<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 4, 1997
REGISTRATION NO. 333-36567
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
----------------
AMENDMENT NO. 2
TO
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. PETER B. TARR, ESQ.
DANIEL A. RASKAS, ESQ. BRENT B. SILER, ESQ.
ARNOLD & PORTER HALE AND DORR LLP
555 TWELFTH STREET, N.W. 1455 PENNSYLVANIA AVENUE, N.W.
WASHINGTON, D.C. 20004 WASHINGTON, D.C. 20004
(202) 942-5000 (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. [_]
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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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 NOVEMBER 4, 1997
[LOGO OF SOFTWARE AG SYSTEMS, INC. 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. The Common Stock has been approved for listing
on the New York Stock Exchange ("NYSE") under the symbol "AGS," subject to
official notice of issuance.
---------
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.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNDERWRITING PROCEEDS TO
DISCOUNTS AND PROCEEDS TO SELLING
PRICE TO COMMISSIONS COMPANY STOCKHOLDERS
PUBLIC (1) (2) (3) (3)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share...................... $ $ $ $
- --------------------------------------------------------------------------------
Total (3)...................... $ $ $ $
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
(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 BancAmerica Robertson Stephens, San Francisco,
California, on or about , 1997.
BANCAMERICA ROBERTSON STEPHENS DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
The date of this Prospectus is , 1997
<PAGE>
[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
<PAGE>
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
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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........................................................... 21
Business................................................................. 32
Management............................................................... 44
Certain Relationships and Transactions................................... 50
Principal and Selling Stockholders....................................... 52
Description of Capital Stock............................................. 54
Shares Eligible for Future Sale.......................................... 57
Underwriting............................................................. 59
Legal Matters............................................................ 61
Experts.................................................................. 61
Additional Information................................................... 61
Index to Consolidated Financial Statements............................... F-1
</TABLE>
----------------
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 SM, 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 or service marks of the Company. Trade names and trademarks of
other companies appearing in this Prospectus are the property of their
respective owners.
3
<PAGE>
SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including information set forth in "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,
financial accounting systems and inventory management 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 78 new consultants in the first nine 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 1,500 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
<PAGE>
"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 developed or acquired by SAG. The Company is
required to pay SAG 24% of the net revenues derived from such license, which
royalty rate is fixed for 20 years. See "Company Background."
The Company sells and markets its software products and professional services
through direct and indirect channels. In North America, the Company sells and
markets its products through a direct channel that includes over 120 people in
19 offices. The Company sells its products in over 20 additional countries
through six exclusive distributorships 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 for the Company's products (other than those
licensed from SAG). 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 1,500 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, Federal Express Corp., Nissan Motor Co., LTD., Cable
and Wireless, PLC, Banorte Bank (Mexico), 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 twelve months ended September 30, 1997,
approximately 96% of the Company's customers who were eligible renewed at least
one of their maintenance agreements.
THE OFFERING
<TABLE>
<C> <S>
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
</TABLE>
- --------
(1) Excludes (i) 4,947,525 shares of Common Stock issuable upon the exercise of
stock options outstanding at October 15, 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
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
PREDECESSOR COMBINED PREDECESSOR
-------------------------------------------------------- --------- -----------
NINE NINE THREE
MONTHS MONTHS MONTHS
YEARS ENDED DECEMBER 31, ENDED ENDED ENDED
---------------------------------------------- SEPT. 30, SEPT. 30, MARCH 31,
1992 1993 1994 1995 1996 1996 1997 1997
-------- -------- -------- -------- -------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA (1):
Software license fees........... $ 50,498 $ 51,672 $ 51,832 $ 52,061 $ 52,163 $ 31,763 $ 40,053 $ 7,341
Maintenance fees................ 51,162 57,264 65,871 65,307 69,702 51,778 53,288 17,352
Professional service fees....... 24,139 31,175 29,552 35,194 34,975 26,980 30,976 9,948
-------- -------- -------- -------- -------- -------- -------- -------
Total revenues................. 125,799 140,111 147,255 152,562 156,840 110,521 124,317 34,641
Gross profit.................... 70,866 70,149 77,429 81,239 83,869 56,861 63,720 17,127
Operating expenses before
write-off...................... 78,739 75,120 76,534 78,051 78,588 55,983 55,198 15,817
Write-off of acquired in-process
research and development
costs (2)...................... -- -- -- -- -- -- 6,051 --
Income (loss) from operations... (7,873) (4,971) 895 3,188 5,281 878 2,471 1,310
Net income (loss)............... (5,587) 6,380 1,382 3,326 6,209 1,910 297 1,373
======== ======== ======== ======== ======== ======== ======== =======
Net income (loss) per share
