-----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, F7nKvHeh/hZ2UX3uMr+EgjUfuALIu/BqiHuynoGN1q1kDimVPXat3JTFDPbOPjHL c5Pmb7YBHI4qdXsdpl6iEw== 0000950109-97-006093.txt : 19970929 0000950109-97-006093.hdr.sgml : 19970929 ACCESSION NUMBER: 0000950109-97-006093 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 19970926 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOFTWARE AG SYSTEMS INC CENTRAL INDEX KEY: 0000352683 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 541167173 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-36567 FILM NUMBER: 97686741 BUSINESS ADDRESS: STREET 1: 11190 SUNRISE VALLEY DR CITY: RESTON STATE: VA ZIP: 20191 BUSINESS PHONE: 7038605050 MAIL ADDRESS: STREET 1: 11190 SUNRISE VALLEY DR CITY: RESTON STATE: VA ZIP: 20191 S-1 1 FORM S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 26, 1997 REGISTRATION NO. 333- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION ---------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------------- SOFTWARE AG SYSTEMS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ---------------- DELAWARE 54-1167173 (STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.) 5734 (PRIMARY STANDARD INDUSTRIAL CLASSIFICATION CODE NUMBER) 11190 SUNRISE VALLEY DRIVE RESTON, VA 20191 (703) 860-5050 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) ---------------- DANIEL F. GILLIS PRESIDENT AND CHIEF EXECUTIVE OFFICER 11190 SUNRISE VALLEY DRIVE RESTON, VA 20191 (703) 860-5050 (NAME AND ADDRESS OF AGENT FOR SERVICE) ---------------- COPIES TO: ROBERT B. OTT, ESQ. DANIEL A. RASKAS, PETER B. TARR, ESQ. BRENT B. SILER, ESQ. ARNOLD & PORTER 555 TWELFTH ESQ. HALE AND DORR LLP 1455 STREET, N.W. WASHINGTON, D.C. 20004 PENNSYLVANIA AVENUE, N.W. WASHINGTON, (202) 942-5000 D.C. ---------------- (202) 942-8400 APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE OF THE SECURITIES TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [_] 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 this Form is a post-effective amendment filed pursuant to Rule 462(d) 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 AMOUNT MAXIMUM MAXIMUM TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED REGISTERED (1) PER SHARE (2) OFFERING PRICE (2) REGISTRATION FEE - ------------------------------------------------------------------------------------------------ Common Stock $.01 par value per share....... 8,855,000 Shares $14.00 $123,970,000 $37,567
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (1) Includes 1,155,000 shares of Common Stock issuable upon exercise of an over-allotment option granted to the Underwriters. (2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457 of the Securities Act of 1933, as amended. ---------------- 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. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +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. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED SEPTEMBER 26, 1997 [LOGO OF SOFTWARE AG AMERICAS APPEARS HERE] 7,700,000 SHARES COMMON STOCK Of the 7,700,000 shares of Common Stock offered hereby, 4,600,000 shares are being sold by Software AG Systems, Inc. (the "Company") and 3,100,000 shares are being sold by certain stockholders of the Company (the "Selling Stockholders"). See "Principal and Selling Stockholders." The Company will not receive any of the proceeds from the sale of shares being sold by the Selling Stockholders. Prior to this offering, there has been no public market for the Common Stock of the Company. It is currently estimated that the initial public offering price per share will be between $12.00 and $14.00 per share. See "Underwriting" for information relating to the method of determining the initial public offering price. Application will be made for listing of the Common Stock on the New York Stock Exchange ("NYSE") under the symbol "AGS." --------- THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 7. --------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE 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 PROCEEDS TO DISCOUNTS AND PROCEEDS TO SELLING PRICE TO COMMISSIONS COMPANY STOCKHOLDERS PUBLIC (1) (2) (3) (3) - -------------------------------------------------------------------------------- Per Share...................... $ $ $ $ - -------------------------------------------------------------------------------- Total (3)...................... $ $ $ $
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1) The Company and the Selling Stockholders have agreed to indemnify the Underwriters as stated herein (the "Underwriters") against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the "Securities Act"). See "Underwriting." (2) Before deducting expenses payable by the Company, estimated at $1,100,000. (3) The Company and the Selling Stockholders have granted to the Underwriters a 30-day option to purchase an aggregate of up to an additional 1,155,000 shares of Common Stock on the same terms as set forth above, solely to cover over-allotments, if any. See "Underwriting." If this option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions, Proceeds to Company and Proceeds to Selling Stockholders will be $ , $ , $ and $ , respectively. --------- The Common Stock is offered by the Underwriters as stated herein, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. It is expected that delivery of such shares will be made through the offices of Robertson, Stephens & Company LLC ("Robertson, Stephens & Company"), San Francisco, California, on or about , 1997. ROBERTSON, STEPHENS & COMPANY DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION The date of this Prospectus is , 1997 [COMPANY LOGO AND GRAPHICAL SCHEMATIC, UNDER THE CAPTION "ENTERPRISE BUSINESS SOLUTIONS", DEPICTING HOW THE COMPANY'S PRODUCTS AND SERVICES WORK TOGETHER AND WITH THIRD PARTY PRODUCTS IN BUSINESS COMPUTING ENVIRONMENTS TO DEVELOP ENTERPRISE LEVEL APPLICATIONS AND TO FACILITATE ACCESS TO INFORMATION. SUB- CAPTIONS INCLUDE "MISSION-CRITICAL SYSTEMS", "DATA WAREHOUSE", "INFORMATION ACCESS" AND "APPLICATION COMPONENT TECHNOLOGY."] CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF THE COMPANY, INCLUDING ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." 2 NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDER OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER TO, OR SOLICITATION OF, ANY PERSON IN ANY JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ---------------- TABLE OF CONTENTS
PAGE ---- Summary.................................................................. 4 Risk Factors............................................................. 7 Company Background....................................................... 15 Use of Proceeds.......................................................... 16 Dividend Policy.......................................................... 16 Capitalization........................................................... 17 Dilution................................................................. 18 Selected Consolidated Financial Data..................................... 19 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 20 Business................................................................. 30 Management............................................................... 41 Certain Relationships and Transactions................................... 47 Principal and Selling Stockholders....................................... 49 Description of Capital Stock............................................. 51 Shares Eligible for Future Sale.......................................... 54 Underwriting............................................................. 56 Legal Matters............................................................ 58 Experts.................................................................. 58 Additional Information................................................... 58 Index to Consolidated Financial Statements............................... F-1
---------------- The Company's principal executive offices are located at 11190 Sunrise Valley Drive, Reston, Virginia 20191, and its telephone number is (703) 860- 5050. The Company intends to mail to all of its stockholders an annual report containing financial statements audited by its independent accountants for each year and quarterly reports containing unaudited financial data for each of the first three quarters of each year. ENTIRE(R), SourcePoint(R), PREDICT(R), ADAPLEX(R), ENTIRE NET-WORK(R) and ENTIRE ACCESS(R) are registered trademarks of the Company, and iXpress(TM), EntireX/DCOM(TM), ENTIRE BROKER(TM), ENTIRE BROKER SDK(TM), ENTIRE BROKER APPC(TM), ENTIRE SAF Gateway(TM), INSIGHT 2000(TM), INSIGHT 2000 Tool Kit(TM), CONSTRUCT(TM), NATURAL Lightstorm(TM), CONSTRUCT Spectrum(TM), CONSTRUCT Spectrum SDK(TM), CONSTRUCT Extract Service(TM), ADABAS Delta Save Facility(TM), ADABAS FASTPATH(TM), ADABAS SQL Server(TM), ADABAS Vista(TM) are trademarks of the Company. Trade names and trademarks of other companies appearing in this Prospectus are the property of their respective owners. 3 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. This Prospectus contains forward-looking statements which involve risks and uncertainties. The Company's actual results may differ materially from those results discussed in these forward-looking statements and from the results historically experienced. Factors that might cause such a difference include, but are not limited to, those discussed in "Risk Factors." THE COMPANY Software AG Systems, Inc. is an enterprise solutions company that provides robust software products and related professional services to large organizations with complex computing requirements. The Company's products are used to build and enhance mission-critical applications that require reliability, scaleability and security, such as customer billing systems, cash management systems and inventory management for aircraft maintenance systems. To complement its products, the Company has a comprehensive professional services offering, including consulting, software integration, systems implementation and large project management services. The Company has over 24 years of experience in addressing the needs of organizations with complex enterprise level computing environments. The Company provides enterprise development software products and related professional services used by organizations to develop new mission-critical applications and enterprise enablement software products and related professional services used to extend existing applications to new technologies. The Company's enterprise development products include ADABAS, a high- performance database management system designed to operate with a variety of data types and computer platforms, and NATURAL, a 4GL programming language that enables the development of applications that are portable, scaleable and interoperable across multiple computing platforms. The Company also provides software products and professional services that enable organizations to extend existing mission-critical applications to the Internet and intranets and to create new applications. Products in this area include ENTIRE, a family of middleware products that facilitates the communication between application components across heterogeneous computing environments; SourcePoint, an automated data warehouse management product; iXpress, a Web application assembly and deployment platform; and EntireX/DCOM, a product that uses Microsoft's ActiveX technology to bridge applications written in a variety of programming languages. The Company's professional services that complement its products include application development and enhancement, application reengineering, application porting and rightsizing, Web integration and data warehouse design and implementation. The Company has a rapidly growing Year 2000 Program which offers a new, internally developed software product, INSIGHT 2000 Tool Kit, as well as project management and consulting services to assist customers in the resolution of their year 2000 problem. The Company believes that there are over one billion lines of NATURAL code in the United States alone, most of which are candidates for year 2000 analysis, remediation and testing. To address this opportunity, the Company has hired 34 new consultants in the first six months of 1997 and has opened three Millenium Centers for code analysis, remediation and testing. The Company's strategy is to further leverage its current leadership position in building enterprise applications and data access solutions for large organizations by extending its product and professional service offerings into the Web integration, data warehouse, middleware and year 2000 markets. Key elements of this strategy include enhancing and extending product offerings through acquisitions of complementary products or technologies, internal product development and licensing additional products; leveraging the Company's current base of over 1,300 customers; expanding the Company's professional service offerings; and selling additional products and professional services through the Company's distribution channels. On March 31, 1997, the senior management of the Company and Thayer Equity Investors III, L.P. ("Thayer") acquired approximately 89% of the outstanding Common Stock of the Company (the 4 "Recapitalization"). Prior to the Recapitalization, the Company was a wholly owned subsidiary of Software AG, a large German software company ("SAG"), and the Company's management was constrained in its ability to develop new products, license third-party software, retain capital for expansion and make acquisitions of companies, products or technologies. Management has undertaken several strategic initiatives since the Recapitalization to increase revenue growth and profitability including building a product development organization, developing a product and professional services offering that addresses the year 2000 problem and acquiring R. D. Nickel and Associates Incorporated ("R.D. Nickel"), a software company with a family of application development products. The Company believes that, as an independent entity, it will continue to have significant opportunities to enhance growth. Immediately prior to the Recapitalization, the Company renegotiated its licensing agreement with SAG (as renegotiated, the "Cooperation Agreement") to provide the Company the exclusive and perpetual right to license and service in North America, South America, Japan and Israel (collectively, the "Territory") both existing and future products of SAG. The Company markets and sells its software products and professional services through direct and indirect channels. In North America, the Company sells its products through a direct sales channel that includes over 100 people in 19 sales offices. The Company sells its products in over 20 additional countries through six distributors located in South America, Japan and Israel. In addition, the Company has access to the distribution channels of SAG in over 50 countries outside the Territory. The Company recently implemented a reorganization of its sales force into three groups that focus separately on selling Enterprise License Agreements ("ELAs"), professional services and the Year 2000 Program. The Company believes that this reorganization and the resulting productivity improvements in its sales force have contributed to its revenue growth since the Recapitalization. The Company has over 1,300 customers, consisting primarily of major corporations, government agencies and educational institutions. The Company's customers include Morgan Stanley, Dean Witter, Discover & Co., Delta Air Lines, Inc., Sprint Corporation, Tandy Corporation, Federal Express Corp., Nissan Motor Co., LTD., Cable and Wireless, PLC, Banorte Bank, State of California, State of New Jersey, Federal Bureau of Investigation, Brown University and the University of Texas. Most of the Company's customers have been long term users of its products and services. For the nine months ended June 30, 1997, 97% of the Company's customers who were eligible renewed at least one of their maintenance arrangements. THE OFFERING Common Stock Offered by the Company................. 4,600,000 shares Common Stock Offered by the Selling Stockholders.... 3,100,000 shares Common Stock to be Outstanding after the Offering (1)................................................ 28,937,500 shares Use of Proceeds..................................... To repay indebtedness; to fund an acquisition payment; and for working capital and other general corporate purposes. See "Use of Proceeds." Proposed NYSE Symbol................................ AGS
- -------- (1) Excludes (i) 4,947,525 shares of Common Stock issuable upon the exercise of stock options outstanding at September 26, 1997, granted under the Software AG Systems, Inc. 1997 Stock Option Plan (the "Stock Option Plan") at a weighted average exercise price of $4.90 per share and (ii) 1,927,475 additional shares of Common Stock reserved for future issuance under the Stock Option Plan. See "Management--Stock Option Plan." 5 SUMMARY CONSOLIDATED FINANCIAL DATA (in thousands, except per share data)
PREDECESSOR COMBINED PREDECESSOR SUCCESSOR ------------------------------------------------------- -------- ----------- --------- SIX SIX THREE THREE MONTHS MONTHS MONTHS MONTHS YEARS ENDED DECEMBER 31, ENDED ENDED ENDED ENDED ---------------------------------------------- JUNE 30, JUNE 30, MARCH 31, JUNE 30, 1992 1993 1994 1995 1996 1996 1997 1997 1997 -------- -------- -------- -------- -------- -------- -------- ----------- --------- CONSOLIDATED STATEMENT OF OPERATIONS DATA (1): Software license fees... $ 50,498 $ 51,672 $ 51,832 $ 52,061 $ 52,163 $18,978 $21,595 $ 7,341 $14,254 Maintenance fees........ 51,162 57,264 65,871 65,307 69,702 34,396 35,746 17,352 18,394 Professional service fees................... 24,139 31,175 29,552 35,194 34,975 16,021 20,247 9,948 10,299 -------- -------- -------- -------- -------- ------- ------- ------- ------- Total revenues......... 125,799 140,111 147,255 152,562 156,840 69,395 77,588 34,641 42,947 Gross profit............ 70,866 70,149 77,429 81,239 83,869 35,585 39,972 17,127 22,845 Income (loss) from operations............. (7,873) (4,971) 895 3,188 5,281 (2,976) 3,463 1,310 2,153 Net income (loss)....... (5,587) 6,380 1,382 3,326 6,209 (835) 3,524 1,373 2,151 Net income (loss) per share (2).............. $(0.18) $0.21 $0.05 $0.11 $0.20 $(0.03) $0.13 $0.04 $0.08
JUNE 30, 1997 -------------------------------------- PRO FORMA ACTUAL PRO FORMA (3) AS ADJUSTED (4) -------- ------------- --------------- CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................ $ 8,440 $ 3,340 $ 52,754 Working capital ......................... 14,457 4,257 53,671 Total assets............................. 123,591 125,391 174,805 Total stockholders' equity............... 39,310 36,010 90,524
- -------- (1) The historical financial data set forth for the periods ended, or as of dates, on or prior to March 31, 1997 reflect the results of operations and balance sheet data of the Company prior to the Recapitalization when the Company was a wholly owned subsidiary of SAG and is captioned as "Predecessor." The historical financial data subsequent to March 31, 1997 reflect the results of operations and balance sheet data subsequent to the Recapitalization and is captioned as "Successor." "Combined" data combines financial data for the three months ended March 31, 1997 (prior to the Recapitalization) with financial data for the three months ended June 30, 1997 (subsequent to the Recapitalization). See "Company Background." (2) Shares used in computing net income (loss) per share for all periods presented are 30,583,942, except for the three month and six month periods ended June 30, 1997, which are 27,421,472. See Note 1 of Notes to Consolidated Financial Statements. (3) Pro forma gives effect to (i) the issuance by the Company of a promissory note in the principal amount of $5.1 million in connection with the acquisition of R.D. Nickel and (ii) the expected write-off of $3.3 million of purchased in-process research and development expected to be recorded in connection with the acquisition of R.D. Nickel. (4) As adjusted to give effect to the sale by the Company of 4,600,000 shares of Common Stock offered hereby by it at an assumed initial public offering price of $13.00 per share and the application of the net proceeds therefrom. See "Use of Proceeds." Except as otherwise indicated, the information contained in this Prospectus assumes no exercise of the Underwriters' over-allotment option and reflects a 275-for-1 stock split to be effected as a stock dividend prior to the closing of this offering. Unless the context otherwise requires, all references in this Prospectus to the "Company" or "Software AG Systems, Inc." refer to Software AG Systems, Inc., a Delaware corporation, and its consolidated subsidiaries and assume the consummation of the agreement dated as of September 26, 1997 to acquire R.D. Nickel. See "Company Background." 6 RISK FACTORS This Prospectus contains forward-looking statements which involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements and from the results historically experienced as a result of certain factors, including those in the following risk factors and elsewhere in this Prospectus. In addition to the other information contained in this Prospectus, the following risk factors should be considered carefully in evaluating the Company and its business before purchasing shares of the Common Stock offered hereby. POTENTIAL FLUCTUATIONS IN QUARTERLY PERFORMANCE The Company has experienced significant quarterly and other fluctuations in revenues and operating results and expects these fluctuations to continue in the future. The Company believes that these fluctuations have been primarily attributable to the budgeting and purchasing practices of its customers, and, to a lesser extent, the Company's sales commission practices, which are based partly on annual quotas, and other factors. The Company's revenues and results of operations may also be affected by seasonal trends which have resulted in higher revenues in the Company's third and fourth quarters and lower revenues in its first and second quarters. The Company's professional services fees tend to fluctuate due to the completion or commencement of significant projects, the number of working days in a quarter and the Company's ability to attract, retain and efficiently utilize professional services personnel. The Company's future revenues and operating results may fluctuate as a result of these and other factors, including the demand for the Company's products and services, the timing and cost of new product and service introductions and product enhancements by the Company or its competitors, changes in the mix of products and services sold by the Company and in the mix of sales by distribution channels, commencement or conclusion of significant service contracts, timing of any acquisitions and associated costs, the size, timing and terms of customer orders, including delays in significant orders, changes in pricing policies by the Company or its competitors, the timing of collection of accounts receivable, changes in foreign currency exchange rates, competitive conditions in the industry and general economic conditions. The Company's expense levels are based, in part, on its expectation of future revenues, and expense levels are, to a large extent, fixed in the short term. The Company may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. If revenue levels are below expectations for any reason, the Company's operating results are likely to be materially and adversely affected. The Company's net income may be disproportionately affected by a reduction in revenue because a large portion of the Company's expenses cannot be easily reduced. In addition, the Company intends to increase its operating expenses by expanding its software product development staff, increasing its professional services and sales and marketing operations, expanding its distribution channels and hiring personnel in other operating areas. The Company expects to experience a significant time lag between the date professional services, sales and technical personnel are hired and the date such personnel become fully productive. The timing of such expansion and the rate at which new technical, professional services and sales personnel become productive as well as the timing of the introduction and success of new distribution channels could cause material fluctuations in quarterly results of operations. Furthermore, to the extent such increased operating expenses precede or are not subsequently followed by increased revenues, the Company's business, financial condition and results of operations could be materially and adversely affected. Due to all of the foregoing factors, it is likely that in some future periods the Company's revenues or operating results will be below the expectations of securities analysts or investors, in which case the market price of the Common Stock would likely be materially and adversely affected. See "Management's Discussion and Analysis of Financial Conditions and Results of Operations--Quarterly Results of Operations." RELATIONSHIP WITH SAG The Company has the exclusive right to license and service in North America, South America, Japan and Israel both existing and future products developed or acquired by SAG and, historically, substantially all of 7 the Company's revenues have been derived from the licensing and servicing of products developed by SAG. As a result, a materially adverse change in the financial condition, or a change in control, of SAG could have a material adverse effect on the business, financial condition and results of operations of the Company. In the past, SAG has reported operating losses. In addition, the failure of SAG to develop new products and enhancements to existing products in a timely manner, to provide ongoing technical support for its existing products or to adequately protect its proprietary rights could have a material adverse effect on the business, financial condition and results of operations of the Company. In the past, the Company has experienced delays in receiving products from SAG in a timely manner. The Cooperation Agreement requires SAG to ensure that its products are year 2000 compliant in accordance with a specific timetable and any failure by SAG to adhere to that timetable also could have a material adverse effect on the Company's business, financial condition and results of operations. In 1995 and 1996, the Company's aggregate royalty payments to SAG were $23.9 million and $26.1 million, respectively. To the extent that the Company's aggregate royalty payments to SAG fall below $21 million in any calendar year through the year 2000, the Company generally is required to pay the differential to SAG, and any such payment could have a material adverse effect on the Company's business, financial condition and results of operations. SAG has the exclusive right to license and service in all territories other than North America, South America, Japan and Israel both existing and future products developed or acquired by the Company. As a result, the Company is dependent on SAG for the distribution of these products outside of North America, South America, Japan and Israel. Any failure by SAG to distribute such products in a timely and effective manner could have a material adverse effect on the Company's business, financial condition and results of operations. See "Company Background." TECHNOLOGICAL CHANGE; DEPENDENCE ON NEW PRODUCTS AND PRODUCT ENHANCEMENTS The Company operates in a rapidly changing technological environment in which it must keep pace with new technologies and competitive forces in order to be successful. The Company's success will depend in part on its ability to acquire and/or develop product enhancements and new products that keep pace with continuing changes in technology and evolving customer preferences. There can be no assurance that the Company will be successful in acquiring and/or developing product enhancements or new products to adequately address changing technologies, that it can introduce such products on a timely basis or that any such products or enhancements will be successful in the marketplace. The Company's failure to acquire and/or develop technological improvements or to adapt its products to technological change may have a material adverse effect on the Company's business, financial condition and results of operations. DEPENDENCE ON THE YEAR 2000 MARKET The Company believes that its future growth depends, in part, on increased demand for the Company's products and professional services relating to the resolution of the year 2000 problem. The Company had no revenues from its Year 2000 Program in 1996. For the six months ended June 30, 1997, the Company had revenues of $1.9 million from its Year 2000 Program. Although the Company believes that the market for products and professional services relating to the year 2000 problem will grow as the year 2000 approaches, there can be no assurance that this market will develop to the extent anticipated by the Company. Significant expenses for sales and marketing may be required to educate potential clients of the year 2000 problem and the need for products and professional services addressing the problem. There can be no assurance that potential clients will understand or acknowledge the problem. In addition, affected organizations may not be willing or able to allocate the resources, financial or otherwise, to address the problem in a timely manner. Many organizations may attempt to resolve the problem internally rather than contract with outside firms such as the Company and value added integrators to which the Company may license its software products. Due to these and other factors, development of the market for the Company's year 2000 products and professional services is uncertain and unpredictable. In addition, the Company anticipates that demand for products and professional services that address the year 2000 problem will decline, perhaps rapidly, following the year 2000. 8 If the market for year 2000 products and professional services fails to grow, or grows more slowly than anticipated, the Company's business, financial condition and results of operations could be materially adversely affected. In addition, competition for personnel qualified to perform professional services relating to the year 2000 problem is intense, and there can be no assurance that the Company will be able to retain its employees who provide such professional services or be able to attract and retain such personnel in the future. RELIANCE ON ACQUISITIONS The Company believes that its future growth will depend, in part, on its ability to successfully identify, acquire and then develop promising technologies and products. In addition, the Company intends to build its product development staff in part through acquisitions. The Company signed an agreement on September 26, 1997 to acquire R.D. Nickel. The integration of R.D. Nickel or any other future acquisitions into the Company's existing business could result in certain unanticipated difficulties that could require a disproportionate amount of management's attention and the Company's resources. Furthermore, there can be no assurance that the anticipated benefits of acquiring R.D. Nickel or any other future acquisition will be realized. The Company has limited experience in completing acquisitions and integrating acquired technologies or products into its operations. The Company may compete for future acquisition opportunities with other companies that have significantly greater financial and management resources. While the Company is continually searching for acquisition opportunities, there are presently no agreements with respect to any material acquisition, and there can be no assurance that the Company will be successful in identifying, acquiring and developing products and technology. Acquisitions could also have adverse short-term effects on the Company's operating results, and could result in dilutive issuances of equity securities and the incurrence of debt and contingent liabilities. In addition, many business acquisitions must be accounted for as purchases and, because most software-related acquisitions involve the purchase of significant intangible assets, these acquisitions typically result in substantial amortization charges and may also involve charges for acquired research and development projects, which could have a material adverse effect on the Company's operating results. The Company expects to incur significant charges of this nature in connection with the acquisition of R.D. Nickel. See "Company Background." MANAGEMENT OF PROFESSIONAL SERVICES GROWTH The Company recently has experienced a period of growth in its professional services business, with revenues from such business increasing from $16.0 million for the six months ended June 30, 1996 to $20.2 million for the six months ended June 30, 1997. The Company's ability to staff and manage any future growth in this business effectively will require it to continue to improve its operational, financial and management controls and reporting systems and procedures, and to hire, train, motivate and manage its professional services employees. There can be no assurance that the Company will be able to manage these challenges in an efficient or timely manner. If management of the Company is unable to manage growth effectively, the Company's business, financial condition and results of operations could be materially adversely affected. DEPENDENCE ON CUSTOMER BASE Most of the Company's sales are made to its existing customers. Customers typically pay a one-time licensing fee for use of the Company's products and generally pay an annual charge for maintenance which includes software updates and technical support. There can be no assurance that customers will continue to purchase the Company's products and services, that the Company's historic maintenance renewal rates will continue, or that the Company will be able to maintain its current pricing levels for products and maintenance. Customers' decisions not to renew their maintenance agreements or to renew them on different terms could have a material adverse effect on the Company's business, financial condition and results of operations. RELIANCE ON MAINFRAME COMPUTING ENVIRONMENT The majority of the Company's products are purchased by customers using IBM and IBM-compatible mainframe computing platforms. Worldwide, an increasing proportion of computing functions are being 9 performed on alternative computing platforms, including mid-range computers and client/server networks. A significant shift in the way the Company's customers use computing platforms may have a material adverse effect on the Company's business, financial condition and results of operations. In addition, although the Company believes that any migration away from mainframe computing platforms is subsiding as a result of more cost effective mainframe technology and other factors, any further significant reduction in the role of mainframe or other legacy systems could have a material adverse effect on the Company's business, financial condition and results of operations. PROPRIETARY TECHNOLOGY The Company's success is dependent to a significant extent on its ability to protect its proprietary rights. The Company has no patents and depends upon a combination of trade secret, copyright and trademark laws, license agreements, nondisclosure, assignment of invention and other contractual provisions, and various security measures to protect its proprietary rights. The Company is also dependent on SAG and other third parties that license products to the Company to protect their proprietary rights in such products. There can be no assurance that the legal protections afforded to, or the precautions taken by, the Company or its third-party licensors will be adequate to prevent misappropriation of their respective proprietary rights. In addition, these protections do not prevent independent third-party development of functionally equivalent or superior technologies, products or professional services. Any infringement or misappropriation of the Company's proprietary rights, or those of its third-party licensors, could have a material adverse effect on the Company's business, financial condition and results of operations. In the future, litigation may be necessary to enforce and protect the Company's trade secrets, copyrights and other intellectual property or proprietary rights. The Company may also be subject to litigation to defend against claimed infringement of, or to determine the scope and validity of, the intellectual property or proprietary rights of others. In the event of litigation involving the use of technology by the Company, the Company could be required to expend significant resources to develop non-infringing technology or to obtain licenses to technology in litigation. There can be no assurance that the Company would be successful in such development or that any such licenses would be available on commercially reasonable terms, if at all. Although the Company is not aware that its products, trademarks and other proprietary rights infringe upon the proprietary rights of third parties, there can be no assurance that third parties will not assert infringement claims against the Company and that such claims will not have a material adverse effect on the Company's business, financial condition and results of operations. Any such litigation could result in substantial cost to the Company and divert management's attention from the Company's operations, either of which could have a material adverse effect on the Company's business, financial condition and results of operations. Adverse determinations in such litigation could result in the loss of the Company's proprietary rights, subject the Company to significant liabilities, require the Company to seek licenses from third parties or prevent the Company from selling its products, any one of which would have a material adverse effect on the Company's business, financial condition and results of operations. See "Business--Proprietary Rights." DEPENDENCE ON THIRD-PARTY TECHNOLOGY The Company's products are currently designed, and may in the future be designed, to work on or in conjunction with certain third-party hardware and/or software products. If any of these current or future third- party vendors were to discontinue making their products available to the Company or to licensees of the Company's products or to increase materially the cost to the Company or its licensees to acquire, license or purchase the third-party vendors' products, or if a material problem were to arise in connection with the ability of the Company's products to properly use or operate with third- party hardware and/or software products, the Company's products would have to be redesigned by the Company, or the licensor of the product to the Company, to function with or on alternative third-party products. There can be no assurance that an alternative source of suitable technology would be available or that the Company, or the licensor of the product to the Company, would be able to develop an alternative product on a timely basis or at a reasonable cost. The failure of the Company to license, acquire or develop alternative technologies or products 10 on a timely basis and at a reasonable cost could have a material adverse effect on the Company's business, financial condition and results of operations. COMPETITION The markets for the Company's software products and professional services are highly competitive and characterized by continual change and improvement in technology. The Company provides products and professional services to several markets within the computer industry and encounters competitors within each such market. Many of the Company's competitors have significantly greater financial, marketing and other competitive resources than the Company. The Company's principal competitors currently include IBM Corporation ("IBM"), Oracle Corporation ("Oracle"), Microsoft Corporation ("Microsoft"), Informix Corporation ("Informix"), PLATINUM Technology, Inc. ("PLATINUM"), Sybase, Inc. ("Sybase"), VIASOFT, Inc. ("Viasoft"), Sterling Software, Inc. ("Sterling Software"), Visigenic Software, Inc. ("Visigenic"), SAS Institute, Inc. ("SAS"), Formal Systems, Inc. ("Formal Systems"), BDM International, Inc. ("BDM") and Electronic Data Systems Corporation ("EDS"). Few of the Company's competitors compete in all of the same markets as the Company. In certain markets in which the Company competes, such as the year 2000 market, there are no significant barriers to entry. There can be no assurance that the Company will be able to compete successfully against current and future competitors, and the failure to do so would have a material adverse effect upon the Company's business, financial condition and results of operations. In addition, no assurance can be given that the Company will not be required to make substantial additional investments in connection with its research, development, marketing, sales and customer service efforts in order to meet any competitive threat, or that such required investments will not have a material adverse effect on operating margins. Increased competition could result in reduction in market share, pressure for price reductions and related reductions in gross margins, any of which could materially adversely affect the Company's business, financial condition and results of operations. See "Business--Competition." RISK ASSOCIATED WITH INTERNATIONAL SALES AND OPERATIONS The Company holds the exclusive right to license SAG products in North America, South America, Japan and Israel. In South America, Japan and Israel, the Company has entered into exclusive distributorship arrangements with local firms. The Company's distributorships in South America, Japan and Israel have been in place for 25, 21 and 19 years, respectively, and collectively accounted for 11.3% and 12.4% of the Company's total revenues in 1996 and the first six months of 1997, respectively. There can be no assurance that such distributors will continue to perform as they have historically and that they will not offer products that compete with the Company's products. Additionally, the distributorships generally may be terminated by either party at any time upon compliance with applicable notice provisions. In the event that any of the distributorships were terminated or expired, there can be no assurance that the Company could find an adequate replacement, and such a termination or expiration could have a material adverse effect on the Company's business, financial condition and results of operations. The Company is currently renegotiating its distributorship arrangements in Japan and South America. Sales of products and the provision of services to customers outside the United States accounted for 15.2% and 15.9% of the Company's total revenues in 1996 and the first six months of 1997, respectively. The Company anticipates that revenues from international sales and services will continue to account for a material portion of its total revenues in the foreseeable future. As a result, the Company may be subject to certain risks associated with international operations, including risks associated with foreign currency exchange rate fluctuations and risks associated with the application and imposition of protective legislation and regulations relating to import or export (including export of high technology products) or otherwise resulting from trade, foreign policy or the variability of foreign economic conditions. To date, the Company has not engaged in any hedging transactions to mitigate its risks relating to exchange rate fluctuations. Additional risks associated with international operations include costs of localizing products for foreign countries, lack of acceptance of localized products in foreign countries, difficulties in enforcing intellectual property and contract rights, the burdens of complying with a wide variety of foreign laws, potentially adverse tax consequences, tariffs, quotas 11 and other barriers, and potential difficulties in collecting accounts receivable. There can be no assurance that these and other factors will not have a material adverse effect on the Company's business, financial condition and results of operations. RISK OF SOFTWARE DEFECTS Software products as complex as those offered by the Company frequently contain errors or defects, especially when first introduced or when new versions or enhancements are released. Despite product testing, new products may contain defects or software errors and, as a result, the Company may experience delayed or lost revenues during the period required to correct any defects or errors. Any such defects or errors could result in adverse customer reactions, negative publicity regarding the Company and its products, harm to the Company's reputation, or loss of or delay in market acceptance, or could require expensive product changes, any of which could have a material adverse effect upon the Company's business, financial condition and results of operations. The Company's Cooperation Agreement with SAG provides for only limited warranties by SAG with respect to the software products licensed by it to the Company and, therefore, the Company may be primarily liable to its customers for defects in SAG-supplied software. POTENTIAL FOR CONTRACT LIABILITY The Company markets its products and professional services to customers for developing, building, deploying, maintaining and managing mission-critical computer software applications and for addressing the year 2000 problem. The Company's license and other agreements with its customers typically contain provisions designed to limit the Company's exposure to potential liability claims relating to the Company's products or professional services. Despite this precaution, there can be no assurance that the limitations of liability set forth in the Company's agreements would be enforceable or would otherwise protect the Company from liability for damages. Although the Company has not experienced any material product liability claims to date, the sale and support of the Company's products and professional services may entail the risk of such claims, which could be substantial in light of the use of such products in mission-critical applications. A material product liability claim against the Company, regardless of its outcome, could result in substantial cost to the Company and divert management's attention from the Company's operations. Therefore, any material product liability claim could have a material adverse effect on the Company's business, financial condition and results of operations. DEPENDENCE ON STATE, LOCAL AND OTHER GOVERNMENT CONTRACTS The Company derived 24.8% of its total revenues in 1996 and 20.5% of its total revenues for the first six months of 1997 from selling its products and professional services directly or indirectly to state and local government agencies. In addition, the Company derived 12.0% of its total revenues in 1996 and 1.1% of its total revenues for the first six months of 1997 from selling its products and professional services directly or indirectly to federal government agencies. Any failure to obtain a contract award, or a delay on the part of a government agency in making the award or in ordering products and professional services under an awarded contract, could have a material adverse effect on the Company's business, financial condition and results of operations. Other risks generally involved in government sales include the larger discounts (and thus lower margins) typically involved in government sales, the dependence of the Company on the ability of a prime contractor, if any, to obtain the award and perform the contract, the unpredictability of funding for various government programs, the ability of the government agency to unilaterally terminate the contract, and the dependence on the creditworthiness of any prime contractor (some of which are relatively small organizations without substantial funds). The Company anticipates that state, local and other government sales will continue to represent a significant but fluctuating portion of its revenues in the future. FIXED PRICE CONTRACTS Revenues from fixed price contracts have represented approximately 8% and 11% of the Company's total revenues for 1996 and the first six months of 1997, respectively. In making proposals for fixed price contracts, 12 the Company relies on its estimated costs for completing the project. These estimates reflect, among other factors, judgments as to the efficiencies of the Company's technology and services as applied to the project. Any increased or unexpected costs or unanticipated delays in connection with the performance of fixed price contracts could have a material adverse effect on the Company's business, financial condition and results of operations. In the past, the Company has suffered material losses on fixed price contracts. DEPENDENCE ON KEY PERSONNEL; NEED TO HIRE ADDITIONAL PERSONNEL The Company's future performance depends to a significant degree upon the continued service of the key members of its management, as well as marketing, sales, consulting and product development personnel, and its ability to attract and retain new management and other personnel. The loss of any one or more of the Company's key personnel could have a material adverse effect on the Company's business, financial condition and results of operations. Company employees are employed at-will and the Company has no fixed-term employment agreements with any of its employees. While historically the Company primarily has relied on SAG for product development, the Company believes its future success will also depend in part upon its ability to develop its own technologies and products and, consequently, upon its ability to attract and retain highly skilled technical and product development personnel. Competition for such personnel is intense, and there can be no assurance that the Company will be able to retain its key employees or that it will be successful in attracting, integrating and retaining new personnel in the future. Failure to attract, integrate and retain such personnel could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, the Company currently has approximately 110 independent contractors who work as technical consultants primarily in connection with the Company's professional service offerings. Competition for such contractors is intense and the failure to continue to attract and hire such contractors when they are needed could have a material adverse effect on the Company's business, financial condition and results of operations. CONTROL BY OFFICERS, DIRECTORS AND THAYER Upon completion of this offering, the Company's officers and directors, and their affiliates, in the aggregate, will have voting control over approximately 72% of the Company's outstanding Common Stock. In particular, Thayer and its affiliates will have voting control over approximately 60% of the Company's outstanding Common Stock. As a result, these stockholders will be able to control all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. The voting power of Thayer and the Company's officers and directors under certain circumstances could have the effect of preventing or delaying a change in control of the Company. See "Principal and Selling Stockholders." ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS The Company's Second Amended and Restated Certificate of Incorporation and Second Amended and Restated Bylaws contain certain provisions that may have the effect of discouraging a third party from making an acquisition proposal for the Company. Such provisions could limit the price that investors might be willing to pay in the future for shares of the Company's Common Stock. For example, the Board of Directors is authorized to issue, without stockholder approval, up to 25,000,000 shares of preferred stock, $.01 par value, of the Company (the "Preferred Stock") with voting, conversion and other rights and preferences that may be superior to the Common Stock and that could adversely affect the voting power or other rights of the holders of Common Stock. The issuance of Preferred Stock or of rights to purchase Preferred Stock could be used to discourage an unsolicited acquisition proposal. Other provisions impose various procedural and other requirements that could make it more difficult for shareholders to effect certain corporate actions. In addition, the Company's Board of Directors is divided into three classes, each of which will serve for a staggered three-year term, which may make it more difficult for a third party to gain control of the Company's Board of Directors. Certain provisions of the Cooperation Agreement with SAG may also have the effect of discouraging a third party from making an acquisition proposal for the Company. See "Company Background" and "Description of Capital Stock--Certain Provisions of Delaware Law, the Certificate of Incorporation and the Bylaws." 13 NO PRIOR MARKET FOR COMMON STOCK AND POSSIBLE VOLATILITY OF COMMON STOCK PRICE Prior to this offering, there has been no public market for the Common Stock, and there can be no assurance that an active trading market will develop following this offering. The initial public offering price will be determined through negotiations among the Company and the Underwriters and may not be indicative of the market price of the Common Stock after the completion of this offering. See "Underwriting" for factors to be considered in determining the initial public offering price. The market price for the Common Stock after this offering may be volatile and may be affected by a number of factors, including the announcement of new products, product enhancements or services by the Company or its competitors, quarterly variations in the Company's or its competitors' results of operations, changes in earnings estimates or recommendations by securities analysts, developments in the Company's industry, general market conditions and other factors, including factors unrelated to the operating performance of the Company or its competitors. In addition, stock prices for many companies in the technology sector have experienced wide fluctuations that often have been unrelated to the operating performance of such companies. Such factors and fluctuations, as well as general economic, political and market conditions, such as recessions, may materially adversely affect the market price of the Company's Common Stock. SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this offering, the Company will have outstanding 28,937,500 shares of Common Stock. Of these shares, the 7,700,000 shares offered hereby will be freely tradable without restriction in the public market. An additional 2,750,000 shares will be eligible for sale beginning 90 days after the date of this Prospectus (of which will be subject to 180- day lock-up agreements between certain shareholders and the Representatives of the Underwriters), and 18,487,500 shares will be eligible for sale beginning March 31, 1998 (of which will be subject to 180-day lock-up agreements). Robertson, Stephens & Company may, in its sole discretion and at any time without notice, release all or any portion of the securities subject to the lockup agreements. In addition, the Company intends to file registration statements on Form S-8 under the Securities Act of 1933, as amended (the "Securities Act"), on or about the date of this Prospectus to register all shares of Common Stock issued or reserved for issuance under the Stock Option Plan. Sales of substantial amounts of Common Stock or the availability of such shares for sale could adversely affect prevailing market prices of the Common Stock. See "Shares Eligible for Future Sale" and "Underwriting." DILUTIVE EFFECT OF THE OFFERING Purchasers of Common Stock in this offering will experience immediate and significant dilution of approximately $10.73 in the net tangible book value per share of the Common Stock so purchased, based on an assumed initial public offering price of $13.00 per share. This will result in the existing stockholders of the Company realizing an immediate accretion in the net tangible book value of their investment. See "Dilution." DIVIDENDS The Company does not anticipate paying any cash dividends on its Common Stock in the foreseeable future. See "Dividend Policy." 14 COMPANY BACKGROUND In February 1981, the Company was incorporated as a Delaware corporation and established as a holding company for Software AG Americas, Inc. Since 1973, Software AG Americas, Inc. has primarily licensed and serviced SAG products in the United States and other countries through a series of licensing agreements with SAG. In June 1981, the Company sold approximately 30% of its outstanding common stock in an initial public offering. In 1988, SAG purchased all of the outstanding stock of the Company, thereby acquiring control of the Company. On March 31, 1997, the Company consummated the Recapitalization, pursuant to which Thayer and the senior management of the Company acquired approximately 89% of the outstanding Common Stock of the Company. See "Certain Relationships and Transactions." The Company believes that the Recapitalization provides several significant benefits to the Company, such as access to growth and development capital, equity ownership incentives for management and other key employees, and the opportunity and ability to pursue acquisitions and internal product development. Immediately prior to the Recapitalization, the Company and SAG entered into the Cooperation Agreement which generally (i) provides the Company the exclusive and perpetual right to license and service in North America, South America, Japan and Israel (the "Territory") both existing and future products developed or acquired by SAG and (ii) provides SAG the exclusive and perpetual right to license and service outside the Territory both existing and future products developed or acquired by the Company. Each of the Company and SAG must pay the other 24% of the net revenues derived from such licenses. This 24% royalty rate is fixed for 20 years. Except under certain circumstances, the Company's minimum annual royalty payment to SAG through the year 2000 must equal at least $21 million. In 1995 and 1996, the Company's aggregate royalty payments to SAG were $23.9 million and $26.1 million, respectively. See "Certain Relationships and Transactions." The Company anticipates that the Cooperation Agreement and SAG's equity interest in the Company will promote close collaboration between the Company and SAG. See "Principal and Selling Stockholders." The Cooperation Agreement contains certain safeguards to ensure that the Company and SAG are able to continue to exercise their respective rights to license and service each other's products in their respective territories. These safeguards include rights of first refusal with respect to transfers of proprietary rights to third parties and restrictions on SAG from competing against the Company in the Territory and on the Company from competing against SAG outside the Territory. The Cooperation Agreement also prohibits either party from consummating a change of control unless such party's successor agrees to be bound by the terms of the Cooperation Agreement with respect to all existing products of such party and future products that are materially derived therefrom. In addition, SAG is precluded from consummating a change of control unless its successor agrees to continue supporting the research and development of SAG's then existing and planned products for two years following the change in control. The Company is precluded from consummating a change in control in which certain specified entities would be its successor unless such entities agree to pay the Company's minimum annual royalty payments to SAG until the later of December 31, 2000 or two years following the change in control. The Company entered into an agreement on September 26, 1997 to acquire R.D. Nickel, a software company that develops, licenses and supports a family of application development products, including CONSTRUCT and CONSTRUCT Spectrum. Additionally, R.D. Nickel has served as the exclusive distributor of the Company's products in Canada since 1973. In the year ended November 30, 1996 and for the seven months ended June 30, 1997, R.D. Nickel had revenues of US$13.6 million and US$9.4 million, respectively. The Company purchased R.D. Nickel for Cdn$14.0 million (approximately US$10.1 million), consisting of a Cdn$7.0 million promissory note and Cdn$7.0 million in cash. The Company is required to repay the promissory note with proceeds from this offering. In connection with this acquisition, the Company expects to record approximately US$6.7 million of goodwill, which will be amortized on a straight-line basis over 10 years, and to take a one-time charge of approximately US$3.3 million in the quarter ending September 30, 1997 associated with the purchase of incomplete or in-process research and development. 15 USE OF PROCEEDS The net proceeds to the Company from the sale of the 4,600,000 shares of Common Stock offered by the Company hereby are estimated to be approximately $54.5 million, assuming an initial public offering price of $13.00 per share and after deducting the underwriting discounts and commissions and estimated offering expenses payable by the Company. The Company will not receive any proceeds from the sale of Common Stock by the Selling Stockholders. The principal purposes of this offering are to increase the Company's equity capital, to establish a public market for the Company's Common Stock, to provide enhanced equity incentives to attract and retain key employees, to increase the Company's visibility in its markets, to facilitate future access to public capital markets and to obtain additional working capital. The Company will use approximately Cdn$7.1 million (US$5.1 million) of the net proceeds to prepay a promissory note issued by the Company in connection with the acquisition of R.D. Nickel. This note bears simple interest at a rate of 9% per annum. It has a stated maturity date of September 30, 1999, but requires prepayment upon consummation of this offering. In accordance with the terms of the acquisition of R.D. Nickel, upon consummation of this offering, the Company will owe an additional payment of Cdn$500,000 (approximately US$360,000) in connection with the R.D. Nickel acquisition, which amount will be paid from the net proceeds of this offering. See "Company Background." The remainder of the net proceeds of this offering will be used for working capital and other general corporate purposes, including financing product development and augmenting the Company's professional services business. A portion of the net proceeds may also be used to fund acquisitions of complementary businesses, products or technologies. The Company is not currently a party to any agreements with respect to any acquisitions. Pending such uses, the Company intends to invest the net proceeds in short-term, interest bearing, investment grade securities. DIVIDEND POLICY In 1995 and 1996, while a wholly owned subsidiary of SAG, the Company paid aggregate dividends to SAG of $1.7 million and $9.0 million, respectively. The Company does not anticipate paying any cash dividends on its Common Stock in the foreseeable future. Certain of the Company's lines of credit have the effect of restricting the ability of the Company to pay cash dividends. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" and Note 3 of Notes to Consolidated Financial Statements. 16 CAPITALIZATION The following table sets forth as of June 30, 1997 the capitalization and short term debt of the Company (i) on an actual basis, (ii) on a pro forma basis to reflect the acquisition of R.D. Nickel and (iii) on a pro forma as adjusted basis to give effect to the sale by the Company of the 4,600,000 shares of Common Stock offered by it hereby at an assumed initial public offering price of $13.00 per share and the application of the net proceeds therefrom. See "Use of Proceeds." This table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus.
