paid to the Trustee, and thereupon such paying agent shall be released from all further liability with respect to such monies. Section 13.4. Return of Unclaimed Monies. Subject to the requirements of -------------------------- applicable law, any monies deposited with or paid to the Trustee for payment of the principal of, premium, if any, or interest on Securities and not applied but remaining unclaimed by the holders of Securities for two years after the date upon which the principal of, premium, if any, or interest on such Securities, as the case may be, shall have become due and payable, shall be repaid to the Company by the Trustee on demand and all liability of the Trustee shall thereupon cease with respect to such monies and the holder of any of the Securities shall thereafter look only to the Company for any payment which such holder may be entitled to collect unless an applicable abandoned property law designates another Person. Section 13.5. Reinstatement. If the Trustee or the paying agent is unable ------------- to apply any money in accordance with Section 13.2 by reason of any order or ------------ judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, the Company's obligations under this Indenture and the Securities shall be revived and reinstated as though no deposit had occurred pursuant to Section 13.1 until such time as the Trustee or ------------ the paying agent is permitted to -62- apply all such money in accordance with Section 13.2; provided, however, that if ------------- -------- ------- the Company makes any payment of interest or premium, if any, on or principal of any Security following the reinstatement of its obligations, the Company shall be subrogated to the rights of the holders of such Securities to receive such payment from the money held by the Trustee or paying agent. ARTICLE XIV IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS Section 14.1. Indenture and Securities Solely Corporate Obligations. No ----------------------------------------------------- recourse for the payment of the principal of or premium, if any, or interest on any Security, or for any claim based thereon or otherwise in respect thereof, and no recourse under or upon any obligation, covenant or agreement of the Company in this Indenture or in any supplemental indenture or in any Security, or because of the creation of any indebtedness represented thereby, shall be had against any incorporator, stockholder, employee, agent, officer, or director or subsidiary, as such, past, present or future, of the Company or of any successor corporation, either directly or through the Company or any successor corporation, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise, it being expressly understood that all such liability is hereby expressly waived and released as a condition of, and as a consideration for, the execution of this Indenture and the issue of the Securities. ARTICLE XV CONVERSION OF SECURITIES Section 15.1. Right to Convert. Subject to and upon compliance with the ---------------- provisions of this Indenture, the holder of any Security shall have the right, at any time prior to the close of business on September 15, 2002 (except that, with respect to any Security or portion of a Security which shall be called for redemption, such right shall terminate, except as provided in Section 15.2 or ------------ Section 3.4, at the close of business on the Business Day immediately preceding - ----------- the date fixed for redemption of such Security or portion of a Security, unless the Company shall default in payment due upon redemption thereof) to convert the principal amount of any such Security, or any portion of such principal amount which is $1,000 or an integral multiple thereof, into that number of fully paid and non-assessable shares of Common Stock (as such shares shall then be constituted) obtained by dividing the principal amount of the Security or portion thereof surrendered for conversion by the Conversion Price in effect at such time, by surrender of the Security so to be converted in whole or in part in the manner provided, together with any required funds, in Section 15.2. A ------------ holder of Securities is not entitled to any rights of a holder of Common Stock until -63- such holder has converted his Securities to Common Stock, and only to the extent such Securities are deemed to have been converted to Common Stock under this Article XV. ---------- Section 15.2. 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 Security, the holder of any such Security to be converted in whole or in part shall surrender such Security, duly endorsed, at an office or agency maintained by the Company pursuant to Section ------- 5.2, accompanied by the funds, if any, required by the last paragraph of this - --- Section 15.2, and shall give written notice of conversion in the form provided - ------------ on the Securities (or such other notice which is acceptable to the Company) to the office or agency that the holder elects to convert such Security or the portion thereof specified in said notice. Such notice shall also state the name or names (with address or addresses) in which the certificate 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 15.7. Each such Security surrendered for conversion shall, unless the - ------------ shares issuable on conversion are to be issued in the same name as the registration of such Security, 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 a Security in global form, the beneficial holder must complete the appropriate instruction form for conversion pursuant to the Depository's book- entry conversion program, deliver by book-entry delivery an interest in such Security in global form, 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 15.2 and any transfer taxes if required pursuant to Section 15.7. As promptly as practicable after satisfaction of the requirements for conversion set forth above, 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 Securityholder (as if such transfer were a transfer of the Security or Securities (or portion thereof) so converted), the Company shall issue and shall deliver to such holder at the office or agency maintained by the Company for such purpose pursuant to Section 5.2, a certificate or certificates for the ----------- number of full shares of Common Stock issuable upon the conversion of such Security 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 15.3. In ------------ case any Security of a denomination greater than $1,000 shall be surrendered for partial conversion, and subject to Section 2.3, the Company shall execute and ----------- the Trustee shall authenticate and deliver to the holder of the Security so -64- surrendered, without charge to him, a new Security or Securities in authorized denominations in an aggregate principal amount equal to the unconverted portion of the surrendered Security. Each conversion shall be deemed to have been effected as to any such Security (or portion thereof) on the date on which the requirements set forth above in this Section 15.2 have been satisfied as to such Security (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 any such surrender on any date when the stock transfer - -------- ------- books of the Company shall be closed shall constitute the person in whose name the certificates are to be issued as the record holder thereof for all purposes on the next succeeding 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 Security shall be surrendered. Any Security or portion thereof surrendered for conversion during the period from the close of business on the 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 Security or portion thereof being converted shall have been called for redemption during the period from the close of business on such record date to the close of business on the Business Day next preceding the following interest payment date) be accompanied by payment, in immediately available funds or other funds acceptable to the Company, of an amount equal to the interest payable on such interest payment date on the principal amount 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. In the event a Security or portion thereof is called for redemption and the holder elects to convert such Security after it has been called for redemption, the holder will be entitled to receive interest on such Security for the period from the last interest payment date through the date of conversion. Except as provided above in this Section 15.2, no ------------ adjustment shall be made for interest accrued on any Security converted or for dividends on any shares issued upon the conversion of such Security as provided in this Article. Upon the conversion of an interest in a Security in global form, the Trustee, or the Custodian at the direction of the Trustee, shall make a notation on such Security in global form as to the reduction in the principal amount represented thereby. Section 15.3. Cash Payments in Lieu of Fractional Shares. No fractional ------------------------------------------ shares of Common Stock or scrip representing fractional shares shall be issued upon conversion of Securities. If more than one Security shall be surrendered for conversion at one time by the same holder, the number of full shares which shall be issuable upon conversion shall be computed on the basis of the aggregate principal amount of the Securities (or specified -65- portions thereof to the extent permitted hereby) so surrendered. If any fractional share of stock would be issuable upon the conversion of any Security or 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 share of Common Stock shall be the Closing Price on the first Trading Day immediately preceding the day on which the Securities (or specified portions thereof) are deemed to have been converted. Section 15.4. Conversion Price. The conversion price shall be as ---------------- specified in the form of Security (herein called the "Conversion Price") ---------------- attached as Exhibit A hereto, subject to adjustment as provided in this Article --------- ------- XV. - -- Section 15.5. Adjustment of Conversion Price. The Conversion Price shall ------------------------------ be adjusted from time to time by the Company as follows: (a) In case the Company shall hereafter pay a dividend or make a distribution to all holders of the outstanding Common Stock in shares of Common Stock, the Conversion Price in effect at the opening of business on the date following the date fixed for the determination of stockholders entitled to receive such dividend or other distribution shall be reduced by multiplying such Conversion Price by a fraction of which the numerator shall be the number of shares of Common Stock outstanding at the close of business on the date fixed for such determination and the denominator shall be the sum of such number of shares and the total number of shares constituting such dividend or other distribution, such reduction to become effective immediately after the opening of business on the day following the date fixed for such determination. The Company will not pay any dividend or make any distribution on shares of Common Stock held in the treasury of the Company. If any dividend or distribution of the type described in this Section 15.5(a) is declared but not so paid or made, the --------------- Conversion