(3)............................ $ (0.18) $ 0.21 $ 0.05 $ 0.11 $ 0.20 $ 0.06 $ 0.01 $ 0.04
======== ======== ======== ======== ======== ======== ======== =======
<CAPTION>
SUCCESSOR
---------
SIX
MONTHS
ENDED
SEPT. 30,
1997
---------
<S> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA (1):
Software license fees........... $32,712
Maintenance fees................ 35,936
Professional service fees....... 21,028
---------
Total revenues................. 89,676
Gross profit.................... 46,593
Operating expenses before
write-off...................... 39,381
Write-off of acquired in-process
research and development
costs (2)...................... 6,051
Income (loss) from operations... 1,161
Net income (loss)............... (1,076)
=========
Net income (loss) per share
(3)............................ $ (0.04)
=========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
----------------------------
ACTUAL AS ADJUSTED (4)
-------- ---------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.......................... $ 18,322 $ 67,411
Working capital ................................... 3,119 57,273
Total assets....................................... 141,056 190,505
Total stockholders' equity......................... 36,401 90,915
</TABLE>
- --------
(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 six months ended September
30, 1997 (subsequent to the Recapitalization). See "Company Background."
(2) The write-off of acquired in-process research and development costs for the
nine months ended September 30, 1997 relates to the Company's acquisition
of R.D. Nickel. Before deducting the nonrecurring write-off for this
period, income from operations was approximately $8.5 million, net income
was approximately $6.3 million and net income per share was $0.23 (based on
weighted average fully diluted shares outstanding of 27,421,472).
(3) Shares used in computing net income (loss) per share for all periods
presented are 30,583,942, except for the three month period ended March 31,
1997 and the six and nine month periods ended September 30, 1997, which are
27,421,472. See Note 1 of Notes to Consolidated Financial Statements.
(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.
6
<PAGE>
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 results of operations 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 results of operations 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 the
productivity 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 results of operations 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 AND ROYALTY PAYMENTS TO SAG
The Company has the exclusive and perpetual 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
the Company's revenues have been derived from the licensing and servicing of
products developed or acquired by SAG. As a result, a materially adverse
change in the financial condition, or a change
7
<PAGE>
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 or enhancements to existing products in a timely manner, to provide
ongoing technical support for its 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 specified timetable. There can be no
assurance that SAG will adhere to that timetable with respect to all of its
products and SAG has recently delayed the timetable for certain of its
products. Any failure by SAG to adhere to the specified timetable could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Cooperation Agreement also requires the Company to
pay SAG 24% of the net revenues derived during the next 20 years from the
Company's licensing of products developed or acquired by SAG. See "Company
Background." 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 $21.0 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 and perpetual 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 or enhancements 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 nine months ended September 30, 1997, the
Company had revenues of $3.7 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
by contracting with outside firms such as the Company and value added
integrators to which the Company may license its software products. Other
organizations may elect to replace their existing systems with year 2000-
compliant hardware and software, rather than incur substantial cost in making
their existing systems year 2000-compliant. In addition, there can be no
assurance that a competitor will not develop a fully-automated solution to the
year 2000 problem. 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.
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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. On September 30, 1997,
the Company acquired 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, the Company is not currently a party
to any agreements, understandings or negotiations 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
has incurred significant charges of this nature in connection with its
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 $27.0
million for the nine months ended September 30, 1996 to $31.0 million for the
nine months ended September 30, 1997. The Company's ability to staff and
effectively manage any future growth in this business 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 services which include 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
services. 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
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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 respective 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 involved 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 or
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 litigation involving the use of technology by the
Company 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
could 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 such third-party
vendor's 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
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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. 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 its 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 and perpetual 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 20 years, respectively, and
collectively accounted for 11.3% and 11.2% of the Company's total revenues in
1996 and the first nine 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.