JUNE 30, 1997 --------------------------------- PRO FORMA ACTUAL PRO FORMA (1) AS ADJUSTED ------- ------------- ----------- (in thousands) Short term debt.......................... $ -- $ 5,100 $ -- ======= ======= ======= Stockholders' equity: Preferred Stock, $.01 par value; 25,000,000 shares authorized (2); none issued and outstanding, actual, pro forma or pro forma as adjusted ...... -- -- -- Common Stock, $.01 par value; 75,000,000 shares authorized (2); 24,337,500 shares issued and outstanding, actual and pro forma; 28,937,500 shares issued and outstanding, pro forma as adjusted (3)..................................... 243 243 289 Additional paid-in capital............... 36,916 36,916 91,384 Retained earnings........................ 2,151 (1,149) (1,149) ------- ------- ------- Total stockholders' equity............. 39,310 36,010 90,524 ------- ------- ------- Total capitalization.................. $39,310 $36,010 $90,524 ======= ======= =======
- -------- (1) Pro forma gives effect to (i) the issuance by the Company of a promissory note in the principal amount of $5.1 million in connection with the acquisition of R.D. Nickel and (ii) the expected write-off of $3.3 million of purchased in-process research and development to be recorded in connection with the acquisition of R.D. Nickel. (2) Authorized shares give effect to an amendment to the Company's certificate of incorporation filed subsequent to June 30, 1997. (3) Excludes (i) 3,059,650 shares of Common Stock issuable upon the exercise of stock options outstanding at June 30, 1997, granted under the Stock Option Plan at an exercise price of $1.47 per share, (ii) 137,500 shares of Common Stock issued subsequent to June 30, 1997, (iii) 1,887,875 shares of Common Stock issuable upon the exercise of stock options granted under the Stock Option Plan subsequent to June 30, 1997 at a weighted average exercise price of $10.45 per share and (iv) 1,927,475 shares of Common Stock reserved for future issuance pursuant to the Stock Option Plan. See "Management--Stock Option Plan." 17 DILUTION The net tangible book value of the Company as of June 30, 1997 was $11.2 million, or $0.46 per share of outstanding Common Stock. Net tangible book value per share is equal to the Company's total tangible assets less total liabilities, divided by the total number of shares of Common Stock outstanding. After giving effect to the sale of the 4,600,000 shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $13.00 per share and the receipt of the estimated net proceeds therefrom, the adjusted net tangible book value of the Company as of June 30, 1997 would have been $65.7 million, or $2.27 per share. This represents an immediate increase in net tangible book value of $1.81 per share to existing stockholders and an immediate dilution of $10.73 per share to investors purchasing shares of Common Stock in this offering. The following table illustrates this per share dilution: Assumed initial public offering price per share.............. $13.00 ------ Net tangible book value per share at June 30, 1997......... $0.46 Increase per share attributable to new investors........... 1.81 ----- Net tangible book value per share after this offering........ 2.27 ------ Dilution per share to new investors.......................... $10.73 ======
The following table summarizes as of June 30, 1997 the differences between the number of shares of Common Stock purchased from the Company, the total consideration paid and the average price per share paid by existing stockholders and by the new investors at an assumed initial public offering price of $13.00 per share.
SHARES PURCHASED (1) TOTAL CONSIDERATION ------------------------------------------ AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ------------ --------------------- ------- ------------- Existing stockholders (1).................... 24,337,500 84.1% $34,765,000 36.8% $ 1.43 New investors........... 4,600,000 15.9 59,800,000 63.2% 13.00 ------------ ------- ----------- ----- Total................. 28,937,500 100.0% $94,565,000 100.0% ============ ======= =========== =====
- -------- (1) Sales by the Selling Stockholders in this offering will cause the number of shares of Common Stock held by existing stockholders to be reduced to 21,237,500 shares, or 73.4% of the total number of shares of Common Stock to be outstanding after this offering (20,660,000 shares, or 68.6%, if the Underwriters' over-allotment option is exercised in full), and will increase the number of shares of Common Stock held by the new investors to 7,700,000 shares, or 26.6% of the total number of shares of Common Stock to be outstanding immediately after this offering (8,855,000 shares, or 29.4%, if the Underwriters' over-allotment option is exercised in full). See "Principal and Selling Stockholders." The calculation of net tangible book value per share and the other computations above assume no exercise of outstanding options under the Stock Option Plan. As of September 26, 1997, 4,947,525 shares of Common Stock were issuable upon exercise of outstanding stock options at a weighted average exercise price of $4.90 per share. To the extent the outstanding options are exercised, or additional stock options are granted and exercised at a price per share below the initial public offering price in the future, there will be further dilution to new investors. See "Management--Stock Option Plan." 18 SELECTED CONSOLIDATED FINANCIAL DATA The consolidated statement of operations data set forth below for each of the years ended December 31, 1994, 1995 and 1996 and the consolidated balance sheet data as of December 31, 1995 and 1996 have been derived from the Company's consolidated financial statements, which statements have been audited by KPMG Peat Marwick LLP, independent certified public accountants, and are included elsewhere in this Prospectus. The consolidated balance sheet data at December 31, 1994 is derived from the Company's consolidated financial statements, which statements have been audited by KPMG Peat Marwick LLP and are not included in this Prospectus. The financial data presented as of and for the years ended December 31, 1992 and 1993 are derived from the Company's financial statements, which statements have been audited by other auditors and are not included in this Prospectus. The financial data presented as of June 30, 1997 and for the six months ended June 30, 1996 and 1997 are derived from unaudited consolidated financial statements included elsewhere in this Prospectus, which, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial data for such periods. The results of operations for the six months ended June 30, 1997 are not necessarily indicative of the results to be expected for the full year or for any future period. The selected consolidated financial data set forth below should be read in conjunction with the Consolidated Financial Statements and Notes thereto and with "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this Prospectus. The historical financial data set forth below for the periods ended, or as of the dates prior to, March 31, 1997 reflect the results of operations and balance sheet data of the Company prior to the Recapitalization when the Company was a wholly owned subsidiary of SAG and is captioned as "Predecessor." The historical financial information subsequent to March 31, 1997 reflect the results of operations and balance sheet data subsequent to the Recapitalization and is captioned as "Successor." See "Company Background."
PREDECESSOR COMBINED (1) PREDECESSOR SUCCESSOR ------------------------------------------------------- ------------ ----------- --------- SIX SIX THREE THREE MONTHS MONTHS MONTHS MONTHS YEAR ENDED DECEMBER 31, ENDED ENDED ENDED ENDED ---------------------------------------------- JUNE 30, JUNE 30, MARCH 31, JUNE 30, 1992 1993 1994 1995 1996 1996 1997 1997 1997 -------- -------- -------- -------- -------- -------- ------------ ----------- --------- (in thousands, except per share data) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues: Software license fees........ $ 50,498 $ 51,672 $ 51,832 $ 52,061 $ 52,163 $18,978 $21,595 $ 7,341 $14,254 Maintenance fees............. 51,162 57,264 65,871 65,307 69,702 34,396 35,746 17,352 18,394 Professional service fees.... 24,139 31,175 29,552 35,194 34,975 16,021 20,247 9,948 10,299 -------- -------- -------- -------- -------- ------- ------- ------- ------- Total revenues............. 125,799 140,111 147,255 152,562 156,840 69,395 77,588 34,641 42,947 -------- -------- -------- -------- -------- ------- ------- ------- ------- Cost of revenues: Software license............. 12,046 14,331 13,513 15,244 14,120 5,049 6,172 2,098 4,074 Maintenance.................. 23,457 29,796 29,823 23,488 25,885 12,990 12,782 6,205 6,577 Professional services........ 19,430 25,835 26,490 32,591 32,966 15,771 18,662 9,211 9,451 -------- -------- -------- -------- -------- ------- ------- ------- ------- Total cost of revenues .... 54,933 69,962 69,826 71,323 72,971 33,810 37,616 17,514 20,102 -------- -------- -------- -------- -------- ------- ------- ------- ------- Gross profit.................. 70,866 70,149 77,429 81,239 83,869 35,585 39,972 17,127 22,845 -------- -------- -------- -------- -------- ------- ------- ------- ------- Operating expenses: Software product development................. 6,219 3,045 900 900 1,372 1,001 283 -- 283 Sales and marketing.......... 36,239 43,439 50,422 52,512 48,677 21,427 18,794 7,317 11,477 Administrative and general... 36,281 28,636 25,212 24,639 28,539 16,133 17,432 8,500 8,932 -------- -------- -------- -------- -------- ------- ------- ------- ------- Total operating expenses... 78,739 75,120 76,534 78,051 78,588 38,561 36,509 15,817 20,692 -------- -------- -------- -------- -------- ------- ------- ------- ------- Income (loss) from operations................... (7,873) (4,971) 895 3,188 5,281 (2,976) 3,463 1,310 2,153 Other income and expense, net.......................... 1,431 7,599 1,882 2,449 5,230 1,640 2,575 978 1,597 -------- -------- -------- -------- -------- ------- ------- ------- ------- Income (loss) before cumulative effect of change in accounting principle and income taxes................. (6,442) 2,628 2,777 5,637 10,511 (1,336) 6,038 2,288 3,750 Cumulative effect of change in accounting principle......... -- 5,070 -- -- -- -- -- -- -- Income tax provision (benefit) ............................. (855) 1,318 1,395 2,311 4,302 (501) 2,514 915 1,599 -------- -------- -------- -------- -------- ------- ------- ------- ------- Net income (loss)............. $ (5,587) $ 6,380 $ 1,382 $ 3,326 $ 6,209 $ (835) $ 3,524 $ 1,373 $ 2,151 ======== ======== ======== ======== ======== ======= ======= ======= ======= Net income (loss) per share (2).......................... $ (0.18) $ 0.21 $ 0.05 $ 0.11 $ 0.20 $(0.03) $ 0.13 $ 0.04 $ 0.08 ======== ======== ======== ======== ======== ======= ======= ======= ======= Dividends..................... $ -- $ -- $ 600 $ 1,700 $ 9,000 $ -- $ -- $ -- $ -- - ------------------------------------- ======== ======== ======== ======== ======== ======= ======= ======= =======
PREDECESSOR SUCCESSOR ------------------------------------------ --------- DECEMBER 31, ------------------------------------------ JUNE 30, 1992 1993 1994 1995 1996 1997 ------- ------- ------- -------- -------- --------- (in thousands) CONSOLIDATED BALANCE SHEET DATA: Working capital (deficit).............. $ 7,239 $ 6,355 $ 5,167 $ (2,465) $ 30,421 $ 14,457 Total assets............ 75,647 74,175 86,466 125,612 158,088 123,591 Long-term debt, less current maturities..... 5,942 3,212 431 -- -- -- Total stockholders' equity................. 23,810 30,190 30,972 32,599 29,808 39,310
- ------- (1) Reflects combined data for the three months ended March 31, 1997 (prior to the Recapitalization) and for the three months ended June 30, 1997 (subsequent to the Recapitalization). (2) Shares used in computing net income (loss) per share for all periods presented are 30,583,942, except for the three month and six month periods ended June 30, 1997 which are 27,421,472. See Note 1 of Notes to Consolidated Financial Statements. 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion contains forward-looking statements which involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in "Risk Factors." OVERVIEW The Company is an enterprise solutions company that provides robust software products and related professional services to large organizations with complex computing requirements. The Company's revenues are primarily derived from license fees for the use of software products, fees for maintenance related to those products and fees for professional services. Since 1973, the Company has primarily licensed and serviced SAG products in the United States and other countries through a series of licensing agreements with SAG. In 1981, the Company sold approximately 30% of its outstanding Common Stock in an initial public offering. In 1988, SAG purchased all of the outstanding Common Stock of the Company, thereby acquiring control of the Company. On March 31, 1997, the Company consummated the Recapitalization, pursuant to which the senior management of the Company and Thayer acquired approximately 89% of the outstanding Common Stock of the Company. The Company believes the Recapitalization provides several significant benefits to the Company such as access to growth and development capital, equity ownership incentives for management and other key employees, and the opportunity and ability to pursue acquisitions and internal product development. See "Company Background" and "Certain Relationships and Transactions." Prior to the Recapitalization, the Company's management team was constrained by SAG in its ability to develop new products, license third-party software, retain capital for expansion and make acquisitions of companies, products or technologies. The Company's relatively low software product development expenditures resulted, in part, from these constraints. Management has undertaken several strategic initiatives since the Recapitalization to increase revenue growth and profitability, including building a product development organization, developing a product and professional services offering that addresses the year 2000 problem and acquiring R.D. Nickel. Software license fees are generated through the licensing of enterprise development and enterprise enablement products. Enterprise development products include ADABAS, a high-performance data management system, and NATURAL, a 4GL programming language. Enterprise enablement software products include ENTIRE, a family of middleware products; INSIGHT 2000 Tool Kit, a software product that addresses the year 2000 problem; and a number of Company and third-party products which address the data warehouse and Web enablement markets. The Company recognizes license fee revenues in accordance with Statement of Position 91-1, "Software Revenue Recognition" issued by the American Institute of Certified Public Accountants. Software license fee revenues are recognized upon shipment of the software if the software is not subject to customer acceptance or significant post-delivery obligations. If the license is subject to customer acceptance or significant post-delivery obligations, the recognition of license fees is deferred until customer acceptance or the significant post-delivery obligations have been met. The Company also provides maintenance and support services to its customers. Such maintenance services are typically provided in accordance with annual agreements, with maintenance fees charged as a percentage of current software license fees. Maintenance fees are recognized ratably over the term of the agreement. Software license and maintenance fees are derived from both direct and indirect channels. In the United States, Mexico and Canada, a direct sales and support structure is utilized through the Company's wholly 20 owned subsidiaries. In the remainder of the Territory, exclusive distributors sell the Company's products and provide maintenance support for which they pay the Company a royalty. The Company has historically derived the majority of its revenues from sales within the United States. Sales outside of the United States represented 13.9%, 16.2% and 15.9% of the Company's total revenues in 1995, 1996 and the six months ended June 30, 1997, respectively. The Company also generates revenues through the provision of professional services associated with the implementation and deployment of the Company's enterprise development and enterprise enablement products and through educational services. The Company recognizes revenue from professional services as such services are performed. The Company's professional services offerings include consulting, software integration, system implementation, large project management and year 2000 analysis and remediation. These services are delivered on either a time and materials basis or a fixed price basis. The Company is currently moving away from fixed price professional services contracts. However, year 2000 business will continue to be conducted using primarily fixed price contracts based on the number of lines of code analyzed or remediated, as opposed to a specific and defined set of deliverables as is the case in traditional fixed price contracts. The Company offers its products and professional services to certain customers under ELAs. ELAs are typically long term contracts of three to five years which include the provision of software products, professional services and maintenance support. Revenues from software licenses sold as part of an ELA are recognized as revenue when such products are shipped and revenue from professional services and maintenance support are recognized as provided. As of June 30, 1997, 91 of the Company's customers had entered into ELA agreements with the Company. 21 RESULTS OF OPERATIONS The following table sets forth certain financial data for the periods indicated expressed as a percentage of total revenues.
PREDECESSOR COMBINED (1) ---------------------------------------------- ------------ SIX MONTHS SIX MONTHS YEAR ENDED ENDED ENDED DECEMBER 31, JUNE 30, JUNE 30, ---------------------------------- ---------- ------------ 1992 1993 1994 1995 1996 1996 1997 ----- ----- ----- ----- ----- ---------- ------------ Revenues: Software license fees................. 40.1% 36.9% 35.2% 34.1% 33.3% 27.3% 27.8% Maintenance fees...... 40.7 40.9 44.7 42.8 44.4 49.6 46.1 Professional services fees................. 19.2 22.2 20.1 23.1 22.3 23.1 26.1 ----- ----- ----- ----- ----- ----- ----- Total revenues...... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 ----- ----- ----- ----- ----- ----- ----- Cost of revenues: Software license...... 9.6 10.2 9.2 10.0 9.0 7.3 8.0 Maintenance........... 18.6 21.3 20.3 15.4 16.5 18.7 16.5 Professional services............. 15.4 18.4 18.0 21.4 21.0 22.7 24.1 ----- ----- ----- ----- ----- ----- ----- Total cost of revenues........... 43.6 49.9 47.5 46.8 46.5 48.7 48.6 ----- ----- ----- ----- ----- ----- ----- Gross profit............ 56.4 50.1 52.5 53.2 53.5 51.3 51.4 ----- ----- ----- ----- ----- ----- ----- Operating expenses: Software product development.......... 4.9 2.2 0.6 0.6 0.9 1.4 0.4 Sales and marketing... 28.8 31.0 34.2 34.4 31.0 30.9 24.2 Administrative and general.............. 28.8 20.4 17.1 16.2 18.2 23.2 22.5 ----- ----- ----- ----- ----- ----- ----- Total operating ex- penses............. 62.5 53.6 51.9 51.2 50.1 55.5 47.1 ----- ----- ----- ----- ----- ----- ----- Income (loss) from operations............. (6.1) (3.5) 0.6 2.0 3.4 (4.2) 4.3 Other income and expense, net .......... 1.1 5.4 1.3 1.6 3.3 2.4 3.3 ----- ----- ----- ----- ----- ----- ----- Income (loss) before cumulative effect of change in accounting principle and income taxes........... (5.0) 1.9 1.9 3.6 6.7 (1.8) 7.6 Cumulative effect of change in accounting principle.............. -- 3.6 -- -- -- -- -- Income tax provision (benefit).............. (0.7) 0.9 0.9 1.5 2.6 (0.7) 3.3 ----- ----- ----- ----- ----- ----- ----- Net income (loss)....... (4.3)% 4.6% 1.0% 2.1% 4.1% (1.1)% 4.3% ===== ===== ===== ===== ===== ===== ===== The following table sets forth, for each component of revenues, the cost of such revenues as a percentage of such revenues for the periods indicated: PREDECESSOR COMBINED (1) ---------------------------------------------- ------------ SIX MONTHS SIX MONTHS YEAR ENDED ENDED ENDED DECEMBER 31, JUNE 30, JUNE 30, ---------------------------------- ---------- ------------ 1992 1993 1994 1995 1996 1996 1997 ----- ----- ----- ----- ----- ---------- ------------ Software license...... 23.9% 27.7% 26.1% 29.3% 27.1% 26.6% 28.6% Maintenance........... 45.8 52.0 45.3 36.0 37.1 37.8 35.8 Professional services............. 80.5 82.9 89.6 92.6 94.3 98.4 92.2
- -------- (1) Reflects combined data for the three months ended March 31, 1997 (prior to the Recapitalization) and for the three months ended June 30, 1997 (subsequent to the Recapitalization). 22 SIX MONTHS ENDED JUNE 30, 1997 AND 1996 Revenues Total Revenues. The Company's revenues are currently derived from fees from licensing the Company's software products, fees for providing maintenance to customers which have licensed the Company's software products and fees from professional services. The Company's total revenues were $77.6 million and $69.4 million for the six months ended June 30, 1997 and 1996, respectively, representing an increase of 11.8%. Software License Fees. The Company's software license fees are derived primarily from the licensing of the Company's enterprise development and enterprise enablement products. Software license fees were $21.6 million and $19.0 million for the six months ended June 30, 1997 and 1996, respectively, representing an increase of 13.7%. This increase was primarily attributable to the reorganization of the direct sales force at the beginning of 1997 into three groups, with one focused on software products, another on professional services and a third on the Year 2000 Program. Maintenance Fees. The Company's maintenance fees are derived primarily from providing technical support to customers which have licensed the Company's enterprise development and enterprise enablement products. Maintenance is available in various levels of support and priced as a percentage of the software license fees. The most commonly contracted level is priced at 18% of the applicable license fee at the time of renewal. Software customers are not required to renew their maintenance agreements and renewals can be expected only if the customer continues to use the licensed product. Maintenance fees were $35.7 million and $34.4 million for the six months ended June 30, 1997 and 1996, respectively, representing an increase of 3.8%. This increase was due primarily to the effect of price increases, combined with an increase in the maintenance base from the sale of new software licenses. Professional Services Fees. The Company's professional services fees are derived primarily from work performed by the Company on behalf of customers who have licensed the Company's software products. Professional services fees were $20.2 million and $16.0 million for the six months ended June 30, 1997 and 1996, respectively, representing an increase of 26.3%. This increase was attributable to two sources. Professional services fees grew 14.5% primarily due to additional new business generated by the reorganization of the sales force as noted above. In addition, professional services fees in 1997 include $1.9 million from work performed as a part of the Company's Year 2000 Program, which began in 1997. Cost of Revenues Software License. Software license costs consist primarily of royalties paid to third parties. Software license costs were $6.2 million and $5.0 million for the six months ended June 30, 1997 and 1996, respectively, representing 28.6% and 26.6% of software license fees for each respective period. The increase in dollar amount was due primarily to an increase in sales volume. The percentage increase was primarily due to a shift in product mix since royalty rates on third-party products vary from 24% to 40%. Maintenance. Maintenance costs consist of royalties paid to third parties, the costs of providing customer support and the distribution costs of new releases. Maintenance costs were $12.8 million and $13.0 million for the six months ended June 30, 1997 and 1996, respectively, representing 35.8% and 37.8% of maintenance fees for each respective period. This decrease was primarily attributable to expense reductions relating to customer support and product release personnel. This reduction program was begun in late 1994, and substantially implemented by June 1997. The program reduced the number of support and product release personnel from 136 at December 31, 1994 to 78 at June 30, 1997. The reduction of personnel was accompanied by a reorganization of responsibilities within the support function, which was designed to improve productivity and the level of customer support. This reorganization involved a shift in focus from a customer specialization to product specialization. The change was augmented by the addition of new customer call handling and problem solving tools, combined with more effective product release methods. 23 Professional Services. Professional services costs consist of labor and related overhead costs for the people performing the service. Such costs include costs for project management, quality control, proposal writing and project review. Professional services costs were $18.7 million and $15.8 million for the six months ended June 30, 1997 and 1996, respectively, representing 92.2% and 98.4% of professional services fees for each respective period. The improvement in margin was primarily attributable to improved performance on fixed price contracts combined with improved utilization of resources. Both of these improvements were derived from process changes initiated in late 1995 that included enhanced infrastructure and tools for project management, improved estimating and bidding processes, and expanded quality control procedures. Operating Expenses Software Product Development. Software product development expenses include all labor and overhead costs related to the development of software products owned by the Company. Software product development costs were $0.3 million and $1.0 million for the six months ended June 30, 1997 and 1996, respectively, representing 1.4% and 5.3% of software license fees for each respective period. This decrease was the result of a sale, with transfer of the applicable software product development costs, of one of the Company's products in 1996 to a third party. Prior to the Recapitalization, the Company's ability to invest in software product development was constrained. The Company expects software product development expenses to increase in the future as a percentage of software license fees. Sales and Marketing. Sales and marketing expenses consist primarily of employee salaries, benefits, commissions, and associated overhead costs, and the cost of marketing programs, direct mailings, public relations, trade shows, seminars, advertising and related communications. Sales and marketing expenses were $18.8 million and $21.4 million for the six months ended June 30, 1997 and 1996, respectively, representing 24.2% and 30.9% of total revenues for each respective period. This decrease was primarily attributable to reductions in the direct sales force and related support personnel, combined with reductions in marketing staff and programs. These reductions were begun in 1995 and substantially implemented by June 1997. The program reduced the number of direct sales, direct sales support and marketing personnel from 252 at December 31, 1994 to 123 at June 30, 1997. Administrative and General. Administrative and general expenses include employee salaries and benefits for administration, executive, finance, legal, human resources, data center, distribution and internal systems personnel and associated overhead costs, as well as bad debt expenses and accounting and legal expenses. Administrative and general expenses were $17.3 million and $16.1 million for the six months ended June 30, 1997 and 1996, respectively, representing 22.3% and 23.2% of total revenues for each respective period. The increased dollar amount was the result of increases in personnel related expenses and infrastructure required to support an independent company. Other Other Income and Expense, Net. Other income and expense, net consists primarily of interest earned on cash, cash equivalents, short term investments and long term customer contracts carried by the Company, and miscellaneous income, offset in part by interest expense associated with equipment financing. Interest and investment income and expense, net was $2.6 million and $1.6 million for the six months ended June 30, 1997 and 1996, respectively. Income Tax Provision (Benefit). Income tax provision (benefit) was $2.5 million and $(0.5) million for the six months ended June 30, 1997 and 1996, respectively, resulting in effective tax rates of 40.7% and 37.5%, respectively. YEARS ENDED DECEMBER 31, 1996 AND 1995 Revenues Total Revenues. The Company's total revenues were $156.8 million and $152.6 million in 1996 and 1995, respectively, representing an increase of 2.8%. 24 Software License Fees. Software license fees were $52.2 million in 1996 and $52.1 million in 1995, or 33.3% and 34.1% of total revenues for each respective period. Maintenance Fees. Maintenance fees were $69.7 million in 1996 and $65.3 million in 1995, representing an increase of 6.7%. This increase was due primarily to the effect of price increases combined with an increase in the maintenance base from the sale of additional software licenses. Professional Services Fees. Professional services fees were $35.0 million in 1996 and $35.2 million in 1995, or 22.3% and 23.1% of total revenues for each respective period. This minimal decline from 1995 to 1996 was the result of actions taken in the latter part of 1995 to temporarily curb growth in the professional services operation so that the Company could build a stronger infrastructure and control process to support the rapid growth anticipated from the Year 2000 Program. These actions were largely accomplished and accounted for in the first half of 1996. Cost of Revenues Software License. Software license costs were $14.1 million in 1996 and $15.2 million in 1995, representing 27.1% and 29.3% of software license fees for each respective period. This decrease was primarily attributable to lower third-party royalty rates associated with a slight shift in product mix. Maintenance. Maintenance costs were $25.9 million in 1996 and $23.5 million in 1995, representing 37.1% and 36.0% of maintenance fees for each respective period. The increase from 1995 to 1996 was primarily attributable to royalties related to additional revenue combined with a change in product mix. Professional Services. Professional services costs were $33.0 million in 1996 and $32.6 million in 1995, representing 94.3% and 92.6% of professional services fees in each respective period. This increase was primarily attributable to an increase in spending for infrastructure to support the anticipated growth in the Year 2000 Program, partially offset by improved margins on new projects. Operating Expenses Software Product Development. Software product development expenses were $1.4 million in 1996 and $0.9 million in 1995, representing 2.6% and 1.7% of software license fees, respectively. This increase was primarily attributable to the employment of additional staff to develop and enhance the Company's products. Sales and Marketing. Sales and marketing expenses were $48.7 million in 1996 and $52.5 million in 1995, representing 31.0% and 34.4% of total revenues, respectively. This decrease in expenses was primarily attributable to reductions made in 1995 to the direct sales force and to the direct support personnel. As discussed previously, these reductions commenced in 1995 and were substantially implemented by June 1997. The net effect of this reduction during 1996 was to reduce the direct selling and support personnel from 131 at December 31, 1995, to 98 at December 31, 1996, a net reduction of 25%. Administrative and General. Administrative and general expenses were $28.5 million in 1996 and $24.6 million in 1995, representing 18.2% and 16.2% of total revenues, respectively. This increase was primarily attributable to investments in computer equipment necessary to support anticipated year 2000 growth and severance payments made to the Company's former chief executive officer. Other Other Income and Expense, Net. Other income and expense, net was $5.2 million in 1996 and $2.4 million in 1995. The difference was attributable to interest received on $30.0 million in loans made to SAG in three stages over 1995 and 1996, combined with income received for the sale of the rights to one of the Company's products. The loans were retired in March 1997 prior to the Recapitalization. 25 Income Tax Provision. Income tax provision was $4.3 million and $2.3 million in 1996 and 1995, respectively, resulting in effective tax rates of 40.9% and 41.0%, respectively. YEARS ENDED DECEMBER 31, 1995 AND 1994 Revenues Total Revenues. The Company's total revenues were $152.6 million and $147.3 million in 1995 and 1994, respectively, representing an increase of 3.6%. Software License Fees. Software license fees were $52.1 million in 1995 and $51.8 million in 1994, or 34.1% and 35.2% of total revenues for each respective period. Maintenance Fees. Maintenance fees were $65.3 million in 1995 and $65.9 million in 1994, or 42.8% and 44.7% of total revenues for each respective period. This decrease was primarily attributable to the transfer in 1994 of the rights to license SAG products in Southeast Asia from the Company to SAG. These rights accounted for 1994 maintenance revenue of $3.0 million. Adjusting 1994 for the impact of the loss of this territory and these rights in 1995, maintenance revenues would have grown 3.8% from $62.9 million in 1994 to $65.3 million in 1995. The increase was due primarily to the effect of price increases, combined with an increase in the maintenance base from the sale of new software licenses. Professional Services Fees. Professional services fees were $35.2 million in 1995 and $29.6 million in 1994, representing an increase of 18.9%. This growth was the result of an increased level of business in the customer base, aided significantly by the award to the Company of several large contracts. Costs of Revenues Software Licenses. Software license costs were $15.2 million in 1995 and $13.5 million in 1994, representing 29.3% and 26.1% of software license fees for each respective period. This increase was primarily attributable to an increase in third-party royalty rates associated with a shift in product mix. Maintenance. Maintenance costs were $23.5 million in 1995 and $29.8 million in 1994, representing 36.0% and 45.3% of maintenance fees for each respective period. This decrease from 1994 to 1995 was primarily attributable to personnel cost reductions made as a result of the transfer of the Southeast Asian, territory to SAG, combined with a significant reduction in customer support and product release personnel. As discussed previously, this planned reduction was combined with changes in support processes designed to improve productivity and customer service. Professional Services. Professional services costs were $32.7 million in 1995 and $26.5 million in 1994, representing 92.6% and 89.6% of professional services fees in each respective period. This increase was primarily attributable to losses on certain fixed price contracts. As a result, the Company temporarily slowed the growth in professional services in order to improve its infrastructure and control process. Operating Expenses Software Product Development. Software product development expenses were $0.9 million in 1995 and $0.9 million in 1994, representing 1.7% of software license fees in both years. Sales and Marketing. Sales and marketing expenses were $52.5 million in 1995 and $50.4 million in 1994, representing 34.4% and 34.2% of total revenues, respectively. The increase in expenses was attributable to higher commissions resulting from the growth in software licenses and professional services fees. Administrative and expenses Administrative and general expenses were $24.6 million in 1995 and $25.2 million in 1994, representing 16.2% and 17.1% of total revenues for each respective period. 26 Other Other Income and Expense, Net. Other income and expense, net was $2.4 million in 1995 and $1.9 million in 1994. Income Tax Provision. Income tax provision was $2.3 million and $1.4 million for 1995 and 1994, respectively, resulting in effective tax rates of 41.0% and 50.2%, respectively. QUARTERLY RESULTS OF OPERATIONS The following table sets forth certain unaudited quarterly statement of operations data for each of the eight most recent quarters. In the opinion of management, this information has been prepared on the same basis as the audited financial statements appearing elsewhere in this Prospectus, and all necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts stated below to present fairly the unaudited quarterly results when read in conjunction with the audited Consolidated Financial Statements and Notes thereto. The operating results for any quarter are not necessarily indicative of results for any future period.
PREDECESSOR SUCCESSOR ------------------------------------------------------------------- --------- QUARTER ENDED ----------------------------------------------------------------------------- SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, 1995 1995 1996 1996 1996 1996 1997 1997 --------- -------- --------- -------- --------- -------- --------- --------- (in thousands) Revenues: Revenues: Software license fees................. $13,664 $17,309 $ 6,609 $12,369 $12,785 $20,400 $ 7,341 $14,254 Maintenance fees...................... 16,901 17,744 17,171 17,225 17,382 17,924 17,352 18,394 Professional services fees............ 7,352 8,206 8,506 7,515 10,959 7,995 9,948 10,299 ------- ------- ------- ------- ------- ------- ------- ------- Total revenues........................ 37,917 43,259 32,286 37,109 41,126 46,319 34,641 42,947 ------- ------- ------- ------- ------- ------- ------- ------- Cost of revenues: Software license...................... 3,963 5,020 1,758 3,291 3,494 5,577 2,098 4,074 Maintenance........................... 5,925 6,389 6,614 6,376 6,273 6,622 6,205 6,577 Professional services................. 6,812 7,689 8,480 7,291 10,083 7,112 9,211 9,451 ------- ------- ------- ------- ------- ------- ------- ------- Total cost of revenues................ 16,700 19,098 16,852 16,958 19,850 19,311 17,514 20,102 ------- ------- ------- ------- ------- ------- ------- ------- Gross profit........................... 21,217 24,161 15,434 20,151 21,276 27,008 17,127 22,845 ------- ------- ------- ------- ------- ------- ------- ------- Operating expenses: Software product development.......... 245 260 410 591 371 -- -- 283 Sales and marketing................... 13,378 14,431 8,576 12,851 9,712 17,538 7,317 11,477 Administrative and general............ 6,283 6,774 7,349 8,784 7,339 5,067 8,500 8,932 ------- ------- ------- ------- ------- ------- ------- ------- Total operating expenses.............. 19,906 21,465 16,335 22,226 17,422 22,605 15,817 20,692 ------- ------- ------- ------- ------- ------- ------- ------- Income (loss) from operations.......... 1,311 2,696 (901) (2,075) 3,854 4,403 1,310 2,153 Other income and expense, net.......... 1,184 576 592 1,048 533 3,057 978 1,597 ------- ------- ------- ------- ------- ------- ------- ------- Income (loss) before income taxes...... 2,495 3,272 (309) (1,027) 4,387 7,460 2,288 3,750 Income tax provision (benefit)......... 387 1,070 (97) (404) 1,642 3,161 915 1,599 ------- ------- ------- ------- ------- ------- ------- ------- Net income (loss)...................... $ 2,108 $ 2,202 $ (212) $ (623) $ 2,745 $ 4,299 $ 1,373 $ 2,151 - -------------------------------------------------- ======= ======= ======= ======= ======= ======= ======= =======
The following table sets forth certain unaudited consolidated quarterly statement of operations data expressed as a percentage of total revenues for each of the eight most recent quarters.