Price shall again be adjusted to the Conversion Price which would then be in effect if such dividend or distribution had not been declared. (b) In case the Company shall issue rights or warrants to all holders of its outstanding shares of Common Stock entitling them (for a period expiring within 45 days after the date fixed for determination of stockholders entitled to receive such rights or warrants) to subscribe for or purchase shares of Common Stock at a price per share less than the Current Market Price (as defined below) on the date fixed for determination of stockholders entitled to receive such rights or warrants, the Conversion Price shall be adjusted so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the date fixed for determination of stockholders -66- entitled to receive such rights or warrants by a fraction of which the numerator shall be the number of shares of Common Stock outstanding at the close of business on the date fixed for determination of stockholders entitled to receive such rights and warrants plus the number of shares which the aggregate offering price of the total number of shares so offered would purchase at such Current Market Price, and of which the denominator shall be the number of shares of Common Stock outstanding on the date fixed for determination of stockholders entitled to receive such rights and warrants plus the total number of additional shares of Common Stock offered for subscription or purchase. Such adjustment shall be successively made whenever any such rights and warrants are issued, and shall become effective immediately after the opening of business on the day following the date fixed for determination of stockholders entitled to receive such rights or warrants. To the extent that shares of Common Stock are not delivered after the expiration of such rights or warrants, the Conversion Price shall be readjusted to the Conversion Price which would then be in effect had the adjustments made upon the issuance of such rights or warrants been made on the basis of delivery of only the number of shares of Common Stock actually delivered. In the event that such rights or warrants are not so issued, the Conversion Price shall again be adjusted to be the Conversion Price which would then be in effect if such date fixed for the determination of stockholders entitled to receive such rights or warrants had not been fixed. In determining whether any rights or warrants entitle the holders to subscribe for or purchase shares of Common Stock at less than such Current Market Price, and in determining the aggregate offering price of such shares of Common Stock, there shall be taken into account any consideration received by the Company for such rights or warrants, the value of such consideration, if other than cash, to be determined by the Board of Directors. (c) In case outstanding shares of Common Stock shall be subdivided into a greater number of shares of Common Stock, the Conversion Price in effect at the opening of business on the day following the day upon which such subdivision becomes effective shall be proportionately reduced, and conversely, in case outstanding shares of Common Stock shall be combined into a smaller number of shares of Common Stock, the Conversion Price in effect at the opening of business on the day following the day upon which such combination becomes effective shall be proportionately increased, such reduction or increase, as the case may be, to become effective immediately after the opening of business on the day following the day upon which such subdivision or combination becomes effective. (d) In case the Company shall, by dividend or otherwise, distribute to all holders of its Common Stock -67- shares of any class of capital stock of the Company (other than any dividends or distributions to which Section 15.5(a) applies) or evidences --------------- of its indebtedness or assets (including securities, but excluding any rights or warrants referred to in Section 15.5(b), and excluding any --------------- dividend or distribution paid exclusively in cash (any of the foregoing hereinafter in this Section 15.5(d) called the "New Securities")), then, in --------------- -------------- each such case (unless the Company elects to reserve such New Securities for distribution to the Securityholders upon the conversion of the Securities so that any such holder converting Securities will receive upon such conversion, in addition to the shares of Common Stock to which such holder is entitled, the amount and kind of such New Securities which such holder would have received if such holder had converted its Securities into Common Stock immediately prior to the Record Date (as defined in Section ------- 15.5(h) for such distribution of the New Securities)), the Conversion Price ------ shall be reduced so that the same shall be equal to the price determined by multiplying the Conversion Price in effect on the Record Date with respect to such distribution by a fraction of which the numerator shall be the Current Market Price per share of the Common Stock on such Record Date less the fair market value (as determined by the Board of Directors, whose determination shall be conclusive, and described in a resolution of the Board of Directors) on the Record Date of the portion of the Securities so distributed applicable to one share of Common Stock and the denominator shall be the Current Market Price per share of the Common Stock, such reduction to become effective immediately prior to the opening of business on the day following such Record Date; provided, however, that in the event -------- ------- the then fair market value (as so determined) of the portion of the New Securities so distributed applicable to one share of Common Stock is equal to or greater than the Current Market Price of the Common Stock on the Record Date, in lieu of the foregoing adjustment, adequate provision shall be made so that each Securityholder shall have the right to receive upon conversion the amount of New Securities such holder would have received had such holder converted each Security on the Record Date. In the event that such dividend or distribution is not so paid or made, the Conversion Price shall again be adjusted to be the Conversion Price which would then be in effect if such dividend or distribution had not been declared. If the Board of Directors determines the fair market value of any distribution for purposes of this Section 15.5(d) by reference to the actual or when issued --------------- trading market for any securities, it must in doing so consider the prices in such market over the same period used in computing the Current Market Price of the Common Stock. In the event the Company implements a stockholder rights plan, such rights plan shall provide that upon conversion of the Securities the holders will receive, in addition to the -68- Common Stock issuable upon such conversion, the rights issued under such rights plan (notwithstanding the occurrence of an event causing such rights to separate from the Common Stock at or prior to the time of conversion). 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 15.5 ------------ (and no adjustment to the Conversion Price under this Section 15.5 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 15.5(d). If any such right or warrant, --------------- including any such existing rights 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 15.5 was made, (1) in the case of any such rights ------------ or warrants which shall all have been redeemed or repurchased without exercise by any holders thereof, the Conversion 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 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 15.5(d) and Sections 15.5(a) and (b), any --------------- ---------------- --- dividend or distribution to which this Section 15.5(d) is applicable that --------------- also includes shares of -69- Common Stock, or rights or warrants to subscribe for or purchase shares of Common Stock 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 further Conversion Price reduction required by this Section 15.5(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 15.5(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 "the 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 -------- 15.5(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 15.5(a). --------------- (e) In case the Company shall, by dividend or otherwise, distribute to all holders of its Common Stock cash (excluding any cash that is distributed upon a merger or consolidation to which Section 15.6 applies or ------------ as part of a distribution referred to in Section 15.5(d)) in an aggregate --------------- amount that, combined together with (1) the aggregate amount of any other such distributions to all holders of its Common Stock made exclusively in cash within the 12 months preceding the date of payment of such distribution, and in respect of which no adjustment pursuant to this Section 15.5(e) has been made, and (2) the aggregate of any cash plus the --------------- fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a resolution of the Board of Directors) of consideration payable in respect of any tender offer by the Company for all or any portion of the Common Stock concluded within the 12 months preceding the date of payment of such distribution, and in respect of which no adjustment pursuant to Section 15.5(f) has been made, --------------- exceeds 10% of the product of the Current Market Price (determined as provided in Section 15.5(h)) on the Record Date with respect to such --------------- distribution times the number of shares of Common Stock outstanding on such date, then, immediately after the close of business on such date, the Conversion Price shall be reduced so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the close of business on such Record Date by a fraction (i) the numerator of which shall be equal to the Current Market Price on the Record Date less an amount equal to the quotient of (x) the excess of such combined amount over such 10% and (y) the number of shares of Common Stock outstanding on the Record Date and (ii) the denominator of which shall be equal to the Current Market Price on such -70- Record Date; provided, however, that, if the portion of the cash so -------- ------- distributed applicable to one share of Common Stock is equal to or greater than the Current Market Price of the Common Stock on the Record Date, in lieu of the foregoing adjustment, adequate provision shall be made so that each Securityholder shall have the right to receive upon conversion the amount of cash such holder would have received had such Holder converted such Security immediately prior to such Record Date. If such dividend or distribution is not so paid or made, the Conversion Price shall again be adjusted to be the Conversion Price which would then be in effect if such dividend or distribution had not been declared. (f) In case a tender offer made by the Company or any of its subsidiaries for all or any portion of the Common Stock expires and such tender offer (as amended upon the expiration thereof) requires the payment to stockholders (based on the acceptance (up to any maximum specified in the terms of the tender offer) of Purchased Shares (as defined below)) of an aggregate consideration having a fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a