Royalty revenues from international distributors represented 17.2% and 17.8%
of the Company's total revenues in 1996 and the first nine months of 1997,
respectively. The Company anticipates that royalty 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 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
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in foreign countries, difficulties in enforcing intellectual property,
proprietary and contract rights, the burdens of complying with a wide variety
of foreign laws, potentially adverse tax consequences, tariffs, quotas 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 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 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 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 23.5% of its total revenues in 1996 and 27.6% of its
total revenues for the first nine months of 1997 from selling its products and
professional services directly or indirectly to state and local government
agencies. In addition, the Company derived 8.9% of its total revenues in 1996
and 9.7% of its total revenues for the first nine 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 represented approximately 8.0% and 10.3%
of the Company's total revenues for 1996 and the first nine months of 1997,
respectively. In making proposals for fixed price contracts, the Company
relies on its estimated costs for completing the project. These estimates
reflect, among
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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, at
September 30, 1997, the Company had 106 independent contractors working 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 73% 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, the members of
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."
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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 (all of which will be subject to 180-
day lock-up agreements between certain shareholders and the Representatives of
the Underwriters), and 17,880,850, 469,150 and 137,500 additional shares (all
of which will be subject to 180-day lock-up agreements) will be eligible for
sale beginning March 31, 1998, June 30, 1998 and August 22, 1998,
respectively. BancAmerica Robertson Stephens 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"), as soon as practicable after consummation of
this offering, in order to register all shares of Common Stock issuable 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 $11.01 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."
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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 the senior management of the Company and Thayer acquired approximately
89% of the outstanding Common Stock of the Company. See "Certain Relationships
and Transactions." Thayer is a private equity fund based in Washington, D.C.
that targets investments in the information technology and services industries
and its investors include corporations, pension funds and financial
institutions. 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 1994, 1995 and 1996, the Company's aggregate
royalty payments to SAG were approximately $29.0 million, $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.
On September 30, 1997, the Company acquired 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 ten months
ended September 30, 1997, R.D. Nickel had revenues of US$13.6 million and
US$12.6 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. Upon consummation of
this offering, the Company will owe an additional payment of
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Cdn$500,000 (approximately US$360,000) in connection with the acquisition,
which also will be paid with proceeds from this offering. In connection with
this acquisition, in the quarter ended September 30, 1997, the Company
recorded approximately US$4.9 million of goodwill, which will be amortized on
a straight-line basis over 10 years, and took a one-time charge of
approximately US$6.1 million associated with the purchase of incomplete or in-
process research and development.
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 a portion of the net proceeds to repay 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 and will have an
outstanding balance of principal and accrued interest at November 15, 1997 of
approximately Cdn$7.1 million (US$5.1 million). 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), which 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, understandings or negotiations with
respect to any material 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 cash 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 6 of
Notes to Consolidated Financial Statements.
16
<PAGE>
CAPITALIZATION
The following table sets forth as of September 30, 1997 the capitalization
and short term debt of the Company on an actual basis and on an 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.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
--------------------
ACTUAL AS ADJUSTED
------- -----------
(in thousands)
<S> <C> <C>
Short term debt........................................... $ 5,065 $ --
======= =======
Stockholders' equity:
Preferred Stock, $.01 par value; 25,000,000 shares
authorized; none issued and outstanding actual or as
adjusted ............................................. $ -- $ --
Common Stock, $.01 par value; 75,000,000 shares
authorized; 24,337,500 shares issued and outstanding
actual, and 28,937,500 shares issued and outstanding as
adjusted (1)............................................. 243 289
Additional paid-in capital................................ 37,234 91,702
Retained earnings (deficit)............................... (1,076) (1,076)
------- -------
Total stockholders' equity.............................. 36,401 90,915
------- -------
Total capitalization................................... $36,401 $90,915
======= =======
</TABLE>
- --------
(1) Excludes (i) 4,947,525 shares of Common Stock issuable upon the exercise
of stock options outstanding at September 30, 1997, granted under the
Stock Option Plan at a weighted average exercise price of $4.90 per share,
and (ii) 1,927,475 shares of Common Stock reserved for future issuance
pursuant to the Stock Option Plan. See "Management--Stock Option Plan."