PREDECESSOR SUCCESSOR ------------------------------------------------------------------- --------- QUARTER ENDED ----------------------------------------------------------------------------- --- SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, 1995 1995 1996 1996 1996 1996 1997 1997 --------- -------- --------- -------- --------- -------- --------- --------- Revenues: Software license fees.................. 36.0% 40.0% 20.5% 33.3% 31.1% 44.0% 21.2% 33.2% Maintenance fees....... 44.6 41.0 53.2 46.4 42.3 38.7 50.1 42.8 Professional service fees.................. 19.4 19.0 26.3 20.3 26.6 17.3 28.7 24.0 ----- ----- ----- ----- ----- ----- ----- ----- Total revenues....... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 ----- ----- ----- ----- ----- ----- ----- ----- Cost of revenue: Software license....... 10.5 11.6 5.4 8.9 8.5 12.0 6.1 9.5 Maintenance............ 15.6 14.8 20.5 17.2 15.3 14.3 17.9 15.3 Professional service... 18.0 17.8 26.3 19.6 24.5 15.4 26.6 22.0 ----- ----- ----- ----- ----- ----- ----- ----- Total cost of reve- nues................ 44.1 44.2 52.2 45.7 48.3 41.7 50.6 46.8 ----- ----- ----- ----- ----- ----- ----- ----- Gross profit............ 55.9 55.8 47.8 54.3 51.7 58.3 49.4 53.2 ----- ----- ----- ----- ----- ----- ----- ----- Operating expenses: Software product development........... 0.6 0.6 1.3 1.6 0.9 -- -- 0.7 Sales and marketing.... 35.3 33.4 26.6 34.6 23.6 37.9 21.1 26.7 Administrative and general............... 16.6 15.7 22.8 23.7 17.8 10.9 24.5 20.8 ----- ----- ----- ----- ----- ----- ----- ----- Total operating expenses............ 52.5 49.7 50.7 59.9 42.3 48.8 45.6 48.2 ----- ----- ----- ----- ----- ----- ----- ----- Income (loss) from oper- ations................. 3.4 6.1 (2.9) (5.6) 9.4 9.5 3.8 5.0 Other income and ex- pense, net............. 3.1 1.3 1.8 2.8 1.3 6.6 2.8 3.7 ----- ----- ----- ----- ----- ----- ----- ----- Income (loss) before income taxes........... 6.5 7.4 (1.1) (2.8) 10.7 16.1 6.6 8.7 Income tax provision (benefit).............. 1.0 2.5 (0.3) (1.1) 4.0 6.8 2.6 3.7 ----- ----- ----- ----- ----- ----- ----- ----- Net income (loss)....... 5.5% 4.9% (0.8)% (1.7)% 6.7% 9.3% 4.0% 5.0% ===== ===== ===== ===== ===== ===== ===== =====
As a result of the Recapitalization on March 31, 1997, the Company is no longer a wholly owned subsidiary of SAG. Management has undertaken several strategic initiatives since the Recapitalization to increase revenue growth and profitability including building a product development organization, developing a product and professional services offering that addresses the year 2000 problem and acquiring R.D. Nickel. The revenue and profit improvements from the first quarter to the second quarter may be partially attributable to these changes, but there can be no assurance that this trend will continue in future quarters. Due in part to these initiatives, the Company expects that product development costs as a percentage of software license fees will increase and that administrative and general expenses as a percentage of total revenues will decrease. The Company's results of operations have historically fluctuated on a quarterly basis and are expected to be subject to quarterly fluctuations in the future. The Company's software license fees have tended to increase through each successive quarter of the year, with software license fees in the first quarter of a year being lower than those in the immediately preceding fourth quarter. Third quarter results have been favorably affected by increased end of the year spending by the Company's government customers. Fourth quarter results benefit from those customers who operate on a calendar year basis, combined with the Company's sales compensation plans which include incentives for achieving annual targets. The Company typically does not have a material backlog of unfilled orders, and revenues in any quarter are substantially dependent on orders booked in that quarter. Maintenance fees generally have not fluctuated on a quarterly basis to the same degree as software license fees due to the large percentage of maintenance fees generated from renewals of maintenance contracts which are recognized ratably over the contract period. Revenues from professional services are influenced by the number of personnel providing such services, the utilization rates of such personnel and the number of billable days in a quarter. Other factors being equal, 28 a quarter ending December 31 will generally reflect lower professional services fees than other quarters due to the relatively large number of holidays falling in that quarter. In addition, the completion or commencement of significant professional services projects may affect the revenues from professional services in a particular quarter. The Company's expenses are generally fixed and do not vary significantly in the short term with revenues. As a result, operating and net income in a given quarter may be disproportionately affected by a reduction in revenues. The Company's quarterly operating results may continue to fluctuate due to numerous factors, including the demand for the Company's products and services, the timing and cost of new product and service introductions and product enhancements by the Company or its competitors, changes in the mix of products and services sold by the Company and in the mix of sales by distribution channels, commencement or conclusion of significant service contracts, timing of any acquisitions and associated costs, the size, timing and terms of customer orders, including delays in significant orders, changes in pricing policies by the Company or its competitors, the timing of collection of accounts receivable, changes in foreign currency exchange rates, competitive conditions in the industry and general economic conditions. See "Risk Factors--Potential Fluctuations in Quarterly Performance." LIQUIDITY AND CAPITAL RESOURCES Since 1988, when the Company became a wholly owned subsidiary of SAG, the Company has financed its operations principally through cash flow from operating activities. In order to meet its short term cash needs and to pay dividends to SAG, in 1992 the Company began to periodically sell long term customer receivable contracts. Sales of long term customer receivable contracts increased in subsequent years in order to meet SAG's directives and in connection with the Recapitalization. Since the Recapitalization, the Company has sold $8.9 million of long term customer receivable contracts, primarily to fund the purchase of R.D. Nickel. The Company does not expect to sell additional long term customer receivable contracts in the foreseeable future. Investing activities used net cash of $3.1 million, $23.8 million, $4.3 million and $24.4 million during 1994, 1995, 1996 and the six months ended June 30, 1997, respectively, primarily to fund capital expenditures needed to support expansion of the Company's business, to provide loans to SAG and as consideration for the Cooperation Agreement. Financing activities used net cash of $4.5 million, $4.8 million, $9.0 million and $2.4 million during 1994, 1995, 1996 and the six months ended June 30, 1997, respectively, primarily for the repayment of long term obligations, the payment of dividends, and the issuance and repurchase of Common Stock. The Company has no long term debt, and as of June 30, 1997 had approximately $8.4 million in cash and investments. The Company has two accounts receivable lines of credit. Under these lines, the Company may sell long term receivable contracts. These transactions are treated as sales by the Company as the economic interest in the contract is transferred to the buyer. Domestic accounts receivable averaged 50 days outstanding at June 30, 1997, which is down from an average of 72 days outstanding at March 31, 1997 as a result of changes made by management following the Recapitalization. The Company's international distributors report and pay in U.S. dollars. In addition, royalties reported and paid by the Company to SAG under the Cooperation Agreement are in U.S. dollars. The Company's Mexican subsidiary was founded in 1996 and represented less than 3% of total revenues in 1996. The Company, therefore, has not to date engaged in foreign currency hedging transactions. In the event of significant growth in international operations, the Company may enter into hedging transactions. The Company traditionally leases all major equipment, and has no investment in inventory or facilities other than leasehold improvements. The Company believes that the proceeds from the sale of the Common Stock offered hereby, together with its existing cash balances, funds generated from operations and available accounts receivable lines of credit will be sufficient to finance the Company's operations for at least the next twelve months. Although operating activities may provide cash in certain periods, to the extent the Company grows in the future, its operating and investing activities may use such cash. There can be no assurances that any necessary additional financing will be available to the Company on commercially reasonable terms. 29 BUSINESS Software AG Systems, Inc. is an enterprise solutions company that provides robust software products and related professional services to large organizations with complex computing requirements. The Company's products are used to build and enhance mission-critical applications that require reliability, scaleability and security, such as customer billing systems, cash management systems and inventory management for aircraft maintenance systems. To complement its products, the Company has a comprehensive services offering, including consulting, software integration, systems implementation and large project management services. The Company has over 24 years of experience in addressing the needs of organizations with complex enterprise level computing environments. The Company provides enterprise development software products and related professional services used by organizations to develop new mission-critical applications and enterprise enablement software products and related professional services used to extend existing applications to new technologies. The Company's enterprise development products include ADABAS, a high-performance database management system designed to operate with a variety of data types and computer platforms, and NATURAL, a 4GL programming language that enables the development of applications that are portable, scaleable and interoperable across multiple computing platforms. The Company also provides software products and professional services that enable organizations to extend existing mission-critical applications to the Internet and intranets and to create new applications. Products in this area include ENTIRE, a family of middleware products that facilitates the communication between application components across heterogeneous computing environments; SourcePoint, an automated data warehouse management product; iXpress, a Web application assembly and deployment platform; and EntireX/DCOM, a product that uses Microsoft's ActiveX technology to bridge applications written in a variety of programming languages. The Company has also developed a software product, INSIGHT 2000 Tool Kit, and professional services that address the year 2000 problem. The Company's professional services that complement its products include application development and enhancement, application reengineering, application porting and rightsizing, Web integration and data warehouse design and implementation. The Company markets and sells its software products and services through direct and indirect channels in North America, South America, Japan and Israel. Over 1,300 customers in North America, South America, Japan and Israel have licensed the Company's products or purchased the Company's professional services since January 1996. These customers include large corporations, government agencies and educational institutions, such as Nabisco, Inc., Sprint Corporation, the National Aeronautics and Space Administration, the Federal Aviation Administration, Brown University, USX Corporation, the University of Texas and the State of California. INDUSTRY BACKGROUND Worldwide, large business and governmental organizations rely on large-scale computer applications to help manage their businesses. These applications, many of which are mission-critical, contain the core knowledge and processes that support the major operations of these organizations. Examples of such applications include order entry systems, financial accounting systems, inventory management systems and customer billing systems. Mainframes are the predominant computing platform for running mission- critical applications because they provide the high levels of reliability, scaleability, security, manageability and control required by such applications. Recently, with the proliferation of intranets, the growth of the Internet and the decreasing cost of operating mainframe systems, mainframes have gained increased importance as servers capable of managing and providing widespread access to corporate data. Large organizations are also seeking to leverage investments in existing systems by integrating their mainframe systems with distributed computing environments. International Data Corporation estimated that worldwide software revenue for the mainframe segment exceeded $26 billion in 1996. 30 Organizations must continually build, modify and maintain their information systems in order to respond to competitive pressures, regulatory changes and technological advances. For example, many organizations have initiated significant modifications of their information systems to address the increasing demands of management for more information for decision making and the needs of customers and suppliers for greater access to information. Organizations are constantly updating their information systems to exploit advances in database management, communication and software technologies and to maximize the return on their investments in existing systems. In addition, the size and complexity of the year 2000 problem, a problem expected in the year 2000 when applications with two-digit entries in the date code field will need to accept four-digit entries to distinguish twenty-first century dates from twentieth century dates, has created significant demand for technology and professional services that address that problem. The need to continually adapt information systems is placing increased demands on organizations. Already suffering from a shortage of qualified technical professionals, information technology ("IT") organizations are required to work more productively, to distribute information to users more quickly and to preserve the investments that have already been made in computing assets. The Company estimates that there are over one billion lines of NATURAL code in the United States alone. IT organizations are seeking to integrate new technologies into their mainframe systems to avoid the downtime, expense and risks involved in replacing these systems and the applications running on these systems. In many cases, IT organizations lack the resources and expertise required to cost-effectively implement and maintain distributed computing systems. The inability of these organizations to fully utilize available technology, together with the limited functionality of many existing processes and tools, have increased demand for integrated software development products and professional services. As a result, organizations are increasingly seeking to achieve the reliability, scaleability and interoperability of legacy systems while leveraging the speed, cost effectiveness and flexibility of new technologies. The Company believes that organizations are meeting this challenge by working with vendors that: (i) provide enterprise level performance; (ii) enhance and extend existing computing investments; and (iii) provide a comprehensive solution of products, professional services and support. THE COMPANY'S SOLUTIONS Over its 24 year history, the Company has developed significant expertise in addressing the needs of large, complex computing environments at the enterprise level. The Company's solutions enable its customers to leverage their investments in existing information systems and personnel, and to enhance and expand these systems to meet the changing needs of the enterprise. The Company believes its solutions provide the following benefits: Provide Enterprise Level Performance. The Company's solutions consist of software products and related professional services that are used for the development and enhancement of mission-critical enterprise applications. The Company's products are used to build, maintain and extend business applications that require reliability, scaleability and security, and constitute the core technology behind mission-critical systems, such as those used for cash management, customer billing and inventory management for aircraft maintenance. Enhance and Extend Existing Computing Investments. The Company's application development and enablement products and related professional services allow its customers to preserve their investments in mainframe systems by updating and evolving their systems to meet changing business processes and needs. Enable New Enterprise Applications. The Company's products and professional services enable its customers to implement new enterprise applications that require access to existing corporate data wherever it resides. For example, the Company's software products and professional services expertise in building data warehousing applications allow IT organizations to create data warehouses that enable managers and knowledge workers to access and analyze corporate data previously unavailable to them for improved decision making. 31 Extend Mission-Critical Applications to Distributed Computing Environments. The Company's solutions allow its customers to extend their mission-critical applications to distributed computing environments. Organizations can use the Company's products and professional services to connect their network-based architectures, including Internet and intranet- based systems, to their mainframe applications, providing improved access to corporate data. In this manner, existing applications need not be rewritten in order to extend them to the network or the Web, and the security, extensibility and scaleability of mainframe environments can be extended. Provide Solutions to the Year 2000 Problem. The Company's year 2000 product, INSIGHT 2000 Tool Kit, and professional services assist its customers in resolving their year 2000 problem. Organizations can use the Company's year 2000 product and professional services to analyze the amount of remediation needed and to develop and implement a remediation and testing plan. In this manner, existing applications need not be abandoned or replaced upon the arrival of the year 2000. Provide a Comprehensive Solution of Products, Professional Services and Support. The Company's solutions represent a comprehensive offering of products, professional services and support from a single vendor. While many "point" products exist in the form of connectivity tools, programming languages and data management products, most are limited in their ability to support the enterprise computing environment. The Company's extensive experience in enterprise software and related professional services enables it to address customers' mission-critical computing needs. THE COMPANY'S STRATEGY The Company's strategy is to further leverage its current leadership position in building enterprise applications and data access solutions for large organizations by extending its product and professional service offerings into the Web integration, data warehouse, middleware and year 2000 markets. Key elements of the Company's strategy include the following: Enhance and Extend Product Offerings. The Company believes that a substantial opportunity exists to provide software products and professional services that assist organizations in building, modifying and maintaining mainframe systems. To pursue this opportunity, the Company intends to enhance its existing product offerings with added features and functionality. The Company also intends to broaden its product offerings through internal product development, additional licensed products from third parties and acquisitions. In furtherance of this strategy, the Company recently signed an agreement to acquire R.D. Nickel, a software company with a family of application development products. Upon completion of this acquisition, the Company will obtain the CONSTRUCT family of application development products which are used in conjunction with NATURAL. In addition, pursuant to the Cooperation Agreement, the Company has an exclusive right to license in the Territory any new products developed by SAG. The Company expects to continue to benefit from SAG's product development efforts, which in 1996 totaled approximately $56 million. See "Company Background." Leverage Customer Base. Most of the Company's customers are large, sophisticated organizations with complex information systems in dispersed, heterogeneous computing environments. Over 1,300 customers in North America, South America, Japan and Israel have licensed the Company's products or purchased the Company's professional services since January 1996. Typically, the IT budget of a customer of the Company substantially exceeds the annual amount such customer spends with the Company. The Company believes it can expand its share of its customers' IT budgets through increased and improved product and professional services offerings. Expand Professional Services Offerings. The Company believes that, due to the strategic nature of its products, customers require the Company to provide comprehensive professional services and support. The Company's strategy is to expand its key professional services offerings, which are centered around application development, data warehousing, Web integration and the year 2000 problem. The Company expects to hire additional consultants and to develop new professional service offerings to meet its customers' evolving service needs. The Company intends to expand its efforts to cross sell its professional services to its product customers. 32 Leverage Distribution Channels. The Company directly and indirectly sells its products in over 20 countries throughout North America, South America, Japan and Israel (the "Territory") through distributors. Through the Cooperation Agreement with SAG, the Company has access to SAG's distribution channel for the Company's products (other than those licensed from SAG) in 50 additional countries outside the Territory. The Company intends to leverage this distribution channel by developing and acquiring additional products for distribution by SAG. PRODUCTS AND SERVICES The following diagram depicts how the Company provides enterprise solutions for its customers. The Company works at the highest level of IT organizations to evaluate the overall needs of the enterprise and develop solutions that use its products and professional services to effectively build, extend and enable complex computing environments. Typically, the Company's solutions focus either on building and deploying new mission-critical applications or enhancing and extending existing business-critical applications through building data warehouses and integrating with the Internet and intranets. The Company's products and professional services allow its customers to leverage their investments in existing information systems and personnel and to enhance and expand these systems to meet the changing needs of their organizations. - ------------------------------------------------------------------------------- UNDERSTAND BUSINESS PROBLEMS - ------------------------------------------------------------------------------- IDENTIFY BUSINESS SOLUTIONS - ------------------------------------------------------------------------------- Build and Deploy Enhance and Extend ENTERPRISE DEVELOPMENT ENTERPRISE ENABLEMENT Mission-critical Business-critical APPLICATIONS DECISION SUPPORT WEB INTEGRATION Buy . Rightsize . Migrate . Build . Deploy Data Warehouse Internet/Intranet PLATFORMS MVS/VSE . UNIX . Windows NT . Windows NATURAL ADABAS ENTIRE 4GL Development Language Data Management Middleware & Web Enabling YEAR 2000 Remediation PROFESSIONAL SERVICES Core Product . Web Integration . Data Warehouse . Year 2000 . Education . Technology . Support 33 The following table summarizes the Company's product offerings by category, indicating the year the product was introduced, the shipment date of the product's current version, and the platforms supported by the product.
YEAR OF CURRENT PLATFORMS PRODUCTS (1) INTRODUCTION VERSION SUPPORTED ------------ ------------ ------- --------- ENTERPRISE DEVELOPMENT NATURAL Product Line NATURAL 1979 12/95 MVS/VSE NATURAL 1993 7/96 UNIX NATURAL 1996 11/96 WIN NT NATURAL Lightstorm 1995 2/97 WIN CONSTRUCT 1988 9/97 MVS/VSE CONSTRUCT 1993 10/96 UNIX CONSTRUCT Spectrum 1997 8/97 MVS/VSE CONSTRUCT Spectrum 1997 8/97 WIN NT CONSTRUCT Spectrum SDK 1997 8/97 MVS/VSE CONSTRUCT Spectrum SDK 1997 8/97 WIN NT PREDICT 1983 2/97 MVS/VSE PREDICT 1993 2/97 UNIX ADABAS Product Line ADABAS 1972 1/97 MVS/VSE ADABAS 1993 7/97 UNIX ADABAS Delta Save Facility 1996 2/96 MVS/VSE ADABAS FASTPATH 1991 12/96 MVS/VSE ADABAS SQL Server 1992 10/95 MVS/VSE ADABAS Vista 1997 9/97 MVS/VSE ADAPLEX+ 1996 2/97 MVS/VSE ENTERPRISE ENABLEMENT ENTIRE Product Line iXpress 1996 8/97 WIN NT ENTIRE ACCESS 1994 12/96 UNIX ENTIRE ACCESS 1995 12/96 WIN NT ENTIRE BROKER 1994 4/97 MVS/VSE ENTIRE BROKER 1996 8/97 UNIX ENTIRE BROKER 1996 7/97 WIN NT ENTIRE BROKER SDK 1997 9/97 WIN NT ENTIRE BROKER APPC 1991 2/95 MVS/VSE ENTIRE NET-WORK 1987 8/97 MVS/VSE ENTIRE NET-WORK 1993 9/97 UNIX ENTIRE NET-WORK 1995 3/97 WIN NT ENTIRE SAF Gateway 1997 4/97 MVS/VSE EntireX/DCOM 1997 9/97 UNIX Data Warehouse Product Line SourcePoint 1995 6/97 UNIX PASSPORT 1995 8/97 MVS/VSE CONSTRUCT Extract Service 1997 5/97 MVS/VSE CONSTRUCT Extract Service 1997 3/97 UNIX ESPERANT 1994 2/97 WIN DSS AGENT 1995 8/96 WIN Year 2000 Product INSIGHT 2000 Tool Kit 1997 9/97 WIN
- -------- (1) CONSTRUCT, CONSTRUCT Spectrum, CONSTRUCT Spectrum SDK and INSIGHT 2000 Tool Kit are products owned by the Company. iXpress, PASSPORT, ESPERANT and DSS AGENT are products which the Company has the right to license pursuant to agreements with third parties other than SAG. The Company has the exclusive right to license and service all other products listed in this table in North America, South America, Japan and Israel pursuant to the Cooperation Agreement with SAG. 34 Enterprise Development Products and Professional Services The Company provides a family of enterprise development software products and related professional services that allow its customers to develop and deploy enterprise solutions that are integrated with existing data and applications. . NATURAL, the Company's 4GL programming language for the enterprise environment, is designed to increase productivity in application software design, development and deployment. NATURAL supports Rapid Application Development to RDBMS environments with applications that are portable, scaleable and interoperable across multiple computing platforms. . Add-on products for the NATURAL environment include: NATURAL LightStorm, for repository-based development environments; CONSTRUCT, for model-based Rapid Application Development; and CONSTRUCT Spectrum, for automated development of distributed components. The Company's family of data management solutions delivers access to data and are designed to ensure the reliability, integrity, and security of such data throughout an organization's computing environment. . ADABAS, the Company's flagship high-performance database management product, is designed to handle large volumes of changing data requiring high levels of availability. It provides multi-data model support, multi- platform support, comprehensive SQL support, and a variety of extended capabilities that take advantage of technological advances in both hardware and software. . Add-on products for the ADABAS environment include: ADABAS SQL Server, an SQL interface to ADABAS data; ADABAS ADAPLEX+, a technology that distributes and presents a single view of multiple databases; ADABAS FASTPATH, which optimizes database and application performance; and ADABAS Delta Save Facility, for reducing backup time and database recovery processing. . Core Product Services. These professional services focus on the deployment and use of the Company's database management and application development products, including application development and enhancement, application reengineering, application porting and rightsizing. Enterprise Enablement Products and Professional Services The Company's ENTIRE middleware products and professional services minimize the complexity of integrating a distributed computing environment that encompasses a variety of platforms, protocols, programming languages and databases. . The ENTIRE product family includes: ENTIRE BROKER, a cross-platform messaging middleware product that links mainframe applications and components to ActiveX- and Java-enabled desktops; and ENTIRE SAF Gateway, a central security administration environment. The Company also offers ENTIRE BROKER APPC, a product that links Advanced Program-to-Program Communication and IBM's MQSeries-enabled mainframe applications to ActiveX- and Java- enabled desktops; ENTIRE BROKER Software Development Kit, a set of software products for building and deploying distributed applications; and EntireX/DCOM, a product that allows applications or pieces of applications to work together transparently on Windows and/or UNIX platforms. . iXpress is an Internet-enablement technology that combines component technology, such as Java and ActiveX, with enterprise systems, allowing organizations to deliver and manage business-critical information solutions via the Web. . Web Integration Services. The Company offers its customers a variety of Web integration professional services, such as integrating an organization's Internet site with an order entry system; integrating multiple sources of data, applications and services from multiple platforms; enabling secure access for suppliers to specific data and applications; and distributing application components across the network. The Company's data warehousing solutions include both products and professional services for implementing a data warehouse and its approach encompasses six elements: data acquisition, data warehouse administration, services and support, education, business analysis tools and database management. 35 . SourcePoint is an administration product for automating data extraction, transportation and loading from operational data sources to data warehouse servers. SourcePoint works separately or in an integrated fashion with PASSPORT, a data extraction and transformation product. In addition, the Company's CONSTRUCT Extract Service offers a Rapid Application Development approach to creating NATURAL extraction programs that integrate directly with SourcePoint. . ESPERANT, a query and reporting product, and DSS AGENT, a relational online analytical processing (OLAP) product, offer users decision support tools for accessing and analyzing data for improved decision making. . Data Warehouse Services. The Company provides consulting services and methodologies for building and implementing data warehouses, with a focus on rapid delivery of scaleable data warehouses. The Company offers a software product and a professional services capability that address the year 2000 problem. . INSIGHT 2000 Tool Kit is a product that allows developers to analyze and remediate NATURAL code by providing a picture of how much code needs to be fixed, helping project managers break year 2000 projects into segments and develop a comprehensive work plan for executing remediation. . Year 2000 Services. The Company's year 2000 professional service offerings include impact assessment, analysis and implementation to assist customers in resolving their year 2000 problem. These services are provided through a professional staff with expertise in managing large projects and in the methodologies and products that underlie software integration and systems management. The Company also recently established Millennium Centers in Denver, Colorado, Fort Lee, New Jersey and Sacramento, California to provide remediation and testing for its year 2000 program and plans to establish additional centers in the future. Year 2000 remediation can be done at one of the Company's Millennium Centers or at the customer's site. Other Services Education Services. The Company provides customers with in-depth training in the Company's products, with courses available through scheduled and customized classes. In addition, the Company offers programs to accelerate the implementation of application development, Web integration, data warehouse and year 2000 projects. Technology Services. The Company also provides system engineering services, supplementary database administration services and database application and network performance and tuning services. SOFTWARE PRODUCT DEVELOPMENT Prior to the Recapitalization, the Company was a wholly owned subsidiary of SAG and the Company's research and development efforts were directed by SAG. The Company's software product development expenses were $0.9 million, $0.9 million and $1.4 million in 1994, 1995 and 1996, respectively. Since the Recapitalization, the Company has begun building its internal product development group, which currently consists of 17 people, including 12 people added as a result of the acquisition of R.D. Nickel. The first product resulting from the Company's recent internal product development efforts is INSIGHT 2000 Tool Kit, which was released in September 1997. The Company intends to continue expanding its product development group through additional acquisitions and internal hiring. Since the Cooperation Agreement provides the Company with an exclusive right to license in the Territory products developed by SAG, the Company also expects to continue to benefit from SAG's product development efforts. In 1996, SAG's product development costs were approximately $56 million. In September 1997, SAG released EntireX/DCOM, the first product resulting from SAG's strategic relationship with Microsoft. PRODUCT MAINTENANCE AND CUSTOMER SUPPORT The Company offers a wide range of product maintenance and customer support services. The Company believes that its future success is dependent in part on its ability to provide high levels of customer service in 36 order to cultivate advocacy by the Company's installed customer base. For the nine months ended June 30, 1997, approximately 97% of the Company's customers who were eligible renewed at least one of their maintenance arrangements. As of June 30, 1997, the Company had 78 employees devoted to its maintenance and customer support services. Customers may choose from three levels of service and support offerings: basic, extended and custom, which are differentiated by service deliverables and access to support persons. Some of these customer support services include: . Support during product proof-of-concept/trial . Technical support 24 hours a day, seven days a week . Customized support offerings . Onsite installation and implementation . Remote analysis . Automated customer assistance and Web-based electronic services CUSTOMERS AND MARKETS Over 1,300 customers in North America, South America, Japan and Israel have licensed the Company's products or purchased the Company's professional services since January 1996. These customers consist primarily of major corporations, government agencies and educational institutions. The following examples are representative of how customers use the Company's products and professional services to build and enable enterprise level, mission-critical applications for large organizations. Utility Billing Services, Incorporated ("UBS"). An information service bureau for water and wastewater companies, UBS needed to develop a new customer information system to handle approximately 600,000 customer accounts for 15 clients in New Jersey and New York. UBS decided to use the Company's ADABAS, NATURAL and CONSTRUCT products and related services to develop a system of enhanced services and applications that could be sold as an independent software package to UBS's water utility clients handling their own billing and information tracking. According to UBS, six of its programmers developed the entire system in less than two years at a cost of approximately $420,000 and the system resulted in savings of approximately $1.7 million compared to projected COBOL development costs. Federal Aviation Administration ("FAA"). In 1994, the FAA decided to migrate its 400 mainframe COBOL financial and accounting modules to the Company's ADABAS product. To facilitate conversion of the online portion of the system, the FAA also used the Company's NATURAL Lightstorm product to create new client/server components and the ADABAS product to manage data running in Microsoft's Windows and Windows NT environments. According to the FAA, the new system supports 1.7 million financial transactions each month, is utilized by employees to pay vendors an average of $27 million a day and is used daily by approximately 2,000 employees worldwide to process departmental accounting information. City of New York. The City of New York was using an integrated, COBOL-based system to process various business and commercial compliance activities, such as license processing, inspections, cash management and consumer services. In order to keep up with the changing operational requirements of a diverse user community, the City of New York decided to switch to a new system using the Company's ADABAS and NATURAL products. According to the City of New York, the new system produced a 60% decrease in license processing time and resulted in a 40% increase in revenue collections. Pepsi-Cola General Bottlers Inc. ("PCGB"). In 1990, PCGB, then one of the largest of Pepsi-Cola's bottlers, found that its systems were unable to handle the company's volume of transactions. PCGB decided to replace its existing systems with a system designed to centralize and support business processes in a single set of programs and files. PCGB chose the Company's ADABAS product and, in the process, developed its own enterprise methodology called Open Batch Architecture which uses the Company's NATURAL, CONSTRUCT and ADABAS products to streamline code development. According to PCGB, its new system for domestic operations processes approximately 40 million commands daily. 37 The following is a representative list of some of the Company's customers that produced revenues of at least $500,000 for the Company during the 18 months ended June 30, 1997. American Community Mutual Insurance Co. National Aeronautics and Space Administration American Electric Power Company, Inc. Nissan Motor Co., LTD. Banorte Bank Ryerson Tull Brown University Rykoff-Sexton, Inc. Burlington Northern Santa Fe Corporation S.C. Johnson & Son Inc. Cable and Wireless, PLC Sprint Corporation Centers for Disease Control State of California Central Hudson Gas & Electric Corporation State of Hawaii City of New York State of Nevada City of Philadelphia State of New Jersey Commonwealth of Virginia State of Texas Cutler-Hammer, Inc. State of Washington Delta Air Lines, Inc. Tandy Corporation Duke Power Company Union Electric Company Federal Aviation Administration University of Arkansas Federal Bureau of Investigation University of Hawaii Federal Express Corp. University of Texas KN Energy, Inc. University of Toronto Morgan Stanley, Dean Witter, Discover & Co. US Airways Group, Inc. Nabisco Inc. US Patent & Trademark Office USX Corporation
In 1996 and during the first six months of 1997, no single customer accounted for more than 10% of the Company's total revenues. SALES AND MARKETING The Company sells its products through both direct and indirect sales channels. Recently, the Company reorganized its sales organization into three groups which focus separately on sales of ELAs, professional services and the Year 2000 Program. The reorganization of the sales force has resulted in significantly increased productivity per salesperson. In North America, the Company sells its products through a direct sales channel that includes 95 people in 19 sales offices. The Company sells its products in over 20 additional countries through six distributors located in South America, Japan and Israel. In addition, the Company has access to SAG's distribution channel for the Company's products (other than those licensed from SAG) in over 50 countries outside North America, South America, Japan and Israel. In North America, the Company directly sells its professional services through 28 people. In addition, the Company has nine people in the United States focused on selling its year 2000 products and professional services. The Company's corporate marketing organization supports the Company's sales and professional services channels through the efforts of 39 professionals with expertise in product marketing, marketing communications, database marketing, inside sales and strategic development. The Company also has strategic marketing relationships with certain vendors of computing products and services, including IBM, Microsoft, Digital Equipment Corporation, Andersen Consulting and BDM. COMPETITION The markets for the Company's software products and professional services are highly competitive and characterized by continual change and improvement in technology. The Company provides products and professional services to several markets within the computer industry and encounters a variety of competitors within each such market. Many of the Company's competitors have significantly greater financial, marketing 38 and other competitive resources than the Company. In addition, in certain markets in which the Company competes, such as the year 2000 market, there are no significant barriers to entry. Few of the Company's competitors compete in all of the same markets as the Company. In the enterprise development markets, the Company's competitors with respect to enterprise and departmental database management products include IBM, Oracle, Informix, Sybase and Microsoft. In addition, the Company's 4GL applications programming language, NATURAL, competes with offerings from both large and small companies, including Oracle, Microsoft, IBM and Sterling Software. In the enterprise enablement markets, the Company's products compete in both the component/object and the message oriented segments of the middleware market, where its competitors include IBM, Microsoft, and Visigenic. The Company's competitors in the data warehousing segment of the enablement markets include IBM, SAS, and PLATINUM and database vendors such as Oracle, Sybase and Informix. In the market for year 2000 products and professional services, the Company's competitors include Formal Systems, Viasoft, BDM and EDS. The principal competitive factors affecting the markets for the Company's product and professional services offerings include: (1) product functionality, performance, reliability and ease of use, (2) quality of technical support, training and consulting services, (3) responsiveness to customer needs, (4) reputation, experience and financial stability and (5) cost of ownership, including initial price and deployment costs as well as ongoing maintenance costs. Due to the continued increase in new product licenses and professional services revenues, the Company believes that it has competed effectively in each of these areas. Nevertheless, current and potential competitors may introduce new and better products, make strategic acquisitions, or establish cooperative relationships among themselves or with third parties, thereby increasing the ability of their products to address the needs of the Company's current and prospective customers. There can be no assurance that the Company will be able to compete successfully against current and future competitors, and the failure to do so would have a material adverse effect upon the Company's business, financial condition and results of operations. See "Risk Factors--Competition." PROPRIETARY RIGHTS The products sold by the Company consist of products developed by SAG (e.g., ADABAS, NATURAL and ENTIRE), products owned by other third parties which are distributed by the Company (e.g., ESPERANT and iXpress) and products developed or acquired by the Company (e.g., INSIGHT 2000 Tool Kit, CONSTRUCT, CONSTRUCT Spectrum and CONSTRUCT Spectrum SDK). For all of these products, the Company, if not the developer, is contractually obligated to provide appropriate security measures to protect the proprietary materials of SAG and other third parties against misappropriation and illegal copying. The Company treats all of the products that it distributes as proprietary trade secrets and confidential information. It relies primarily upon a combination of trade secret, copyright and trademark laws, its license agreements with customers, and its internal security systems, confidentiality procedures and employee agreements to maintain the security of its products. The Company typically provides its products to users under nonexclusive, nontransferable perpetual licenses which generally permit use of the licensed software solely for internal operations on designated computers at specific sites. Under certain circumstances, the Company makes available the source code for its products under an escrow arrangement which restricts access to and use of the source code. Although the Company takes steps to protect its trade secrets, there can be no assurance that misappropriation will not occur. In addition, the laws of some foreign countries do not protect proprietary rights to the same extent as the laws of the United States. The Company seeks to protect its software, documentation and other written materials under copyright law, and to assert trademark rights in its product names. The Company has not sought to protect its products under patent laws, though SAG and some third parties have patented, in the United States, Japan and/or the European Union, certain of the products which the Company distributes. 39 Although the Company is not aware of any claims that its products infringe on the proprietary rights of third parties, there can be no assurance that third parties will not assert infringement claims against the Company in the future with respect to current and future products or that any such assertion may not require the Company to enter into royalty arrangements or result in costly litigation. See "Risk Factors--Proprietary Technology." EMPLOYEES As of June 30, 1997, the Company employed 696 people, with 329 in professional services and consulting, 118 in sales and marketing, 150 in customer support, and 99 in general and administrative. As of June 30, 1997, the Company also utilized approximately 110 individuals under independent contracts. None of the Company's employees is represented by a labor union, and the Company has never experienced any work stoppage. The Company considers its relations with its employees to be good. The Company's success will depend in part on its continued ability to attract and retain highly qualified personnel in a competitive market for experienced software developers, professional services staff and sales and marketing personnel. FACILITIES The Company's executive offices, principal marketing and data center facility are located in approximately 170,000 square feet of space in a three building campus that the Company leases in Reston, Virginia. The Company's Customer Service and Support Center is located in approximately 85,000 square feet that the Company leases in Highlands Ranch, Colorado. The Company leases product sales and professional services branch offices in Irvine and Sacramento, California; Atlanta, Georgia; Chicago, Illinois; Braintree, Massachusetts; Bloomington, Minnesota; Fort Lee, New Jersey; Plymouth Meeting, Pennsylvania; Dallas, Texas; Bellevue, Washington and Reston, Virginia in the United States. The Company's subsidiary in Mexico leases offices in Mexico City and Monterrey, Mexico. As a result of the acquisition of R.D. Nickel, the Company will lease product sales and professional services branch offices in the following cities in Canada: Calgary, Cambridge, Edmonton, Montreal, Ottawa and Toronto. LEGAL PROCEEDINGS From time to time, the Company is involved in legal proceedings and litigation arising in the ordinary course of business. As of the date of this Prospectus, the Company is not a party to any litigation or other legal proceeding that, in the opinion of management, could have a material adverse effect on the Company's business, financial condition or results of operations. 40 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The executive officers and directors of the Company, and their respective ages as of September 26, 1997, are as follows:
NAME AGE POSITION - ---- --- -------- Carl J. Rickertsen (1)(2).. 37 Chairman of the Board Daniel F. Gillis........... 51 President, Chief Executive Officer and Director Harry K. McCreery.......... 51 Vice President, Treasurer and Chief Financial Officer Timothy L. Hill............ 39 Vice President--Marketing Derek M. Brigden........... 45 Vice President--Operations and Chief Information Officer James H. Daly.............. 54 Vice President, Secretary and General Counsel Thomas E. Gorley........... 51 Vice President--Professional Services Dr. Philip S. Dauber (1)... 56 Director Dr. Erwin Koenigs.......... 47 Director Edward E. Lucente (2)...... 57 Director Dr. Paul G. Stern (1)(2)... 58 Director