resolution of the Board of Directors) that, combined together with (1) the aggregate of the cash plus the fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a resolution of the Board of Directors), as of the expiration of such tender offer, of consideration payable in respect of any other tender offers, by the Company or any of its subsidiaries for all or any portion of the Common Stock expiring within the 12 months preceding the expiration of such tender offer and in respect of which no adjustment pursuant to this Section 15.5(f) has been made and (2) the aggregate amount of any --------------- distributions to all holders of the Common Stock made exclusively in cash within 12 months preceding the expiration of such tender offer and in respect of which no adjustment pursuant to Section 15.5(e) has been made, --------------- exceeds 10% of the product of the Current Market Price (determined as provided in Section 15.5(h)) as of the last time (the "Expiration Time") --------------- --------------- tenders could have been made pursuant to such tender offer (as it may be amended) times the number of shares of Common Stock outstanding (including any tendered shares) at the Expiration Time, then, and in each such case, immediately prior to the opening of business on the day after the date of the Expiration Time, the Conversion Price shall be adjusted so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the close of business on the date of the Expiration Time by a fraction of which the numerator shall be the number of shares of Common Stock outstanding (including any tendered shares) at the Expiration Time multiplied by the Current Market Price of the Common Stock on the Trading Day next succeeding the -71- Expiration Time and the denominator shall be the sum of (x) the fair market value (determined as aforesaid) of the aggregate consideration payable to stockholders based on the acceptance (up to any maximum specified in the terms of the tender offer) of all shares validly tendered and not withdrawn as of the Expiration Time (the shares deemed so accepted, up to any such maximum, being referred to as the "Purchased Shares") and (y) the product ---------------- of the number of shares of Common Stock outstanding (less any Purchased Shares) at the Expiration Time and the Current Market Price of the Common Stock on the Trading Day next succeeding the Expiration Time, such reduction (if any) to become effective immediately prior to the opening of business on the day following the Expiration Time. If the Company is obligated to purchase shares pursuant to any such tender offer, but the Company is permanently prevented by applicable law from effecting any such purchases or all such purchases are rescinded, the Conversion Price shall again be adjusted to be the Conversion Price which would then be in effect if such tender offer had not been made. If the application of this Section ------- 15.5(f) to any tender offer would result in an increase in the Conversion ------- Price, no adjustment shall be made for such tender offer under this Section ------- 15.5(f) . ------- (g) In case of a tender or exchange offer made by a person other than the Company or any subsidiary of the Company for an amount which increases the offeror's ownership of Common Stock to more than 20% of the Common Stock outstanding and shall involve the payment by such person of consideration per share of Common Stock having a fair market value (as determined by the Board of Directors, whose determination shall be conclusive, and described in a resolution of the Board of Directors) at the Expiration Time that exceeds the Current Market Price of the Common Stock on the Trading Day next succeeding the Expiration Time, and in which, as of the Expiration Time the Board of Directors is not recommending rejection of the offer, the Conversion Price shall be reduced so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the Expiration Time by a fraction of which the numerator shall be the number of shares of Common Stock outstanding (including any tendered or exchanged shares) on the Expiration Time multiplied by the Current Market Price of the Common Stock on the Trading Day next succeeding the Expiration Time and the denominator shall be the sum of (x) the fair market value (determined as aforesaid) of the aggregate consideration payable to stockholders based on the acceptance (up to any maximum specified in the terms of the tender or exchange offer) of all shares validly tendered or exchanged and not withdrawn as of the Expiration Time (the shares deemed so accepted, up to any such maximum, being referred to as the "Purchased Shares") and (y) the product of the number of shares --------- ------ of Common Stock outstanding (less any Purchased Shares) on the -72- Expiration Time and the Current Market Price of the Common Stock on the Trading Day next succeeding the Expiration Time, such reduction to become effective as of immediately prior to the opening of business on the day following the Expiration Time. In the event that such person is obligated to purchase shares pursuant to any such tender or exchange offer, but such person is permanently prevented by applicable law from effecting any such purchases or all such purchases are rescinded, the Conversion Price shall again be adjusted to be the Conversion Price which would then be in effect if such tender or exchange offer had not been made. Notwithstanding the foregoing, the adjustment described in this Section 15.5(g) shall not be --------------- made if, as of the Expiration Time, the offering documents with respect to such offer disclose a plan or intention to cause the Company to engage in any transaction described in Article XII . ----------- (h) For purposes of this Section 15.5, the following terms shall have ------------ the meaning indicated: (1) "Closing Price" with respect to any securities on any day ------------- shall mean the closing sale price regular way on such day or, in case no such sale takes place on such day, the average of the reported closing bid and asked prices, regular way, in each case on the New York Stock Exchange, or, if such security is not listed or admitted to trading on such Exchange, on the principal national security exchange or quotation system on which such security is quoted or listed or admitted to trading, or, if not quoted or listed or admitted to trading on any national securities exchange or quotation system, the average of the closing bid and asked prices of such security on the over-the-counter market on the day in question as reported by the National Quotation Bureau Incorporated, or a similar generally accepted reporting service, or if not so available, in such manner as furnished by any New York Stock Exchange member firm selected from time to time by the Board of Directors for that purpose, or a price determined in good faith by the Board of Directors or, to the extent permitted by applicable law, a duly authorized committee thereof, whose determination shall be conclusive. (2) "Current Market Price" shall mean the average of the daily -------------------- Closing Prices per share of Common Stock for the ten consecutive Trading Days immediately prior to the date in question; provided, -------- however, that (1) if the "ex" date (as hereinafter defined) for any ------- event (other than the issuance or distribution requiring such computation) that requires an adjustment to the Conversion Price pursuant to Section 15.5(a), (b), (c), (d), (e), (f) or (g) occurs --------------- --- --- --- --- --- --- during such ten consecutive Trading Days, the Closing Price for each Trading Day -73- prior to the "ex" date for such other event shall be adjusted by multiplying such Closing Price by the same fraction by which the Conversion Price is so required to be adjusted as a result of such other event, (2) if the "ex" date for any event (other than the issuance or distribution requiring such computation) that requires an adjustment to the Conversion Price pursuant to Section 15.5(a), --------------- (b), (c), (d), (e), (f) or (g) occurs on or after the "ex" date for --- --- --- --- --- --- the issuance or distribution requiring such computation and prior to the day in question, the Closing Price for each Trading Day on and after the "ex" date for such other event shall be adjusted by multiplying such Closing Price by the reciprocal of the fraction by which the Conversion Price is so required to be adjusted as a result of such other event, and (3) if the "ex" date for the issuance or distribution requiring such computation is prior to the day in question, after taking into account any adjustment required pursuant to clause (1) or (2) of this proviso, the Closing Price for each Trading Day on or after such "ex" date shall be adjusted by adding thereto the amount of any cash and the fair market value (as determined by the Board of Directors or, to the extent permitted by applicable law, a duly authorized committee thereof in a manner consistent with any determination of such value for purposes of Section 15.5(d), (f) or (g), whose determination shall be conclusive --------------- --- --- and described in a resolution of the Board of Directors or such duly authorized committee thereof, as the case may be) of the evidences of indebtedness, shares of capital stock or assets being distributed applicable to one share of Common Stock as of the close of business on the day before such "ex" date. For purposes of any computation under Section 15.5(f) or (g), the Current Market Price of the Common --------------- --- Stock on any date shall be deemed to be the average of the daily Closing Prices per share of Common Stock for such day and the next two succeeding Trading Days; provided, however, that if the "ex" date -------- ------- for any event (other than the tender or exchange offer requiring such computation) that requires an adjustment to the Conversion Price pursuant to Section 15.5(a), (b), (c), (d), (e), (f) or (g) occurs on --------------- ---- --- --- --- --- --- or after the Expiration Time for the tender or exchange offer requiring such computation and prior to the day in question, the Closing Price for each Trading Day on and after the "ex" date for such other event shall be adjusted by multiplying such Closing Price by the reciprocal of the fraction by which the Conversion Price is so required to be adjusted as a result of such other event. For purposes of this paragraph, the term "ex" date, (1) when used with respect to any issuance or distribution, means the first date on which the Common Stock trades regular way on the relevant -74- exchange or in the relevant market from which the Closing Price was obtained without the right to receive such issuance or distribution, (2) when used with respect to any subdivision or combination of shares of Common Stock, means the first date on which the Common Stock trades regular way on such exchange or in such market after the time at which such subdivision or combination becomes effective, and (3) when used with respect to any tender or exchange offer means the first date on which the Common Stock trades regular way on such exchange or in such market after the Expiration Time of such offer. (3) "fair market value" shall mean the amount which a willing ----------------- buyer would pay a willing seller in an arm's