17
<PAGE>
DILUTION
The net tangible book value of the Company as of September 30, 1997 was $3.0
million, or $0.12 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 September
30, 1997 would have been $57.5 million, or $1.99 per share. This represents an
immediate increase in net tangible book value of $1.87 per share to existing
stockholders and an immediate dilution of $11.01 per share to investors
purchasing shares of Common Stock in this offering. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.............. $13.00
------
Net tangible book value per share at September 30, 1997.... $0.12
Increase per share attributable to new investors........... 1.87
-----
Net tangible book value per share after this offering........ 1.99
------
Dilution per share to new investors.......................... $11.01
======
</TABLE>
The following table summarizes as of September 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.
<TABLE>
<CAPTION>
SHARES PURCHASED (1) TOTAL CONSIDERATION
------------------------------------------ AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ --------------------- ------- ------------- ---
<S> <C> <C> <C> <C> <C> <C>
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%
============ ======= =========== =====
</TABLE>
- --------
(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 68.7%, 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 October 15, 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
<PAGE>
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
September 30, 1997 and for the nine months ended September 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 nine months ended September 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."
<TABLE>
<CAPTION>
PREDECESSOR COMBINED (1) PREDECESSOR SUCCESSOR
-------------------------------------------------------- ------------ ----------- ---------
NINE NINE THREE SIX
MONTHS MONTHS MONTHS MONTHS
YEAR ENDED DECEMBER 31, ENDED ENDED ENDED ENDED
---------------------------------------------- SEPT. 30, SEPT. 30, MARCH 31, SEPT. 30,
1992 1993 1994 1995 1996 1996 1997 1997 1997
-------- -------- -------- -------- -------- --------- ------------ ----------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues:
Software license fees....... $ 50,498 $ 51,672 $ 51,832 $ 52,061 $ 52,163 $ 31,763 $ 40,053 $ 7,341 $32,712
Maintenance fees............ 51,162 57,264 65,871 65,307 69,702 51,778 53,288 17,352 35,936
Professional service fees... 24,139 31,175 29,552 35,194 34,975 26,980 30,976 9,948 21,028
-------- -------- -------- -------- -------- -------- -------- ------- -------
Total revenues............ 125,799 140,111 147,255 152,562 156,840 110,521 124,317 34,641 89,676
-------- -------- -------- -------- -------- -------- -------- ------- -------
Cost of revenues:
Software license............ 12,046 14,331 13,513 15,244 14,120 8,543 12,600 2,098 10,502
Maintenance................. 23,457 29,796 29,823 23,488 25,885 19,263 20,844 6,205 14,639
Professional services....... 19,430 25,835 26,490 32,591 32,966 25,854 27,153 9,211 17,942
-------- -------- -------- -------- -------- -------- -------- ------- -------
Total cost of revenues ... 54,933 69,962 69,826 71,323 72,971 53,660 60,597 17,514 43,083
-------- -------- -------- -------- -------- -------- -------- ------- -------
Gross profit................. 70,866 70,149 77,429 81,239 83,869 56,861 63,720 17,127 46,593
-------- -------- -------- -------- -------- -------- -------- ------- -------
Operating expenses:
Software product
development................ 6,219 3,045 900 900 1,372 1,372 595 -- 595
Sales and marketing......... 36,239 43,439 50,422 52,512 48,677 31,139 27,854 7,317 20,537
Administrative and
general.................... 36,281 28,636 25,212 24,639 28,539 23,472 26,749 8,500 18,249
Write-off of acquired in-
process research and
development costs (2)...... -- -- -- -- -- -- 6,051 -- 6,051
-------- -------- -------- -------- -------- -------- -------- ------- -------