- -------- (1) Member of the Compensation Committee. (2)Member of the Audit Committee. Carl J. Rickertsen has served as Chairman of the Board of the Company since April 1997. Mr. Rickertsen is also a member of TC Equity Partners, LLC and TC Management LLC, which are, respectively, the general partner and managing agent of Thayer. Thayer is a private equity fund in Washington, D.C. that targets investments in the information technology and services industries. From September 1994 to April 1996, Mr. Rickertsen was a partner with Thayer Capital Partners, an affiliate of Thayer. Prior to that, Mr. Rickertsen acted as a private financial consultant from 1993 through August 1994 and was a partner at Hancock Park Associates, a private equity investment firm based in Los Angeles, from 1989 to 1993. Before joining Hancock Park Associates, Mr. Rickertsen was an associate at Brentwood Associates from 1987 to 1989 and a financial analyst in the high technology group at Morgan Stanley & Co., Inc. from 1983 to 1985. Mr. Rickertsen currently serves as a director of MLC Holdings, Inc. Daniel F. Gillis has served as President and Chief Executive Officer of the Company and the Company's wholly owned subsidiary, Software AG Americas, Inc. ("Software Americas"), since May 1996. He also has served as a director of the Company since February 1997. Previously, Mr. Gillis served as Senior Vice President of U.S. Sales of Software Americas from April 1995 to May 1996 and as Vice President of Federal Systems Sales of Software Americas from January 1995 to March 1995. From August 1994 to January 1995, he was a private consultant. From May 1987 through August 1994, he was Executive Vice President at Falcon Microsystems Incorporated, a computer products reseller and systems integrator. Mr. Gillis currently serves as a director of Carleton Corporation. Harry K. McCreery has served as Vice President, Treasurer and Chief Financial Officer of the Company since April 1997. He also has served as Treasurer of Software Americas since May 1991, Chief Financial Officer of Software Americas since June 1989 and as Chief Information Officer of Software Americas from June 1989 to December 1990. Timothy L. Hill has served as Vice President--Marketing of the Company since August 1997. Previously, Mr. Hill served from July 1994 through July 1997 as Vice President, Worldwide Marketing & Sales for Iomega Corporation, a manufacturer of computer storage products. From August 1993 through July 1994, Mr. Hill served as Vice President, Marketing for Falcon Microsystems Incorporated. From January 1988 to August 1993, Mr. Hill was Director of Marketing & Sales, Consumer Business Division, at Gates Energy Products, a manufacturer of consumer and commercial rechargeable battery products. 41 Derek M. Brigden has served as Vice President--Operations and Chief Information Officer of the Company since April 1997. He has been Vice President--Operations and Chief Information Officer of Software Americas since December 1990. James H. Daly has served as Vice President and General Counsel of the Company since April 1997 and as Secretary of the Company since 1992. Mr. Daly also has served as Vice President, General Counsel and Secretary of Software Americas since May 1991. Thomas E. Gorley has served as Vice President--Professional Services of the Company since April 1997. He has served as Vice President--Professional Services of Software Americas since February 1996. From September 1994 to June 1995, Mr. Gorley served as Senior Vice President of Electronic Data Systems Corporation, a systems integration and consulting company. He also served as President of Bell Atlantic Utilities Systems, a software development and services company, from June 1992 to December 1993. Mr. Gorley was a private consultant from June 1995 to February 1996 and from January 1994 to September 1994. Dr. Philip S. Dauber has served as a director of the Company since April 1997. Dr. Dauber has served as a consultant at IQI, Inc., a telemarketing firm, since November 1996, and as the acting President of IQI, Inc. from February 1997 through August 1997. Before joining IQI, Inc., Dr. Dauber was employed as an independent consultant, providing services to several technology oriented businesses. Dr. Dauber served as a Senior Vice President of Unisys Corporation from 1981 to 1987 during which time he was also Chairman and Chief Executive Officer of Memorex, Inc., a wholly owned subsidiary of Unisys Corporation. Before joining Unisys Corporation, Dr. Dauber was employed by IBM Corporation from 1965 to 1981 and served as Secretary of its Corporate Management Committee from 1980 to 1981. Dr. Erwin Koenigs has served as a director of the Company since December 1996 and was Chairman of the Board of the Company from December 1996 through March 1997. Dr. Koenigs has served as Chairman of the Board since September 1996 and Chief Executive Officer of SAG since November 1996. From April 1989 to November 1996, Dr. Koenigs was Chief Executive Officer of Linotype-Hell AG in Eschborn, Germany, a supplier of prepress and publishing technology. Edward E. Lucente has served as a director of the Company since April 1997. Since May 1995, Mr. Lucente has served as the Chief Executive Officer and President of Liant Software Corporation, a software development company. Previously, he was a marketing consultant from May 1994 until April 1995, and Executive Vice President of Sales and Marketing of Digital Equipment Corporation, a computer hardware, software and services company, from March 1993 through April 1994. From February 1991 until March 1993, Mr. Lucente was a Member of the Executive Office of Northern Telecom Limited, a supplier of digital telecommunications systems, serving from January 1992 until March 1993 as an Executive Vice President of Northern Telecom Limited. Mr. Lucente currently serves as a director of Compuserve Corporation, Genicom Corporation and Information Resources, Inc. Dr. Paul G. Stern has served as a director of the Company since April 1997. Dr. Stern is also a member of TC Equity Partners, LLC and TC Management LLC, which are, respectively, the general partner and managing agent of Thayer. In 1995, Dr. Stern joined Thayer as a co-founder. Prior to that, Dr. Stern was a Special Limited Partner at Forstmann Little & Co., a private investment firm, from June 1993 to June 1995. From March 1989 until June 1993, Dr. Stern served as Chief Executive Officer and Chairman of the Board of Northern Telecom Limited. Dr. Stern currently serves as a director of The Dow Chemical Company, The LTV Corporation and Whirlpool Corporation. The Company's Second Amended and Restated Bylaws (the "Bylaws") provide for the Company's Board of Directors to be comprised of six directors, and permit the Board of Directors from time to time to increase or decrease the number of directors. Pursuant to the terms of the Company's Second Amended and Restated Certificate of Incorporation (the "Certificate of Incorporation"), upon the consummation of this offering the directors will be divided into three classes. One class will hold office initially for a term expiring at the annual meeting of the stockholders to be held in 1998, a second class will hold office initially for a term expiring at 42 the annual meeting of stockholders to be held in 1999 and a third class will hold office initially for a term expiring at the annual meeting of stockholders to be held in 2000. Each director will hold office for the term to which he is elected and until his successor is duly elected and qualified or until his earlier death, resignation or removal. Mr. Gillis and Dr. Koenigs will have terms expiring in 1998, Dr. Dauber and Mr. Lucente will have terms expiring in 1999, and Mr. Rickertsen and Dr. Stern will have terms expiring in 2000. At each annual meeting of the stockholders of the Company, the successors to the class of directors whose terms expire at such meeting will be elected to hold office for a term expiring at the third succeeding annual meeting of stockholders after their election. Executive officers of the Company are elected by the Board of Directors on an annual basis and serve until the first meeting of the Board of Directors following the next annual meeting of stockholders following their election and until their successors have been duly elected and qualified or until their earlier death, resignation or removal. There are no family relationships among any of the executive officers or directors of the Company. COMMITTEES OF THE BOARD OF DIRECTORS In April 1997, the Board of Directors established an Audit Committee and a Compensation Committee. The Audit Committee makes recommendations concerning the engagement of independent public accountants, reviews with the Company's independent public accountants the plans and results of the audit engagement, approves professional services provided by the Company's independent public accountants and reviews any recommendations made by the Company's auditors regarding the Company's accounting methods and the adequacy of the Company's internal accounting controls. The current members of the Audit Committee are Messrs. Lucente and Rickertsen and Dr. Stern. The Compensation Committee establishes general guidelines regarding the compensation of the officers and executives of the Company and its subsidiaries, and determines the compensation of the executive officers of the Company. The Compensation Committee also administers the Stock Option Plan. The current members of the Compensation Committee are Mr. Rickertsen and Drs. Stern and Dauber. The Audit Committee and the Compensation Committee are comprised solely of directors who are not officers or employees of the Company or any of its subsidiaries ("Independent Directors"). DIRECTOR COMPENSATION The Company's directors were not compensated during 1996 for any services provided as directors and did not receive during such fiscal year any benefits or other forms of compensation, cash or otherwise, from the Company for their service as directors. The Company has no present plans to pay such benefits or compensation to directors. The Company intends to reimburse directors for certain out-of-pocket expenses incurred in connection with attendance at Board of Directors and committee meetings. Each of Dr. Dauber and Mr. Lucente has received grants of nonstatutory stock options under the Stock Option Plan to purchase 54,450 shares of Common Stock at an exercise price equal to $1.47 per share. The options vest in equal annual installments over a period of four years, commencing March 31, 1998. The options become exercisable in full upon a change in control of the Company. See "--Stock Option Plan." 43 EXECUTIVE COMPENSATION The following table sets forth certain information concerning the compensation paid to the persons who served as the Company's Chief Executive Officer during 1996 and each of the four other most highly compensated executive officers of the Company whose annual salary and bonus compensation for 1996 exceeded $100,000 (collectively, the "Named Executive Officers"). The Named Executive Officers did not receive any stock option grants in 1996, hold any stock options at the end of 1996 or exercise any stock options during 1996. SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION ---------------------------------- OTHER ANNUAL ALL OTHER NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION (1) COMPENSATION (2) - --------------------------- -------- -------- ---------------- ---------------- Current Executive Officers Daniel F. Gillis (3) President and Chief Executive Officer......... $249,039 $240,500 $24,000 $ 179,671 Harry K. McCreery (4) Vice President, Treasurer and Chief Financial Officer................... 170,000 132,600 -- 235,933 Derek M. Brigden (4) Vice President--Operations and Chief Information Officer................... 150,000 101,346 -- 7,500 James H. Daly (4) Vice President-- International Operations, Secretary and General Counsel................... 142,000 92,300 20,208 159,183 Former Executive Officers Michael J. King (5) President and Chief Executive Officer......... 130,344 -- -- 2,800,874(5) William Cripe (6) Vice President--Human Resources................. 123,613 81,900 -- 97,060(6)
- ------- (1) In accordance with the rules of the Securities and Exchange Commission (the "Commission"), other compensation in the form of perquisites and other personal benefits have been omitted because such perquisites and other personal benefits constituted in the aggregate less than the lesser of $50,000 or 10% of the total annual salary and bonus reported for the Named Executive Officer during 1996. (2) Unless otherwise indicated, consists of (i) amounts of deferred compensation earned and credited to deferred compensation accounts of the Named Executive Officer during 1996 and (ii) $7,500 of contributions paid by the Company on behalf of each Named Executive Officer under the 401(k) Plan. See "--Deferred Compensation Agreements," "--401(k) Plan" and footnotes 5 and 6 below. The Company does not have any long term incentive plans. (3) Mr. Gillis served as President and Chief Executive Officer of the Company from May 6, 1996. (4) In 1996, these individuals served as executive officers of Software Americas, the Company's wholly owned subsidiary, and performed policy making functions for both Software Americas and the Company. (5) Mr. King served as President and Chief Executive Officer of the Company and Software Americas prior to Mr. Gillis. Amounts reported as All Other Compensation include (i) severance payments in the amount of $950,000, (ii) deferred compensation payments in the amount of $1,843,374 and (iii) $7,500 of contributions paid by the Company under the 401(k) Plan. (6) During 1996, Mr. Cripe served as Vice President--Human Resources of Software Americas. His employment with Software Americas was terminated on March 21, 1997. Amounts reported as All Other Compensation include (i) $90,930 of deferred compensation earned and credited to Mr. Cripe's deferred compensation account and (ii) $6,130 of contributions paid by the Company on behalf of Mr. Cripe under the 401(k) Plan. 44 Messrs. Gillis, McCreery, Brigden, Daly, Gorley and Hill have received grants of nonstatutory stock options under the Stock Option Plan to purchase aggregate amounts of 2,472,800 and 1,017,289 shares of Common Stock at an exercise price per share equal to $1.47 and $12.00, respectively. The options granted to Messrs. Gillis and McCreery vest in equal annual installments over a period of three years, and the options granted to Messrs. Brigden, Daly, Gorley and Hill vest in equal annual installments over a period of four years. The options become exercisable in full upon a change in control of the Company. See "--Stock Option Plan." Messrs. Gillis, McCreery, Brigden, Daly, Gorley and Hill have also received grants of nonstatutory stock options under the Stock Option Plan to purchase an aggregate of 618,200 shares of Common Stock at an exercise price per share equal to $9.60, which options are fully vested. STOCK OPTION PLAN In connection with the Recapitalization, which was consummated on March 31, 1997, the Company authorized the granting of stock options to purchase an aggregate of 3,300,000 shares of Common Stock at an exercise price equal to $1.47, the per share purchase price of the Recapitalization. On April 29, 1997, the Company adopted the Software AG Systems, Inc. 1997 Stock Option Plan (the "Stock Option Plan"). The Stock Option Plan is intended to assist the Company and its affiliates in attracting and retaining employees, directors, consultants and advisors (collectively, the "Eligible Individuals") and to promote the identification of their interests with those of the stockholders of the Company. The Stock Option Plan permits a maximum of 6,875,000 shares of Common Stock to be issued to Eligible Individuals pursuant to grants of stock options. Unless sooner terminated by the Company's Board of Directors, the Stock Option Plan will terminate on April 1, 2007. Options granted under the Stock Option Plan may be either "incentive stock options" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or nonstatutory stock options. No option granted under the Stock Option Plan is exerciseable after the tenth anniversary of the option's date of grant. The Company has granted to Eligible Individuals nonstatutory stock options to acquire an aggregate of 4,947,525 shares of Common Stock at a weighted average exercise price of $4.90 per share. 401(K) PLAN Software Americas provides a 401(k) plan (the "401(k) Plan") giving eligible employees, including executive officers, the opportunity to accrue additional income and to save for retirement on a before-tax basis. The 401(k) Plan is qualified under Section 401(k) of the Code. All Software Americas employees are eligible to participate in the plan after six months of full-time employment. The 401(k) Plan provides that each participant may contribute up to 15% of the participant's annual pre-tax compensation, but not more than the annual maximum prescribed by law. The 401(k) Plan requires 100% matching contributions by Software Americas up to 5% of the participant's annual compensation. DEFERRED COMPENSATION AGREEMENTS Software Americas has entered into deferred compensation agreements with Messrs. Gillis, McCreery and Daly (the "Deferred Compensation Agreements"). Pursuant to these agreements, each of Messrs. Gillis, McCreery and Daly annually receives a credit of $41,838, $46,000 and $24,000, respectively, to his deferred compensation account plus an additional credit to such account equal to 53%, 100% and 120%, respectively, of his bonus for such year. The deferred compensation accounts earn interest at an annual rate of 6%. Under the Deferred Compensation Agreements, no additional credits, other than interest, will be made to any of the deferred compensation accounts after December 31, 1998. The deferred compensation accounts of Messrs. McCreery and Daly are fully vested. Mr. Gillis' deferred compensation account is currently 40% vested and will vest in full as of December 31, 1998. Except under certain circumstances, upon termination of employment, each of Messrs. Gillis, McCreery and Daly is entitled to receive from Software Americas payments totaling the vested portion of his deferred compensation account. 45 SEVERANCE AGREEMENTS Mr. Gillis has entered into a memorandum of understanding with the Company with respect to the termination of his employment as President and Chief Executive Officer of the Company. Under this agreement, the Company is required to pay Mr. Gillis a severance benefit equal to twelve months of his then-current salary plus annual bonus, and, for a period not to exceed twelve months, to continue to make available his health and other fringe benefits if (i) the Company terminates his employment other than for cause or (ii) he resigns within ninety days of a substantial change in his title or a substantial reduction in his compensation and benefits or job responsibilities. Each of Messrs. McCreery, Brigden and Daly has entered into a memorandum of understanding with Software Americas with respect to the termination of his employment on terms and conditions substantially similar to Mr. Gillis' memorandum of understanding with the Company, provided, however, that no severance or other benefits are due under these agreements if the executive officer resigns within ninety days of a substantial reduction in his compensation and benefits related to a company wide reduction or a substantial reduction in his job responsibilities that is deemed to be in the best business interests of Software Americas. Pursuant to the terms of a Shareholders Agreement dated as of April 1, 1997, each of Messrs. Gillis, McCreery, Brigden, Daly and Gorley has agreed that (i) prior to the fifth anniversary of the termination of his employment with the Company, he will not influence any employee to leave the Company and (ii) prior to the third anniversary of the termination of his employment with the Company (unless such termination is by the Company without cause), he will not directly or indirectly compete with the Company by soliciting any of its customers, clients or suppliers. Mr. Hill has agreed to similar restrictions pursuant to a subscription agreement between Mr. Hill and the Company dated as of August 22, 1997. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Prior to April 1997, the Company did not have a Compensation Committee or other committee of the Board of Directors performing an equivalent function, and the compensation of the Company's executive officers was determined by the Company's Board of Directors. Since April 29, 1997, the Compensation Committee of the Company's Board of Directors has been comprised of Mr. Rickertsen and Drs. Stern and Dauber, each of whom is an Independent Director. Mr. Rickertsen and Dr. Stern are members of TC Equity Partners, LLC, which is the general partner of Thayer, a stockholder of the Company. 46 CERTAIN RELATIONSHIPS AND TRANSACTIONS At the closing of the Recapitalization, Thayer and the senior management of the Company acquired approximately 89% of the outstanding voting equity of the Company pursuant to an agreement among the Company, SAG, Thayer and the following executive officers of the Company: Daniel F. Gillis, Harry K. McCreery, Gary Hayes, James H. Daly, Derek M. Brigden and Thomas E. Gorley (collectively, such individuals are referred to as the "Managers"). Prior to the Recapitalization, SAG owned all of the Company's 27,500,000 outstanding shares of Common Stock. In connection with the Recapitalization, the Company (i) repurchased 24,750,000 shares of Common Stock from SAG for an aggregate purchase price of 57,000,000 Deutsche Marks ($34.1 million) and (ii) issued and sold 20,678,350 shares of Common Stock to Thayer and an aggregate of 771,650 shares of Common Stock to the Managers for an aggregate purchase price of $31,526,820, or $1.47 per share. Of the Common Stock purchased by the Managers, Messrs. Gillis and McCreery each purchased 204,050 shares and Messrs. Hayes, Daly, Brigden and Gorley purchased 84,975, 108,625, 67,925 and 102,025 shares, respectively. After the Recapitalization, SAG retained 2,750,000 shares of Common Stock, representing approximately 11% of the outstanding Common Stock. Dr. Erwin Koenigs, the Chairman of the Board and Chief Executive Officer of SAG, is currently a director of the Company. As a result of the Recapitalization, Thayer and the Managers respectively owned approximately 85% and 3% of the outstanding Common Stock. Dr. Stern and Mr. Rickertsen, directors of the Company, are members of TC Equity Partners, LLC, which is the sole general partner of Thayer. In addition, Mr. Gillis is currently, and was at the time of the Recapitalization, a director of the Company. In connection with the Recapitalization, on March 31, 1997, Software Americas borrowed $5,000,000 from Thayer under a short term note agreement for working capital requirements. This note accrued interest at a simple rate equal to 10% per annum and was repaid on April 11, 1997. In addition, Software Americas paid to TC Management LLC ("TC Management") a financial advisory fee of $840,000 in consideration for investment banking and advisory services provided by TC Management in connection with the Recapitalization, and reimbursed TC Management for its out-of-pocket expenses in connection with the Recapitalization. On April 1, 1997, Software Americas also agreed to pay on a quarterly basis an annual fee of $300,000 to TC Management for management and consulting services to be provided by TC Management to Software Americas in connection with the operation and conduct of Software Americas' business. To date, Software Americas has paid $150,000 of such fees. TC Management provides management services to Thayer. Dr. Stern and Mr. Rickertsen, directors of the Company, are members of TC Management. In connection with the Recapitalization, Software Americas also paid a one-time advisory fee of $250,000 to MLC Holdings, Inc. Mr. Rickertsen, is a director of MLC Holdings, Inc. Prior to the Recapitalization, the Company licensed and serviced SAG products pursuant to a license agreement entered into by SAG and Software Americas on January 1, 1995 (the "License Agreement"). The License Agreement gave Software Americas the exclusive rights to license and service SAG products in North America, South America, Japan and Israel, and gave SAG the exclusive rights to license and service Software Americas products in all other areas. Immediately prior to the Recapitalization, Software Americas and SAG entered into a Cooperation Agreement dated March 31, 1997 which terminated and superseded the License Agreement. The Cooperation Agreement generally provides (i) Software Americas the exclusive and perpetual right to license and service in North America, South America, Japan and Israel (the "Territory") both existing and future products developed or acquired by SAG and (ii) SAG the exclusive and perpetual right to license and service outside the Territory both existing and future products developed or acquired by Software Americas. Each of Software Americas and SAG must pay the other 24% of the net revenues derived from such licenses. Except in certain circumstances, Software Americas' minimum annual royalty payment to SAG through the year 2000 must at least equal $21 million. This 24% royalty rate is fixed for 20 years. In 1994, 1995, 1996 and the first six months of 1997, Software Americas' royalty payments to SAG were $29.0 million, $23.9 million, $26.1 million and $12.3 million, respectively. In the same periods, SAG's royalty payments to Software Americas were $0, $0.3 million, $0.3 million and $0.4 million, respectively. See "Company Background." 47 On December 5, 1993, Software Americas and SAG entered into a Products and Research & Development Operations Transfer Agreement (the "R&D Agreement") which required Software Americas to provide certain services relating to certain SAG employees who utilized Software Americas facilities. In connection with the Recapitalization, on March 31, 1997, Software Americas entered into an Administrative Services Agreement (the "ASA") with SAG, terminating the R&D Agreement and requiring that Software Americas provide services similar to those required under the R&D Agreement. SAG is required under the ASA to reimburse Software Americas for its costs incurred in connection with the ASA and to pay Software Americas $500,000 per year during the years 1997, 1998 and 1999 for the use of certain machinery leased by Software Americas. In 1994, 1995, 1996 and the first six months of 1997, payments to Software Americas under the R&D Agreement and the ASA were approximately $7.5 million, $8.8 million, $15.9 million and $6.6 million, respectively. From 1988 until the Recapitalization, the Company was a wholly owned subsidiary of SAG. Accordingly, during that period, there were a variety of intercompany transactions, including loans and dividends, between the Company and SAG. In 1995 and 1996, the Company paid aggregate dividends to SAG of $1.7 and $9.0 million, respectively. Except as described above, all of these transactions that were material terminated in connection with the Recapitalization. See "Dividend Policy" and Note 6 of the Notes to the Consolidated Financial Statements. On August 22, 1997, the Company entered into a subscription agreement with Timothy L. Hill, the Company's Vice President--Marketing, pursuant to which the Company issued and sold to Mr. Hill 137,500 shares of Common Stock for an aggregate purchase price of $202,095. Pursuant to the subscription agreement, the Company has the right to repurchase Mr. Hill's shares at $1.47 per share if Mr. Hill's employment with the Company is terminated for any reason prior to August 22, 1999. The Company has issued options to purchase an aggregate of 94,325 shares of Common Stock at an exercise price of $1.47 to the members of Thayer's Advisory Board. The Company and Thayer have entered into a registration rights agreement for the benefit of all holders of "restricted securities" of the Company within the meaning of Rule 144 of the Commission as of the date hereof and certain transferees. Pursuant to this agreement, a majority-in-interest of such holders has the right to require the Company to register their restricted securities for resale under the Securities Act on up to five occasions (only one of which may be on Form S-1) and such holders have been granted certain "piggy-back" registration rights with regard to certain securities offerings initiated by the Company. The Company has agreed to pay certain expenses in connection with such registrations. On March 24, 1997, Thomas Gorley borrowed $75,000 from Software Americas under a promissory note. The promissory note accrues interest at the rate of 6% per annum and is due and payable upon Mr. Gorley's termination of employment with Software Americas. 48 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth certain information known to the Company regarding beneficial ownership of the Company's Common Stock as of September 26, 1997, and as adjusted to reflect the sale of the shares pursuant to this offering, by (i) each person who is known by the Company to own beneficially more than 5% of the outstanding shares of Common Stock, (ii) each director and Named Executive Officer of the Company, (iii) all directors and executive officers of the Company as a group and (iv) each Selling Stockholder. Except as otherwise indicated below, to the knowledge of the Company, each person listed below has sole voting power and investment power with respect to the shares beneficially owned by such person, subject to community property laws where applicable.
SHARES SHARES BENEFICIALLY OWNED BENEFICIALLY OWNED PRIOR TO OFFERING (2) SHARES TO BE AFTER OFFERING (2) ------------------------- SOLD IN ------------------ NAME AND ADDRESS (1) NUMBER PERCENT OFFERING (3) NUMBER PERCENT - -------------------- ------------- ----------------------- ---------- ------- Thayer Equity Investors 20,209,200 83.0% 3,083,260 17,125,940 59.2% III, L.P............... 1455 Pennsylvania Avenue, N.W. Washington, DC 20004 Software AG............. 2,750,000 11.3 -- 2,750,000 9.5 Uhlandstrasse 12, D- 64297 Darmstadt, Germany TC Co-Investors, LLC.... 109,725 * 16,740 92,985 * 1455 Pennsylvania Avenue, N.W. Washington, DC 20004 Daniel F. Gillis........ 561,550 2.3 -- 561,550 1.9 Harry K. McCreery....... 396,550 1.6 -- 396,550 1.4 James H. Daly........... 125,675 * -- 125,675 * Derek M. Brigden........ 84,975 * -- 84,975 * Carl J. Rickertsen (4).. 20,318,925 83.5 3,100,000 17,218,925 60.0 Dr. Philip S. Dauber 67,925 * -- 67,925 * (5).................... Dr. Erwin Koenigs (6)... 2,852,025 11.7 -- 2,852,025 9.9 Edward E. Lucente....... -- -- -- -- -- Dr. Paul G. Stern (4)... 20,318,925 83.5 3,100,000 17,218,925 60.0 Michael J. King......... -- -- -- -- -- William Cripe........... -- -- -- -- -- All directors and executive officers as a group (11 persons) (7).................... 24,681,250 98.9% 3,100,000 21,581,250 73%
- -------- * Less than 1% of the outstanding Common Stock (1) The business address for Messrs. Gillis, McCreery, Brigden and Daly is 11190 Sunrise Valley Drive, Reston, Virginia 20191. The business address for Mr. Rickertsen and Dr. Stern is c/o Thayer Equity Investors III, L.P., 1455 Pennsylvania Avenue, N.W., Washington, DC 20004. The business address for Dr. Koenigs is c/o Software AG, Uhlandstrasse 12, D-64297, Darmstadt, Germany. 49 (2) The number of shares of Common Stock outstanding prior to this offering includes (i) 24,337,500 shares outstanding as of September 26, 1997 and (ii) with respect to each person, the shares issuable by the Company pursuant to options held by such person which may be exercised within 60 days following September 26, 1997 ("Presently Exercisable Options"). The number of shares of Common Stock deemed outstanding after this offering includes an additional 4,600,000 shares that are being offered for sale by the Company in this offering. Beneficial ownership is determined in accordance with the rules of the Commission that deem shares to be beneficially owned by any person or group who has or shares voting and investment power with respect to such shares. Presently Exercisable Options are deemed to be outstanding and to be beneficially owned by the person holding such options for the purpose of computing the percentage ownership of such person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person or group. (3) If the Underwriters exercise their over-allotment option to purchase up to 1,155,000 shares, the following stockholders named in the table above will sell up to the following number of additional shares: Thayer Equity Investors III, L.P., 574,381 shares; and TC Co-Investors, LLC 3,119 shares. (4) Consists of 20,209,200 shares held of record by Thayer and 109,725 shares held of record by TC Co- Investors, LLC ("TC Co-Investors"). Thayer is a Delaware limited partnership whose general partner is TC Equity Partners, LLC, a Delaware limited liability company ("TC Equity Partners"). TC Equity beneficially owns, and has sole voting and investment power with respect to, the shares of Common Stock held of record by Thayer. TC Co- Investors is a Delaware limited liability company whose managing member is TC Management LLC ("TC Management"). TC Management beneficially owns, and has sole voting and investment power with respect to, the shares of Common Stock held of record by TC Co-Investors. The members of each of TC Equity Partners and TC Management are Frederic V. Malek, Dr. Paul G. Stern and Carl J. Rickertsen. Dr. Stern and Mr. Rickertsen may be deemed to be the beneficial owners of the shares of Common Stock held by each of Thayer and TC Co-Investors. (5) All of the reported shares are held of record by PSERD Trust, of which Dr. Dauber is a trustee. Dr. Dauber shares voting and investment power with respect to all shares held by PSERD Trust and may be deemed to be the beneficial owner of all such shares. (6) 2,750,000 of the reported shares are held of record by Software AG ("SAG"). Dr. Koenigs, a director of the Company, is the Chairman of the Board and Chief Executive Officer of SAG, and may be deemed to have or share voting and investment power with respect to all shares held of record by SAG. Dr. Koenigs disclaims beneficial ownership of all shares held of record by SAG. (7) Includes 20,209,200 shares held of record by Thayer, 2,750,000 shares held of record by SAG, 109,725 shares held of record by TC Co-Investors and 67,925 shares held of record by PSERD Trust. See footnotes (4), (5) and (6). 50 DESCRIPTION OF CAPITAL STOCK The authorized capital stock of the Company consists of 75,000,000 shares of Common Stock, $.01 par value per share, and 25,000,000 shares of preferred stock, $.01 par value per share (the "Preferred Stock"). The following summary of certain provisions of the Common Stock and Preferred Stock does not purport to be complete and is subject to, and qualified in its entirety by, the provisions of applicable law and by the Company's Certificate of Incorporation, a copy of which is filed as an exhibit to the Registration Statement of which this Prospectus is a part. COMMON STOCK As of September 26, 1997, there were 24,337,500 shares of Common Stock outstanding held of record by 18 stockholders. Based on the number of shares outstanding as of that date and giving effect to the issuance of the 4,600,000 shares of Common Stock being offered by the Company hereby, there will be 28,937,500 shares of Common Stock outstanding upon the consummation of this offering. Holders of Common Stock are entitled to one vote per share on all matters to be voted on by stockholders. There are no cumulative voting rights. All outstanding shares of Common Stock are, and all shares of Common Stock issued and sold in this offering will be, duly authorized, validly issued, fully paid and nonassessable. Subject to such preferential rights as may be granted by the Board of Directors in connection with the issuance of Preferred Stock, distributions may be paid to the holders of Common Stock when, as and if declared by the Board of Directors out of funds legally available therefore. The Company does not intend to pay dividends on its Common Stock in the foreseeable future. See "Dividend Policy." Holders of Common Stock have no preemptive or other rights to subscribe for additional shares of Common Stock, redemption rights or conversion rights. Upon liquidation, dissolution or winding up of the Company, the holders of the Common Stock are entitled to share ratably in all assets of the Company that are legally available for distribution after payment of all debts and other liabilities and subject to any prior rights of holders of Preferred Stock, if any, then outstanding. PREFERRED STOCK The Board of Directors has authority to issue 25,000,000 shares of Preferred Stock in one or more series and to fix the relative rights, preferences, privileges, qualifications, limitations and restrictions thereof, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting any series or the designation of such series, without further vote or action by the stockholders. The Board of Directors could, without the approval of the stockholders, issue Preferred Stock having voting or conversion rights that could adversely affect the voting power of the holders of Common Stock, and the issuance of Preferred Stock could be used, under certain circumstances, to render more difficult or discourage a hostile takeover of the Company. The Company has no present plans to issue any shares of Preferred Stock. LIMITATION ON LIABILITY AND INDEMNIFICATION OF DIRECTORS The Company has adopted provisions in its Certificate of Incorporation limiting the liability of directors of the Company for monetary damages. The effect of this provision in the Certificate of Incorporation is to eliminate the rights of the Company and its stockholders (through stockholders' derivative suits on behalf of the Company) to recover monetary damages against a director for breach of the fiduciary duty of care as a director (including breaches resulting from negligent or grossly negligent behavior) except in certain limited situations. This provision does not limit or eliminate the rights of the Company or any stockholder to seek nonmonetary relief such as an injunction or rescission in the event of a breach of a director's duty of care. The provisions of the Certificate of Incorporation described above apply to an officer of the Company only if 51 he or she is a director of the Company and is acting in his or her capacity as director, and do not apply to officers of the Company who are not directors. These provisions will not alter the liability of directors under federal securities laws. The Company's Certificate of Incorporation and Bylaws contain provisions indemnifying the directors and officers of the Company to the fullest extent permitted by the Delaware General Corporate Law ("DGCL"). The Company believes that these provisions will assist the Company in attracting and retaining qualified individuals to serve as directors and officers. CERTAIN PROVISIONS OF DELAWARE LAW, THE CERTIFICATE OF INCORPORATION AND THE BYLAWS The Company is subject to the provisions of Section 203 of the DGCL. Subject to certain exceptions, Section 203 prohibits a publicly held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the interested stockholder attained such status with the approval of the Board of Directors, the business combination is approved in a prescribed manner or certain other conditions are satisfied. A "business combination" includes, among other transactions, mergers, asset sales and other transactions resulting in a financial benefit to the interested stockholder. Subject to certain exceptions, an "interested stockholder" is a person who, together with affiliates and associates, owns, or within three years did own, 15% or more of the corporation's voting stock. The Company's Certificate of Incorporation and Bylaws contain certain provisions that could make more difficult the acquisition of the Company by means of a tender offer, a proxy contest or otherwise. These provisions are intended to discourage certain types of coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control of the Company to negotiate first with the Board of Directors. The Company believes that the benefits of these provisions outweigh the potential disadvantages of discouraging such proposals because, among other things, negotiation of such proposals might result in an improvement of their terms. Classified Board of Directors. The Certificate of Incorporation provides that, upon consummation of an underwritten public offering of the Company Common Stock, the Board of Directors will be divided into three classes of directors, each class constituting approximately one-third of the total number of directors and the classes serving staggered three-year terms. The classification of directors will have the effect of making it more difficult for stockholders to change the composition of the Board of Directors. The Company believes, however, that the longer time required to elect a majority of a classified Board of Directors will help to ensure continuity and stability of the Company's management and policies. The classification provisions could also have the effect of discouraging a third party from accumulating large blocks of the Company's Common Stock or attempting to obtain control of the Company, even though such an attempt might be beneficial to the Company and its stockholders. Accordingly, stockholders could be deprived of certain opportunities to sell their shares of Common Stock at a higher market price than might otherwise be the case. See "Management-- Executive Officers and Directors." Number of Directors; Removal; Filling Vacancies. The Certificate of Incorporation provides that the number of directors will be fixed by, or determined pursuant to, the Bylaws. The Bylaws provide that the Board of Directors shall consist of six directors and that the Board of Directors may increase or decrease the number of directors. The Bylaws also provide that the number of directors shall not be increased by 50% or more in any 12-month period without the approval of at least two-thirds of the directors then in office. The Certificate of Incorporation provides that any vacancies will be filled only by the affirmative vote of a majority of the remaining directors then in office, even if less than a quorum. Accordingly, the Board of Directors could temporarily prevent any stockholder from enlarging the Board of Directors and filling the new directorships with such stockholder's own nominees. The Certificate of Incorporation also provides that directors (or the entire Board) may be removed from office by the stockholders for cause by the vote of the holders of at least a majority of the Common Stock. 52 No Stockholder Action by Written Consent; Special Stockholder Meetings. The Certificate of Incorporation provides that, after the consummation of an underwritten public offering of the Company's Common Stock, stockholder action can be taken only at an annual or special meeting of stockholders and can not be taken by written consent in lieu of a meeting. The Bylaws provide that special meetings of the stockholders may be called only by the Chairman of the Board of Directors, a majority of the Board of Directors or the Chief Executive Officer of the Company. These provisions may have the effect of delaying consideration of a stockholder proposal until the next annual meeting. These provisions may also discourage another person or entity from making a tender offer for the Company's Common Stock. Advance Notice Provisions for Stockholder Nominations and Stockholder Proposals. The Bylaws establish an advance notice procedure for stockholders to make nominations of candidates for election as directors or to bring other business before an annual meeting of stockholders of the Company (the "Stockholder Notice Procedure"). The Stockholder Notice Procedure provides that (i) only persons who are nominated by, or at the direction of, the Board of Directors, or by a stockholder who has given timely written notice containing specified information to the Secretary of the Company prior to the meeting at which directors are to be elected, will be eligible for election as directors of the Company and (ii) at an annual meeting only such business may be conducted as has been brought before the meeting by, or at the direction of, the Board of Directors, or by a stockholder who has given timely written notice to the Secretary of the Company of such stockholder's intention to bring such business before the meeting. Except for stockholder proposals submitted in accordance with the federal proxy rules as to which the requirements specified therein shall control, notice of stockholder nominations or business to be conducted at a meeting must be received by the Company not less than 60 days nor more than 90 days prior to the date of the annual meeting if the notice is to be submitted at an annual meeting, or not later than 10 days following the day on which notice of the date of a special meeting was given if the notice is to be submitted at a special meeting. The purpose of requiring stockholders to give the Company advance notice of nominations and other business is to afford the Board of Directors a meaningful opportunity to consider the qualifications of the proposed nominees or the advisability of the other proposed business and, to the extent deemed necessary or desirable by the Board of Directors, to inform stockholders and make recommendations about such qualifications or business, as well as to provide a more orderly procedure for conducting meetings of stockholders. Although the Bylaws do not give the Board of Directors any power to disapprove stockholder nominations for the election of directors or proposals for action, they may have the effect of precluding a contest for the election of directors or the consideration of stockholder proposals if the proper procedures are not followed and of discouraging or deterring a third party from conducting a solicitation of proxies to elect its own slate of directors or to approve its own proposal without regard to whether consideration of such nominees or proposals might be harmful or beneficial to the Company and its stockholders. Amendment of Certificate of Incorporation and Bylaws. The Certificate of Incorporation provides that, after consummation of an underwritten public offering of the Company's Common Stock, the provisions therein relating to the staggered Board of Directors, the availability of action by written consent by stockholders, removal of directors and filling of vacancies on the Board of Directors may be amended, altered, changed or repealed only by the affirmative vote of the holders of at least two-thirds of the voting power of all the shares of capital stock then entitled to vote, voting as a single class. The Certificate of Incorporation also provides that, after consummation of an underwritten public offering of the Company's Common Stock, the Bylaws may not be adopted, amended, altered, changed or repealed by the affirmative vote of the majority of the members of the Board of Directors. Any action taken by the stockholders with respect to adopting, amending, altering, changing or repealing any Bylaw may be taken only by the affirmative vote of the holders of at least two-thirds of the voting power of all of the shares of capital stock then entitled to vote, voting as a single class. TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar for the Company's Common Stock is . 53 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no market for the Common Stock of the Company. Future sales of substantial amounts of Common Stock in the public market, or the perception that such sales might occur, could adversely affect the market price of the Common Stock and could impair the ability of the Company to raise equity capital in the future. Upon completion of this offering, the Company will have 28,937,500 outstanding shares of Common Stock (assuming no exercise of the Underwriters' over-allotment option). Of these shares, the 7,700,000 shares of Common Stock sold in this offering will be freely tradable without restriction or further registration under the Securities Act, except for any shares purchased by "affiliates" of the Company, as that term is defined under the Securities Act and the regulations promulgated thereunder (an "Affiliate"). The remaining 21,237,500 shares of Common Stock (the "Restricted Shares") held by existing stockholders were sold by the Company in reliance on exemptions from the registration requirements of the Securities Act and are "restricted securities" within the meaning of Rule 144 promulgated under the Securities Act. Of the Restricted Shares, 2,750,000 shares will be eligible for sale beginning 90 days after the date of this Prospectus (of which will be subject to 180-day lock-up agreements between certain shareholders and the Representatives of the Underwriters), and 18,487,500 additional shares will be eligible for sale beginning March 31, 1998 (of which will be subject to 180-day lock-up agreements). The holders of shares of Common Stock have agreed with the Representatives that, until 180 days from the date of this Prospectus, subject to certain limited exceptions, they will not, directly or indirectly, sell, offer, contract to sell, pledge, grant any option to purchase or otherwise dispose of any shares of Common Stock or any securities convertible into, or exchangeable for, or any rights to purchase or acquire, shares of Common Stock, owned directly by such holders or with respect to which they have the power of disposition, without the prior written consent of Robertson, Stephens & Company. Robertson, Stephens & Company may, in its sole discretion and at any time without notice, release all or any portion of the securities subject to the lockup agreements. In general, under Rule 144, as currently in effect, beginning 90 days after the date of this Prospectus, any holder of Restricted Shares, including an Affiliate of the Company, as to which at least one year has elapsed since the later of the date of the acquisition of such Restricted Shares from the Company or an Affiliate, would be entitled within any three-month period to sell a number of shares that does not exceed the greater of 1% of the then outstanding shares of Common Stock (289,375 shares immediately following the closing of this offering) or the average weekly trading volume of the Common Stock during the four calendar weeks preceding the date on which notice of the sale is filed with the Commission. Sales under Rule 144 are also subject to certain manner of sale provisions, notice requirements and the availability of current public information about the Company. Affiliates of the Company must comply with the restrictions and requirements of Rule 144 (except for the one- year holding period requirement) in order to sell shares of Common Stock which are not "restricted securities" (such as shares acquired by Affiliates in this offering). Further, under Rule 144(k) a person who holds restricted shares as to which at least two years have elapsed since the later of their acquisition from the Company or an Affiliate, and who is not deemed to have been an Affiliate of the Company at any time during the three months preceding a sale, is entitled to sell such shares under Rule 144 without regard to volume limitations, manner of sale provisions, notice requirements or availability of current public information concerning the Company. As of September 26, 1997, options to purchase 4,947,525 shares were outstanding under the Stock Option Plan, and an additional 1,927,475 shares were reserved for issuance under the Stock Option Plan. The Company intends to file a registration statement on Form S-8 under the Securities Act covering the shares issuable under the Stock Option Plan. Such registration statement is expected to be filed and become effective 54 as soon as practicable after consummation of this offering. After the effective date of such registration statement, shares of Common Stock issued under the Stock Option Plan will be immediately eligible for sale in the public market, subject in certain cases to the lock-up restrictions described above and to Rule 144 volume limitations applicable to Affiliates. The holders of 18,487,500 Restricted Shares have been granted certain rights to have their shares of Common Stock registered for sale under the Securities Act. See "Certain Relationships and Transactions." 55 UNDERWRITING The Underwriters named below, acting through their representatives, Robertson, Stephens & Company LLC and Donaldson, Lufkin & Jenrette Securities Corporation (the "Representatives"), have severally agreed, subject to the terms and conditions of the Underwriting Agreement, to purchase from the Company and the Selling Stockholders the number of shares of Common Stock set forth opposite their respective names below. The Underwriters are committed to purchase and pay for all such shares if any are purchased. No such reduction shall change the amount of proceeds to be received by the Company as set forth on the cover page of this Prospectus.