length transaction. (4) "Record Date" shall mean, with respect to any dividend, ----------- distribution or other transaction or event in which the holders of Common Stock have the right to receive any cash, securities or other property or in which the Common Stock (or other applicable security) is exchanged for or converted into any combination of cash, securities or other property, the date fixed for determination of shareholders entitled to receive such cash, securities or other property (whether such date is fixed by the Board of Directors or by statute, contract or otherwise). (5) "Trading Day" shall mean (x) if the applicable security is ----------- listed or admitted for trading on the New York Stock Exchange or another national security exchange, a day on which the New York Stock Exchange or another national security exchange is open for business or (y) if the applicable security is quoted on the Nasdaq National Market, a day on which trades may be made thereon or (z) if the applicable security is not so listed, admitted for trading or quoted, any day other than a Saturday or Sunday or a day on which banking institutions in the State of New York are authorized or obligated by law or executive order to close. (i) The Company may make such reductions in the Conversion Price, in addition to those required by Sections 15.5(a), (b), (c), (d), (e), (f) and ---------------- --- --- --- --- --- (g), as the Board of Directors considers to be advisable to avoid or --- diminish any income tax to holders of Common Stock or rights to purchase Common Stock resulting from any dividend or distribution of stock (or rights to acquire stock) or from any event treated as such for income tax purposes. To the extent permitted by applicable law, the Company from time to time may reduce the Conversion Price by any -75- amount for any period of time if the period is at least thirty (30) 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 fifteen (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. (j) No adjustment in the Conversion Price shall be required unless such adjustment would require an increase or decrease of at least one percent (1%) in such price; provided, however, that any adjustments which -------- ------- by reason of this Section 15.5(j) are not required to be made shall be --------------- carried forward and taken into account in any subsequent adjustment. All calculations under this Article XV shall be made by the Company and shall ---------- be made to the nearest cent or to the nearest one hundredth of a share, as the case may be. (k) Whenever the Conversion Price is adjusted as herein provided, the Company shall promptly file with the Trustee and any conversion agent other than the Trustee an Officers' Certificate setting forth the Conversion Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment. Promptly after delivery of such certificate, the Company shall prepare a notice of such adjustment of the Conversion Price setting forth the adjusted Conversion Price and the date on which each adjustment becomes effective and shall mail notice of such adjustment of the Conversion Price to the holder of each Security at his last address appearing on the Security register provided for in Section 2.5 ----------- of this Indenture, within ten (10) days after execution thereof. Failure to deliver such notice shall not affect the legality or validity of any such adjustment. (l) In any case in which this Section 15.5 provides that an ------------ adjustment shall become effective immediately after a record date for an event, the Company may defer until the occurrence of such event (i) issuing to the holder of any Security converted after such record date and before the occurrence of such event the additional shares of Common Stock issuable upon such conversion by reason of the adjustment required by such event over and above such conversion by reason of the adjustment required by such event and above the Common Stock issuable upon such conversion before giving effect to such adjustment and (ii) paying to such holder any amount in cash in lieu of any fraction pursuant to Section 15.5. ------------ -76- (m) For purposes of this Section 15.5, the number of shares of Common ------------ Stock at any time outstanding shall not include shares held in the treasury of the Company but shall include shares issuable in respect of scrip certificates issued in lieu of fractions of shares of Common Stock. The Company will not pay any dividend or make any distribution on shares of Common Stock held in the treasury of the Company. Section 15.6 Effect of Reclassification, Consolidation, Merger or Sale. --------------------------------------------------------- If any of the following events occur, namely (i) any reclassification or change of the outstanding shares of Common Stock (other than a subdivision or combination to which Section 15.5(c) applies), (ii) any consolidation, merger or --------------- combination of the Company with another corporation 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, or (iii) any sale or conveyance of the properties and assets of the Company as, or substantially as, an entirety to any other corporation 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 corporation, as the case may be, shall execute with the Trustee a supplemental indenture (which shall comply with the Trust Indenture Act as in force at the date of execution of such supplemental indenture) providing that such Security shall be convertible into the kind and amount of shares of stock and other securities or 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, combination, 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 shares of stock and other securities or property or assets (including cash) receivable upon such reclassification, change, consolidation, merger, combination, sale or conveyance (provided that, if the kind or amount of shares of stock and other securities or 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 ------- 15.6, the kind and amount of shares of stock and other securities or property or - ---- assets (including cash) 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 -77- indenture shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article. The Company shall cause notice of the execution of such supplemental indenture to be mailed to each holder of Securities, at his address appearing on the Security register provided for in Section 2.5 of this Indenture, within ten ----------- (10) days after execution thereof. Failure to deliver such notice shall not affect the legality or validity of such supplemental indenture. The above provisions of this Section shall similarly apply to successive reclassifications, changes, consolidations, mergers, combinations, sales and conveyances. If this Section 15.6 applies to any event or occurrence, Section 15.5 shall ------------ ------------ not apply. Section 15.7. Taxes on Shares Issued. The issue of stock certificates on ---------------------- conversions of Securities shall be made without charge to the converting Securityholder for any tax in respect of the issue thereof. The Company shall not, however, be required to pay any 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 Security 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 15.8. Reservation of Shares to Be Fully Paid; Compliance with ------------------------------------------------------- Governmental Requirements; Listing of Common Stock. The Company shall reserve, - -------------------------------------------------- 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 will upon issue be fully paid and non-assessable by the Company and free from all taxes, liens and charges with respect to the issue thereof. The Company covenants that if any shares of Common Stock to be provided for the purpose of conversion of Securities hereunder -78- require registration with or approval of any governmental authority under any federal or state law before such shares may be validly issued upon conversion, the Company will in good faith and as expeditiously as possible endeavor to secure such registration or approval, as the case may be. The Company further covenants that if at any time the Common Stock shall be listed on the New York Stock Exchange or any other national securities exchange the Company will, if permitted by the rules of such exchange, list and keep listed so long as the Common Stock shall be so listed on such exchange, all Common Stock issuable upon conversion of the Securities. Section 15.9 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 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 Security and the Trustee and any other conversion agent make no representations with respect thereto. Subject to the provisions of Section 8.1, 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 Security 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 15.6 relating either to ------------ the kind or amount of shares of stock or securities or property (including cash) receivable by Securityholders upon the conversion of their Securities after any event referred to in such Section 15.6 or to any adjustment to be made with ------------ respect thereto, but, subject to the provisions of Section 8.1, may accept as ----------- conclusive evidence of the correctness of any such provisions, and shall be protected in relying upon, the Officers' 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 15.10 Notice to Holders Prior to Certain Actions. In case: ------------------------------------------ (a) the Company shall declare a dividend (or any other distribution) on its Common Stock that would require an -79- adjustment in the Conversion Price pursuant to Section 15.5; or ------------ (b) the Company shall authorize the granting to all or substantially all the holders of its Common Stock of rights or warrants to subscribe for or purchase any share of any class or any other rights or warrants; or (c) of any reclassification or reorganization of the Common Stock of the Company (other than a subdivision or combination of its outstanding Common Stock, or a change in par value, or from par value to no par value, or from no par value to par value), or of any consolidation or merger to which the Company is a party and for which approval of any shareholders of the Company is required, or of the sale or transfer of all or substantially all of the assets of the Company; or (d) of the voluntary or involuntary dissolution, liquidation or winding-up of the Company; the Company shall cause to be filed with the Trustee and to be mailed to each holder of Securities at his address appearing on the Security register provided for in Section 2.5 of this Indenture, as promptly as possible but in any event ----------- at least fifteen (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 or warrants 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, consolidation, 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. ARTICLE XVI. REPURCHASE OF SECURITIES AT OPTION OF THE HOLDER UPON CHANGE IN CONTROL Section 16.1 Right to Require Repurchase. In the event that a Change in --------------------------- Control (as hereinafter defined) shall occur, then each holder shall have the right, at the holder's option, to require the Company to repurchase, and upon the exercise of such right the Company shall