Total operating expenses.. 78,739 75,120 76,534 78,051 78,588 55,983 61,249 15,817 45,432
-------- -------- -------- -------- -------- -------- -------- ------- -------
Income (loss) from
operations.................. (7,873) (4,971) 895 3,188 5,281 878 2,471 1,310 1,161
Other income and expense,
net......................... 1,431 7,599 1,882 2,449 5,230 2,173 2,354 978 1,376
-------- -------- -------- -------- -------- -------- -------- ------- -------
Income (loss) before
cumulative effect of change
in accounting principle and
income taxes................ (6,442) 2,628 2,777 5,637 10,511 3,051 4,825 2,288 2,537
Cumulative effect of change
in accounting principle..... -- 5,070 -- -- -- -- -- -- --
Income tax provision
(benefit) .................. (855) 1,318 1,395 2,311 4,302 1,141 4,528 915 3,613
-------- -------- -------- -------- -------- -------- -------- ------- -------
Net income (loss)............ $ (5,587) $ 6,380 $ 1,382 $ 3,326 $ 6,209 $ 1,910 $ 297 $ 1,373 $(1,076)
======== ======== ======== ======== ======== ======== ======== ======= =======
Net income (loss) per share
(3)......................... $ (0.18) $ 0.21 $ 0.05 $ 0.11 $ 0.20 $ 0.06 $ 0.01 $ 0.04 $ (0.04)
======== ======== ======== ======== ======== ======== ======== ======= =======
Dividends.................... $ -- $ -- $ 600 $ 1,700 $ 9,000 $ -- $ -- $ -- $ --
======== ======== ======== ======== ======== ======== ======== ======= =======
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
------------------------------------------ ---------
DECEMBER 31,
------------------------------------------ SEPT. 30,
1992 1993 1994 1995 1996 1997
------- ------- ------- -------- -------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Working capital
(deficit).............. $ 7,239 $ 6,355 $ 5,167 $ (2,465) $ 30,421 $ 3,119
Total assets............ 75,647 74,175 86,466 125,612 158,088 141,056
Long-term debt, less
current maturities..... 5,942 3,212 431 -- -- --
Total stockholders'
equity................. 23,810 30,190 30,972 32,599 29,808 36,401
</TABLE>
- --------
(1) Reflects combined data for the three months ended March 31, 1997 (prior to
the Recapitalization) and for the six months ended September 30, 1997
(subsequent to the Recapitalization).
(2) The write-off of acquired in-process research and development costs for
the nine months ended September 30, 1997 relates to the Company's
acquisition of R.D. Nickel. Before deducting the nonrecurring write-off
for this period, income from operations was approximately $8.5 million,
net income was approximately $6.3 million and net income per share was
$0.23 (based on weighted average fully diluted shares outstanding of
27,421,472).
(3) Shares used in computing net income (loss) per share for all periods
presented are 30,583,942, except for the six and nine month periods ended
September 30, 1997 which are 27,421,472. See Note 1 of Notes to
Consolidated Financial Statements.
20
<PAGE>
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 North America, a direct sales and support structure is
utilized through the Company's wholly
21
<PAGE>
owned subsidiaries. In the remainder of the Territory, exclusive distributors
sell the Company's products and provide maintenance support and pay the
Company a royalty on the revenues derived therefrom. The Company has
historically derived the majority of its revenues from sales within the United
States. Royalty revenues from international distributors represented 14.1%,
17.2% and 17.8% of the Company's total revenues in 1995, 1996 and the nine
months ended September 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 Enterprise License Agreements ("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 September 30, 1997, 106
of the Company's customers had entered into ELAs with the Company.
22
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain financial data for the periods
indicated expressed as a percentage of total revenues.