NUMBER UNDERWRITER OF SHARES ----------- --------- Robertson, Stephens & Company LLC............................... Donaldson, Lufkin & Jenrette Securities Corporation............. --------- Total....................................................... 7,700,000 =========
The Company has been advised by the Representatives that the Underwriters propose to offer the shares of Common Stock to the public at the initial public offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession of not more than $ per share, of which $ per share may be reallowed to other dealers. After the initial public offering, the public offering price, concession and reallowance to dealers may be reduced by the Representatives. The Company and the Selling Stockholders have granted to the Underwriters an option, exercisable during the 30-day period after the date of this Prospectus, to purchase an aggregate of up to an additional 1,115,000 shares of Common Stock at the same price per share as the Company and the Selling Stockholders receive for the 7,700,000 shares that the Underwriters have agreed to purchase. To the extent that the Underwriters exercise such option, each of the Underwriters will have a firm commitment to purchase approximately the same percentage of such additional shares that the number of shares of Common Stock to be purchased by it shown in the above table represents as a percentage of the 7,700,000 shares offered hereby. If purchased, such additional shares will be sold by the Underwriters on the same terms as those on which the 7,700,000 shares are being sold. The Company and the Selling Stockholders subject to such over-allotment option will be obligated, pursuant to the option, to sell shares 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 shares of Common Stock offered hereby. The Underwriting Agreement contains covenants of indemnity among the Underwriters, the Company and the Selling Stockholders against certain civil liabilities, including liabilities under the Securities Act of 1933, as amended, and liability arising from breaches of representations and warranties contained in the Underwriting Agreement. All current officers and directors of the Company, and stockholders holding shares of Common Stock, have agreed with the Representatives that, until 180 days from the date of this Prospectus, subject to certain limited exceptions, they will not, directly or indirectly, offer, sell, contract to sell, grant any option to purchase, pledge, or otherwise dispose of or transfer, any shares of Common Stock, or any securities convertible into or exchangeable for, or any rights to purchase or acquire, shares of Common Stock, now owned or hereafter acquired by such holders or with respect to which they have or hereafter acquire the power of disposition, without the prior written consent of Robertson, Stephens & Company LLC. Robertson, Stephens & Company LLC may, in its sole discretion and without notice, release all or any portion of the securities subject to the lock-up agreements. In addition, the Company has agreed that, until 180 days from 56 the date of this Prospectus, the Company will not, without the prior written consent of Robertson, Stephens & Company LLC, subject to certain exceptions, sell or otherwise dispose of any shares of Common Stock, any options or warrants to purchase any shares of Common Stock or any securities convertible into, exercisable for or exchangeable for shares of Common Stock other than the Company's sale of shares in this offering, the issuance of Common Stock upon the exercise of outstanding options, or the Company's grant of options and issuance of stock under the Stock Option Plan. See "Shares Eligible for Future Sale." The Representatives have advised the Company and the Selling Stockholders that the Underwriters do not intend to confirm sales to accounts over which they exercise discretionary authority. Certain persons participating in this offering may overallot or effect transactions which stabilize, maintain or otherwise affect the market price of the Common Stock at levels above those which might otherwise prevail in the open market, including by entering stabilizing bids, effecting syndicate covering transactions or imposing penalty bids. A stabilizing bid means the placing of any bid or effecting of any purchase for the purpose of pegging, fixing or maintaining the price of the Common Stock. A syndicate covering transaction means the placing of any bid on behalf of the underwriting syndicate or the effecting of any purchase to reduce a short position created in connection with this offering. A penalty bid means an arrangement that permits the Underwriters to reclaim a selling concession from a syndicate member in connection with this offering when shares of Common Stock sold by the syndicate member are purchased in syndicate covering transactions. Such transactions may be effected, where permitted, on the NYSE or otherwise. Such stabilizing, if commenced, may be discontinued at any time. The Underwriters have reserved for sale, at the initial public offering price, up to 5% of the shares of Common Stock offered hereby for employees of the Company and certain individuals who have expressed an interest in purchasing shares of Common Stock in this offering. The number of shares available for sale to the general public will be reduced to the extent such persons purchase such reserved shares. Any reserved shares not so purchased will be offered by the Underwriters to the general public on the same basis as other shares offered hereby. Prior to this offering, there has been no public market for the Common Stock of the Company. Consequently, the initial public offering price for the Common Stock will be determined through negotiations among the Company and the Representatives. The material factors to be considered in such negotiations will be prevailing market and economic conditions, certain financial information of the Company for recent periods, the market valuations of other companies engaged in activities similar to those of the Company, estimates of the business potential and prospects of the Company, the present state of the Company's business operations, the Company's management and other factors deemed relevant. The estimated initial public offering price range set forth on the cover of this preliminary prospectus is subject to change as a result of market conditions and other factors. There can be no assurance that an active or orderly trading market will develop for the Common Stock or that the Common Stock will trade in the public market subsequent to this offering at or above the initial trading price. See "Risk Factors--No Prior Market for Common Stock and Possible Volatility of Common Stock Price". 57 LEGAL MATTERS The validity of the shares of Common Stock offered hereby will be passed upon for the Company and the Selling Stockholders by Arnold & Porter, Washington, D.C. Certain legal matters in connection with this offering will be passed upon for the Underwriter by Hale and Dorr LLP, Washington, D.C. EXPERTS The consolidated financial statements and schedule of the Company as of December 31, 1995 and 1996, and for each of the years in the three-year period ended December 31, 1996 have been included in this Prospectus and elsewhere in the Registration Statement in reliance upon the reports 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. On July 11, 1997, the Company retained KPMG Peat Marwick LLP to act as its independent public accountants and informed the prior auditors, Gocial & Company, P.C., the Company's independent accountants since January 1992, of its decision. In connection with its audit of the consolidated financial statements for the years ended December 31, 1995 and 1996, there were no disagreements with the prior auditors on any matters of accounting principles or practices, financial statement disclosure or auditing scope or procedures. The prior auditors' report on the Company's consolidated financial statements for the years ended December 31, 1995 and 1996 contained no adverse opinion or disclaimer of opinion and was not modified or qualified as to uncertainty, audit scope, or accounting principles. The decision to change was approved by the Board of Directors of the Company. The Company has provided the prior auditors with a copy of the disclosure contained in this section of the Prospectus. ADDITIONAL INFORMATION The Company has filed with the Commission a Registration Statement (of which this Prospectus is a part) on Form S-1 (together with all amendments, schedules and exhibits thereto, the "Registration Statement") under the Securities Act with respect to the shares of Common Stock offered hereby. This Prospectus does not contain all the information set forth in the Registration Statement, certain portions of which have been omitted as permitted by the rules and regulations of the Commission. Statements contained in this Prospectus as to the content of any contract or other documents are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference and the exhibits and schedules hereto. For further information regarding the Company and the Common Stock offered hereby, reference is hereby made to the Registration Statement and such exhibits and schedules which may be obtained from the Commission at its principal office in Washington, D.C. upon payment of the fees prescribed by the Commission. The Registration Statement, including the exhibits and schedules forming a part thereof, filed by the Company with the Commission can be inspected and copies obtained from 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 following regional offices of the Commission: Seven World Trade Center, Suite 1300, New York, New York 10048, and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such material can be obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. In addition, the Commission maintains a Web site (http:\\www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. 58 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Independent Auditors' Report.............................................. F-2 Consolidated Balance Sheets as of December 31, 1995 and 1996.............. F-3 Consolidated Statements of Operations for each of the years in the three- year period ended December 31, 1996...................................... F-4 Consolidated Statements of Stockholder's Equity for each of the years in the three-year period ended December 31, 1996............................ F-5 Consolidated Statements of Cash Flows for each of the years in the three- year period ended December 31, 1996...................................... F-6 Notes to Consolidated Financial Statements................................ F-7 Unaudited Condensed Consolidated Balance Sheet as of June 30, 1997........ F-17 Unaudited Condensed Consolidated Statements of Operations for the six months ended June 30, 1996, the three months ended March 31, 1997, and the three months ended June 30, 1997..................................... F-18 Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 1996, the three months ended March 31, 1997, and the three months ended June 30, 1997..................................... F-19 Notes to Unaudited Condensed Consolidated Financial Statements............ F-20
F-1 WHEN THE STOCK SPLIT TRANSACTION REFERRED TO IN NOTE 14 OF THE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS HAS BEEN CONSUMMATED, WE WILL BE IN A POSITION TO RENDER THE FOLLOWING REPORT. /s/ KPMG PEAT MARWICK LLP INDEPENDENT AUDITORS' REPORT Board of Directors Software AG Systems, Inc.: We have audited the accompanying consolidated balance sheets of Software AG Systems, Inc. and subsidiaries as of December 31, 1995 and 1996, and the related consolidated statements of operations, stockholder's equity, and cash flows for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Software AG Systems, Inc. and subsidiaries as of December 31, 1995 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. McLean, Virginia September 12, 1997, except for note 14, which is as of F-2 SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1995 AND 1996
1995 1996 -------- -------- (in thousands) ASSETS Current: Cash and cash equivalents.................................. $ 1,573 $ 25,773 Accounts receivable, net of allowance for doubtful accounts.................................................. 58,983 67,370 Notes receivable, SAG...................................... -- 30,000 Current portion of deferred income taxes................... 3,666 3,412 Prepaid expenses........................................... 1,600 3,298 Other current assets....................................... 816 2,686 -------- -------- Total current assets..................................... 66,638 132,539 Installment accounts receivable, net of current portion...... 19,114 10,955 Note receivable, SAG......................................... 20,000 -- Property, equipment and leasehold improvements, net of accumulated depreciation and amortization................... 15,026 8,923 Deferred income taxes........................................ -- 1,469 Other assets................................................. 4,834 4,202 -------- -------- Total assets........................................... $125,612 $158,088 ======== ======== LIABILITIES AND STOCKHOLDER'S EQUITY Current: Accounts payable........................................... $ 3,301 $ 6,773 Accrued payroll and employee benefits...................... 12,986 10,792 Payable to SAG............................................. 17,132 33,317 Income taxes payable....................................... 1,821 3,106 Other current liabilities.................................. 3,694 5,265 Current portion of deferred revenues, net of deferred royalties of $7,126,000 and $7,923,000.................... 30,169 42,865 -------- -------- Total current liabilities................................ 69,103 102,118 Deferred revenues, net of deferred royalties of $7,131,000 and $7,415,000.............................................. 23,883 23,472 Deferred gain................................................ -- 2,690 Deferred income taxes........................................ 27 -- -------- -------- Total liabilities...................................... 93,013 128,280 -------- -------- Commitments and contingencies Stockholder's equity: Common stock ($.01 par value; 55,000,000 shares authorized, 27,500,000 shares issued and outstanding)................. 275 275 Additional paid-in capital................................. 11,877 11,877 Retained earnings.......................................... 20,447 17,656 -------- -------- Total stockholder's equity............................... 32,599 29,808 -------- -------- Total liabilities and stockholder's equity............. $125,612 $158,088 ======== ========
See accompanying notes to consolidated financial statements. F-3 SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
1994 1995 1996 ------------- ------------- ------------- (in thousands, except per share amounts) Revenues: Software license fees............. $ 51,832 $ 52,061 $ 52,163 Maintenance fees.................. 65,871 65,307 69,702 Professional services fees........ 29,552 35,194 34,975 ------------- ------------- ------------- Total revenues.................. 147,255 152,562 156,840 ------------- ------------- ------------- Cost of revenues: Software license.................. 13,513 15,244 14,120 Maintenance....................... 29,823 23,488 25,885 Professional services............. 26,490 32,591 32,966 ------------- ------------- ------------- Total cost of revenues.......... 69,826 71,323 72,971 ------------- ------------- ------------- Gross profit........................ 77,429 81,239 83,869 ------------- ------------- ------------- Operating expenses: Software product development...... 900 900 1,372 Sales and marketing............... 50,422 52,512 48,677 Administrative and general........ 25,212 24,639 28,539 ------------- ------------- ------------- Total operating expenses........ 76,534 78,051 78,588 ------------- ------------- ------------- Income from operations.............. 895 3,188 5,281 Other income and expense, net....... 1,882 2,449 5,230 ------------- ------------- ------------- Income before income taxes.......... 2,777 5,637 10,511 Income tax provision................ 1,395 2,311 4,302 ------------- ------------- ------------- Net income.......................... $ 1,382 $ 3,326 $ 6,209 ============= ============= ============= Net income per share................ $ 0.05 $ 0.11 $ 0.20 ============= ============= ============= Shares used in computing net income per share.......................... 30,584 30,584 30,584 ============= ============= =============
See accompanying notes to consolidated financial statements. F-4 SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
COMMON STOCK $0.01 PAR VALUE ADDITIONAL TOTAL ---------------- PAID-IN- RETAINED STOCKHOLDER'S SHARES AMOUNT CAPITAL EARNINGS EQUITY -------- ------- ---------- -------- ------------- (in thousands) Balance at December 31, 1993..................... 27,500 $ 275 $11,877 $18,039 $30,191 Net income................ 1,382 1,382 Cash dividends ($0.02 per share)................... (600) (600) -------- ------ ------- ------- ------- Balance at December 31, 1994..................... 27,500 275 11,877 18,821 30,973 Net income................ 3,326 3,326 Cash dividends ($0.06 per share)................... (1,700) (1,700) -------- ------ ------- ------- ------- Balance at December 31, 1995..................... 27,500 275 11,877 20,447 32,599 Net income................ 6,209 6,209 Cash dividends ($0.33 per share)................... (9,000) (9,000) -------- ------ ------- ------- ------- Balance at December 31, 1996..................... 27,500 $ 275 $11,877 $17,656 $29,808 ======== ====== ======= ======= =======
See accompanying notes to consolidated financial statements. F-5 SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
1994 1995 1996 -------- -------- -------- (in thousands) Cash flows from operating activities: Net income.................................. $ 1,382 $ 3,326 $ 6,209 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.............. 3,952 3,921 3,660 Loss on sales of property and equipment.... 139 67 156 Deferred income taxes...................... 1,509 (408) (1,242) Deferred gain.............................. -- -- (140) Net proceeds from sales of accounts receiv- able...................................... -- 28,852 28,448 Change in: Accounts receivable, excluding net pro- ceeds from sales........................ (14,303) (47,331) (28,674) Prepaid expenses......................... (913) 348 (1,698) Other current assets..................... (224) 225 (1,870) Accounts payable......................... 451 (817) 3,472 Accrued payroll and employee benefits.... 508 3,181 (2,194) Payable to SAG........................... 6,749 8,495 16,185 Other current liabilities................ 329 646 1,571 Income taxes payable..................... 967 1,678 1,285 Deferred revenues, net................... 7,210 27,435 12,285 -------- -------- -------- Net cash provided by operating activi- ties................................. 7,756 29,618 37,453 -------- -------- -------- Cash flows from investing activities: Additions to property, equipment and lease- hold improvements.......................... (2,973) (1,839) (3,740) Proceeds from sales of property and equip- ment....................................... 18 200 9,044 Short-term investment....................... (150) 150 -- Notes receivable, SAG....................... -- (20,000) (10,000) Change in other assets, net................. 41 (2,287) 443 -------- -------- -------- Net cash used in investing activi- ties................................. (3,064) (23,776) (4,253) -------- -------- -------- Cash flows from financing activities: Payment of long-term obligations............ (3,882) (3,124) -- Dividends paid.............................. (600) (1,700) (9,000) -------- -------- -------- Net cash used in financing activi- ties................................. (4,482) (4,824) (9,000) -------- -------- -------- Net increase in cash and cash equivalents.... 210 1,018 24,200 Cash and cash equivalents, beginning......... 345 555 1,573 -------- -------- -------- Cash and cash equivalents, ending............ $ 555 $ 1,573 $ 25,773 ======== ======== ======== Noncash investing and financing activity: Deferred gain on sale leaseback of customer support facility .......................... $ -- $ -- $ 2,830 ======== ======== ======== Supplemental disclosures: Interest paid............................... $ 446 $ 350 $ 103 ======== ======== ======== Income taxes paid (refunded), net........... $ (743) $ 387 $ 3,481 ======== ======== ========
See accompanying notes to consolidated financial statements. F-6 SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1994, 1995 AND 1996 (1) DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Reporting Entity and Principles of Consolidation Software AG Systems, Inc. and subsidiaries (the "Company") is a wholly owned subsidiary of Software AG, a German corporation ("SAG"). Subsequent to year- end 1996, the Company was recapitalized. See note 14. The consolidated financial statements include the accounts of Software AG Systems, Inc. and its wholly owned subsidiaries, including Software AG Americas, Inc. (formerly Software AG of North America, Inc.). All inter-company balances and transactions between the Company and its wholly owned subsidiaries have been eliminated. Description of Operations The Company provides software products and professional services utilized by organizations to build and enhance enterprise-level applications. The Company's products are used for mission-critical applications that require reliability, scaleability and security, such as customer billing systems, cash management systems, and inventory management. The Company's business is focused on database management and applications development products. The Company markets and sells its software products and services, as well as third-party products, through direct and indirect channels in the United States, Canada and Mexico, and through distributors worldwide. Revenue Recognition The Company recognizes revenue in accordance with the provisions of the American Institute of Certified Public Accountants Statement of Position No. 91-1, Software Revenue Recognition. Product license revenues are recognized when there is an executed license agreement, the software and authorization code have been delivered, collectibility from the customer is probable, and there are no significant remaining obligations to the customer. Maintenance revenues, which include unspecified when-and-if deliverable software upgrades, user documentation, and technical support for software products, are deferred and recognized on a straight-line basis over the term of the maintenance agreement, generally one year. Customer training revenues and revenues from time and material type professional consulting and custom application contracts are recognized as the services are provided and the work is performed. Revenues from long-term fixed price professional consulting and custom application contracts are accounted for under the percentage of completion method. When estimates of costs, on long-term fixed price contracts, indicate a loss, such a loss is provided for currently. Sales of enterprise license agreements, which generally bundle a combination of products, technical services, and professional consulting services, are accounted for according to their component parts using the criteria described above. Property, Equipment and Leasehold Improvements Property, equipment and leasehold improvements are recorded at cost. Depreciation of property and equipment is provided on a straight-line basis over the estimated useful asset lives, generally 31.5 years for property and three to five years for equipment. Leasehold improvements are amortized on a straight-line basis over the lesser of the respective lease term or estimated useful asset lives. F-7 SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1994, 1995 AND 1996 Income taxes The Company uses the asset and liability method to account for income taxes. Under the asset and liability method, deferred income taxes are recognized for the future tax consequences attributable to future years for differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Use of Estimates The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash Equivalents The Company considers all highly liquid instruments with a maturity of three months or less at time of purchase to be cash equivalents. Cash equivalents consist of commercial paper and overnight repurchase agreements. Net Income per Share Net income per share is computed using the weighted average number of common and common equivalent shares outstanding during the period. Pursuant to the Securities and Exchange Commission Staff Accounting Bulletins and staff policy, such computations include all common and common equivalent shares issued within the 12 months preceding the Company's initial public offering as if they were outstanding for all periods presented. See note 14. (2) CONCENTRATIONS OF CREDIT RISK AND FAIR VALUES OF FINANCIAL INSTRUMENTS Concentrations of Credit Risk Financial instruments that potentially subject the Company to credit risk include accounts receivable and cash. Management believes that credit risk related to the Company's accounts receivable is limited due to a large number of customers in differing industries and geographic areas. The Company does not require collateral for accounts receivable. Historically, the Company has not experienced significant losses on accounts receivable except in isolated situations. The Company maintains depository relationships with several banks. At times, the Company's cash deposits may exceed federally insured limits. Periodically, the Company invests excess cash in low risk, highly liquid repurchase agreements and other instruments through high credit quality financial institutions. The Company has not experienced any losses in its depository accounts or short-term investments and management believes that the Company is not exposed to any significant credit risks. Fair Value of Financial Instruments The carrying amounts of cash, accounts receivable, notes receivable from SAG, accounts payable, payable to SAG, and amounts included in other current assets and current liabilities that meet the definition of a financial instrument, approximate fair value because of the short-term nature of these amounts. F-8 SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1994, 1995 AND 1996 The carrying amount of installment accounts receivable, net of related deferred revenues approximates the fair value. (3) ACCOUNTS RECEIVABLE At December 31, 1995 and 1996, accounts receivable include:
1995 1996 ------- ------- (in thousands) Domestic: Currently billed......................................... $31,305 $40,581 Unbilled services........................................ 2,209 6,029 Installment.............................................. 35,790 26,255 Other.................................................... 2,745 1,059 ------- ------- 72,049 73,924 International.............................................. 10,814 9,381 ------- ------- 82,863 83,305 Less: allowance for doubtful accounts...................... 4,766 4,980 ------- ------- 78,097 78,325 Less: long-term portion of installment accounts receivable................................................ 19,114 10,955 ------- ------- Current portion of accounts receivable..................... $58,983 $67,370 ======= =======
Installment Accounts Receivable Installment accounts receivable represent unbilled receivables from enterprise license agreements and other long-term and short-term contracts with deferred invoicing terms. At December 31, 1995 and 1996, installment accounts receivable include:
1995 1996 ------- ------- (in thousands) Gross installment accounts receivable....................... $37,709 $27,258 Less: unearned interest..................................... 1,919 1,003 ------- ------- 35,790 26,255 Less: current portion....................................... 16,676 15,300 ------- ------- $19,114 $10,955 ======= =======
The effective interest rate on the installment accounts receivable, net of related deferred revenues, at December 31, 1995 and 1996 was approximately 12%. F-9 SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1994, 1995 AND 1996 At December 31, 1996, installment accounts receivable are scheduled to be invoiced as follows:
YEARS ENDING DECEMBER 31, AMOUNT ------------------------- -------------- (in thousands) 1997..................................................... $15,884 1998..................................................... 4,874 1999..................................................... 4,034 2000..................................................... 1,260 2001..................................................... 1,206 ------- $27,258 =======
In 1995 and 1996, the Company sold installment accounts receivable relating to certain enterprise license agreements and other long-term contracts to unrelated financing companies, receiving net proceeds of $28,852,000 and $28,448,000, respectively. The installment accounts receivable sold include those relating to product and license fees, technical services, and professional consulting services. Under the terms of the agreements with the financing companies, the Company continues to service the receivables sold, including invoicing and collection, and makes payments to the financing companies under pre-determined amortization schedules based on the scheduled invoicing dates of the receivables sold. The amortization schedules provide rates of return to the financing companies ranging from 8.5% to 8.9%. The agreements allow for substitution of contracts for early terminations and require the Company to repurchase contracts that cease to meet eligibility requirements, such as those contracts that become 90 days past due. At December 31, 1995 and 1996, the Company remained contingently liable under the recourse provisions for $26,468,000 and $44,801,000, respectively. The Company's allowance for doubtful accounts is maintained at a level that management believes is sufficient to cover potential losses under the recourse provisions on receivables sold. Under the terms of the agreements, the Company is required to maintain specified amounts of net worth and cash availability, and a debt to equity ratio that does not exceed a specified amount. If the Company fails to maintain these specified amounts, the financing companies may assume the servicing rights on receivables sold. Unbilled Services Unbilled services relate primarily to long-term professional consulting services and custom application contracts accounted for using the percentage of completion method. Billings on these contracts generally are tied to achieving specific milestones. At December 31, 1995 and 1996, unbilled services include:
1995 1996 ------- ------- (in thousands) Unbilled work in process.................................... $ 3,712 $ 6,775 Retainage................................................... 1,008 1,474 ------- ------- 4,720 8,249 Less: advance billings and prepayments...................... 2,511 2,220 ------- ------- $ 2,209 $ 6,029 ======= =======
F-10 SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1994, 1995 AND 1996 (4) PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
DECEMBER 31, --------------- 1995 1996 ------- ------- (in thousands) Building and land........................................... $ 6,589 $ -- Computer equipment.......................................... 16,705 18,138 Furniture and other equipment............................... 7,032 7,713 Leasehold improvements...................................... 8,410 9,021 ------- ------- 38,736 34,872 Less: accumulated depreciation and amortization............. 23,710 25,949 ------- ------- $15,026 $ 8,923 ======= =======
Depreciation and amortization for 1994, 1995, and 1996, was $3,829,000, $3,733,000, and $3,473,000, respectively. (5) SALE OF CUSTOMER SUPPORT FACILITY In 1996, the Company recorded a sale-leaseback transaction for its customer support facility. In connection with the sale, the Company realized a gain of $2,830,000, which is being recognized on a straight-line basis over the term of the related operating lease. (6) TRANSACTIONS WITH RELATED PARTY Royalties Effective January 1, 1995, the Company and SAG entered into a license agreement whereby the Company is required to pay royalties of 24% of the net sales amount for licenses of, and technical services on, SAG's products. For 1994, 1995 and 1996, royalty expense related to SAG's products was $29,026,000, $23,887,000 and $26,058,000, respectively. Under the license agreement, SAG pays royalties to the Company on sales of the Company's products under the same terms. For 1995 and 1996, royalty revenues related to the Company's products were $295,000 and $294,000, respectively. As more fully described in note 14, the Company and SAG entered into a Cooperation Agreement in connection with the Recapitalization Agreement entered into on March 31, 1997. Cost Reimbursements As an accommodation to SAG, the Company houses certain product development and quality assurance personnel. SAG reimburses the Company for the costs incurred related to such product development and quality assurance activities. All intellectual property resulting from this work is the sole property of SAG. The reimbursements from SAG are netted against costs incurred and included in software product development costs in the statement of operations. Reimbursements for 1994, 1995, and 1996, were $7,518,000, $8,767,000, and $15,931,000, respectively. F-11 SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1994, 1995 AND 1996 Notes Receivable/Payable In 1995, the Company loaned $20,000,000 to SAG, which originally was scheduled to be repaid in 2000. In 1996, the Company loaned an additional $10,000,000 to SAG, which originally was scheduled to be repaid in 2001. Interest at 6.5% and 7%, respectively, is payable quarterly on the 1995 and 1996 loans. Interest earned for 1995 and 1996 was $280,000 and $1,590,000, respectively. The payable to SAG of $17,132,000 and $33,317,000 at December 31, 1995 and 1996, respectively, includes royalties due under the license agreement on sales of both product licenses and technical services, as well as net amounts due on other transactions between the Company and SAG. These amounts are non- interest bearing. In March, 1997, the Company and SAG agreed to offset the entire balance of the notes receivable from SAG as of December 31, 1996 against the payable to SAG. In 1995, SAG loaned $2,500,000 to the Company, which was repaid during the year. Interest expense on this note was $119,000, computed at 8%. Dividends In 1994, 1995, and 1996, the Company paid dividends of $600,000, $1,700,000 and $9,000,000, respectively, to SAG, which at the time owned 100% of the outstanding common stock of the Company. (7) INCOME TAXES Income tax expense for 1994, 1995, and 1996 consisted of:
1994 1995 1996 ------ ------ ------- (in thousands) Current expense: Federal.............................................. $ (719) $1,744 $ 4,167 State................................................ (85) 274 586 Foreign.............................................. 690 701 791 ------ ------ ------- (114) 2,719 5,544 ------ ------ ------- Deferred expense (benefit): Federal.............................................. 1,350 (265) (1,136) State................................................ 159 (143) (106) ------ ------ ------- 1,509 (408) (1,242) ------ ------ ------- $1,395 $2,311 $ 4,302 ====== ====== =======
F-12 SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1994, 1995 AND 1996 (7) INCOME TAXES--(CONTINUED) Income tax expense for 1994, 1995, and 1996, differed from the amounts computed by applying the U.S. federal income tax rate of 34% to pretax income as a result of the following:
1994 1995 1996 ------ ------ ------ (in thousands) Computed "expected" tax expense:......................... $ 944 $1,917 $3,573 Increase (reduction), in income taxes resulting from: State income taxes, net of federal benefit............. 106 181 296 Expenses, principally meals and entertainment, not de- ductible.............................................. 310 277 224 Other, net............................................. 35 (64) 209 ------ ------ ------ $1,395 $2,311 $4,302 ====== ====== ======
The tax effects of temporary differences that give rise to significant portions of deferred income tax assets (liabilities) at December 31, 1995 and 1996 consist of:
1995 1996 ------- ------- (in thousands) Deferred tax assets arising from deductible temporary differ- ences: Accrued compensation costs and other expenses.............. $ 1,808 $ 1,533 Allowance for doubtful accounts............................ 1,859 1,879 Depreciation and amortization.............................. 600 917 Deferred gain--installment method.......................... 172 1,022 ------- ------- 4,439 5,351 Deferred tax liabilities arising from taxable temporary dif- ferences: Leases of product licenses................................. 800 470 ------- ------- Net deferred income taxes.................................... 3,639 4,881 Less: current portion, deferred tax assets................... 3,666 3,412 ------- ------- Noncurrent portion, deferred tax assets (liabilities)........ $ (27) $ 1,469 ======= =======
In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Based upon the level of historical taxable income and projections for future taxable income over the periods for which the deferred tax assets are deductible, management believes that it is more likely than not that the Company will realize the benefits of these deductible differences. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income are reduced. (8) RETIREMENT PLANS The Company has a retirement plan covering substantially all of its employees. This plan meets the requirements of Section 401(k) of the Internal Revenue Code. The Company matches employee contributions and may make additional contributions based on the Company's profitability. For 1994, l995, and 1996, the Company's matching (and total) contributions were $1,967,000, $l,789,000, and $1,854,000, respectively. F-13 SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1994, 1995 AND 1996 (8) RETIREMENT PLANS--(CONTINUED) The Company also has entered into deferred compensation agreements with certain key executives. Under these agreements, the executives are credited with annual pre-determined amounts and amounts based on bonuses received, and earn interest on the deferred amounts. Total deferrals, which are included in accrued payroll and employee benefits, were $3,038,000 and $1,504,000, at December 31, 1995 and 1996, respectively, net of loans of $0 and $558,000, respectively. The expense for these agreements was $653,000 and $1,218,000, for 1995 and 1996, respectively. To assist in the funding of these agreements the Company has purchased corporate-owned life insurance on certain of these executives. The cash surrender value of these policies, which is included in other assets, was $1,067,000 and $668,000, at December 31, 1995 and 1996, respectively. (9) OPERATING LEASE COMMITMENTS The Company leases office space and equipment under operating lease agreements that expire at various dates through 2015. Future minimum rent payments under operating leases, net of aggregate rents of $1,924,000 expected to be received from subleasing of a portion of the customer support facility and another facility, at December 31, 1996, are :
YEARS ENDING DECEMBER 31, FACILITIES EQUIPMENT TOTAL - ------------------------- ---------- --------- ------- (in thousands) 1997.............................................. $ 5,770 $1,357 $ 7,127 1998.............................................. 5,969 1,162 7,131 1999.............................................. 6,102 811 6,913 2000.............................................. 6,030 148 6,178 2001.............................................. 5,426 39 5,465 Thereafter........................................ 29,392 -- 29,392 ------- ------ ------- $58,689 $3,517 $62,206 ======= ====== =======
Facility rent expense for 1994, 1995, and 1996, was $5,942,000, $6,105,000, and $7,002,000, respectively. Rent expense includes the current year effect of determinable scheduled rent increases and initial rent abatement periods contained in certain of the Company's facility lease agreements. Equipment lease expense for 1994, 1995, and 1996, was $706,000, $l,532,000, and $1,678,000, respectively. The Company's operating lease agreement for its customer support facility requires the Company to maintain minimum amounts of net worth and retained earnings. If the minimum amounts are not maintained, the Company will be required to post a $500,000 irrevocable letter of credit for each $2,000,000 shortfall, to be applied by the lessor in the event of default under the lease. (10) CONTINGENCIES The Company is involved in various claims and legal proceedings of a nature considered normal to its business, primarily relating to product and contract performance issues, and employee termination matters. While it is not feasible to predict or determine the final outcome of these proceedings, management does not believe that they will have a material adverse effect on the Company's financial position or results of operations. F-14 SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1994, 1995 AND 1996 (11) NEW ACCOUNTING STANDARDS In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 128, "Earnings per Share," which is effective for all interim and annual periods ending after December 15, 1997. This statement replaces "primary" and "fully diluted" earnings per share (EPS) with "basic" and "diluted" EPS on the face of the statement of operation. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income," which is effective for the year ending December 31, 1998. This statement established standards for the reporting and display of comprehensive income and its components in the financial statements. Earlier application of this standard is permitted. However, upon its adoption the Company will be required to reclassify previously reported annual and interim financial statements. The Company does not expect that the adoption of these new accounting standards will have a material effect on the Company's financial position or results of operation. (12) REVENUES FROM INTERNATIONAL DISTRIBUTORS Royalty revenues from international distributors for 1994, 1995, and 1996 are as follows:
1994 1995 1996 -------- -------- -------- (in thousands) Japan............................................... $ 8,145 $ 8,607 $ 9,207 Brazil.............................................. 2,800 5,931 7,000 Canada.............................................. 4,410 3,981 4,640 Other............................................... 8,610 3,046 6,114 -------- -------- -------- Total royalty revenues from international distrib- utors............................................ 23,965 21,565 26,961 Domestic revenues................................. 123,290 130,997 129,879 -------- -------- -------- Total revenues.................................. $147,255 $152,562 $156,840 ======== ======== ========
Royalty revenues from international distributors included in software license fees and maintenance fees on the consolidated statements of operations were approximately $12,379,000 and $11,586,000, respectively, in 1994, $13,316,000 and $8,249,000, respectively, in 1995, and $16,982,000 and $9,979,000, respectively, in 1996. (13) OTHER INCOME AND EXPENSE, NET Other income and expense, net on the consolidated statements of operations primarily includes interest income of $1,293,000 in 1994; interest income of $1,406,000 in 1995; and interest income of $2,914,000, and gain on sale of other assets of $1,000,000 in 1996. (14) SUBSEQUENT EVENTS On March 31, 1997, the Company entered into a Recapitalization Agreement under which the Company repurchased from its parent 24,750,000 shares of common stock. Simultaneously, the Company sold 21,450,000 shares of common stock to an unrelated entity and certain of the Company's managers. In connection with the Recapitalization Agreement, the Company entered into a perpetual Cooperation Agreement with SAG that superseded the license agreement dated January 1, 1995. As consideration for the Cooperation Agreement, the Company paid SAG approximately $22,600,000. Under the Cooperation F-15 SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED) DECEMBER 31, 1994, 1995 AND 1996 (14) SUBSEQUENT EVENTS--(CONTINUED) Agreement, the Company and SAG are required to pay royalties of 24% of net revenues from sales of licenses of, and technical services on, each other's products for the initial 20 years of the perpetual term of the agreement. For calendar years 1997 through 2000, the Company will be required to pay SAG minimum annual royalties of $21,000,000, provided that SAG's worldwide product and technical services revenues for each of those years are at least equal to SAG's 1996 worldwide revenues. In the event of a future decrease in SAG's worldwide revenues, the minimum annual royalty requirement will be reduced proportionately. In connection with the Recapitalization Agreement on March 31, 1997, the Company authorized the issuance of options to acquire an aggregate of $3,059,650 shares of common stock at an exercise price of $1.47. This exercise price represents the amount per share that Thayer and management paid to acquire an 89% interest in the Company on March 31, 1997. The Company also adopted the 1997 Stock Option Plan (the "Plan") on April 29, 1997. On August 8, 1997, 749,650 and 106,975 options were granted with exercise prices of $9.60 and $1.47 per share, respectively, under the Plan. On September 23, 1997, 1,031,250 options were granted with an exercise price of $12.00 per share, under the Plan. As of September 26, 1997, the Company signed an agreement to acquire all of the outstanding stock of R.D. Nickel and Associates, Inc., for approximately Cdn$14,000,000. The transaction will be accounted for under the purchase method of accounting for a business combination. R.D. Nickel and Associates, Inc. is a software company that has a family of application development products and is the exclusive distributor of the Company's products in Canada. In September, 1997, the Company's Board of Directors authorized management of the Company to file a Registration Statement with the Securities and Exchange Commission permitting the Company to sell shares of its common stock to the public. The Company's Board of Directors also approved a 275-for-1 stock split. Common share and per share data in these consolidated financial statements have been retroactively adjusted to reflect the stock split. Additionally, the Company's Board of Directors authorized an additional 20,000,000 shares of $.01 par value common stock and 25,000,000 shares of $.01 par value preferred stock. (15) QUARTERLY FINANCIAL DATA (UNAUDITED) Unaudited summarized financial data by quarters for 1995 and 1996 is as follows:
QUARTER ENDED ------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 -------- ------- ------------ ----------- 1995 (in thousands, except per share data) ---- Revenue......................... $32,623 $38,736 $37,917 $43,259 Gross profit.................... 16,193 19,668 21,217 24,161 Net income (loss) .............. (3,637) 2,653 2,108 2,202 Net income (loss) per share..... $ (0.12) $ 0.09 $ 0.07 $ 0.07 1996 ---- Revenue......................... $32,286 $37,109 $41,126 $46,319 Gross profit.................... 15,434 20,151 21,276 27,008 Net income (loss) .............. (212) (623) 2,745 4,299 Net income (loss) per share..... $ (.01) $ (.02) $ 0.09 $ 0.14
F-16 SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1997 -------------- (in thousands) ASSETS Current: Cash and cash equivalents.................................... $ 8,440 Accounts receivable, net of allowance for doubtful accounts.. 58,426 Current portion of deferred income taxes..................... 4,264 Income taxes receivable...................................... 765 Other current assets......................................... 6,154 -------- Total current assets....................................... 78,049 Installment accounts receivable, net of current portion........ 4,294 Property, equipment and leasehold improvements, net of accumulated depreciation and amortization..................... 9,042 Deferred income taxes.......................................... 616 Cooperation agreement, net of accumulated amortization......... 22,948 Other intangible asset, net of accumulated amortization........ 6,269 Other assets................................................... 2,373 -------- Total assets............................................. $123,591 ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current: Accounts payable............................................. $ 6,310 Accrued payroll and employee benefits........................ 8,253 Payable to SAG............................................... 4,848 Other current liabilities.................................... 5,979 Current portion of deferred revenues, net of deferred royalties................................................... 38,202 -------- Total current liabilities.................................. 63,592 Deferred revenues, net of deferred royalties................... 20,689 -------- Total liabilities ....................................... 84,281 -------- Stockholders' equity........................................... 39,310 -------- Total liabilities and stockholders' equity............. $123,591 ========
See accompanying notes to unaudited condensed consolidated financial statements. F-17 SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
PREDECESSOR SUCCESSOR --------------------------- ------------ THREE MONTHS THREE MONTHS SIX MONTHS ENDED ENDED ENDED JUNE 30, MARCH 31, JUNE 30, 1996 1997 1997 -------------- ------------ ------------ (in thousands, except per share amounts) Revenues: Software license fees.............................................................. $18,978 $ 7,341 $14,254 Maintenance fees................................................................... 34,396 17,352 18,394 Professional services fees......................................................... 16,021 9,948 10,299 ------- ------- ------- Total revenues................................................................... 69,395 34,641 42,947 ------- ------- ------- Cost of revenues: Software license................................................................... 5,049 2,098 4,074 Maintenance........................................................................ 12,990 6,205 6,577 Professional services.............................................................. 15,771 9,211 9,451 ------- ------- ------- Total cost of revenues........................................................... 33,810 17,514 20,102 ------- ------- ------- Gross profit......................................................................... 35,585 17,127 22,845 ------- ------- ------- Operating expenses: Software product development....................................................... 1,001 -- 283 Sales and marketing................................................................ 21,427 7,317 11,477 Administrative and general......................................................... 16,133 8,500 8,932 ------- ------- ------- Total operating expenses......................................................... 38,561 15,817 20,692 ------- ------- ------- Income (loss) from operations........................................................ (2,976) 1,310 2,153 Other income and expense, net........................................................ 1,640 978 1,597 ------- ------- ------- Income (loss) before income taxes.................................................... (1,336) 2,288 3,750 Income tax expense (benefit)......................................................... (501) 915 1,599 ------- ------- ------- Net income (loss).................................................................... $ (835) $ 1,373 $ 2,151 ======= ======= ======= Net income (loss) per share.......................................................... $ (0.03) $ 0.04 $ 0.08 ======= ======= ======= Shares used in computing net income (loss) per share................................. 30,584 30,584 27,422 - -------------------------------------------------- ======= ======= =======
See accompanying notes to unaudited condensed consolidated financial statements. F-18 SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