repurchase, all of such holder's Securities, or any portion of the principal amount thereof that -80- is an integral multiple of $1,000 (provided that no single Security may be repurchased in part unless the portion of the principal amount of such Security to be outstanding after such repurchase is equal to $1,000 or an integral multiple of $1,000), on the date (the "Repurchase Date") that is 30 days after --------------- the date of the Company Notice (as defined in Section 16.2) for cash at a ------------ purchase price equal to 100% of the principal amount (the "Repurchase Price") ---------------- plus interest accrued and unpaid interest to, but excluding, the Repurchase Date. The Company covenants that, prior to the mailing of the Company Notice, the Company shall (i) repay in full all Senior Indebtedness or offer to repay in full all Senior Indebtedness the terms of which prohibit the payment of the Securities prior to such Senior Indebtedness upon a Change in Control or (ii) obtain the requisite consent of the holders of any such Senior Indebtedness to permit the repurchase of the Securities pursuant to this Article XVI. The Company shall first comply with the covenant in the preceding sentence before it shall be required to repurchase Securities pursuant to this Article XVI. The Company also covenants that, upon a Change in Control, the Company will not make any payment to or for the benefit of any holder of any securities that are "junior" in right of payment to the Securities (including, but not limited to, holders of the New Preferred Stock), until a date following the Repurchase Date. Whenever in this Indenture there is a reference, in any context, to the principal of any Security as of any time, such reference shall be deemed to include reference to the Repurchase Price payable in respect of such Security to the extent that such Repurchase Price is, was or would be so payable at such time, and express mention of the Repurchase Price in any provision of this Indenture shall not be construed as excluding the Repurchase Price in those provisions of this Indenture when such express mention is not made. Section 16.2. Notices: Method of Exercising Repurchase Right, Etc. ---------------------------------------------------- (a) Unless the Company shall have theretofore called for redemption all of the outstanding Securities pursuant to Article III, on or before the ----------- 15th day after the occurrence of a Change in Control, the Company or, at the written request of the Company on or before the 10th day after receipt of such request, the Trustee shall give to all holders of Securities notice (the "Company Notice") of the occurrence of the Change in Control and of -------------- the repurchase right set forth herein arising as a result thereof. The Company shall also deliver a copy of such notice of a repurchase right to the Trustee. Each notice of a repurchase right shall state: (1) the Repurchase Date, -81- (2) the date by which the repurchase right must exercised, (3) the Repurchase Price, (4) a description of the procedure which a holder must follow to exercise a repurchase right, (5) that on the Repurchase Date the Repurchase Price will become due and payable upon each such Security designated by the holder to be repurchased, and that interest thereon shall cease to accrue on and after said date, (6) the Conversion Price, the date on which the right to convert the Securities to be repurchased will terminate and the places where such Securities may be surrendered for conversion, and (7) the place or places where such Securities are to be surrendered for payment of the Repurchase Price and accrued interest, if any. No failure of the Company to give the foregoing notices or defect therein shall limit any holder's right to exercise a repurchase right or affect the validity of the proceedings for the repurchase of Securities. If any of the foregoing provisions or other provisions of this Article are inconsistent with applicable law, such law shall govern. (b) To exercise a repurchase right, a holder shall deliver to the Trustee or any paying agent on or before the 30th day after the date of the Company Notice (i) written notice of the holder's exercise of such right, which notice shall set forth the name of the holder, the principal amount of the Securities to be repurchased (and, if any Security is to be repurchased in part, the serial number thereof, the portion of the principal amount thereof to be repurchased and the name of the Person in which the portion thereof to remain outstanding after such repurchase is to be registered) and a statement that an election to exercise the repurchase right is being made thereby, and (ii) the Securities with respect to which the repurchase right is being exercised. (c) In the event a repurchase right shall be exercised in accordance with the terms hereof, the Company shall pay or cause to be paid to the Trustee or the paying agent the Repurchase Price in cash, for payment to the holder on the Repurchase Date, together with accrued and unpaid interest to, but excluding, the Repurchase Date payable with respect -82- to the Securities as to which the repurchase right has been exercised. (d) If any Security (or portion thereof) surrendered for repurchase shall not be so paid on the Repurchase Date, the principal amount of such Security (or portion thereof, as the case may be) shall, until paid, bear interest from the Repurchase Date at the rate of __% per annum, and each Security shall remain convertible into Common Stock until the principal of such Security (or portion thereof, as the case may be) shall have been paid or duly provided for. (e) Any Security which is to be repurchased only in part shall be surrendered to the Trustee (with, if the Company or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company and the Trustee duly executed by, the holder thereof or his attorney duly authorized in writing), and the Company shall execute, and the Trustee shall authenticate and deliver to the holder of such Security without service charge, a new Security or Securities, containing identical terms and conditions, each in an authorized denomination in aggregate principal amount equal to and in exchange for the portion of the principal of the Security so surrendered that was not repurchased. (f) Any holder that has delivered to the Trustee its written notice exercising its right to require the Company to repurchase its Securities upon a Change in Control shall have the right to withdraw such notice at any time prior to the close of business on the Repurchase Date by delivery of a written notice of withdrawal to the Trustee prior to the close of business on such date. A Security in respect of which a holder is exercising its option to require repurchase upon a Change in Control may be converted into Common Stock in accordance with Article XV only if such ---------- holder withdraws its notice in accordance with the preceding sentence. Section 16.3. Certain Definitions. For purposes of this Article XVI, ------------------- ----------- (a) the term "beneficial owner" shall be determined in accordance with Rule 13d-3 promulgated by the Commission pursuant to the Exchange Act; and (b) the term "Person" shall include any syndicate or group which would be deemed to be a "person" under Section 13(d)(3) of the Exchange ---------------- Act. Section 16.4. Change in Control. A "Change in Control" shall be deemed ----------------- ----------------- to have occurred at such time after the original issuance of the Securities as: -83- (a) any Person (other than the Company, any subsidiary of the Company, or any entity Controlled by the foregoing, any officer of the Company as of the date hereof or any employee benefit plan of the Company or any such subsidiary) is or becomes the beneficial owner, directly or indirectly, through a purchase or other acquisition transaction or series of transactions (other than a merger or consolidation involving the Company), of shares of capital stock of the Company entitling such Person to exercise in excess of 35% of the total voting power of all shares of capital stock of the Company entitled to vote generally in the election of directors; (b) there occurs any consolidation of the Company with, or merger of the Company into, any other Person, any merger of another Person into the Company, or any sale or transfer of the assets of the Company as, or substantially as, an entirety to another Person (other than (i) any such transaction pursuant to which the holders of the Common Stock immediately prior to such transaction have, directly or indirectly, shares of capital stock of the continuing or surviving corporation immediately after such transaction which entitle such holders to exercise in excess of 50% of the total voting power of all shares of capital stock of the continuing or surviving corporation entitled to vote generally in the election of directors and (ii) any merger (1) which does not result in any reclassification, conversion, exchange or cancellation of outstanding shares of Common Stock or (2) which is effected solely to change the jurisdiction of incorporation of the Company and results in a reclassification, conversion or exchange of outstanding shares of Common Stock solely into shares of common stock and separate series of common stock carrying substantially the same relative rights as the Common Stock); or (c) a change in the Board of Directors of the Company in which the individuals who constituted the Board of Directors of the Company at the beginning of the two-year period immediately preceding such change (together with any other director whose election by the Board of Directors of the Company or whose nomination for election by the stockholders of the Company was approved by a vote of at least a majority of the directors then in office either who were directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the directors then in office. Section 16.5. Consolidation, Merger, Etc. In the case of any --------------------------- reclassification, change, consolidation, merger, combination, sale or conveyance to which Section 15.6 applies, in which the Common Stock of the Company is ------------ changed or exchanged as a result into the right to receive shares of stock and other securities or property or assets (including cash) which includes shares of -84- Common Stock of the Company or common stock of another person that are, or upon issuance will be, traded on a United States national securities exchange or approved for trading on an established automated over-the-counter trading market in the United States and such shares constitute at the time such change or exchange becomes effective in excess of 50% of the aggregate fair market value of such shares of stock and other securities, property and assets (including cash) (as determined by the Company, which determination shall be conclusive and binding), then the person formed by such consolidation or resulting from such merger or combination or which acquires the properties or assets (including cash) of the Company, as the case may be, shall execute and deliver to the Trustee a supplemental indenture (which shall comply with the Trust Indenture Act as in force at the date of execution of such supplemental indenture) modifying the provisions of this Indenture relating to the right of holders of