PREDECESSOR SUCCESSOR ----------------------- ------------ SIX MONTHS THREE MONTHS THREE MONTHS ENDED ENDED ENDED JUNE 30, MARCH 31, JUNE 30, 1996 1997 1997 ---------- ------------ ------------ (in thousands) Cash flows from operating activities: Net income (loss)...................................................................... $ (835) $ 1,373 $ 2,151 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization........................................................ 1,798 941 1,670 Loss on sales of property and equipment.............................................. (5) -- -- Deferred gain........................................................................ -- (36) -- Net proceeds from sales of accounts receivable....................................... 9,258 -- -- Changes in operating accounts, net................................................... (4,398) 8,148 (4,574) ------- ------- -------- 5,818 10,426 (753) ------- ------- -------- Cash flows from investing activities: Additions to property, equipment and leasehold improvements............................ (1,291) (208) (1,791) Proceeds from sales of property and equipment.......................................... 39 -- -- Purchase of Cooperation Agreement...................................................... -- -- (22,612) ------- ------- -------- (1,252) (208) (24,403) ------- ------- -------- Cash flows from financing activities: Repurchase of common stock............................................................. -- -- (33,920) Issuance of common stock............................................................... -- -- 31,525 Dividends paid......................................................................... (3,000) -- -- ------- ------- -------- (3,000) -- (2,395) ------- ------- -------- Net increase (decrease) in cash and cash equivalents..................................... 1,566 10,218 (27,551) Cash and cash equivalents, beginning..................................................... 1,573 25,773 35,991 ------- ------- -------- Cash and cash equivalents, ending........................................................ $ 3,139 $35,991 $ 8,440 - -------------------------------------------------- ======= ======= ========
See accompanying notes to unaudited condensed consolidated financial statements. F-19 SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (1) BASIS OF PRESENTATION In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting of only normal recurring accruals, necessary for a fair presentation of the financial position of Software AG Systems, Inc. and subsidiaries (the "Company") as of June 30, 1997, and the results of its operations for the six months ended June 30, 1996 and the three-month periods ended March 31, and June 30, 1997. These condensed consolidated financial statements are unaudited and do not include all related footnote disclosures. The June 30, 1997 condensed consolidated balance sheet reflects the Recapitalization of the Company (see note 2), and is not comparative to the financial positions of prior periods. The interim unaudited condensed financial statements should be read in conjunction with the audited financial statements. The Company's results of operations for the six months ended June 30, 1996 and the three month period ended March 31, 1997, respectively, are based on operations which occurred prior to the acquisition of the Company by Thayer Equity Investors III., L.P. ("Thayer") and certain members of the Company's management and are not comparative with the results of operations for the three month period ended June 30, 1997. The results of operations for the three month periods ended March 31, 1997 and June 30, 1997 are not necessarily indicative of the results of operations to be expected in the future. (2) RECAPITALIZATION OF THE COMPANY On March 31, 1997, the Company entered into a Recapitalization Agreement under which the Company repurchased from its parent, Software AG, a German corporation ("SAG"), 24,750,000 shares of common stock and sold 21,450,000 shares of common stock to a group consisting of Thayer and certain of the Company's managers. As a result of this change in control, the acquisition by Thayer was accounted for as a purchase business combination, and as such the fair value of the Company's assets and liabilities was recorded as of April 1, 1997. In connection with the Recapitalization Agreement, the Company entered into a Cooperation Agreement with SAG that superseded the license Agreement dated January 1, 1995. As consideration for the Cooperation Agreement, the Company paid SAG approximately $22,600,000. Under the Cooperation Agreement, the Company and SAG are required to pay royalties of 24% of net revenues from sales of licenses of, and technical services on, each other's products for the initial 20 years of the perpetual term of the agreement. For calendar years 1997 through 2000, the Company will be required to pay SAG minimum annual royalties of $21,000,000, provided that SAG's worldwide product and technical services revenues for each of those years are at least equal to SAG's 1996 worldwide revenues. In the event of a future decrease in SAG's worldwide revenues, the minimum annual royalty requirement will be reduced proportionately. Thayer and certain of the Company's management acquired an 89% interest in the Company for approximately $34 million. The determination of fair value allocated to the identifiable assets and liabilities of the Company has been estimated by management based on the nature of the assets and liabilities acquired, and general economic factors. Based on this preliminary allocation, the fair value of the Company's Cooperation Agreement has been estimated at approximately $23,500,000, based on an independent appraisal. The fair value of the Company's remaining assets and liabilities has been presumed to be equal to the book value as of the date of the acquisition. Based on preliminary allocation of the purchase price to the net assets and liabilities, an excess of purchase price over net assets acquired (goodwill) of approximately $6,401,000 was recorded. Such goodwill is being amortized on a straight-line basis over 10 years. In the opinion of management of the Company, the final allocation of the purchase price will not be materially different from the preliminary purchase price allocation. F-20 SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (3) STOCK OPTION PLAN In connection with the Recapitalization Agreement, on March 31, 1997, the Company authorized the issuance of options to acquire an aggregate of $3,059,650 shares of common stock at an exercise price of $1.47. This exercise price represents the amount per share that Thayer and management paid to acquire an 89% interest in the Company on March 31, 1997. The Company also adopted the 1997 Stock Option Plan (the "Plan") on April 29, 1997. On August 8, 1997, 749,650 and 106,975 options were granted with exercise prices of $9.60 and $1.47 per share, respectively, under the Plan. On September 23, 1997, 1,031,250 options were granted with an exercise price of $12.00 per share, under the Plan. (4) SUBSEQUENT EVENTS As of September 26, 1997, the Company signed an agreement to acquire all of the outstanding stock of R.D. Nickel and Associates, Inc., for approximately Cdn$14,000,000. The transaction will be accounted for under the purchase method of accounting for a business combination. R.D. Nickel and Associates, Inc. is a Canadian software company that has a family of application development products and has been the exclusive distributor of the Company's products in Canada. In September, 1997, the Company's Board of Directors authorized management of the Company to file a Registration Statement with the Securities and Exchange Commission permitting the Company to sell shares of its common stock to the public. The Company's Board of Directors also approved a 275-for-1 stock split. Common share and per share data in these condensed consolidated financial statements have been retroactively adjusted to reflect the stock split. Additionally, the Company's Board of Directors authorized an additional 20,000,000 shares of $.01 par value Common Stock and 25,000,000 shares of $.01 par value Preferred Stock. F-21 [Outside Back Cover] Graphical depiction of five computer screens, one large central screen and four smaller screens in each corner, with the text "FREE YOUR INFORMATION" superimposed over the large screen. aech of the four smaller screens have text that describes certain of the Company's products or services. The text for each smaller screen is set forth below: 1. ENTERPRISE DEVELOPMENT Application Development & Database Management Tools . NATURAL . NATURAL LIGHTSTORM . CONSTRUCT . ADABAS . PREDICT 2. ENTERPRISE ENABLEMENT Middleware & Web Enabling Solutions . iXpress . ENTIRE BROKER . ENTIRE NET-WORK . ENTIRE SAF GATEWAY 3. DATA WAREHOUSE Data Management & Access Technologies . SourcePoint . PASSPORT . CONSTRUCT ES . ESPERANT . DSS Agent 4. PROFESSIONAL SERVICES Customized Consulting . Core Services . Web Integration . Data Warehouse . Year 2000 . Education PART II. INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following are the estimated expenses in connection with the issuance and distribution of the securities being registered, all of which will be paid by the Company. SEC registration fee............................................. $ 37,567 NASD filing fee.................................................. 12,897 New York Stock Exchange listing fee.............................. 179,100 Blue Sky fees and expenses....................................... 12,000 Printing and engraving expenses.................................. 200,000 Legal fees and expenses.......................................... 300,000 Accounting fees and expenses..................................... 300,000 Transfer agent and registrar fees................................ 12,000 Miscellaneous.................................................... 46,436 ---------- Total........................................................ $1,100,000 ==========
-------- The Company intends to pay all expenses of registration, issuance and distribution, excluding underwriters' discounts and commissions, with respect to the shares being sold by the Selling Stockholders. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 415 of the Delaware General Corporation Law sets forth conditions and limitations governing the indemnification of officers, directors and other persons. The Company has adopted provisions in its Second Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws which provide for indemnification of its officers and directors to the maximum extent permitted under the Delaware General Corporation Law. As authorized by the Delaware General Corporation Law, the Second Amended and Restated Certificate of Incorporation limits the liability of directors of the Company for monetary damages. The effect of this provision is to eliminate the rights of the Company and its stockholders (through stockholders' derivative suits on behalf of the Company) to recover monetary damages against a director for breach of the fiduciary duty of care as a director (including breaches resulting from negligent or grossly negligent behavior) except in certain limited situations. This provision does not limit or eliminate the rights of the Company or any stockholder to seek non-monetary relief such as an injunction or rescission in the event of breach of a director's duty of care. These provisions will not alter the liability of directors under federal securities laws. The Company has purchased an insurance policy which purports to insure the officers and directors of the Company against certain liabilities incurred by them in the discharge of their functions as such officers and directors except for liabilities resulting from their own malfeasance. Under the terms of the Underwriting Agreement, the Underwriters have agreed to indemnify, under certain conditions, the Company, its directors, certain of its officers and persons who control the Company within the meaning of the Securities Act against certain civil liabilities and liabilities arising from breaches of representations and warranties contained in the Underwriter Agreement. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. On March 31, 1997, the senior management of the Company and Thayer Equity Investors III, L.P. ("Thayer") acquired approximately 89% of the then outstanding Common Stock of the Company (the "Recapitalization") pursuant to an agreement among the Company, Software AG ("SAG"), Thayer, and the II-1 following executive officers of the Company: Daniel F. Gillis, Harry K. McCreery, Gary Hayes, James H. Daly, Derek M. Brigden and Thomas E. Gorley (collectively, such individuals are referred to as the "Managers"). In connection therewith, (i) 20,678,350 shares of Common Stock were issued and sold to Thayer for an aggregate purchase price of $30,392,662.86, and (ii) 771,650 shares of Common Stock were issued and sold to the Managers for an aggregate purchase price of $1,134,158. In addition, on August 22, 1997 the Company entered into a subscription agreement with Timothy L. Hill, the Company's Vice President--Marketing, pursuant to which the Company issued and sold to Mr. Hill 137,500 shares of Common Stock for an aggregate purchase price of $202,095. The Company has also granted options to purchase an aggregate of 4,947,525 shares of Common Stock at a weighted average exercise price equal to $4.90 per share. All such options and shares of Common Stock were issued in private placements exempt from registration under Section 4(2) of the Securities Act or Rule 701 thereunder. All such shares reflect a 275- for-one stock split with respect to the Common Stock to be effected as a dividend prior to the effective date of the Registration Statement. No underwriters were involved in the sales or issuances of the securities described above. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. An index to exhibits appears on page E-1. ITEM 17. UNDERTAKINGS. The undersigned registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, 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 479(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, 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-2 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN RESTON, VIRGINIA ON SEPTEMBER 26, 1997. Software AG Systems, Inc. By: /s/ Daniel F. Gillis ----------------------------------- DANIEL F. GILLIS Director, President and Chief Executive Officer PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED ON SEPTEMBER 26, 1997. By: /s/ Daniel F. Gillis ----------------------------------- DANIEL F. GILLIS Director, President and Chief Executive Officer (Principal Executive Officer) By: /s/ Harry K. McCreery ----------------------------------- HARRY K. MCCREERY Vice President, Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer) By: * ----------------------------------- CARL J. RICKERTSEN Chairman of the Board of Directors By: * ----------------------------------- DR. PHILIP S. DAUBER Director By: * ----------------------------------- DR. ERWIN KOENIGS Director By: * ----------------------------------- EDWARD E. LUCENTE Director By: * ----------------------------------- DR. PAUL G. STERN Director *By: /s/ Harry K. McCreery --------------------------------- Harry K. McCreery Attorney-In-Fact II-3 ACCOUNTANT'S REPORT ON SCHEDULE WHEN THE STOCK SPLIT TRANSACTION REFERRED TO IN NOTE 14 OF THE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS HAS BEEN CONSUMMATED, WE WILL BE IN A POSITION TO RENDER THE FOLLOWING REPORT. /s/ KPMG PEAT MARWICK LLP The Board of Directors Software AG Systems, Inc. The audits referred to in our report dated September 12, 1997, except for note 14, which is as of . . . included the related financial statement schedule for each of the years in the three-year period ended December 31, 1996, included in the registration statement. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. McLean, Virginia September 12, 1997, except for Note 14, which is as of . . . S-1 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS -------------------- BALANCE AT CHARGED TO CHARGED DEDUCTIONS BALANCE BEGINNING COSTS AND TO OTHER (WRITE- AT END DESCRIPTION OF PERIOD EXPENSES ACCOUNTS OFFS) OF PERIOD ----------- ---------- ---------- -------- ---------- --------- --- 1/1/94 - 12/31/94 Allowance for Doubtful Accounts 4,741,158 (262,269) 409,298 4,069,591 1/1/95 - 12/31/95 Allowance for Doubtful Accounts 4,069,591 2,331,608 1,635,681 4,765,518 1/1/96 - 12/31/96 Allowance for Doubtful Accounts 4,765,518 1,298,361 1,083,575 4,980,304
S-2 INDEX TO EXHIBITS
EXHIBIT NO. ------- **1.1 Form of Underwriting Agreement *3.1 Second Amended and Restated Certificate of Incorporation of the Registrant *3.2 Second Amended and Restated Bylaws of the Registrant **4 Specimen Common Stock Certificate of the Registrant **5 Opinion of Arnold & Porter regarding the legality of the shares of Common Stock being registered **10.1 Recapitalization Agreement among Software AG, Software AG Systems, Inc., Thayer Equity Investors III, L.P. and certain Managers of Software AG Systems, Inc. (dated as of March 18, 1997) *10.2 Cooperation Agreement between Software AG and Software AG Americas, Inc. (dated as of March 31, 1997) **10.3 Share Purchase Agreement among Software AG Americas, Inc., Software AG (Canada), Inc., Robert D. Nickel and Caelum Investments, Inc. (dated as of September 26, 1997) **10.4 Memorandum of Understanding between Daniel F. Gillis and Software AG Systems, Inc. (dated as of April 24, 1997) **10.5 Memorandum of Understanding between Harry K. McCreery and Software AG Americas, Inc. (dated as of December 16, 1996) **10.6 Memorandum of Understanding between Derek M. Brigden and Software AG Americas, Inc. (dated as of December 13, 1996) **10.7 Memorandum of Understanding between James H. Daly and Software AG Americas, Inc. (dated as of December 18, 1996) **10.8 Memorandum of Understanding between Thomas E. Gorley and Software AG Americas, Inc. (dated as of August 22, 1996) **10.9 Software AG Systems, Inc. 1997 Stock Option Plan **10.10 Management and Consulting Agreement between TC Management LLC and Software AG Americas, Inc. (dated as of April 1, 1997) **10.11 Deferred Compensation Agreement between Daniel F. Gillis and Software AG Americas, Inc. (dated as of July 1, 1995), as amended **10.12 Deferred Compensation Agreement between James H. Daly and Software AG Americas, Inc. (dated as of January 1, 1993), as amended **10.13 Deferred Compensation Agreement between Harry K. McCreary and Software AG Americas, Inc. (dated as of January 1, 1991), as amended **10.14 Administrative Services Agreement between Software AG and Software AG Americas, Inc. (dated as of March 31, 1997) **10.15 Registration Rights Agreement between Software AG Systems, Inc. and Thayer Equity Investors III, L.P. **10.16 Subscription Agreement between Timothy L. Hill and Software AG Systems, Inc. (dated as of August 22, 1997) *11 Computations of Earnings per Share **21 Subsidiaries of the Registrant **23.1 Consent of Arnold & Porter (included in its opinion filed as Exhibit 5.) *23.2 Consent of KPMG Peat Marwick LLP *24.1 Powers of Attorney *27 Financial Data Schedule
- -------- * Filed herewith ** To be filed by amendment. E-1 EX-3.1 2 2ND AMENDED AND RESTATED CERT. OF INCORPORATION Exhibit 3.1 SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF SOFTWARE AG SYSTEMS, INC. Software AG Systems, Inc., a corporation organized and existing under and by virtue of the Delaware General Corporation Law (the "Corporation"), hereby certifies as follows: 1. The name of the Corporation is Software AG Systems, Inc.; the corporation was originally incorporated as Software AG International, Inc.; the original certificate of incorporation was filed on February 26, 1981 with the Secretary of State of the State of Delaware. 2. This Second Amended and Restated Certificate of Incorporation, the entirety of which is set forth below, has been duly adopted in accordance with Sections 242 and 245 of the Delaware General Corporation Law. * * * ARTICLE I NAME ---- The name of the Corporation is Software AG Systems, Inc. (the "Corporation"). ARTICLE II ADDRESS OF REGISTERED OFFICE; NAME OF REGISTERED AGENT ----------------------------- The address of the Corporation's registered office in the State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle, Delaware 19801. The name of its registered agent at such address is The Corporation Trust Company. ARTICLE III PURPOSE AND POWERS ------------------ The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the Delaware General Corporation Law (the "DGCL"). - 2 - ARTICLE IV CAPITAL STOCK ------------- Section 4.1. Total Number of Shares of Capital Stock. The total number of --------------------------------------- shares of capital stock of all classes that the Corporation shall have authority to issue is 100,000,000 shares. The authorized stock is divided into 75,000,000 shares of Common Stock, $.0l par value per share (the "Common Stock") and 25,000,000 shares of Preferred Stock, $.0l par value per share (the "Preferred Stock"). Section 4.2. Preferred Stock. The Board of Directors is authorized, --------------- subject to limitations prescribed by law and the provisions of this Article IV, to provide for the issuance of one or more classes, or series thereof, of Preferred Stock, and by filing a certificate pursuant to the DGCL, to establish from time to time the number of shares to be included in each such class or series, and to fix the designation, powers, preferences and rights of the shares of each such class or series and the qualifications, limitations or restrictions thereof. The authority of the Board with respect to each class or series shall include, but not be limited to, determination of the following: (a) The number of shares constituting that class or series and the distinctive designation of that class or series, which number the Board of Directors may thereafter (except where otherwise provided in a resolution designating a particular class or series) increase (but not above the total number of authorized shares of the class or series) or decrease (but not below the number of shares thereof then outstanding); (b) The dividend rate on the shares of that class or series, the conditions and dates upon which such dividends shall be payable, whether dividends shall be cumulative, and, if so, from which date or dates, and the relative rights of priority, if any, of payment of dividends on shares of that class or series; (c) Whether the shares of that class or series shall have voting rights in addition to the voting rights provided by law, and, if so, the terms of such voting rights; (d) Whether the shares of that class or series shall have conversion or exchange privileges, and, if so, the times, prices, rates, adjustments and other terms and conditions of such conversion or exchange, - 3 - including provision for adjustment of the conversion rate in such events as the Board of Directors shall determine; (e) Whether or not the shares of that class or series shall be redeemable by the Corporation, and, if so, the times, prices and other terms and conditions of such redemption, including the date or dates upon or after which they shall be redeemable, and the amount per share payable in case of redemption, which amount may vary under different conditions and at different redemption dates; (f) Whether that class or series shall have a sinking fund for the redemption or purchase of shares of that class or series, and, if so, the terms and amount of such sinking fund; (g) The rights of the holders of the shares of that class or series upon or in the event of voluntary or involuntary liquidation, dissolution or winding up of, or the distribution of assets of the Corporation, and the relative rights of priority, if any, of payment of shares of that class or series; and (h) Any other relative rights, preferences and limitations of that class or series. Dividends on outstanding shares of Preferred Stock shall be paid or declared and set apart for payment before any dividends shall be paid or declared and set apart for payment on the Common Stock shares with respect to the same dividend period. If upon any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the assets available for distribution to holders of shares of Preferred Stock of all classes and series shall be insufficient to pay such holders the full preferential amount to which they are entitled, then such assets shall be distributed ratably among the shares of all classes and series of Preferred Stock in accordance with the respective preferential amounts (including unpaid cumulative dividends, if any) payable with respect thereto. Section 4.3. Common Stock. (a) Subject to all of the powers, rights and ------------ preferences of the holders of Preferred Stock provided by resolution or resolutions of the Board of Directors pursuant to this Article IV or by the DGCL, the holders of the shares of the Common Stock shall be entitled to one vote for each share so held with respect to all matters voted on by the stockholders of the Corporation. Subject to the powers, rights and - 4 - preferences of any other class of stock and to any limitations on dividends imposed by the DGCL, the holders of the Common Stock shall have the right to receive dividends as and when declared by the Board of Directors in its sole discretion. ARTICLE V STOCKHOLDER MEETINGS AND ACTIONS -------------------------------- Section 5.1. Stockholder Meetings. Meetings of stockholders of the -------------------- Corporation may be held within or without the State of Delaware, as the Bylaws of the Corporation (the "Bylaws") may provide. An annual meeting of the stockholders of the Corporation for the election of directors and for the transaction of such other business as may come before the meeting shall be held at such time and place as shall be determined in accordance with the Bylaws. Elections of directors need not be by written ballot unless otherwise provided in the Bylaws. Section 5.2. Written Consent. Except as may be provided in a resolution --------------- or resolutions providing for any class or series of Preferred Stock pursuant to Article IV hereof, any action required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special meeting of such stockholders and may not be effected by any consent in writing by any such stockholders. This Section 5.2 shall become effective only upon the consummation of an underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended (an "IPO"). ARTICLE VI BOARD OF DIRECTORS ------------------ Section 6.1. Powers of the Board of Directors. The business, property and -------------------------------- affairs of the Corporation shall be managed by or under the direction of the Board of Directors. In furtherance, and not in limitation, of the powers conferred by the DGCL, the Board of Directors is expressly authorized to: (a) adopt, amend, alter, change or repeal the Bylaws; provided, -------- however, that no Bylaws hereafter adopted shall invalidate any prior act of the - ------- directors that was valid at the time such action was taken; (b) determine the rights, powers, duties, rules and procedures that affect the power of the Board of Directors to manage and direct the business and - 5 - affairs of the Corporation, including the power to designate and empower committees of the Board of Directors to elect, appoint and empower the officers and other agents of the Corporation, and to determine the time and place of, and the notice requirements for, Board meetings, as well as quorum and voting requirements for, and the manner of taking, Board action; and (c) exercise all such powers and do all such acts as may be exercised or done by the Corporation, subject to the provisions of the DGCL, this Certificate of Incorporation, and the Bylaws. Section 6.2. Number of Directors. The number of directors constituting ------------------- the Board of Directors shall be as specified in, or as determined pursuant to, the Bylaws. Section 6.3 Classes, Election and Term. The Board of Directors shall be -------------------------- divided into three classes, with each class to be as nearly equal in number as reasonably possible, and with the initial term of office of the first class of directors to expire at the first annual meeting of stockholders held after an IPO, the initial term of office of the second class of directors to expire at the second annual meeting of stockholders held after an IPO, and the initial term of office of the third class of directors to expire at the third annual meeting of stockholders held after an IPO. Commencing with the first annual meeting of stockholders held after an IPO, directors elected to succeed those directors whose terms have expired at an annual meeting shall be elected for a term of office to expire at the third succeeding annual meeting of stockholders after their election, and upon the election and qualification of their successors. If the number of directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain or attain the number of directors in each class as nearly equal as reasonably possible, but in no case shall a decrease in the number of directors shorten the term of any incumbent director. The provisions of this Section 6.3 shall become effective upon the consummation of an IPO. Prior to an IPO, however, the Board of Directors by resolution shall establish and determine the classes into which the directors in office immediately following an IPO shall be divided. Section 6.4. Vacancies. Any vacancies in the Board of Directors for any --------- reason and any newly created directorships resulting by reason of any increase in the number of directors may be filled only by the Board of Directors, acting by a majority of the remaining - 6 - directors then in office, although less than a quorum, or by a sole remaining director, and any directors so appointed shall hold office until the next election of the class for which such directors have been chosen and until their successors are elected and qualified. Section 6.5. Removal of Directors. Except as may be provided in a -------------------- resolution or resolutions providing for any class or series of Preferred Stock pursuant to Article IV hereof, with respect to any directors elected by the holders of such class or series, any director, or the entire Board of Directors, may be removed from office at any time for cause by the affirmative vote of the holders of at least a majority of the voting power of all of the shares of capital stock of the Corporation then entitled to vote generally in the election of directors, voting together as a single class. Section 6.6. Meetings of the Board of Directors. Meetings of the Board of ---------------------------------- Directors may be held within or without the State of Delaware, as the Bylaws may provide. ARTICLE VII LIMITATION ON LIABILITY OF DIRECTORS ------------------------------------ As to any act or omission occurring after this provision becomes effective, a director of the Corporation shall, to the maximum extent permitted by the DGCL, have no personal liability to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. Any repeal or modification of this Article VII by the stockholders of the Corporation shall not adversely affect any right or protection of any director of the Corporation existing at the time of such repeal or modification. ARTICLE VIII INDEMNIFICATION --------------- Section 8.1. Right to Indemnification. Each person who was or is made a ------------------------ party or is threatened to be made a party to or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact: (a) that he or she is or was a director or officer of the Corporation, or - 7 - (b) that he or she, being at the time a director or officer of the Corporation, is or was serving at the request of the Corporation as a director, trustee, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to an employee benefit plan (collectively, "another enterprise" or "other enterprise"), whether either in case (a) or in case (b) the basis of such proceeding is alleged action or inaction (x) in an official capacity as a director or officer of the Corporation, or as a director, trustee, officer, employee or agent of such other enterprise, or (y) in any other capacity related to the Corporation or such other enterprise while so serving as a director, trustee, officer, employee or agent, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by Section 145 of the DGCL (or any successor provision or provisions) as the same exists or may hereafter be amended (but, in the case of any such amendment, with respect to actions taken prior to such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than permitted prior thereto), against all expense, liability and loss (including, without limitation, attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid in settlement) reasonably incurred or suffered by such person in connection therewith if such person satisfied the applicable level of care to permit such indemnification under the DGCL. The persons indemnified by this Article VIII are hereinafter referred to as "indemnitees." Such indemnification as to such alleged action or inaction shall continue as to an indemnitee who has after such alleged action or inaction ceased to be a director or officer of the Corporation, or director, officer, employee or agent of another enterprise; and shall inure to the benefit of the indemnitee's heirs, executors and administrators. The right to indemnification conferred in this Article VIII: (i) shall be a contract right; (ii) shall not be affected adversely as to any indemnitee by any amendment of this Certificate of Incorporation with respect to any action or inaction occurring prior to such amendment; and (iii) shall, subject to any requirements imposed by law and the Bylaws, include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition. Section 8.2. Relationship to Other Rights and Provisions Concerning ------------------------------------------------------ Indemnification. The rights to indemnification and to the advancement of - --------------- expenses - 8 - conferred in this Article VIII shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, this Certificate of Incorporation, Bylaws, agreement, vote of stockholders or disinterested directors or otherwise. The Bylaws may contain such other provisions concerning indemnification, including provisions specifying reasonable procedures relating to and conditions to the receipt by indemnitees of indemnification, provided that such provisions are not inconsistent with the provisions of this Article VIII. Section 8.3. Agents and Employees. The Corporation may, to the extent -------------------- authorized from time to time by the Board of Directors, grant rights to indemnification, and to the advancement of expenses, to any employee or agent of the Corporation (or any person serving at the Corporation's request as a director, trustee, officer, employee or agent of another enterprise) or to persons who are or were a director, officer, employee or agent of any of the Corporation's affiliates, predecessor or subsidiary corporations or of a constituent corporation absorbed by the Corporation in a consolidation or merger or who is or was serving at the request of such affiliate, predecessor or subsidiary corporation or of such constituent corporation as a director, officer, employee or agent of another enterprise, in each case as determined by the Board of Directors to the fullest extent of the provisions of this Article VIII in cases of the indemnification and advancement of expenses of directors and officers of the Corporation, or to any lesser extent (or greater extent, if permitted by law) determined by the Board of Directors. ARTICLE IX BOOKS AND RECORDS ----------------- The books of the corporation may be kept (subject to any provision contained in the laws of the State of Delaware) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the Bylaws. ARTICLE X COMPROMISE ---------- Whenever a compromise or arrangement is proposed between this corporation and its creditors or any class of them and/or between this Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, - 9 - on the application in a summary way of this Corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for this Corporation under the provisions of Section 291 of Title 8 of the DGCL, as that section may read from time to time, or any successor provision, or on the application of trustees in dissolution or of any receiver or receivers appointed for this corporation under the provisions of Section 279 of Title 8 of the DGCL, as that section may read from time to time, or any successor provision, order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this Corporation as a consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of this Corporation, as the case may be, and also on this Corporation. ARTICLE XI AMENDMENT OF BYLAWS ------------------- The Board of Directors shall have the power to adopt, amend, alter, change or repeal the Bylaws. In addition to any requirements of the DGCL (and notwithstanding the fact that a lesser percentage may be specified by the DGCL), any adoption, amendment, alteration, change or repeal of any Bylaws by the stockholders of the Corporation after an IPO shall require the affirmative vote of the holders of at least sixty-six and two-thirds percent (66 2/3%) of the combined voting power of all of the shares of all classes of capital stock of the Corporation then entitled to vote generally in the election of directors. ARTICLE XII AMENDMENT OF CERTIFICATE OF INCORPORATION ----------------------------------------- Section 12.1. General Right to Amend. The Corporation hereby reserves ---------------------- the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, and all rights conferred upon stockholders are granted subject to this - 10 - reservation. Except as may be provided in a resolution or resolutions providing for any class of Preferred Stock pursuant to Article IV hereof and which relate to such class of Preferred Stock and except as provided in Article IV hereof, any such amendment, alteration, change or repeal shall require the affirmative vote of both (a) a majority of the members of the Board of Directors then in office and (b) a majority of the combined voting power of all of the shares of all classes of capital stock of the Corporation then entitled to vote generally in the election of directors. Section 12.2. Abandonment of Proposed Amendment. By a vote of the --------------------------------- majority of the Board of Directors then in office, the Board may adopt a resolution providing that at any time prior to the filing of any such amendment with the Secretary of State, notwithstanding authorization of the proposed amendment by the stockholders, the Board of Directors may abandon such proposed amendment without further action by the stockholders. Section 12.3. Amendment of Certain Provisions. Notwithstanding anything ------------------------------- contained in this Certificate of Incorporation to the contrary, the affirmative vote of the holders of at least sixty-six and two-thirds percent (66 2/3%) of the combined voting power of all of the shares of all classes of capital stock of the Corporation then entitled to vote generally in the election of directors shall be required to amend, repeal or adopt any provision inconsistent with Sections 5.2, 6.3, 6.4 and 6.5 and Article XI hereof and this Section 12.3. This Section 12.3 shall become effective upon consummation of an IPO. ARTICLE XIII DURATION -------- The Corporation shall have perpetual existence. * * * - 11 - I, THE UNDERSIGNED, being the duly elected Vice President, Treasurer and Chief Financial Officer of the corporation, do on behalf of the Corporation make this Second Amended and Restated Certificate of Incorporation of the Corporation, hereby declaring and certifying, under penalties of perjury, that this is the act and deed of the Corporation and that the facts herein stated are true, and accordingly have hereunto set my hand this 25th day of September, 1997. By: /s/ Harry K. McCreery --------------------------------------- Harry K. McCreery Vice President, Treasurer and Chief Financial Officer EX-3.2 3 SECOND AMENDED AND RESTATED BYLAWS Exhibit 3.2 SECOND AMENDED AND RESTATED BYLAWS OF Software AG Systems, Inc. (as amended on September 24, 1997) ARTICLE I. Offices Section 1.1. Registered Office. The registered office of Software AG ----------------- Systems, Inc. (hereinafter called the "Corporation") within the State of Delaware shall be at 1209 Orange Street, Wilmington, Delaware 19801, and the name of the registered agent of the Corporation at such address shall be The Corporation Trust Company. Section 1.2. Executive Office. The principal executive office of the ---------------- Corporation shall be located in Reston, Virginia or such other location as may be specified by the Board of Directors (hereinafter sometimes referred to as the "Board"). The books of account and records shall be kept in such office. Section 1.3. Other Offices. The Corporation may also have offices at ------------- such other places, both within and without the State of Delaware, as the Board of Directors from time to time shall determine or the business of the Corporation may require. ARTICLE II. Meetings of Stockholders Section 2.1. Place of Meetings. All meetings of the stockholders shall ----------------- be held at any such place, either within or without the State of Delaware, as shall be designated from time to time by the Board of Directors and stated in the notice of meeting or in a duly executed waiver thereof. Section 2.2. Annual Meeting. The annual meeting of the stockholders for -------------- the election of directors and for the transaction of such other business as may come before the meeting shall be held at such time and place as shall be determined by the Chief Executive Officer or the Board of Directors and stated in the notice of the meeting. Only such business may be conducted as has been brought before an annual meeting of stockholders by, or at the direction of, the Board of Directors or by a stockholder who has given timely written notice to the - 2 - Secretary of the Company of such stockholder's intention to bring such business before the meeting pursuant to these Bylaws. Section 2.3. Special Meetings. Special meetings of the stockholders, ---------------- for any purpose or purposes, unless otherwise prescribed by statute, may be called only by the Board, the Chairman of the Board or the Chief Executive Officer. The only business which may be conducted at such a meeting, other than procedural matters and matters relating to the conduct of the meeting, shall be the matter or matters described in the notice of the meeting. Section 2.4. Notice of Meetings. Notice of meetings of stockholders ------------------ shall be given as required by applicable law not less than ten days nor more than sixty days before such meeting (unless a different time is specified by law) to every stockholder entitled by law to notice of such meeting. Notice of any such meeting need not be given to any stockholder who shall, either before or after the meeting, submit a signed waiver of notice or who shall attend such meeting, except when he shall attend for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Section 2.5. List of Stockholders. A complete list of the stockholders -------------------- entitled to vote at any meeting of stockholders, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder, shall be prepared by the Secretary and shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held, for at least ten days before the meeting and at the place of the meeting during the whole time of the meeting. Section 2.6. Quorum. A majority in voting power of the outstanding ------ shares of the Corporation entitled to vote on the matters at issue, present in person or represented by proxy, shall constitute a quorum, except as otherwise required by the Delaware General Corporation Law (the "DGCL") . When a quorum is once present to organize a meeting of stockholders, it is not broken by the subsequent withdrawal of any stockholders. - 3 - The holders of a majority of the voting power of the outstanding shares present in person or represented in proxy and entitled to vote at any meeting of stockholders, may adjourn such meeting from time to time without notice other than an announcement at the meeting, whether or not a quorum is present. At any such adjourned meeting at which there is a quorum, any business may be transacted that might have been transacted at the meeting originally called. Section 2.7. Organization. At every meeting of stockholders, the ------------ Chairman of the Board, or in his absence or inability to act, the Chief Executive Officer or, in his absence or inability to act, the person whom the Chief Executive Officer shall appoint, shall act as chairman of, and preside at, the meeting. The Secretary or, in his absence or inability to act, the person whom the chairman of the meeting shall appoint secretary of the meeting, shall act as secretary of the meeting and keep the minutes thereof. Section 2.8. Order of Business. The order of business at all meetings ----------------- of the stockholders shall be as determined by the chairman of the meeting. Section 2.9. Stockholder Nominations and Proposals. (a) No proposal ------------------------------------- for a stockholder vote shall be submitted by a stockholder (a "Stockholder Proposal") to the Corporation's stockholders unless the stockholder submitting such proposal (the "Proponent") shall have filed a written notice setting forth with particularity (i) the names and business addresses of the Proponent and all Persons (as such term is defined in Section 3(a)(9) of the Securities Exchange Act of 1934, as amended through the date of adoption of these Bylaws) acting in concert with the Proponent; (ii) the names and addresses of the Proponent and the Persons identified in clause (i), as they appear on the Corporation's books (if they so appear); (iii) the class and number of shares of the Corporation beneficially owned by the Proponent and the Persons identified in clause (i); (iv) a description of the Stockholder Proposal containing all material information relating thereto; and (v) such other information as the Board of Directors reasonably determines is necessary or appropriate to enable the Board of Directors and stockholders of the Corporation to consider the Stockholder Proposal. Upon receipt of the Stockholder Proposal and prior to the stockholder meeting at which such Stockholder Proposal will be considered, if the Board of Directors or a designated committee or the - 4 - officer who will preside at the stockholders meeting determines that the information provided in a Stockholder Proposal does not satisfy the informational requirements of these Bylaws or is otherwise not in accordance with law, the Secretary of the Corporation shall promptly notify such Proponent of the deficiency in the notice. Such Proponent shall have an opportunity to cure the deficiency by providing additional information to the Secretary within the period of time, not to exceed five days from the date such deficiency notice is given to the Proponent, determined by the Board of Directors, such committee or such officer. If the deficiency is not cured within such period, or if the Board of Directors, such committee or such officer determines that the additional information provided by the Proponent, together with the information previously provided, does not satisfy the requirements of this Section 2.9, then such proposal shall not be presented for action at the meeting in question. (b) Only persons who are selected and recommended by the Board of Directors or the Nominating Committee thereof, or who are nominated by stockholders in accordance with the procedures set forth in this Section 2.9, shall be eligible for election, or qualified to serve, as directors. Nominations of individuals for election to the Board of Directors of the Corporation at any annual meeting or any special meeting of stockholders at which directors are to be elected may be made by any stockholder of the Corporation entitled to vote for the election of directors at that meeting by compliance with the procedures set forth in this Section 2.9. Nominations by stockholders shall be made by written notice (a "Nomination Notice"), which shall set forth (i) as to each individual nominated, (A) the name, date of birth, business address and residence address of such individual; (B) the business experience during the past five years of such nominee, including his or her principal occupations and employment during such period, the name and principal business of any corporation or other organization in which such occupations and employment were carried on and such other information as to the nature of his or her responsibilities and level of professional competence as may be sufficient to permit assessment of his or her prior business experience; (C) whether the nominee is or has ever been at any time a director, officer or owner of 5% or more of any class of capital stock, partnership interests or other equity interest of any corporation, partnership or other entity; (D) any directorships held by such nominee - 5 - in any company with a class of securities registered pursuant to section 12 of the Securities Exchange Act of 1934, as amended, or subject to the requirements of section 15(d) of such Act or any company registered as an investment company under the Investment Company Act of 1940, as amended; and (E) whether, in the last five years, such nominee has been convicted in a criminal proceeding or has been subject to a judgment, order, finding or decree of any federal, state or other governmental entity, concerning any violation of federal, state or other law, or any proceeding in bankruptcy, which conviction, judgment, order, finding, decree or proceeding may be material to an evaluation of the ability or integrity of the nominee; and (ii) as to the Person submitting the Nomination Notice and any Person acting in concert with such Person, (x) the name and business address of such Persons, (y) the name and address of such Persons and as they appear on the Corporation's books (if they so appear) and (z) the class and number of shares of the Corporation which are beneficially owned by such Persons. A written consent to being named in a proxy statement as a nominee, and to serve as a director if elected, signed by the nominee, shall be filed with any Nomination Notice. If the presiding officer at any stockholders meeting determines that a nomination was not made in accordance with the procedures prescribed by these Bylaws, he shall so declare to the meeting and the defective nomination shall be disregarded. (c) Nomination Notices and Stockholder Proposals shall be delivered to the Secretary at the principal executive office of the Corporation not less than sixty and not more than ninety days prior to the date of the meeting of stockholders if such Nomination Notice or Stockholder Proposal is to be submitted at an annual stockholders meeting (provided, however, that if such annual meeting is called to be held before the date specified in Section 2.2 hereof, such Nomination Notice or Stockholder Proposal shall be so delivered no later than the close of business on the tenth day following the day on which notice of the date of the annual stockholders meeting was given). Nomination Notices and Stockholder Proposals shall be delivered to the Secretary at the principal executive office of the Corporation no later than the close of business on the tenth day following the day on which notice of the date of a special meeting of stockholders was given if the Nomination Notice or Stockholder Proposal is to be submitted at a special stockholders meeting. - 6 - (d) The provisions of this Section 2.9 shall become effective upon the consummation of an underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended (an "IPO"). Section 2.10. Voting. Unless otherwise provided in a resolution or ------ resolutions providing for any class or series of Preferred Stock pursuant to Article IV of the Corporation's Certificate of Incorporation (the "Certificate of Incorporation"), any other provision of the Certificate of Incorporation or the DGCL, every stockholder shall be entitled to one vote, in person or by written proxy, for each share of capital stock held of record by such stockholder which is entitled to vote generally in the election of directors. If the Certificate of Incorporation provides for more or