the Securities to cause the Company to repurchase the Securities following a Change in Control, including, without limitation, the applicable provisions of this Article XVI and the definitions of the Common Stock and Change in Control, ----------- as appropriate, and such other related definitions set forth herein as determined in good faith by the Company (which determination shall be conclusive and binding), to make such provisions apply to the common stock and the issuer thereof if different from the Company and Common Stock of the Company (in lieu of the Company and the Common Stock of the Company). ARTICLE XVII. MISCELLANEOUS PROVISIONS Section 17.1. Provisions Binding on Company's Successors. All the ------------------------------------------ covenants, stipulations, promises and agreements by the Company contained in this Indenture shall bind its successors and assigns whether so expressed or not. Section 17.2. Official Acts by Successor Corporation. Any act or -------------------------------------- proceeding by any provision of this Indenture authorized or required to be done or performed by any board, committee or officer of the Company shall and may be done and performed with like force and effect by the like board, committee or officer of any corporation that shall at the time be the lawful sole successor of the Company. Section 17.3. Addresses for Notices, Etc. Any notice or demand which by --------------------------- any provision of this Indenture is required or permitted to be given or served by the Trustee or by the holders of Securities on the Company shall be deemed to have been sufficiently given or made, for all purposes, if given or served by being deposited postage prepaid by registered or certified mail in a post office letter box addressed (until another address is filed by the Company with the Trustee) to System Software Associates, Inc., 500 West Madison Street, 32nd Floor, Chicago, Illinois 60661, Attn: Chief Financial Officer. Any notice, -85- direction, request or demand hereunder to or upon the Trustee shall be deemed to have been sufficiently given or made, for all purposes, if given or served by being deposited postage prepaid by registered or certified mail in a post office letter box addressed to the Corporate Trust Office, which office is, at the date as of which this Indenture is dated, located at 311 West Monroe Street, 12th Floor, Chicago, Illinois 60606, Attn.: Indenture Trust Department. The Trustee, by notice to the Company, may designate additional or different addresses for subsequent notices or communications. Any notice or communication mailed to a Securityholder shall be mailed to him by first class mail, postage prepaid, at his address as it appears on the Security register and shall be sufficiently given to him if so mailed within the time prescribed. Failure to mail a notice or communication to a Securityholder or any defect in it shall not affect its sufficiency with respect to other Securityholders. If a notice or communication is mailed in the manner provided above, it is duly given, whether or not the addressee receives it. Section 17.4. Governing Law. This Indenture and each 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 the laws of the State of New York. Section 17.5. Evidence of Compliance with Conditions Precedent ------------------------------------------------ Certificates to Trustee. Upon any application or demand by the Company to the - ----------------------- Trustee to take any action under any of the provisions of this Indenture, the Company shall furnish to the Trustee an Officers' Certificate stating that all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with, and an Opinion of Counsel stating that, in the opinion of such counsel, all such conditions precedent have been complied with. Each certificate or opinion provided for in this Indenture and delivered to the Trustee with respect to compliance with a condition or covenant provided for in this Indenture shall include (1) a statement that the person making such certificate or opinion has read such covenant or condition; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statement or opinion contained in such certificate or opinion is based; (3) a statement that, in the opinion of such person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether or not, in the opinion of such person, such condition or covenant has been complied with. -86- Section 17.6. Legal Holidays. In any case where the date of maturity of -------------- interest on or principal of the Securities or the date fixed for redemption or repurchase of any Security will not be a Business Day, then payment of such interest on or principal of the Securities 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 date of maturity or the date fixed for redemption or repurchase, and no interest shall accrue for the period from and after such date. Section 17.7. Trust Indenture Act. This Indenture is hereby made subject ------------------- to, and shall be governed by, the provisions of the Trust Indenture Act required to be part of and to govern indentures qualified under the Trust Indenture Act. If any provision hereof limits, qualifies or conflicts with another provision hereof which is required to be included in an indenture qualified under the Trust Indenture Act, such required provision shall control. Section 17.8. No Security Interest Created. Nothing in this Indenture or ---------------------------- in the Securities, expressed or implied, shall be construed to constitute a security interest under the Uniform Commercial Code or similar legislation, as now or hereafter enacted and in effect, in any jurisdiction where property of the Company or its subsidiaries is located. Section 17.9. Benefits of Indenture. Nothing in this Indenture or in the --------------------- Securities, expressed or implied, shall give to any Person, other than the parties hereto, any paying agent, any authenticating agent, any Custodian, any conversion agent, any Security registrar and their successors hereunder, the holders of Securities and the holders of Senior Indebtedness, any benefit or any legal or equitable right, remedy or claim under this Indenture. Section 17.10. Table of Contents, Headings, Etc. The table of contents --------------------------------- and the titles and headings of the articles and sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part hereof, and shall in no way modify or restrict any of the terms or provisions hereof. Section 17.11. Authenticating Agent. The Trustee may appoint an -------------------- authenticating agent which shall be authorized to act on its behalf and subject to its direction in the authentication and delivery of Securities in connection with the original issuance thereof and transfers and exchanges of Securities hereunder, including under Sections 2.4, 2.5, 2.6, 2.7, 3.3, 15.2 and 16.2, as ------------ --- --- --- --- ----- ---- fully to all intents and purposes as though the authenticating agent had been expressly authorized by this Indenture and those Sections to authenticate and deliver Securities. For all purposes of this Indenture, the authentication and delivery of Securities by the authenticating agent shall be deemed to be authentication and delivery of such -87- Securities "by the Trustee" and a certificate of authentication executed on behalf of the Trustee by an authenticating agent shall be deemed to satisfy any requirement hereunder or in the Securities for the Trustee's certificate of authentication. Such authenticating agent shall at all times be a person eligible to serve as trustee hereunder pursuant to Section 8.9. ----------- Any corporation into which any authenticating agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, consolidation or conversion to which any authenticating agent shall be a party, or any corporation succeeding to the corporate trust business of any authenticating agent, shall be the successor of the authenticating agent hereunder, if such successor corporation is otherwise eligible under this Section 17.11, without the execution or filing of any paper or any further act - ------------- on the part of the parties hereto or the authenticating agent or such successor corporation. Any authenticating agent may at any time resign by giving written notice of resignation to the Trustee and to the Company. The Trustee may at any time terminate the agency of any authenticating agent by giving written notice of termination to such authenticating agent and to the Company. Upon receiving such a notice of resignation or upon such a termination, or in case at any time any authenticating agent shall cease to be eligible under this Section, the Trustee shall either promptly appoint a successor authenticating agent or itself assume the duties and obligations of the former authenticating agent under this Indenture, and upon such appointment of a successor authenticating agent, if made, shall give written notice of such appointment of a successor authenticating agent to the Company and shall mail notice of such appointment of a successor authenticating agent to all holders of Securities as the names and addresses of such holders appear on the Security register. The Trustee agrees to pay to the authenticating agent from time to time reasonable compensation for its services (to the extent pre-approved by the Company in writing), and the Trustee shall be entitled to be reimbursed for such pre-approved payments, subject to Section 8.6. ----------- The provisions of Sections 8.2, 8.3, 8.4, 9.3 and this Section 17.11 shall ------------ --- --- --- ------------- be applicable to any authenticating agent. Section 17.12. Execution in Counterparts. This Indenture may be executed ------------------------- in any number of counterparts, each of which shall be an original, but such counterparts shall together constitute but one and the same instrument. -88- System Software Associates, Inc. hereby accepts the trusts in this Indenture declared and provided, upon the terms and conditions hereinabove set forth. IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly signed, all as of the date first written above. SYSTEM SOFTWARE ASSOCIATES, INC. By: ____________________________ Name: Title: Attest: ___________________________ Title: Harris Trust and Savings Bank, as Trustee ----------------------------- By: ____________________________ Name: Title: Attest: ___________________________ Title: -89- EXHIBIT A --------- [FORM OF NOTE] [For Global Security only:] UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, NEW YORK, NEW YORK (THE "DEPOSITORY," WHICH TERM INCLUDES ANY SUCCESSOR DEPOSITORY FOR THE CERTIFICATES) 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 REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY AND ANY PAYMENT HEREON IS MADE TO CEDE & CO. (OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. SYSTEM SOFTWARE ASSOCIATES, INC. ___% CONVERTIBLE SUBORDINATED NOTE DUE 2002 No. ___ CUSIP 871839 AA4 System Software Associates, 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 ________________________________ or registered assigns, the principal sum of [__________ ($__________)] [For Global Security only (as increased or decreased from time to time in accordance with the procedures of DTC)] on September 15, 2002 at the office or agency of the Company maintained for that purpose in Chicago, Illinois or, at the option of the holder of this Note, at the Corporate Trust Office, in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts, and to pay interest, semi-annually on March 15 and September 15 of each year, commencing March 15, 1998, on said principal sum at said office or agency, in like coin or currency, at the rate per annum of ___%, from the date of this Note, until payment of said principal sum has been made or duly provided for. The interest payable on this Note pursuant to the Indenture on any March 15 or September 15 will be paid to the person in whose name this Note (or one or more Predecessor Notes) is registered at the close of business on the 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, as provided in the Indenture provided that any such interest not punctually paid or duly provided for shall be payable as provided in the Indenture. Interest may, at the option of the Company, be paid by check mailed to the registered address of such person; provided that -------- with respect to any holder of Notes with an aggregate principal amount equal to or in excess of $5,000,000, interest may be paid by wire transfer as more fully specified in the Indenture. Reference is made to the further provisions of this Note set forth on the reverse hereof, including, without limitation, provisions subordinating the payment of principal of and premium, if any, and interest on the Notes to the prior payment in full of all Senior Indebtedness, as defined in the Indenture, and provisions giving the holder of this Note the right to convert this Note into Common Stock of the Company 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. 