less than one vote for any share, on any matter, every reference in these Bylaws or the DGCL to a majority or other proportion of stock shall refer to such majority or other proportion of the votes of such stock. The provisions of Section 212 and 217 of the DGCL shall apply in determining whether any shares of capital stock may be voted and the persons, if any, entitled to vote such shares, but the Corporation shall be protected in treating the persons in whose names shares of capital stock stand on the record of stockholders as owners thereof for all purposes. All elections for the Board of Directors shall be decided by a plurality of the votes cast and all other questions shall be decided by a majority of the votes cast, except as otherwise required by law, by the Certificate of Incorporation or by these Bylaws. Abstentions shall not be considered to be votes cast. In voting on any question on which a vote by ballot is required by law, by the Certificate of Incorporation, or is demanded by any stockholder entitled to vote, the voting shall be by written ballot. Each ballot shall be signed by the stockholder voting or by his proxy, and shall state the number of shares voted. On all other questions, the voting may be viva voce. Every stockholder entitled --------- to vote at a meeting of stockholders may authorize another person or persons to act for him by proxy. The validity and enforceability of any proxy shall be determined in accordance with applicable law. Section 2.11. Inspectors. The Board of Directors may, in advance of any ---------- meeting of stockholders, appoint one or more inspectors to act at such meeting or any adjournment thereof. If any of the inspectors so appointed shall fail to appear or act, the -7- chairman of the meeting shall, or if inspectors shall not have been appointed, the chairman of the meeting may, appoint one or more inspectors. Each inspector, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector at such meeting with strict impartiality and according to the best of his ability. The inspectors shall determine the number of shares of capital stock of the Corporation outstanding and the voting power of each, the number of shares represented at the meeting, the existence of a quorum, the validity and effect of proxies, and shall receive votes, ballots or consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots or consents, determine the results, and do such acts as are proper to conduct the election or vote with fairness to all stockholders. On request of the chairman of the meeting, the inspectors shall make a report in writing of any challenge, request or matter determined by them and shall execute a certificate of any fact found by them. No director or candidate for the office of director shall act as an inspector of an election of directors. Inspectors need not be stockholders. ARTICLE III. Board of Directors Section 3.1. General Powers. The business and affairs of the -------------- Corporation shall be managed by or under the direction of the Boards of Directors. Section 3.2. Number, Qualifications, Election and Term of Office. The --------------------------------------------------- Board shall consist of six (6) directors, provided that the Board from time to time may increase or decrease the number of directors to any number not less than one, and provided that, after consummation of an IPO, the number of directors shall not be increased by fifty percent (50%) or more in any twelve- month period without the approval by at least sixty-six and two-thirds percent (66 2/3%) of the members of the Board of Directors then in office. No reduction in the number of directors shall have the effect of shortening the term of any director in office at the time such reduction becomes effective. The retirement age of and other restrictions and qualifications for directors constituting the Board of Directors shall be as authorized from time to time by a majority vote of the members of the Board of Directors then in office. Members of the Board need not be - 8 - residents of the State of Delaware and need not be stockholders of the Corporation. Unless otherwise provided in the Certificate of Incorporation, each director shall be elected at the annual meeting of the stockholders and shall hold office until his successor shall have been elected and qualified or until his earlier death, removal or resignation in the manner provided herein. Section 3.3. Place of Meetings. Meetings of the Board of Directors ----------------- shall be held at such place or places, within or without the State of Delaware, as the Board of Directors may from time to time determine or as shall be specified in the notice of any such meeting. Each regular meeting of the Board of Directors shall be held at the location specified in the notice with respect to such meeting or, if no such notice is provided or no location is specified therein, at the principal executive offices of the Corporation. Section 3.4. Annual Meeting. The Board of Directors shall meet for the -------------- purpose of organization, the election of officers and the transaction of other business, as soon as practicable after each annual meeting of stockholders, on the same day and at the same place where such annual meeting of stockholders shall be held. Notice of such Board meeting need not be given. In the event such annual meeting of stockholders is not so held, the annual meeting of the Board of Directors may be held at such other time or place (within or without the State of Delaware) as shall be specified in a notice thereof given as hereinafter provided in Section 3.7 hereof. Section 3.5. Regular Meetings. Regular meetings of the Board of ---------------- Directors shall be held at such time and place as the Board of Directors may fix. Notice of regular meetings of the Board of Directors need not be given except as otherwise required by applicable law or these Bylaws. Section 3.6. Special Meetings. Special meetings of the Board of ---------------- Directors may be called by the Chairman of the Board of Directors or at the request of a majority of the directors. Section 3.7. Notice of Meetings. Notice of each special meeting of the ------------------ Board of Directors (and of each regular meeting for which notice shall be required) shall be given by the Secretary as hereinafter provided in this Section 3.7, in which notice shall stated the - 9 - time and place of the meeting. Notice of a special meeting shall state the general purpose of the meeting, but other routine business may be conducted at a special meeting without such matter being stated in the notice. Notice of each such meeting shall be (i) mailed, postage prepaid, to each director at his designated address at least seven days before the day on which such meeting is to be held, (ii) sent by overnight courier to each director at his designated address at least two days before the day on which such meeting is to be held (with delivery scheduled to occur no later than the day before the meeting), or (iii) given orally by telephone or other means, or by facsimile, telegraph, cable, telex, telecopier or other similar means, to each director at his designated address at least twenty-four hours before the time at which such meeting is to be held. Notice of any such meeting need not be given to any director who shall, either before or after the meeting, submit a signed waiver of notice or who shall attend such meeting, except when he shall attend for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Section 3.8. Quorum and Manner of Acting. A majority of the entire --------------------------- Board of Directors shall constitute a quorum for the transaction of business at any meeting of the Board of Directors, and, except as otherwise expressly required by the DGCL, the Certificate of Incorporation or these Bylaws, the act of a majority of the directors then in office shall be the act of the Board of Directors at any such meeting. In the absence of a quorum at any meeting of the Board of Directors, a majority of the directors present thereat may adjourn such meeting to another time and place. Notice of the time and place of any such adjourned meeting shall be given to all of the directors unless such time and place were announced at the meeting at which the adjournment was taken, in which case such notice shall only be given to the directors who were not present thereat. At any adjourned meeting at which a quorum is present, any business may be transacted which might have been transacted at the meeting as originally called. The directors shall act only as a Board and the individual directors shall have no power as such. Section 3.9. Organization. At each meeting of the Board of Directors, ------------ the Chairman of the Board or, in his absence, another director chosen by a majority of the directors present, shall act as chairman of the meeting and preside thereat. The Secretary or, in his - 10 - absence, any person appointed by the chairman, shall act as secretary of the meeting and keep the minutes thereof. Section 3.10. Resignations. Any director of the Corporation may resign ------------ at any time by giving written notice of his resignation to the Chairman of the Board, the Chief Executive Officer, or the Secretary. Any such resignation shall take effect at the time specified therein or, if the time when it shall become effective shall not be specified therein, immediately upon its receipt. Unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 3.11. Compensation. Directors shall receive such compensation, ------------ including fees and reimbursement of expenses, for their services as the Board of Directors may determine. Any director may serve the Corporation in any other capacity and receive compensation therefor. Section 3.12. Action by Consent. Unless restricted by the Certificate ----------------- of Incorporation or these Bylaws, any action required or permitted to be taken by the Board of Directors or any committee thereof may be taken without a meeting if all members of the Board of Directors or of such committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of the proceedings of the Board of Directors or such committee, as the case may be. Section 3.13. Telephonic Meeting. Unless restricted by the Certificate ------------------ of Incorporation, any one or more members of the Board of Directors or any committee thereof may participate in a meeting of the Board of Directors or such committee by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. Participation by such means shall constitute presence in person at a meeting. Section 3.14. Nominating Committee. The Board may, by resolution passed -------------------- by a majority of the members of the Board of Directors then in office, designate a Nominating Committee to consist of two or more members of the Board. A majority of the Board of Directors then in office shall have the power to change the membership of the Nominating Committee, fill vacancies therein or remove any members thereof, either with or without - 11 - cause, at any time. Unless otherwise provided by the Board of Directors or the Nominating Committee, quorum, voting, and other procedures of the Nominating Committee shall be the same as those applicable to actions taken by the Board of Directors. The Nominating Committee may fix its rules of procedure, determine its manner of acting and fix the time and place, whether within or without the State of Delaware, of its meetings and specify what notice thereof, if any, shall be given, unless the majority of the Board of Directors shall otherwise by resolution provide. Section 3.15. Other Committees. The Board of Directors may, by ---------------- resolutions passed by a majority of the members of the Board of Directors then in office, designate members of the Board of Directors to constitute other committees which shall in each case consist of such number of directors, and shall have and may execute such powers as may be determined and specified in the respective resolutions appointing them. Any such committee may fix its rules of procedure, determine its manner of acting and fix the time and place, whether within or without the State of Delaware, of its meetings and specify what notice thereof, if any, shall be given, unless the Board of Directors shall otherwise by resolution provide. Unless otherwise provided by the Board of Directors or such committee, quorum, voting and other procedures shall be the same as those applicable to actions taken by the Board of Directors. A majority of the members of the Board of Directors then in office shall have the power to change the membership of any such committee at any time, to fill vacancies therein and to discharge any such committee or to remove any member thereof, either with or without cause, at any time. The Corporation shall be governed by subsection (2) of Section 141(c) of the DGCL. Section 3.16. Presumption of Assent. A director of the Corporation who --------------------- is present at a meeting of the Board of Directors when a vote on any matter is taken is deemed to have assented to the action taken unless he votes against or abstains from the action taken, or unless at the beginning of the meeting or promptly upon arrival, the director objects to the holding of the meeting or the transacting of specified business at the meeting. Any such dissenting votes, abstentions or objections shall be entered in the minutes of the meeting. - 12 - ARTICLE IV. Officers Section 4.1. Designation. The officers of the Corporation shall be ----------- elected by the Board of Directors and shall include the Chief Executive Officer, President, Chief Financial Officer, any number of Vice-Presidents, Treasurer, Secretary and such other officers and assistant officers as the Board may from time to time appoint, or authorize the Chief Executive Officer to appoint. Section 4.2. Election and Tenure. Officers and assistant officers of ------------------- the Corporation may, but need not, also be members of the Board. At its first meeting after each annual meeting of the stockholders, the Board of Directors shall elect the officers or provide for the appointment thereof. Unless otherwise provided by the Certificate of Incorporation, the term of each officer elected by the Board of Directors shall be until the first meeting of the Board of Directors following the next annual meeting of stockholders and until his successor is elected and qualified or until his earlier death, resignation or removal in the manner specified in this Section 4.2. Any officer elected or appointed by the Board may be removed by the Board at any time with or without cause by the affirmative vote of sixty-six and two-thirds percent (66 2/3%) of the members of the Board then in office. Any officer or assistant officer appointed by another officer may be removed from office with or without cause by such officer. The removal of an officer without cause shall be without prejudice to his contract rights, if any. The election or appointment of an officer shall not of itself create contract rights. Any officer of the Corporation may resign at any time by giving written notice of his resignation to the Chairman of the Board, the Chief Executive Officer, or the Secretary. Any such resignation shall take effect at the time specified therein or, if the time when it shall become effective shall not be specified therein, immediately upon its receipt. Unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Should any vacancy occur among the officers, the position shall be filled for the unexpired portion of the term by appointment made by the Board or, in the case of offices held by officers who may be appointed by other officers, by any officer authorized - 13 - to appoint such officer. Any individual may be elected to, and may hold, more than one office of the Corporation. Section 4.3. Duties. The powers and duties of the several officers ------ shall be as provided from time to time by resolution or other directive of the Board. In the absence of such provisions, the respective officers shall have the powers and shall discharge the duties customarily and usually held and performed by like officers of corporations similar in organization and business purposes to the Corporation. Section 4.4. Compensation. Officers may be paid such reasonable ------------ compensation as the Board may from time to time authorize and direct. The Board of Directors may delegate its authority to determine compensation to a committee. ARTICLE V. Stock Certificates and Their Transfer Section 5.1. Stock Certificates. Every holder of stock in the ------------------ Corporation shall be entitled to have a certificate certifying the number of shares of the Corporation owned by such holder. Such certificates shall be in such form (consistent with applicable law) as shall be determined by the Board. All certificates for shares shall be consecutively numbered or otherwise identified. The name and address of the person to whom the shares represented thereby are issued, with the number of shares and date of issue, shall be entered on the stock transfer books of the Corporation. All certificates surrendered to the Corporation for transfer shall be cancelled and no new certificate shall be issued until the former certificate for a like number of shares shall have been surrendered and cancelled, except that in case of a lost destroyed, stolen, or mutilated certificate a new one may be issued therefor on such terms and indemnity to the Corporation as the Board may prescribe. Section 5.2. Registered Stockholders. A record of the name and address ----------------------- of the holder of each certificate, the number of shares represented thereby and the date of issue thereof shall be made on the Corporation's books. The Corporation shall be entitled to recognize the exclusive right of a person registered on its records as the owner of shares of stock to receive dividends and to vote as such owner, shall be - 14 - entitled to hold liable for calls and assessments a person registered on its records as the owner of shares of stock, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares of stock on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of the State of Delaware. Section 5.3. Transfers of Stock. Transfer of shares of stock of the ------------------ Corporation shall be made in accordance with the DGCL. Transfers of stock shall be made on the books of the Corporation only by direction of the person named in the stock certificate or such person's attorney, lawfully constituted in writing, and only upon the surrender of the certificate therefor accompanied by a written assignment of the shares evidenced thereby, which certificate shall be cancelled before any new certificate is issued. Section 5.4. Transfer Agents and Registrars. The Board of Directors may ------------------------------ appoint, or authorize any officer or officers to appoint, one or more transfer agents and one or more registrars. If any certificate is countersigned (a) by a transfer agent other than the Corporation or its employee, or (b) by a registrar other than the Corporation or its employee, any signature on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if such person were such officer, transfer agent or registrar at the date of issue. Section 5.5. Regulations. The Board of Directors may make such ----------- additional rules and regulations, not inconsistent with these Bylaws, as it may deem expedient concerning the issue, transfer and registration of certificates for shares of stock of the Corporation. Section 5.6. Fixing the Record Date. In order that the Corporation may ---------------------- determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or, unless prohibited by the Certificate of Incorporation, to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or - 15 - entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which date shall be a permitted record date under the DGCL with respect to such meeting or action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting, provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. Section 5.7. Lost Certificates. Any person claiming a stock certificate ----------------- in lieu of one lost, stolen or destroyed shall give the Corporation an affidavit as to such person's ownership of the certificate and of the facts which go to prove its loss, theft or destruction. Such person shall also, unless waived by an authorized officer of the Corporation, give the Corporation a bond, in such form as may be approved by the Corporation, sufficient to indemnify the Corporation against any claim that may be made against it on account of the alleged loss of the certificate or the issuance of a new certificate. ARTICLE VI. Indemnification Section 6.1. Indemnification Provisions in Certificate of Incorporation. ---------------------------------------------------------- The provisions of this Article VI are intended to supplement Article VIII of the Certificate of Incorporation pursuant to Section 8.2 of the Certificate of Incorporation. To the extent that this Article VI contains any provisions inconsistent with said Article VIII, the provisions of the Certificate of Incorporation shall govern. Terms defined in such Article VIII shall have the same meaning in this Article VI. Section 6.2. Undertakings for Advances of Expenses. If and to the ------------------------------------- extent the DGCL requires, an advancement by the Corporation of expenses incurred by an indemnitee pursuant to clause (iii) of the last sentence of Section 8.1 of the Certificate of Incorporation (hereinafter an "advancement of expenses") shall be made only upon delivery to the Corporation of an undertaking (hereinafter an "undertaking"), by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right - 16 - to appeal (hereinafter a "final adjudication") that such indemnitee is not entitled to be indemnified for such expenses under Article VIII of the Certificate of Incorporation or otherwise. Section 6.3. Claims for Indemnification. If a claim for indemnification -------------------------- under this Article VI is not paid in full by the Corporation within sixty (60) days after it has been received in writing by the Corporation, except in the case of a claim for an advancement of expenses in which case the applicable period shall be twenty (20) days, the indemnitee may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, or in a suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the indemnitee shall be entitled to be paid also the expense of prosecuting or defending such suit. In any suit brought by the indemnitee to enforce a right to indemnification hereunder (but not in a suit brought by the indemnitee to enforce a right to an advancement of expenses) it shall be a defense that, and in any suit by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the Corporation shall be entitled to recover such expenses only upon a final adjudication that, the indemnitee has not met the applicable standard of conduct set forth in Section 145 of the DGCL (or any successor provision or provisions). Neither the failure of the Corporation (including the Board of Directors, independent legal counsel or its stockholders) to have made a determination prior to the commencement of such suit that indemnification of the indemnitee is proper in the circumstances because the indemnitee has met the applicable standard of conduct set forth in Section 145 of the DGCL (or any successor provision or provisions), nor an actual determination by the Corporation (including the Board of Directors, independent legal counsel, or its stockholders) that the indemnitee has not met such applicable standard of conduct, shall create a presumption that the indemnitee has not met the applicable standard of conduct or, in the case of such a suit brought by the indemnitee, be a defense to such suit. In any suit brought by the indemnitee to enforce a right to indemnification or to an advancement of expenses hereunder, or by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the burden of proving that the indemnitee is not entitled to be indemnified, or to have or retain such advancement of - 17 - expenses, under Article VIII of the Certificate of Incorporation or this Article VI or otherwise, shall be on the Corporation. Section 6.4. Insurance. The Corporation may maintain insurance, at its --------- expense, to protect itself and any director, trustee, officer, employee or agent of the Corporation or another enterprise against any expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the DGCL. Section 6.5. Severability. In the event that any of the provisions of ------------ this Article VI (including any provision within a single section, paragraph or sentence) is held by a court of competent jurisdiction to be invalid, void or otherwise unenforceable, the remaining provisions are severable and shall remain enforceable to the full extent permitted by law. ARTICLE VII. General Provisions Section 7.1. Seal. The seal of the Corporation shall be in such form as ---- shall be approved by the Board of Directors. Section 7.2. Fiscal Year. The fiscal year of the Corporation shall be ----------- the calendar year, unless it is changed by resolution of the Board of Directors. Section 7.3. Checks. Notes. Drafts, Etc. All checks, notes, drafts or -------------------------- other orders for the payment of money of the Corporation shall be signed, endorsed or accepted in the name of the Corporation by such officer, officers, person or persons as from time to time may be designated by the Board of Directors or by an officer or officers authorized by the Board of Directors to make such designation. Section 7.4. Execution of Contracts, Deeds, Etc. The Board may authorize ---------------------------------- any officer, employee or agent to enter into any contract or execute and deliver any instrument in the name and on behalf of the Corporation. Such authority may be general or confined to specific instances, or otherwise limited, and if the Board so provides may be delegated by the person so authorized. - 18 - Section 7.5. Mechanical Endorsement. The Chairman of the Board, Chief ---------------------- Executive Officer, any Vice President or the Secretary may authorize any endorsement on behalf of the Corporation to be made by such mechanical means or stamps as any of such officers may deem appropriate. Section 7.6. Loans. No loans shall be contracted on behalf of the ----- Corporation and no evidence of indebtedness shall be issued in its name unless authorized by a resolution of the Board. Such authority may be general or confined to specific instances, or otherwise limited, and if the Board so provides may be delegated by the person so authorized. Section 7.7. Voting of Stock in Other Corporations. Unless otherwise ------------------------------------- provided by resolution of the Board of Directors, the Chief Executive Officer, from time to time, may (or may appoint one or more attorneys or agents to) cast the votes that the Corporation may be entitled to cast as a shareholder or otherwise in any other corporation, any of whose shares or securities may be held by the Corporation, at meetings of the holders of the shares or other securities of such other corporation, or consent in writing to any action by any such other corporation. In the event one or more attorneys or agents are appointed, the Chief Executive Officer may instruct the person or persons so appointed as to the manner of casting such votes or giving such consent. The Chief Executive Officer may, or may instruct the attorneys or agents appointed to, execute or cause to be executed in the name and on behalf of the Corporation and under its seal or otherwise, such written proxies, consents, waivers or other instruments as may be necessary or proper in the circumstances relating to securities owned by the Corporation. Section 7.8. Dividends. Subject to the provisions of the DGCL and the --------- Certificate of Incorporation, dividends upon the shares of capital stock of the Corporation may be declared by the Board of Directors at any regular or special meeting. Dividends may be paid in cash, in property or in shares of stock of the Corporation, unless otherwise provided by the DGCL or the Certificate of Incorporation. - 19 - ARTICLE VIII. Amendments These Bylaws of the Corporation may be amended, altered, changed, adopted and repealed or new bylaws adopted by the affirmative vote of at least a majority of the members of the Board of Directors then in office at any regular or special meeting. The stockholders also shall have the power to amend, alter, change, adopt and repeal the Bylaws of the Corporation at any annual or special meeting pursuant to the requirements of the Certificate of Incorporation. EX-10.2 4 COOPERATION AGREEMENT Exhibit 10.2 EXECUTION COPY COOPERATION AGREEMENT --------------------- This Cooperation Agreement (the "Agreement") is made this 31st day of March, 1997 (the "Effective Date") by and between Software AG ("SAG"), a German corporation, with its principal place of business in Darmstadt, Germany, and Software AG Americas, Inc. ("SAGA"), a Virginia corporation, with its principal place of business in Reston, Virginia, USA. WHEREAS, each of SAG and SAGA is the developer and/or owner of certain computer software products; and WHEREAS, prior to the Effective Date, SAGA has been an indirect wholly- owned subsidiary of SAG; and WHEREAS, SAGA has been distributing products of SAG, and providing support and maintenance for such products, within the Territory (as defined herein); and WHEREAS, SAG has been distributing products of SAGA, and providing support and maintenance for such products, outside the Territory; and WHEREAS, until the Effective Date, the parties' relationship has been subject to the terms of a Cooperation Agreement dated January 1, 1995, which is hereby terminated and superseded by this Agreement; and WHEREAS, the parties desire to continue their relationship with respect to the distribution and maintenance of products, as it has been prior to the Effective Date, except as specifically modified herein; NOW THEREFORE, in consideration of the mutual promises contained herein, the parties agree as follows: 1. Definitions ----------- 1.1. "Affiliate," with respect to a party, means any corporation or --------- other entity or person that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, such party. 1.2. "Change in Control" means a change in control of a party where, ----------------- after the date hereof, any person, together with its Affiliates (i) becomes, directly or indirectly, whether by merger, consolidation, purchase or any other form of acquisition or transfer, the beneficial owner of 50% or more of the combined voting power of such party's then outstanding securities or other equity interests, (ii) otherwise acquires, - 2 - directly or indirectly, the power to direct, or cause the direction of, the management and policies of such party, whether through the ownership of securities or other interests, by contract or otherwise, or (iii) acquires all or substantially all of the assets of such party. 1.3. "Distributing Party," with respect to a SAG Product or SAGA ------------------ Product, means SAGA or SAG, respectively, which is not the Originating Party, but instead acquires rights with respect to the SAG Product or SAGA Product pursuant to this Agreement. 1.4. "Distribution Charge" means either (i) an amount paid by a party to ------------------- a third party for obtaining from an End User an order for Products or Maintenance, which order is placed directly to such party, or (ii) the amount retained by a Distributor for the distribution of Products or the enrollment of End Users for Maintenance, which amount is determined by deducting from the applicable Amounts Invoiced (as defined in Section 6.2) any amounts payable to the party that appointed the Distributor. 1.5. "Distributor" means any distributor (including, but not limited to, ----------- a value added reseller, subdistributor, Affiliate, consultant, or systems integrator) directly or indirectly appointed by SAG or SAGA to distribute Products. 1.6. "End User" means a person or entity that has the right to use a -------- Product pursuant to an End User Agreement with SAG, SAGA or a Distributor. 1.7. "End User Agreement" means an agreement between SAG, SAGA or a ------------------ Distributor and an End User, pursuant to which the End User receives the right to use a Product and/or Maintenance. 1.8. "First Level Support" means any technical support given by SAG or ------------------- SAGA in response to an End User's request for Maintenance, which technical support does not reasonably require access to or use of the Source Code for the relevant Products. 1.9. "Maintenance" means the provision of reasonable and customary ----------- technical support services for Products to End Users, as generally described in Section 4 of the form "Software License and Technical Services Agreement" attached as Exhibit A and practiced by the parties prior to the Effective Date, or as subsequently agreed by the parties, including, but not limited to, supplying telephone support, new versions and releases, and periodic fixes and error corrections. - 3 - 1.10. "Object Code" means the executable computer code related to a ----------- Product produced by processing (e.g., compiling, assembling or interpreting) the Source Code. 1.11. "Originating Party," with respect to a SAG Product or SAGA ----------------- Product, means SAG or SAGA, respectively, which developed the SAG Product or SAGA Product or otherwise caused the SAG Product or SAGA Product to be brought within the scope of this Agreement. 1.12. "Product" means either a SAG Product or a SAGA Product, as the ------- case might be. 1.13. "SAG Product" means any presently existing or future computer ----------- software, including, but not limited to, computer programs, parts thereof, documentation therefor and related materials, (i) that a SAG Entity develops or has developed for it, whether through employees or independent contractors and whether alone or with others, except as provided in Section 3.3, (ii) in which a SAG Entity owns or acquires proprietary or license rights (other than under this Agreement), (iii) announced as a product of a SAG Entity (other than by virtue of its being licensed by SAGA under this Agreement), (iv) distributed or offered for distribution by a SAG Entity (other than by virtue of its being licensed by SAGA under this Agreement), or (v) which a SAG Entity has the right to distribute within the Territory, at any time during the term of this Agreement; provided that computer software that is or becomes a SAG Product solely because it is a Third Party Product shall remain a SAG Product only for so long as SAG has the right to grant SAGA rights hereunder with respect to such computer software. For purposes of this Agreement, SAG computer software programs intended for use on different platforms shall be deemed separate SAG Products. The SAG Products shall include, but not be limited to, the products listed in Exhibit B. 1.14. "SAGA Product" means any presently existing or future computer ------------ software, including, but not limited to, computer programs, parts thereof, documentation therefor and related materials, (i) that a SAGA Entity develops or has developed for it, whether through employees or independent contractors and whether alone or with others, except as provided in Section 3.3, (ii) in which a SAGA Entity owns or acquires proprietary or license rights (other than under this Agreement), (iii) announced as a product of a SAGA Entity (other than by virtue of its being licensed by SAG under this Agreement), (iv) distributed or offered for distribution by a SAGA Entity (other than by virtue of its being licensed by SAG under this Agreement), or (v) which a SAGA Entity has the right to distribute outside the Territory, at any time during the - 4 - term of this Agreement; provided that computer software that is or becomes a SAGA Product solely because it is a Third Party Product shall remain a SAGA Product only for so long as SAGA has the right to grant SAG rights hereunder with respect to such computer software. For purposes of this Agreement, SAGA computer software programs intended for use on different platforms shall be deemed separate SAGA Products. The SAGA Products shall include, but not be limited to, the products listed in Exhibit C. 1.15. "SAG Entity" means SAG, a successor to SAG, or an Affiliate of ---------- SAG. 1.16. "SAGA Entity" means SAGA, a successor to SAGA, or an Affiliate of ----------- SAGA. 1.17. "Second Level Support" means any technical support given by SAG or -------------------- SAGA in response to an End User's request for Maintenance, which technical support reasonably requires access to or use of the Source Code for the relevant Products, but which is not Third Level Support. 1.18. "Source Code" means the human readable computer programming ----------- language code related to a Product. 1.19. "Technical Materials" means all of the Source Code, Object Code, ------------------- user documentation and training materials for a Product, and any other technical documentation prepared by or available to the Originating Party, or any Affiliate of or successor to the Originating Party, in the normal course of its operations related to the relevant Product, including, but not limited to, flow diagrams, program design documents, programmer work papers, descriptions of data structures, programming conventions and standards. 1.20. "Territory" means (i) the geographical area within the western --------- hemisphere that is contained within the boundaries of 30(degrees) W longitude through 170(degrees) W longitude, excluding Greenland, (ii) the additional countries of Japan and Israel, and (iii) any additional islands in the Pacific Ocean that have installations funded by the U.S. government. 1.21. "Third Level Support" means any technical support given by SAG or ------------------- SAGA in response to an End User's request for Maintenance, which technical support reasonably requires the involvement of the research and development staff of the Originating Party. 1.22. "Third Party Product" means a Product developed by or for a third ------------------- party other than a party's Affiliate that qualifies as a Product solely by virtue of a limited license or - 5 - distributorship granted to a SAG Entity or SAGA Entity, whether on an exclusive or nonexclusive basis. 2. Rights Granted with Respect to Products --------------------------------------- 2.1. Subject to the provisions of Section 2.3, SAG hereby grants to SAGA a perpetual, irrevocable (except by written agreement of the parties), exclusive (except as provided in Section 2.4) license under all of SAG's patents, copyrights, trade secrets and other proprietary and license rights to (i) reproduce, distribute, perform, display, transmit and otherwise use all SAG Products within the Territory, (ii) adapt SAG Products in object code form only, within the Territory, (iii) provide Maintenance for SAG Products to End Users within the Territory, and (iv) authorize others to do the same. SAG expressly retains all such rights outside the Territory. 2.2. Subject to the provisions of Section 2.3, SAGA hereby grants to SAG a perpetual, irrevocable (except by written agreement of the parties), exclusive (except as provided in Section 2.4) license under all of SAGA's patents, copyrights, trade secrets and other proprietary and license rights to (i) reproduce, distribute, perform, display, transmit and otherwise use all SAGA Products outside the Territory, (ii) adapt SAGA Products in object code form only, outside the Territory, (iii) provide Maintenance for SAGA Products to End Users outside the Territory, and (iv) authorize others to do the same. SAGA expressly retains all such rights within the Territory. 2.3. Notwithstanding the other provisions of this Agreement, each party's rights hereunder with respect to a Third Party Product shall be subject to the terms of the agreement between the Originating Party or its Affiliate and a third party pursuant to which the Third Party Product becomes a Product. When a party or its Affiliate acquires from a third party a license or distributorship with respect to computer software that thereby becomes a Product of such party, such party shall use its best efforts to permit the other party to have the full rights contemplated by Section 2.1 or 2.2, as applicable, and Section 3.5. Each party shall have the rights granted in Section 2.1 or 2.2, as applicable, and Section 3.5, and have the obligations arising under this Agreement, with respect to a Third Party Product to the maximum extent consistent with the other party's or its Affiliate's agreements with the third party. Thus, for example, and not as a limitation, if the Originating Party of a Third Party Product is a nonexclusive distributor of such Third Party Product, the Distributing Party shall, to the maximum extent consistent with - 6 - the agreement appointing the Originating Party as a distributor, have a subdistributorship in the relevant geographic area, exclusive as to the Originating Party, but nonexclusive as to third parties likewise appointed as distributors by the third party that appointed the Originating Party. Each party granting rights under this Agreement with respect to a Third Party Product shall inform the other party of the other party's rights and obligations as a sublicensee or subdistributor under the agreements between such first party or its Affiliate and the third party, and the other party shall comply with such obligations. As of the Effective Date, there are certain agreements to which one party to this Agreement is a party concerning one or more Products of the other party, as Products are identified in Exhibits B and C, including, but not limited to, the Value Added Reseller Agreement among Carleton Corporation, Carleton Europe, SAGA and SAG dated April 14, 1995. Promptly after the Effective Date, the parties shall use their best efforts to renegotiate or otherwise restructure, such as through an assignment and delegation, any rights and obligations of the parties under such agreements to be consistent with the designation of the Originating Party through the inclusion of a Product in Exhibit B or C and the respective rights and obligations of the parties under this Agreement as a result thereof. To the extent that the parties have been unable to do so, such as because a third party does not wish to renegotiate such an agreement, or the parties otherwise have not done so, the parties' payment obligations under this Agreement with respect to the relevant Third Party Products shall be adjusted to obtain a financially-equivalent result and the parties otherwise shall cooperate to give the Originating Party, as designated in this Agreement, the benefits of such status. At the request of either party, the parties shall take any actions reasonably required to confirm the parties' respective rights and obligations with respect to Third Party Products. 2.4. SAGA, within the Territory, and SAG outside the Territory, each shall, with respect to the other, be the sole and exclusive distributor of all of the Products and of Maintenance therefor. The parties may, in their discretion, waive such exclusivity for any Product, in any country, by mutual written agreement. If either party believes it desirable to enter into either a "Multinational End User Agreement" (i.e. an End User Agreement with an End User that requires installation of Products in two or more countries) or a "Multinational Distributor Agreement" (i.e. an agreement appointing a Distributor authorized to enter into End User Agreements in two or more countries) , and at least one of such countries is within the Territory and at least one of such countries is outside the Territory, then (i) if the End User's or Distributor's principal office or headquarters is within the - 7 - Territory, SAGA may enter into such an agreement with SAG's written consent, and (ii) if the End User's or Distributor's principal office or headquarters is located outside the Territory, SAG may enter into such an agreement with SAGA's written consent. 2.5. A Distributing Party shall distribute, and cause its Distributors to distribute, the Products of the Originating Party only pursuant to End User Agreements that contain provisions at least as protective of the interests of the Originating Party as Sections 1.2, 5, 6, 7.3, 8, 10 and 13.3 of the form "Software License and Technical Services Agreement" attached as Exhibit A, or such other provisions that may be approved in writing by the Originating Party from time to time; provided that such provisions may be modified as reasonably required to conform to local law and business practice. 2.6. A Distributing Party shall distribute, and cause its Distributors to distribute, each Product of the other party in Object Code form only, except to the extent that the Originating Party distributes, or otherwise permits the distribution of, the Source Code for the Product to third parties. 2.7. Each party shall use its best efforts to distribute Products of the other party and provide Maintenance for such Products, either within the Territory (in the case of SAGA) or outside of the Territory (in the case of SAG), except to the extent that doing so would be in conflict with an obligation that such party owes to a third party at the time the relevant Product becomes a Product, such as a covenant not to compete in an agreement with a third party appointing such party as a distributor of the third party's product. 3. Cooperation and Technical Assistance ------------------------------------ 3.1. The parties shall use their best efforts to cooperate with each other, and to provide each other information and assistance, as they have done prior to the Effective Date or otherwise agree, in all aspects of the development of Products, of the marketing and distribution of Products by SAGA within the Territory and by SAG outside the Territory, and of the provision of Maintenance by SAGA within the Territory and by SAG outside the Territory. 3.2. The parties shall form a "Strategic Advisory Board" consisting of the Chief Executive Officer and Chief Technology Officer of each party. The Strategic Advisory Board shall meet no less often than quarterly, together with its members' respective advisors, if any, at mutually agreeable - 8 - times and places. The Strategic Advisory Board shall provide a forum for discussing matters of interest to either party. The Strategic Advisory Board also shall provide a formal means for the exchange between the parties of information relevant to their respective rights and obligations under this Agreement, including, but not limited to, plans for new or modified Products, marketing plans, information concerning functional, performance, technical, operational and other characteristics, interfaces and features of Products, Technical Materials and other information relating to Products. Within the general provisions of this Section 3.2, the Strategic Advisory Board shall establish its own operating rules and agenda. 3.3. The parties may from time to time desire to perform a joint Product development project. Any such project shall be made the subject of a written agreement addressing at least the following subjects: the scope of the project, the allocation of project costs between the parties, the schedule for any payments and the allocation of the proprietary rights arising from the project. Notwithstanding the foregoing, unless the parties agree otherwise in writing, if either party funds or has funded substantially all of the costs of any development effort, that party shall own all of the proprietary rights arising from that effort and any resulting computer software shall be a Product of such funding party for purposes of this Agreement. Accordingly, for example, and not as a limitation, if one party develops a Product, but the other party makes an incidental contribution to the development of the Product, such as through the consultations of the Strategic Advisory Board, such first party shall own all of the proprietary rights arising from the development of the Product and any resulting computer software shall be a Product of such first party for purposes of this Agreement. In addition, as of the Effective Date and pursuant to a separate agreement between the parties, certain designated employees of SAGA perform computer software development for SAG under the management of SAG, and SAG reimburses SAGA for all of its costs associated with such employees. For so long as any such employees continue to be so designated, and SAG continues to reimburse SAGA for such costs, SAG shall own all of the proprietary rights arising from such development, and any computer software developed by such designated employees of SAGA shall be a SAG Product for purposes of this Agreement. 3.4. Each party acknowledges that for the other party effectively to perform its obligations under this Agreement, and to receive the benefit of its rights under this Agreement, the other party must have prompt, full and unfettered access to Technical Materials in the possession of such first party. The Originating Party shall provide to the other party, promptly after any computer software becomes a "Product" hereunder, - 9 - copies of the complete Source Code and Object Code for the Product, a reasonable number of copies of any user documentation for the Product, and significant existing Technical Materials relating to the Product, except that in the case of a Third Party Product, such items only shall be provided to the extent legally permitted under any applicable agreement between the Originating Party and the third party proprietor of the Third Party Product. Thereafter, an Originating Party shall provide Technical Materials relating to a Product to the other party when requested by the other party or when such Originating Party determines that doing so would materially enhance the other party's ability to develop, market, distribute or provide Maintenance, except that in the case of a Third Party Product, such Technical Materials only shall be provided to the extent legally permitted under any applicable agreement between the Originating Party and the third party proprietor of the Third Party Product. 3.5. Subject to the provisions of Section 2.3, each party hereby grants the other party a perpetual, irrevocable (except by written agreement of the parties), exclusive (except as provided in Section 2.4) license under all of the licensor's patents, copyrights, trade secrets and other proprietary rights to (i) reproduce, distribute, perform, display, transmit and otherwise use Technical Materials, either within the Territory (in the case of SAGA) or outside the Territory (in the case of SAG), (ii) adapt Technical Materials other than the Source Code for Products, either within the Territory (in the case of SAGA) or outside the Territory (in the case of SAG), and (iii) authorize others to do the same to the extent that doing so is reasonably required in the performance of their work on behalf of the licensee. Each party may use the Technical Materials of the other party for any lawful purpose, to whatever extent it deems appropriate to develop markets for Products and Maintenance, either within the Territory (in the case of SAGA) or outside the Territory (in the case of SAG). Such use may include, but is not limited to, development of new interfaces and add-on Products; ports to other platforms; and making performance improvements. Each party shall maintain the confidentiality of Technical Materials of the other party as provided in Article 10. Each party shall take reasonable and customary measures to assure that its employees, agents, independent contractors and Distributors appropriately protect Technical Materials of the other party, which in no event shall be less rigorous than the measures that such first party takes to protect its own similar Technical Materials. 3.6. To provide accountability for Technical Materials that either party deems particularly sensitive, but without affecting the parties' rights and obligations with respect to such Technical Materials, (i) a party providing Technical - 10 - Materials to the other party may require the other party to sign a receipt therefor in the form of Exhibit D, and (ii) a party receiving Technical Materials from the other party may require the other party to sign a transmittal therefor in the form of Exhibit E. 3.7. Each party shall provide First Level Support and Second Level Support for all Products installed or distributed, either within the Territory (in the case of SAGA) or outside the Territory (in the case of SAG), except as the parties may agree otherwise pursuant to Section 2.4. Each Originating Party shall provide Third Level Support for its Products anywhere in the world. The parties shall use their best efforts to coordinate the provision of Third Level Support as described in the "Escalation Management Process Description" of Exhibit F and as they have done prior to the Effective Date or otherwise agree. 3.8. SAG shall develop, and provide to SAGA under the terms of this Agreement, year 2000 compliant versions of all SAG Products in accordance with the schedule set forth in Exhibit G, unless the parties agree otherwise in writing. If either party requests a modification to such schedule, and the parties cannot otherwise reach agreement concerning the modification, the request shall be presented to the Strategic Advisory Board, which may approve a modification to such schedule by unanimous vote of all its members. For the purpose of this Section 3.8, a "year 2000 compliant" Product at least (i) accommodates date values, and accurately processes date data, from years in the same century and in different centuries, and (ii) will neither fail due to, nor produce incorrect results in, date-related processing, including, but not limited to, in connection with dates after 1999. SAG shall identify all such year 2000 compliant SAG Products to SAGA in writing. The year 2000 compliance of such SAG Products is subject to verification by SAGA, at SAGA's cost, using a third party consultant mutually acceptable to SAG and SAGA. 4. Marketing of Products --------------------- 4.1. Each party shall use its best efforts to develop markets for Products of the other party and for Maintenance for such Products, either within the Territory (in the case of SAGA) or outside of the Territory (in the case of SAG), except to the extent that doing so would be in conflict with an obligation that such party owes to a third party at the time the relevant Product becomes a Product, such as a covenant not to compete in an agreement with a third party appointing such party as a distributor of the third party's product. - 11 - 4.2. Unless the parties agree otherwise in writing, each party shall structure its agreements appointing Distributors and otherwise conduct its business so that (i) for each End User license for a Product granted by a Distributor, a license fee is paid by the End User to the Distributor and an amount is paid by the Distributor to the party that has appointed the Distributor, (ii) license fees and other amounts payable are fairly allocated to Products and there is no other unfair discrimination between SAG Products and SAGA Products. 4.3. SAG hereby grants to SAGA a perpetual, irrevocable (except by written agreement of the parties), exclusive (except as provided in Section 2.4) license under all of SAG's trademark, service mark and trade name rights to (i) use SAG's trademarks, service marks and trade names within the Territory and (ii) authorize others to do the same. Such trademarks, service marks and trade names shall include, but not be limited to those listed in Exhibit H. SAGA hereby grants to SAG a perpetual, irrevocable (except by written agreement of the parties), exclusive (except as provided in Section 2.4) license under all of SAGA's trademark, service mark and trade name rights to (i) use SAGA's trademarks, service marks and trade names outside the Territory and (ii) authorize others to do the same. Such trademarks, service marks and trade names shall include, but not be limited to, those listed in Exhibit I. 4.4. Any use by the licensee of a trademark, service mark or trade name licensed under Section 4.3 shall be (i) consistent with the high quality image of the parties so as to enhance the trademarks, service marks and trade names licensed under Section 4.3 and the goodwill relating thereto, and (ii) generally as used prior to the Effective Date or otherwise agreed. A licensee under Section 4.3 shall identify the trademarks, service marks and trade names licensed under Section 4.3 as such, including, but not limited to, through appropriate use of the symbols "(TM)" and "(R)" or other means appropriate under applicable law. Each licensee under Section 4.3 acknowledges the ownership and validity of the trademarks, service marks and trade names licensed under Section 4.3 and shall do nothing inconsistent with such validity and ownership. All uses of the trademarks, service marks and trade names licensed under Section 4.3 shall inure to the benefit of the licensor. A licensee under Section 4.3 shall employ appropriate quality control standards and cooperate with the licensor's efforts to verify that it does so. 4.5. Each party may from time to time elect to develop advertising or other promotional materials relating to Products (collectively, "Advertising Materials"). If so, it shall provide the other party a copy in printed and electronic format of any Advertising Materials that it distributes. Each party - 12 - hereby grants the other party a perpetual, irrevocable (except by written agreement of the parties), exclusive (except as provided in Section 2.4) license under all of the licensor's copyrights and other proprietary rights to (i) reproduce, adapt, distribute, perform, display, transmit and otherwise use Advertising Materials, either within the Territory (in the case of SAGA) or outside the Territory (in the case of SAG), and (ii) authorize others to do the same. A party distributing Advertising Materials in a particular jurisdiction shall be solely responsible for the contents of such materials and for compliance with requirements of local law in their distribution. 4.6. As of the Effective Date, SAG may be a party to certain agreements appointing a Distributor in the Territory or with an End User in the Territory, and SAGA may be a party to certain agreements appointing a Distributor outside the Territory or with an End User outside the Territory. Promptly after the Effective Date, the parties shall use their best efforts to renegotiate or otherwise restructure, such as through an assignment and delegation, any rights and obligations of the parties under such agreements to be consistent with the parties' respective rights and obligations under this Agreement in the relevant geographic areas. To the extent that the parties have been unable to do so, such as because the Distributor or End User does not wish to renegotiate such an agreement, or the parties otherwise have not done so, the parties' payment obligations under this Agreement shall be adjusted to obtain a financially- equivalent result and the parties otherwise shall cooperate to give the party in the geographic area of which each such Distributor distributes Products, or each such End User is located, the benefits of this Agreement. At the request of either party, the parties shall take any actions reasonably required to confirm the parties' respective rights and obligations with respect to a Distributor or End User. 5. User Documentation and Other End User Materials ----------------------------------------------- 5.1. An Originating Party promptly shall provide the Distributing Party a copy in printed and electronic format of the user documentation or other materials that the Originating Party generally distributes with a Product. 5.2. Each party shall make available for purchase by the other party additional copies of user documentation or other materials that the Originating Party generally distributes with a Product as well as any available Advertising Materials and available software media and "PC-Kits." All such materials shall be provided F.O.B. place of shipment, at - 13 - production cost, excluding freight, insurance, import duties, sales tax, VAT and other taxes, in accordance with price lists provided by each party to the other from time to time. 6. Payments -------- 6.1. As consideration for the termination of the Cooperation Agreement between the parties dated January 1, 1995, and its replacement with this Agreement, SAGA shall pay SAG on the Effective Date the sum of thirty-eight million Deutsche Marks (38 million DM). 6.2. From the Effective Date through December 31, 2017, and thereafter unless the parties agree otherwise in writing, (i) SAGA shall pay SAG twenty- four percent (24%) of SAGA's "Net Revenues" (as defined below) from the distribution of SAG Products and the provision of Maintenance for SAG Products within the Territory, and SAG shall pay SAGA twenty-four percent (24%) of SAG's Net Revenues from the distribution of SAGA Products and the provision of Maintenance for SAGA Products outside the Territory. For the purpose of this Section 6.2, "Net Revenues" shall be computed as follows: Net Revenues = Amounts Invoiced - External Distribution Charges - Third Party Obligations - Japan Adjustment Where: "Amounts Invoiced" are the gross amounts invoiced by a party or one of its Distributors (and any additional amounts not invoiced but recognized as revenue in accordance with the relevant entity's revenue recognition policies) for the distribution of Products of the other party and the provision of Maintenance for such Products to End Users (less applicable interest income and all sales, use, VAT and other taxes), and other revenues, such as amounts recovered by a party for infringement of proprietary rights licensed to that party hereunder (less attorneys' fees and other expenses incurred to recover such amounts). "External Distribution Charges" are Distribution Charges for the distribution of Products of the other Party or the enrollment of End Users for Maintenance for such Products that are payable to or retained by a third party that is not an Affiliate of a party. - 14 - "Third Party Obligations" are amounts due to a third party other than an Affiliate of a party pursuant to an agreement for the acquisition, or for the right to distribute, the relevant Product. (The Originating Party shall notify the Distributing Party when there are Third Party Obligations for a Product, and the Distributing Party promptly shall remit such amounts to the Originating Party for disbursement to the third party.) "Japan Adjustment" equals 76% of the aggregate amounts owed or payable to a party with respect to the distribution of Adabas C on Unix, Windows/NT and VAX platforms, and the provision of Maintenance therefor, in Japan prior to October 1, 2006. This adjustment is only applicable to the computation of Net Revenues owed by SAGA to SAG. 6.3. Each Distributing Party shall report to the Originating Party all its relevant Amounts Invoiced, External Distribution Charges and Third Party Obligations in detail within sixty (60) days after the end of the month in which they occur. Based on each such report, which report shall be substantially in the form attached hereto as Exhibit J, the Originating Party may invoice the Distributing Party for the applicable payment under Section 6.2. 6.4. From time to time, a Distributing Party may fail to collect from an End User or Distributor amounts for which payments have been made under Section 6.2, including, but not limited to, as a result of product problems, warranty claims, bad debt or the cancellation or termination of an End User Agreement (it being understood that amounts collected from an End User or Distributor and then credited back to the End User or Distributor, such as when an End User "trades in" a Product to obtain a different Product, are not amounts that the Distributing Party has failed to collect from the End User or Distributor). If such failure continues for one hundred and twenty (120) days after such amounts accrue as Amounts Invoiced, the amounts payable under this Agreement shall be adjusted to reflect such failure, and the Distributing Party shall receive an appropriate credit for any Amounts Invoiced with respect to which payment has not been received by the Distributing Party. If the Distributing Party thereafter receives a payment for which it has received such a credit, such payment shall be treated as Amounts Invoiced in the month in which the payment is received. 6.5. For the calendar years 1997 through and including 2000, SAGA shall pay to SAG a minimum annual aggregate payment under this Agreement of twenty-one million - 15 - U.S. dollars ($21 million); provided that if SAG's Worldwide Revenues in 1998, 1999, or 2000 are less than SAG's published 1996 Worldwide Revenues, then such minimum annual aggregate payment shall be reduced proportionately for that year and each subsequent year through 2000. For purposes of this Section 6.5, "Worldwide Revenues" for any year shall consist of revenues derived during such year by SAG from the distribution of SAG Products and Maintenance for SAG Products and shall be determined on a basis consistent with past practice, except that such revenues shall be calculated based on the currency exchange rates utilized to determine SAG's published 1996 Worldwide Revenues. Should the amounts payable to SAG under Section 6.2 for any year be less than the minimum annual aggregate payment under this Section 6.5 for such year, SAG may invoice SAGA for the difference when SAG invoices SAGA for the payment under Section 6.2 for December of such year. 6.6. SAGA shall not consummate a Change in Control of SAGA after January 1, 1999, or permit a Change in Control of SAGA to be consummated after such date, involving the sale of a controlling interest in SAGA or all or substantially all of the assets of SAGA to any of Oracle Corporation, Sybase, Inc. or Informix Corporation unless the successor of SAGA following the Change in Control has agreed in a writing in which SAG is expressly identified as an intended third party beneficiary that such successor shall pay to SAG a minimum annual aggregate payment under this Agreement from the later of (i) the first day of the month following the month during which the Change in Control occurs (such first day being referred to herein as the "Trigger Date") and (ii) January 1, 2001, through the date which is two years from the Trigger Date (such period being referred to herein as the "Payment Period"). During the Payment Period, the minimum annual aggregate payment required by this Section 6.6 shall equal eighty percent (80%) of the average annual payment under Section 6.2 of this Agreement for the twenty-four (24) months preceding the month in which the Change in Control occurs, provided, however, that such minimum payment shall be applied on a pro rated basis for any Payment Period (or part thereof that extends beyond one year) that is less than a full year. If the amounts payable to SAG under Section 6.2 with respect to the Payment Period (or part thereof) are less than required under this Section 6.6, SAG may invoice SAGA's successor for the difference when SAG invoices SAGA's successor for the payment under Section 6.2 for the last month of the applicable period. 6.7. All payments due to either party under this Agreement shall be due thirty (30) days after the date of the applicable invoice, or if such due date is a Saturday, Sunday or legal holiday observed by either party, the first business day thereafter. - 16 - 6.8. If any payment due hereunder is received after the date when due, such payment will accrue interest at a rate equal to the currency-related FIBOR rate available on the due date, plus three percent (3%). 7. Records, Reports and Audits --------------------------- 7.1. Each party shall prepare and maintain complete and accurate books and records documenting its distribution of Products and provision of Maintenance pursuant to this Agreement and its receipt of all fees and other revenues related thereto. Each party shall maintain such books and records for a minimum of three (3) years from the date of distribution of Products or provision of services, respectively. 7.2. Within thirty (30) days following the end of each calendar quarter, each party shall provide the other with a copy of the standard package of financial information it uses for its own internal reporting purposes for such quarter. In addition, within six (6) months following the end of each calendar year, each party shall provide the other with a copy of its audited consolidated financial statements, including a balance sheet and statement of income, as of the end of such year. 7.3. During the term of this Agreement and for one (1) year thereafter, each party shall have the right, one time during each calendar year, at its expense and upon reasonable notice, to examine or have examined by its authorized representative, the other party's books and records relating to the immediately preceding calendar year in order to determine or verify performance under this Agreement, the amounts due hereunder and the accuracy of any reports furnished hereunder. 8. Warranties and Limitation of Liability -------------------------------------- 8.1. Each party represents and warrants that it has the right to enter into this Agreement and to grant the other party the rights granted herein. 8.2. Each party represents and warrants that its Products will conform with the related Product documentation it provides. A party's sole obligation with respect to any Product or documentation errors will be to use its best efforts to correct, at its expense, any error about which it receives written notice. The warranty and obligations of this Section 8.2 are contingent upon proper use of a Product and - 17 - shall not apply to the extent that any failure is caused by (i) modification of a Product by the other party or by any third party without prior written approval or (ii) use of a Product in a hardware or software environment other than the environment in which the Product is intended to be used, as described in the Product's documentation at the time of such use. 8.3. Each party represents and warrants that its Products do not contain any virus, Trojan horse, worm, or other software designed to permit unauthorized access to, or improperly to modify, delete, damage, deactivate or disable, any software, hardware, or data. 8.4. THE FOREGOING EXPRESS WARRANTIES ARE IN LIEU OF ANY AND ALL OTHER WARRANTIES. EACH PARTY, WITH RESPECT TO ITS PRODUCTS, DISCLAIMS ANY AND ALL OTHER REPRESENTATIONS OR WARRANTIES OF ANY KIND, EITHER EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. 8.5. No party hereto shall be liable in any event for any damages incurred by the other party or by any other person or entity as a result of any misuse of any of the Products, even if such first party had been advised of the possibility of such damages. The parties shall not be liable for any consequential, special, or incidental damages, lost profits, or for any claim or demand against them by any other person or entity, except as provided in Article 9 with respect to claims for indemnification thereunder. 9. Indemnities ----------- 9.1. Subject to Section 9.4, the Originating Party shall defend, indemnify and hold harmless the Distributing Party, its Affiliates and their respective employees, agents, independent contractors, Distributors and End Users from and against any claims, losses, damages, liabilities and costs (including, but not limited to, reasonable attorneys' fees) ("Claims") relating to or resulting from infringement of any third party's patent, copyright or other proprietary rights by the Originating Party's Products or the distribution or use thereof, except to the extent that a Claim is based on modification of a Product without authorization of the Originating Party. In the event an infringement is found, the Originating Party shall use its best efforts promptly to obtain a license for the continued distribution and use of the affected Products, replace the affected Products with substantially equivalent noninfringing products or modify the affected Products so that they are noninfringing. - 18 - 9.2. Subject to Section 9.4, the Distributing Party shall defend, indemnify and hold harmless the Originating Party, its Affiliates and their respective employees and agents from and against any Claims relating to or resulting from modification of a Product by the Distributing Party. 9.3. Subject to Section 9.4, each party shall defend, indemnify and hold harmless the other party, its Affiliates and their respective employees and agents from and against any Claims relating to or resulting from (i) the indemnitor's breach of this Agreement or an End User Agreement or (ii) the negligence of the indemnitor, its Affiliates and their respective employees and agents, including, but not limited to, Claims relating to or resulting from inadequate installation of Products and inadequate Maintenance. 9.4. Each of the foregoing indemnities is subject to the following conditions: 9.4.1. An indemnified person or entity promptly shall notify the indemnifying party in writing of any Claim (provided that the failure of an indemnified person or entity to provide prompt notice shall not relieve the indemnifying party of its obligations under this Article 9, except to the extent that the indemnifying party is actually prejudiced by such failure); 9.4.2. The indemnifying party shall have the right, if it so chooses, to control and direct, at its expense and through counsel of its choosing, the investigation and defense of any third party Claim, but may compromise or settle the same only with the consent of the indemnified person or entity, which consent shall not be unreasonably withheld. The indemnified person or entity shall cooperate fully with the indemnifying party in the defense of any such Claim. 9.5. Upon receipt of a notice of a Claim for indemnification, the indemnifying party shall promptly pay to the indemnified person or entity the amount of such Claim in accordance with and subject to the provisions of this Article 9, provided, however, that no such payment shall be due during any period in which the indemnifying party is contesting in good faith either its obligation to make such indemnification or the amount of the Claim that is payable. - 19 - 10. Confidentiality --------------- 10.1. For the purpose of this Article 10, the term "Confidential Information" means any information used in or relating to the business of one party or its Affiliates (collectively, the "Disclosing Party"), including, but not limited to, the Disclosing Party's Product plans, Technical Materials and financial and customer information, that the Disclosing Party maintains in confidence, and all tangible embodiments of such information, that is received by the other party or its Affiliates (the "Receiving Party"), or to which the Receiving Party has access, in any form; provided that "Confidential Information" does not include any information that the Receiving Party can demonstrate (i) is or becomes publicly known through no fault of the Receiving Party; (ii) is developed independently by the Receiving Party; or (iii) is rightfully obtained by the Receiving Party from a third party not obligated to preserve its confidentiality who did not receive the material or information directly or indirectly from the Disclosing Party. 10.2. A Receiving Party shall not use the Disclosing Party's Confidential Information for any purpose other than in accordance with this Agreement and shall not disclose Confidential Information to any person or entity other than its employees and agents, and its independent contractors and Distributors, which persons and entities have a need to know such Confidential Information and each of which is subject to a nondisclosure obligation comparable in scope to this Article 10. 10.3. Notwithstanding Section 10.2, a Receiving Party may disclose Confidential Information to the extent required by a court or other governmental authority, provided that (i) the Receiving Party gives the Disclosing Party reasonable notice of the disclosure, (ii) the Receiving Party uses reasonable efforts to resist disclosing the Confidential Information, and (iii) upon request of the Disclosing Party, the Receiving Party cooperates with the Disclosing Party to obtain a protective order or otherwise limit the disclosure. 10.4. The parties acknowledge that either party's breach of Section 10.2 would cause the other party irreparable injury for which it would not have an adequate remedy at law. In the event of a breach, the non-breaching party shall be entitled to injunctive relief in addition to any other remedies it may have at law or in equity, without having to prove any actual damages sustained. - 20 - 11. Certain Additional Matters -------------------------- 11.1. During the term of this Agreement, except as provided in Section 2.4, or with the written consent of the other party, neither party shall, nor shall such party permit its Affiliates or the employees or agents of such party or its Affiliates to, directly or indirectly (i) engage, or assist any other person or legal entity to engage, in the distribution of computer software or provision of computer software-related services, or in any other business in which the other party is then actively engaged, or (ii) solicit, actively interfere with the other party's relationship with (or the relationship of such other party's Affiliates or Distributors with), or attempt to divert or entice away, any employee, licensee or customer of such other party, in each of clauses (i) and (ii) either within the Territory (in the case of SAG) or outside of the Territory (in the case of SAGA); provided that any party and its Affiliates may collectively own a passive investment of not more than ten percent (10%) of the stock of any corporation. Each party acknowledges that its obligations under this Article 11 are founded upon valuable consideration, necessary to protect the legitimate interests of the other party (including, but not limited to, the rights granted pursuant to this Agreement), and reasonable with respect to geographic and temporal scope. 11.2. During the term of this Agreement, before either party or its Affiliates may assign, grant any exclusive license with respect to, or otherwise transfer (each such act a "Transfer"), proprietary rights with respect to one of its Products, either within the Territory (in the case of SAGA) or outside of the Territory (in the case of SAG) (such Transfers being precluded by this Agreement outside the Territory (in the case of SAGA) or within the Territory (in the case of SAG)), the other party shall be offered the following rights with respect to such Product: 11.2.1. The transferring party shall first deliver a written notice to the other party stating (i) that the transferring party desires to make a Transfer of such proprietary rights, (ii) the nature of the proposed Transfer and (iii) the price and other material terms of the proposed Transfer. Such notice shall be accompanied by a certificate of the transferring party certifying that it has received from a third party a bona fide offer to acquire such proprietary rights at such price and on such terms as are set forth in the notice and shall identify such third party. 11.2.2. Within thirty (30) days after receipt of a notice as described in Paragraph 11.2.1, the other - 21 - party may elect, by delivering to the transferring party a written notice of its election, to acquire the proprietary rights with respect to the Product on the same terms and conditions specified in such notice. In the event that the other party does so, the parties shall consummate the Transfer within ninety (90) days after the date that the other party receives the notice described in Paragraph 11.2.1. 11.2.3. To the extent the other party does not exercise its rights under Paragraph 11.2.2 within the time period specified therein, the transferring party may Transfer such proprietary rights to the third party specified in the notice described in Paragraph 11.2.1 at such price and on such terms as are set forth in such notice, provided that (i) such Transfer is consummated within one hundred twenty (120) days of the date of delivery of such notice and (ii) prior to the Transfer, such third party agrees in writing, in a form satisfactory to the other party and as a condition of the Transfer, that such third party shall assume all of the obligations of the transferring party under this Agreement relevant to the proprietary rights transferred and the Products embodying such proprietary rights, and that such proprietary rights shall be subject to the rights of the other party under this Agreement. 11.3. SAG shall not consummate a Change in Control of SAG or permit a Change in Control of SAG to be consummated unless the successor of SAG following the Change in Control has agreed, in a writing in which SAGA is expressly identified as an intended third party beneficiary, that such successor shall continue to support the research and development of SAG Products existing or planned before the Change in Control was contemplated and that, in each of the two (2) years following the Trigger Date (as defined in Section 6.6), such successor shall spend an amount on research and development for SAG Products that is at least equal to eighty percent (80%) of SAG's average annual research and development expenses for SAG Products for the twenty-four calendar months preceding the month in which the Change in Control occurs. 11.4. Unless the parties agree otherwise in writing, in the event of a Change in Control of either party, the parties shall cooperate to identify and document all of the then existing Products of the party that is the subject of the Change in Control as of the date of the Change in Control, including Products at all stages of development, whether or not announced to the public as available for distribution. Unless the parties agree otherwise in writing, the party that is the subject of the Change in Control shall not consummate the - 22 - Change in Control or permit the Change in Control to be consummated unless the successor of such party following the Change in Control has agreed in writing (i) to be bound by all of the terms of this Agreement relevant to such existing Products to the same extent as the party that is the subject of the Change in Control, (ii) that all of the terms of this Agreement relevant to such existing Products shall apply to future products of such successor derived in any material respect from such Products, and (iii) that the other party is an intended third party beneficiary of such agreements required by clauses (i) and (ii). 11.5. If either party enters into negotiations or material discussions relating to a potential transaction that could involve a Change in Control of such party, such party shall promptly notify the other party hereto in writing of such discussions or negotiations. 11.6. In addition to the parties' rights and obligations under Sections 11.2 and 12.2, during the term of this Agreement, before SAG decides to stop further enhancement or support of Adabas C for the Unix, Windows/NT or VAX platforms, SAG shall notify SAGA in writing of the extent to which SAG is considering doing so. Within thirty (30) days after receipt of such a notice (the "Election Period"), SAGA may elect, by delivering to SAG a written notice of its election, to continue such enhancement and support to the extent that SAG is considering stopping it. If SAGA makes such an election, then the parties promptly shall negotiate in good faith an arrangement whereby (i) the Products for which SAG is considering stopping further enhancement or support shall become SAGA Products for all purposes under this Agreement at no charge to SAGA, and (ii) after the parties' agreement to such an arrangement, SAGA shall bear the costs of ongoing enhancement and Third Level Support of such Products. The parties shall structure such an arrangement so that it does not constitute "Software AG decid[ing] to stop further enhancement and support" of such Products within the meaning of paragraph 4 of the letter dated October 2, 1996 from Peter Schnell to Yoshioki Ishii. SAG shall not decide to stop further enhancement or support of Adabas C for the Unix, Windows/NT or VAX platforms unless such Election Period has expired without such an election by SAGA. 12. Term, Termination and Remedies ------------------------------ 12.1. This Agreement shall be perpetual from the Effective Date unless terminated by the written agreement of the parties. Notwithstanding either party's breach of this Agreement, this Agreement shall not be terminable other than by - 23 - the written agreement of the parties. In the event of a breach, the non- breaching party shall be entitled to money damages, specific performance or other remedies available at law or in equity, but not to termination or rescission of this Agreement. 12.2. In the event that either party (the "Nonperforming Party") (i) fails materially to fulfill its obligation under Section 3.7 to provide Third Level Support for its Products to End Users of either party, and fails to remedy that breach within thirty (30) days after receiving written notice of such breach from the other party or (ii) becomes insolvent or enters into bankruptcy, liquidation, dissolution or proceedings of a similar nature, then the other party (the "Performing Party") may elect in writing to assume responsibility for providing Third Level Support to all or any of its End Users of all or any of the Nonperforming Party's Products. To the extent that the Performing Party makes such an election, it thereafter shall be excused from making any payment under Section 6.2 for the provision of Maintenance for those Products to those End Users and for any additional distributions of those Products and provision of Maintenance therefor; the Nonperforming Party thereafter shall be excused from any obligations hereunder that are expressly assumed by the Performing Party. Notwithstanding any assumption by the Performing Party of any responsibilities hereunder, the Nonperforming Party shall remain liable for any breach by it of this Agreement. In the event that the Performing Party elects to assume responsibility for providing Third Level Support with respect to any Product of the Nonperforming Party, the licenses granted by the Nonperforming Party to the Performing Party under Section 2.1 or 2.2 and Section 3.5 shall automatically be expanded to include a perpetual, irrevocable (except by written agreement of the parties), exclusive (except as provided in Section 2.4) license to adapt such Product in Source Code form, including, but not limited to, by developing modifications and enhancements to such Product. 13. Notices ------- All notices or other communications which are required or permitted hereunder shall be in writing and sufficient if delivered personally, by facsimile or sent by overnight express or by registered or certified mail, postage prepaid, addressed as follows: - 24 - If to SAG: Software AG Uhlandstrasse 12, D-64297 Darmstadt, Germany Attention: Dr. Erwin Koenigs Facsimile: 49-6151-921868 with a copy to: Software AG Uhlandstrasse 12, D-64297 Darmstadt, Germany Attention: Christine Schwab Facsimile: 49-6151-921600 If to SAGA: Software AG Americas, Inc. 11190 Sunrise Valley Drive Reston, VA 20191 Attention: Harry McCreery Facsimile: 703-391-6504 All such deliveries shall be deemed effective when received by the person entitled to such receipt or when delivery has been attempted but refused by such person. Any party may change the person or address to which such deliveries shall be made with respect to such party by delivering notice thereof to the other party hereto in accordance with this Article 13. 14. Miscellaneous ------------- 14.1. This Agreement is confidential, and neither party shall disclose it without the prior written consent of the other party to any third party, other than its attorneys, consultants, accountants, auditors and others to whom a party has a bona fide business reason for disclosing the Agreement; provided that each party may disclose this Agreement as may be required by law or to enforce the provisions hereof. 14.2. To the extent that either party has copyright or other proprietary rights with respect to a Product identified in Exhibit B or C as being a Product of the other party, such first party hereby irrevocably assigns to such other party its entire right, title and interest in and to such proprietary rights. 14.3. Each party shall take such actions, and sign such documents, as reasonably may be requested by the other party to - 25 - obtain, confirm, maintain or enforce the rights granted in this Agreement. 14.4. A party receiving an exclusive license hereunder shall have the exclusive right to enforce any proprietary rights so licensed, either within the Territory (in the case of SAGA) or outside the Territory (in the case of SAG). If reasonably required to do so, the licensee may join the licensor as a plaintiff. 14.5. The parties shall use the English language in exchanging all documents and other information exchanged between them. 14.6. The provisions of this Agreement are severable, and the unenforceability of any provision of this Agreement shall not affect the enforceability of the remainder of this Agreement. The parties acknowledge that it is their intention that if any provision of this Agreement is determined by a court to be invalid, illegal or unenforceable as drafted, that provision should be construed in a manner designed to effectuate the purpose of that provision to the greatest extent possible under applicable law. 14.7. The rights and remedies provided in this Agreement are, to the extent permitted by law, cumulative and not exclusive of any other right or remedy now or hereafter available at law or in equity. Neither asserting a right nor employing a remedy shall preclude the concurrent assertion of any other right or employment of any other remedy, nor shall the failure to assert, or the delay in asserting, any right or remedy constitute a waiver of that right or remedy. 14.8. The rights of the parties under this Agreement are unique, and the failure of a party to perform its obligations hereunder would irreparably harm the other party. Accordingly, the parties shall, in addition to such other remedies as may be available at law or in equity, have the right to enforce their rights hereunder by actions for specific performance to the extent permitted by law. 14.9. Except as specifically provided in this Agreement, no party may assign any of its rights or delegate its obligations hereunder without the written consent of the other party; provided that in the event of a Change in Control of a party, such party may assign all of its rights and delegate all of its obligations under this Agreement to the successor of such party following the Change in Control, if such successor agrees in a writing in which the other party is expressly identified as an intended third party beneficiary to assume all of the obligations of such party under this - 26 - Agreement. Any purported assignment or delegation in violation of this Section 14.9 shall be void. This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors, permitted assigns and legal representatives. 14.10. This Agreement may be modified or amended only by written agreement of the parties. 14.11. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the Commonwealth of Virginia applicable to agreements made and entirely to be performed within such jurisdiction. The party bringing any action under this Agreement shall only be entitled to choose the federal or state courts in the Commonwealth of Virginia as the venue for such action, and each party consents to the jurisdiction of the court chosen in such manner for such action. 14.12. This Agreement may be executed in any number of counterparts, and each such counterpart shall be deemed to be an original instrument, but all such counterparts together shall constitute but one agreement. 14.13. This Agreement and the Recapitalization Agreement dated as of March 18, 1997 among SAG, Software AG Systems, Inc. ("Systems"), Thayer Equity Investors III, L.P. and certain managers of Systems, including their respective exhibits and attachments, constitute the entire agreement between the parties with respect to the subject matter hereof and supersede all previous agreements, written or oral, with respect to the subject matter hereof, including, but not limited to, the Cooperation Agreement dated as of January 1, 1995 between the parties hereto. - 27 - IN WITNESS WHEREOF, the parties hereto, intending to be legally bound hereby, have caused this Agreement to be executed as of the day and year first above written. SOFTWARE AG By: /s/ Erwin Koenigs --------------------------------------- Dr. Erwin Koenigs Chairman of the Board and By: /s/ Volker Dawedeit --------------------------------------- Volker Dawedeit Board Member SOFTWARE AG AMERICAS, INC. By: /s/ Daniel Gillis ---------------------------------------- Daniel Gillis President and Chief Executive Officer EX-11 5 COMPUTATION OF EARNINGS PER SHARE EXHIBIT 11 SOFTWARE AG SYSTEMS, INC. WEIGHTED AVERAGE SHARES
PREDECESSOR COMBINED PREDECESSOR SUCCESSOR ----------------------------------- -------- ----------- --------- SIX SIX THREE THREE MONTHS MONTHS MONTHS MONTHS YEARS ENDED DECEMBER 31, ENDED ENDED ENDED ENDED -------------------------- JUNE 30, JUNE 30, MARCH 31, JUNE 30, 1994 1995 1996 1996 1997 1997 1997 -------- -------- -------- -------- -------- ----------- --------- (in thousands, except per share data) Weighted average common shares outstanding..... 27,500 27,500 27,500 27,500 24,338 27,500 24,338 Options issued within one year of filing of initial public offering........ 3,084 3,084 3,084 3,084 3,084 3,084 3,084 -------- -------- -------- ------ ------ ------- ------ 30,584 30,584 30,584 30,584 27,422 30,584 27,422 ======== ======== ======== ====== ====== ======= ====== CALCULATION OF NET INCOME (LOSS) PER SHARE: Net income (loss) ...... $ 1,382 $ 3,326 $ 6,209 $ (835) $3,524 $ 1,373 $2,151 ======== ======== ======== ====== ====== ======= ====== Net income (loss) per share.................. $ 0.05 $ 0.11 $ 0.20 $(0.03) $ 0.13 $ 0.04 $ 0.08 ======== ======== ======== ====== ====== ======= ======
1 EX-23.2 6 CONSENT OF KPMG PEAT MARWICK LLP EXHIBIT 23.2 ACCOUNTANT'S CONSENT We consent to the use of our reports included herein and to the reference to our firm under the headings "Selected Consolidated Financial Data" and "Experts" in the prospectus. /s/ KPMG Peat Marwick LLP McLean, Virginia September 26, 1997 EX-24.1 7 POWERS OF ATTORNEY Exhibit 24.1 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or officer of Software AG Systems, Inc., a corporation organized under the laws of the State of Delaware (the "Corporation"), hereby constitutes and appoints Daniel F. Gillis, Harry K. McCreery, James H. Daly, Robert B. Ott, Daniel A. Raskas and Joseph Turitz, and each of them (with full power to each of them to act alone), his true and lawful attorneys-in-fact and agents for him and on his behalf and in his name, place and stead, in all cases with full power of substitution and resubstitution, in any and all capacities, to sign, execute and affix his seal to and file with the Securities and Exchange Commission (or any other governmental or regulatory authority) a Registration Statement on Form S-1 or any other appropriate form and all amendments or supplements (including any post-effective amendments) thereto with all exhibits and any and all documents required to be filed with respect thereto, relating to the registration under the Securities Act of 1933 of shares of the Corporation's common stock, and grants to each of them full power and authority to do and to perform each and every act and thing requisite and necessary to be done in and about the premises in order to effectuate the same as fully to all intents and purposes as he himself might or could do if personally present, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned director and/or officer has hereunto set his hand and seal, as of the date specified. DATED: 9/24/97 /s/ Daniel F. Gillis -------------------------- ----------------------------------- Signature Daniel F. Gillis ----------------------------------- Name POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or officer of Software AG Systems, Inc., a corporation organized under the laws of the State of Delaware (the "Corporation"), hereby constitutes and appoints Daniel F. Gillis, Harry K. McCreery, James H. Daly, Robert B. Ott, Daniel A. Raskas and Joseph Turitz, and each of them (with full power to each of them to act alone), his true and lawful attorneys-in-fact and agents for him and on his behalf and in his name, place and stead, in all cases with full power of substitution and resubstitution, in any and all capacities, to sign, execute and affix his seal to and file with the Securities and Exchange Commission (or any other governmental or regulatory authority) a Registration Statement on Form S-1 or any other appropriate form and all amendments or supplements (including any post-effective amendments) thereto with all exhibits and any and all documents required to be filed with respect thereto, relating to the registration under the Securities Act of 1933 of shares of the Corporation's common stock, and grants to each of them full power and authority to do and to perform each and every act and thing requisite and necessary to be done in and about the premises in order to effectuate the same as fully to all intents and purposes as he himself might or could do if personally present, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned director and/or officer has hereunto set his hand and seal, as of the date specified. DATED: 9/24/97 /s/ Carl J. Rickertsen -------------------------- ----------------------------------- Signature Carl J. Rickertsen ----------------------------------- Name POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or officer of Software AG Systems, Inc., a corporation organized under the laws of the State of Delaware (the "Corporation"), hereby constitutes and appoints Daniel F. Gillis, Harry K. McCreery, James H. Daly, Robert B. Ott, Daniel A. Raskas and Joseph Turitz, and each of them (with full power to each of them to act alone), his true and lawful attorneys-in-fact and agents for him and on his behalf and in his name, place and stead, in all cases with full power of substitution and resubstitution, in any and all capacities, to sign, execute and affix his seal to and file with the Securities and Exchange Commission (or any other governmental or regulatory authority) a Registration Statement on Form S-1 or any other appropriate form and all amendments or supplements (including any post-effective amendments) thereto with all exhibits and any and all documents required to be filed with respect thereto, relating to the registration under the Securities Act of 1933 of shares of the Corporation's common stock, and grants to each of them full power and authority to do and to perform each and every act and thing requisite and necessary to be done in and about the premises in order to effectuate the same as fully to all intents and purposes as he himself might or could do if personally present, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned director and/or officer has hereunto set his hand and seal, as of the date specified. DATED: 9/24/97 /s/ Philip S. Dauber -------------------------- ----------------------------------- Signature Philip S. Dauber ----------------------------------- Name POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or officer of Software AG Systems, Inc., a corporation organized under the laws of the State of Delaware (the "Corporation"), hereby constitutes and appoints Daniel F. Gillis, Harry K. McCreery, James H. Daly, Robert B. Ott, Daniel A. Raskas and Joseph Turitz, and each of them (with full power to each of them to act alone), his true and lawful attorneys-in-fact and agents for him and on his behalf and in his name, place and stead, in all cases with full power of substitution and resubstitution, in any and all capacities, to sign, execute and affix his seal to and file with the Securities and Exchange Commission (or any other governmental or regulatory authority) a Registration Statement on Form S-1 or any other appropriate form and all amendments or supplements (including any post-effective amendments) thereto with all exhibits and any and all documents required to be filed with respect thereto, relating to the registration under the Securities Act of 1933 of shares of the Corporation's common stock, and grants to each of them full power and authority to do and to perform each and every act and thing requisite and necessary to be done in and about the premises in order to effectuate the same as fully to all intents and purposes as he himself might or could do if personally present, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned director and/or officer has hereunto set his hand and seal, as of the date specified. DATED: 9/26/97 /s/ Dr. Erwin Koenigs -------------------------- ----------------------------------- Signature Dr. Erwin Koenigs ----------------------------------- Name POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or officer of Software AG Systems, Inc., a corporation organized under the laws of the State of Delaware (the "Corporation"), hereby constitutes and appoints Daniel F. Gillis, Harry K. McCreery, James H. Daly, Robert B. Ott, Daniel A. Raskas and Joseph Turitz, and each of them (with full power to each of them to act alone), his true and lawful attorneys-in-fact and agents for him and on his behalf and in his name, place and stead, in all cases with full power of substitution and resubstitution, in any and all capacities, to sign, execute and affix his seal to and file with the Securities and Exchange Commission (or any other governmental or regulatory authority) a Registration Statement on Form S-1 or any other appropriate form and all amendments or supplements (including any post-effective amendments) thereto with all exhibits and any and all documents required to be filed with respect thereto, relating to the registration under the Securities Act of 1933 of shares of the Corporation's common stock, and grants to each of them full power and authority to do and to perform each and every act and thing requisite and necessary to be done in and about the premises in order to effectuate the same as fully to all intents and purposes as he himself might or could do if personally present, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned director and/or officer has hereunto set his hand and seal, as of the date specified. DATED: 9/23/97 /s/ Paul G. Stern --------------------------- ----------------------------------- Signature Paul G. Stern ----------------------------------- Name POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or officer of Software AG Systems, Inc., a corporation organized under the laws of the State of Delaware (the "Corporation"), hereby constitutes and appoints Daniel F. Gillis, Harry K. McCreery, James H. Daly, Robert B. Ott, Daniel A. Raskas and Joseph Turitz, and each of them (with full power to each of them to act alone), his true and lawful attorneys-in-fact and agents for him and on his behalf and in his name, place and stead, in all cases with full power of substitution and resubstitution, in any and all capacities, to sign, execute and affix his seal to and file with the Securities and Exchange Commission (or any other governmental or regulatory authority) a Registration Statement on Form S-1 or any other appropriate form and all amendments or supplements (including any post-effective amendments) thereto with all exhibits and any and all documents required to be filed with respect thereto, relating to the registration under the Securities Act of 1933 of shares of the Corporation's common stock, and grants to each of them full power and authority to do and to perform each and every act and thing requisite and necessary to be done in and about the premises in order to effectuate the same as fully to all intents and purposes as he himself might or could do if personally present, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned director and/or officer has hereunto set his hand and seal, as of the date specified. DATED: 9/25/97 /s/ Edward E. Lucente -------------------------- ----------------------------------- Signature Edward E. Lucente ----------------------------------- Name EX-27 8 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS 12-MOS DEC-31-1997 DEC-31-1996 JAN-01-1997 JAN-01-1996 JUN-30-1997 DEC-31-1996 8,440 25,773 0 0 69,206 108,325 6,486 4,980 0 0 78,049 132,539 36,862 34,872 27,820 25,949 123,591 158,088 63,592 102,118 0 0 0 0 0 0 243 275 39,067 29,533 123,591 158,088 77,588 156,840 77,588 156,840 37,616 72,971 37,616 72,971 36,509 78,588 0 0 0 0 6,038 10,511 2,514 4,302 3,524 6,209 0 0 0 0 0 0 0 0 .08 .20 0 0
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