91 This Note 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 Note 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 Note to be duly executed under its corporate seal. Dated: SYSTEM SOFTWARE ASSOCIATES, INC. By: ______________________________________________ [SEAL] Attest: __________________________________________ TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the Notes described in the within-named Indenture. Harris Trust and Savings Bank, as Trustee By: _____________________________________________________________ Authorized Signatory By: __________________________________________ As Authenticating Agent (if different from Trustee) 92 [FORM OF REVERSE OF NOTE] SYSTEM SOFTWARE ASSOCIATES, INC. ___% CONVERTIBLE SUBORDINATED NOTE DUE 2002 This Note is one of a duly authorized issue of Notes of the Company, designated as its ___% Convertible Subordinated Notes due 2002 (herein called the "Notes"), limited to the aggregate principal amount of $100,000,000 ($115,000,000 if the over-allotment option is exercised in full) issued or to be issued under and pursuant to an indenture dated as of September __, 1997 (herein called the "Indenture"), between the Company and Harris Trust and Savings Bank, as trustee (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 Notes. In case an Event of Default, as defined in the Indenture, shall have occurred and be continuing, the principal of and accrued interest on all Notes may be declared, and upon said declaration shall become, due and payable, in the manner, with the effect and subject to the conditions provided in the Indenture. The Indenture contains provisions permitting the Company and the Trustee, with the consent of the holders of not less than a majority in aggregate principal amount of the Notes at the time outstanding, evidenced as in the Indenture provided, to execute supplemental indentures adding any provisions to or changing in any manner or eliminating any of the provisions of the Indenture or of any supplemental indenture or modifying in any manner the rights of the holders of the Notes; provided, however, that no such supplemental indenture -------- ------- shall (i) extend the fixed maturity of any Note, or reduce the rate or extend the time of payment of interest thereon, or reduce the principal amount thereof or premium, if any, thereon, or reduce any amount payable on redemption thereof, or impair the right of any of the holders of the Notes to institute suit for the payment thereof, or make the principal thereof or interest or premium, if any, thereon payable in any coin or currency other than that provided in the Note, or modify the provisions of the Indenture with respect to the subordination of the Notes in a manner adverse to the holders of the Notes in any material respect, or change the obligation of the Company to repurchase any Note upon the occurrence of a Change in Control in a manner adverse to the holder of the Notes, or impair the right to convert the Notes into Common Stock in any material respect, without the consent of the holder of each Note so affected or (ii) reduce the aforesaid percentage of Notes, the holders of which are required to consent to any such supplemental indenture, without the consent of the holders of all Notes then outstanding. It is also provided in the Indenture that the holders of a majority in aggregate principal amount of the Notes at the time outstanding may 93 on behalf of the holders of all of the Notes waive any past default or Event of Default under the Indenture and its consequences, except a default in the payment of interest or any premium on or the principal of any of the Notes, a default in the payment of redemption price pursuant to Article III or ----------- or repurchase price pursuant to Article XVI or a failure by the Company to ----------- convert any Notes into Common Stock of the Company. Any such consent or waiver by the holder of this Note (unless revoked as provided in the Indenture) shall be conclusive and binding upon such holder and upon all future holders and owners of this Note and any Notes which may be issued in exchange or substitute hereof, irrespective of whether or not any notation thereof is made upon this Note or such other Notes. The indebtedness evidenced by the Notes is, to the extent and in the manner provided in the Indenture, expressly subordinate and subject in right of payment to the prior payment in full of all Senior Indebtedness of the Company, as defined in the Indenture, whether outstanding at the date of the Indenture or thereafter incurred, and this Note is issued subject to the provisions of the Indenture with respect to such subordination. Each holder of this Note by accepting the same, agrees to and shall be bound by such provisions and authorizes the Trustee on his behalf to take such action as may be necessary or appropriate to effectuate the subordination so provided and appoints the Trustee his attorney-in-fact for such purpose. No reference herein to the Indenture and no provision of this Note or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and any premium and interest on this Note at the place, at the respective times, at the rate and in the coin or currency herein prescribed. Interest on the Notes shall be computed on the basis of a 360-day year comprised of twelve 30-day months. The Notes are issuable in registered form without coupons in minimum denominations of $1,000 and any integral multiple of $1,000. At the office or agency of the Company referred to on the face hereof, and in the manner and subject to the limitations provided in the Indenture, without payment of any service charge but with payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration or exchange of Notes, Notes may be exchanged for a like aggregate principal amount of Notes of other authorized denominations. The Notes will not be redeemable at the option of the Company prior to September 20, 2000. At any time on or after September 20, 2000, and prior to maturity the Notes may be redeemed at the option of the Company from time to time, as a whole or in part, upon mailing a notice of such redemption not less than 15 nor more than 60 days before the date fixed for redemption to the holders of -2- Notes at their last registered addresses, all as provided in the Indenture, at the following optional redemption prices (expressed as percentages of the principal amount), together in each case with accrued interest to, but excluding, the date fixed for redemption. If redeemed during the 12-month period beginning September 20:
YEAR PERCENTAGE ------ ----------- 2000................ _______% 2001................ _______
and 100% at September 15, 2002; provided that if the date fixed for redemption -------- is on March 15 or September 15, then the semi-annual payment of interest becoming due on such date shall be paid to the holder of record of the Note on the next preceding March 1 or September 1, respectively. The Notes are not subject to redemption through the operation of any sinking fund. If a Change in Control (as defined in the Indenture) occurs prior to maturity, the holder of this Note shall have the right, in accordance with the provisions of the Indenture, to require the Company to repurchase this Note or any portion of the principal amount hereof that is an integral multiple of $1,000 for cash at a Repurchase Price equal to 100% of the principal amount plus accrued and unpaid interest to, but excluding, the Repurchase Date; provided -------- that if such Repurchase Date is March 15 or September 15, then the semi-annual payment of interest becoming due on such date shall be paid to the holder of record of the Note on the next preceding March 1 or September 1, respectively. Within 15 days after the occurrence of a Change in Control, the Company is obligated to give all holders of record of Notes notice of the occurrence of such Change in Control and of the repurchase right arising as a result thereof. Subject to the provisions of the Indenture, the holder hereof has the right, at its option, at any time prior to the close of business on the maturity date, subject to prior redemption or repurchase, or, as to all or any portion hereof called for redemption, prior to the close of business on the Business Day immediately preceding the date fixed for redemption (unless the Company shall default in payment due upon redemption thereof), to convert the principal hereof or any portion of such principal which is $1,000 or an integral multiple thereof, into that number of shares of the Company's Common Stock, as said shares shall be constituted at the date of conversion, obtained by dividing the principal amount of this Note or portion thereof to be converted by the Conversion Price of $_____ or such Conversion Price as adjusted from time to time as provided in the Indenture, upon surrender of this Note, together with a conversion notice as provided in the -3- Indenture, to the Company at the office or agency of the Company maintained for that purpose in Chicago, Illinois, or at the option of such holder, the Corporate Trust Office, and, unless the shares issuable on conversion are to be issued in the same name as this Note, 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 Note shall be surrendered for conversion during the period from the close of business on any record date for the payment of interest to the close of business on the Business Day preceding the interest payment date, this Note (unless it or the portion being converted shall have been called for redemption during the period from the close of business on any record date for the payment of interest to the close of business on the Business Day preceding the interest payment date) must be accompanied by an amount, in immediately available funds or other funds acceptable to the Company, equal to the interest payable on such interest payment date on the principal amount being converted, provided further -------- ------- however, that in the event this Note or a portion thereof is called for - ------- redemption and the holder elects to convert such Note, the holder will be entitled to receive interest on such Note for the period from the last interest payment date through the date of conversion (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 Notes.) No fractional shares will be issued upon any conversion, but an adjustment 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 Note or Notes for conversion. Any Notes called for redemption, unless surrendered for conversion on or before the close of business on the date fixed for redemption, may be deemed to be purchased from the holder of such Notes at an amount equal to the applicable redemption price, together with accrued interest to the date fixed for redemption, by one or more investment bankers or other purchasers who may agree with the Company to purchase such Notes from the holders thereof and convert them into Common Stock of the Company and to make payment for such Notes as aforesaid to the Trustee in trust for such holders. Upon due presentment for registration of transfer of this Note at the office or agency of the Company in Chicago, Illinois, or at the option of the holder of this Note, at the Corporate Trust Office, a new Note or Notes of authorized denominations for an equal aggregate principal amount will be issued to the transferee in exchange thereof, subject to the limitations provided in the Indenture, without charge except for any tax or other governmental charge imposed in connection therewith. The Company, the Trustee, any authenticating agent, any paying agent, any conversion agent and any Securities registrar may deem and treat the registered holder hereof as the absolute owner of -4- this Note (whether or not this Note shall be overdue and notwithstanding any notation of ownership or other writing hereon), for the purpose of receiving payment hereof, or on account hereof, for the conversion hereof and for all other purposes, and neither the Company nor the Trustee nor any other authenticating agent nor any paying agent nor any other conversion agent nor any Securities registrar shall be affected by any notice to the contrary. All payments made to or upon the order of such registered holder shall, to the extent of the sum or sums paid, satisfy and discharge liability for monies payable on this Note. No recourse for the payment of the principal of or any premium or interest on this Note, or for any claim based hereon or otherwise in respect hereof, and no recourse under or upon any obligation, covenant or agreement of the Company in the Indenture or any indenture supplemental thereto or in any Note, or because of the creation of any indebtedness represented thereby, shall be had against any incorporator, stockholder, employee, agent, officer or director or subsidiary, as such, past, present or future, of the Company or of any successor corporation, either directly or through the Company or any successor corporation, whether by virtue of any constitution, statute or rule of law or by the enforcement of any assessment or penalty or otherwise, all such liability being, by the acceptance hereof and as part of the consideration for the issue hereof, expressly waived and released. Terms used in this Note and defined in the Indenture are used herein as therein defined. -5- ABBREVIATIONS The following abbreviations, when used in the inscription of the face of this Note, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common UNIF GIFT MIN ACT - _____ Custodian____ TEN ENT - as tenants by the (Cust) (Minor) entireties JT TEN - as joint tenants under Uniform Gifts to Minors Act with right to survivorship and not as tenants in common ______________________________________ (State)
Additional abbreviations may also be used though not in the above list. CONVERSION NOTICE To: [_________________________] The undersigned registered owner of this Note hereby irrevocably exercises the option to convert this Note, or the portion hereof (which is $1,000 or an integral multiple thereof) below designated, into shares of Common Stock of System Software Associates, Inc. in accordance with the terms of the Indenture referred to in this Note, and directs that the shares issuable and deliverable upon such conversion, together with any check in payment for fractional shares and any Notes representing any unconverted principal amount hereof, be issued and delivered to the registered holder hereof unless a different name has been indicated below. If shares or any portion of this Note not converted are to be issued in the name of a person other than the undersigned, the undersigned will [check the appropriate box below and] pay all transfer taxes payable with respect thereto. Any amount required to be paid to the undersigned on account of interest accompanies this Note. Dated: ___________________ __________________________________________________ __________________________________________________ Signature(s) Signature(s) must be guaranteed by an eligible Guarantor Institution (banks, stock brokers, savings and loan associations and credit unions) with membership in an approved signature guarantee medallion program pursuant to Securities and Exchange Commission Rule 17Ad-15 if shares of Common Stock are to be issued, or Notes to be delivered, other than to and in the name of the registered holder. __________________________________________________ Signature Guarantee Fill in for registration of shares of Common Stock if to be issued, and Notes if to be delivered, other than to and in the name of the registered holder: ____________________________ (Name) ____________________________ (Street Address) ____________________________ (City, State and Zip Code) Please print name and address Principal amount to be converted (if less than all): $ __________ __________________________________________________ Social Security or Other Taxpayer Identification Number -2- ASSIGNMENT For value received _______________ hereby sell(s), assign(s) and transfer(s) unto ________________________________________________________________________________ (Please insert name, social security or other Taxpayer Identification Number of assignee) the within Note, and hereby irrevocably constitutes and appoints ________________________________________________________________________________ attorney to transfer the said Note on the books of the Company, with full power of substitution in the premises. [_] The transferee is an Affiliate of the Company. Dated: ______________ __________________________________________________ __________________________________________________ Signature(s) Signature(s) must be guaranteed by an eligible Guarantor Institution (banks, stock brokers, savings and loan associations and credit unions) with membership in an approved signature guarantee medallion program pursuant to Securities and Exchange Commission Rule 17Ad-15 if shares of Common Stock are to be issued, or Notes to be delivered, other than to and in the name of the registered holder. __________________________________________________ Signature Guarantee -3- OPTION TO ELECT REPURCHASE UPON A CHANGE IN CONTROL To: [_________________________] The undersigned registered owner of this Note hereby irrevocably acknowledges receipt of a notice from System Software Associates, Inc. (the "Company") as to the occurrence of a Change in Control with respect to the Company and requests and instructs the Company to repay the entire principal amount of this Note, or the portion thereof (which is $1,000 or an integral multiple thereof) below designated, in accordance with the terms of the Indenture referred to in this Note at the repurchase price, together with accrued interest to, but excluding, such date, to the registered holder hereof. Dated: _________________ __________________________________________________ __________________________________________________ Signature(s) NOTICE: The above signatures of the holder(s) hereof must correspond with the name as written upon the face of the Note in every particular without alteration, enlargement or any change whatever. Principal amount to be repurchased (if less than all): $ ___________ __________________________________________________ Social Security or Other Taxpayer Identification Number -4- EX-12 4 STATEMENT RE: COMPUTATION OF RATIOS Exhibit 12 ---------- STATEMENT re: Computation of Ratios
Pro Forma ----------------------- Nine Months Year Nine Months Ended July 31, Ended Ended --------------- October 31, July 31, 1992 1993 1994 1995 1996 1996 1997 1996 1997 Fixed charges: --------------------------------------------------------------------------------------- Interest expense $ 0.9 $ 1.1 $ 2.8 $ 2.2 $ 4.7 $ 2.8 $12.2 $ 15.7 $ 22.0 Redeemable Series A Preferred Stock Dividends -- -- -- -- -- -- -- 3.5 3.2 Approximate portion of rental expense representative of an interest factor (1/3 of rent expense) 2.0 2.7 3.0 5.2 8.0 5.5 6.0 8.0 6.0 --------------------------------------------------------------------------------------- Total fixed charges 2.9 3.8 5.8 7.4 12.7 8.3 18.2 27.2 31.2 Income (loss) before income taxes and minority interest 41.6 35.7 15.4 40.9 (51.4) (42.5) (2.5) (63.9) (15.5) --------------------------------------------------------------------------------------- Income (loss) before income taxes and minority interest and total fixed charges $44.5 $39.5 $21.2 $48.3 $(38.7) $ (34.2) $15.7 $(36.7) $ 15.7 Ratio of earnings to fixed charges 15.3 10.4 3.7 6.5 (3.0) (4.1) 0.9 (1.3) 0.5
EX-23.1 5 CONSENT OF PRICE WATERHOUSE LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in the Prospectus constituting part of this Registration Statement on Form S-3 of our report dated January 7, 1997, except as to Notes 6, 7 and 11, which are as of January 29, 1997, relating to the consolidated financial statements of System Software Associates, Inc. as of October 31, 1995 and for the two years then ended which appears in such Prospectus. We also consent to the references to us under the headings "Experts" and "Selected Financial Data" in such Prospectus. However, it should be noted that Price Waterhouse LLP has not prepared or certified such "Selected Financial Data." /s/ Price Waterhouse LLP - ------------------------------------- Price Waterhouse LLP Chicago, Illinois September 2, 1997 EX-23.2 6 CONSENT OF KPMG PEAT MARWICK LLP EXHIBIT 23.2 CONSENT OF INDEPENDENT AUDITORS We consent to the use of our report dated January 7, 1997, except as to Notes 6, 7, and 11 which are as of January 29, 1997, relating to the consolidated balance sheet of System Software Associates, Inc. and subsidiaries as of October 31, 1996, and the related consolidated statements of operations, stockholders' equity, and cash flows for the year then ended included herein and to the reference to our firm under the headings "Selected Financial Data" and "Experts" in the prospectus. /s/ KPMG Peat Marwick LLP ------------------------------------------ KPMG Peat Marwick LLP Chicago, Illinois September 2, 1997 -----END PRIVACY-ENHANCED MESSAGE-----