<TABLE>
<CAPTION>
PREDECESSOR COMBINED (1)
----------------------------------------------- ------------
NINE MONTHS NINE MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, SEPT. 30, SEPT. 30,
---------------------------------- ----------- ------------
1992 1993 1994 1995 1996 1996 1997
----- ----- ----- ----- ----- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Software license
fees................. 40.1% 36.9% 35.2% 34.1% 33.3% 28.7% 32.2%
Maintenance fees...... 40.7 40.9 44.7 42.8 44.4 46.8 42.9
Professional services
fees................. 19.2 22.2 20.1 23.1 22.3 24.5 24.9
----- ----- ----- ----- ----- ----- -----
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 7.7 10.1
Maintenance........... 18.6 21.3 20.3 15.4 16.5 17.4 16.8
Professional
services............. 15.4 18.4 18.0 21.4 21.0 23.4 21.8
----- ----- ----- ----- ----- ----- -----
Total cost of
revenues........... 43.6 49.9 47.5 46.8 46.5 48.5 48.7
----- ----- ----- ----- ----- ----- -----
Gross profit............ 56.4 50.1 52.5 53.2 53.5 51.5 51.3
----- ----- ----- ----- ----- ----- -----
Operating expenses:
Software product
development.......... 4.9 2.2 0.6 0.6 0.9 1.2 0.5
Sales and marketing... 28.8 31.0 34.2 34.4 31.0 28.2 22.4
Administrative and
general.............. 28.8 20.4 17.1 16.2 18.2 21.2 21.5
Write-off of acquired
in-process research
and development costs
(2).................. -- -- -- -- -- -- 4.9
----- ----- ----- ----- ----- ----- -----
Total operating ex-
penses............. 62.5 53.6 51.9 51.2 50.1 50.6 49.3
----- ----- ----- ----- ----- ----- -----
Income (loss) from
operations............. (6.1) (3.5) 0.6 2.0 3.4 0.9 2.0
Other income and
expense, net .......... 1.1 5.4 1.3 1.6 3.3 2.0 1.9
----- ----- ----- ----- ----- ----- -----
Income (loss) before
cumulative effect of
change in accounting
principle and
income taxes........... (5.0) 1.9 1.9 3.6 6.7 2.9 3.9
Cumulative effect of
change in accounting
principle.............. -- 3.6 -- -- -- -- --
Income tax provision
(benefit).............. (0.7) 0.9 0.9 1.5 2.6 1.0 3.6
----- ----- ----- ----- ----- ----- -----
Net income (loss)....... (4.3)% 4.6% 1.0% 2.1% 4.1% 1.9% 0.3%
===== ===== ===== ===== ===== ===== =====
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:
<CAPTION>
PREDECESSOR COMBINED (1)
----------------------------------------------- ------------
NINE MONTHS NINE MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, SEPT. 30, SEPT. 30,
---------------------------------- ----------- ------------
1992 1993 1994 1995 1996 1996 1997
----- ----- ----- ----- ----- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Software license...... 23.9% 27.7% 26.1% 29.3% 27.1% 26.9% 31.5%
Maintenance........... 45.8 52.0 45.3 36.0 37.1 37.2 39.1
Professional
services............. 80.5 82.9 89.6 92.6 94.3 95.8 87.7
</TABLE>
- --------
(1) Reflects combined data for the three months ended March 31, 1997 (prior to
the Recapitalization) and for the six months ended September 30, 1997
(subsequent to the Recapitalization).
(2) The write-off of acquired in-process research and development costs for the
nine months ended September 30, 1997 relates to the Company's acquisition
of R.D. Nickel. Before deducting the nonrecurring write-off for this
period, income from operations as a percentage of total revenues was 6.9%
and net income as a percentage of total revenues was 5.1%.
23
<PAGE>
NINE MONTHS ENDED SEPTEMBER 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 $124.3 million and
$110.5 million for the nine months ended September 30, 1997 and 1996,
respectively, representing an increase of 12.5%.
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 $40.1 million and
$31.8 million for the nine months ended September 30, 1997 and 1996,
respectively, representing an increase of 26.1%. This increase was primarily
attributable to the reorganization of the direct sales force at the beginning
of 1997 into three groups, with one group focused on software products,
another on professional services and a third on the Year 2000 Program. As a
result of this reorganization, the Company has experienced increased
acceptance of ELAs by its customer base. For the nine months ended September
30, 1997, the Company has entered into 30 new ELAs, compared to 14 new ELAs
for the nine months ended September 30, 1996.
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 $53.3 million and $51.8 million for the nine months ended September 30,
1997 and 1996, respectively, representing an increase of 2.9%. 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 $31.0 million and $27.0 million for the nine months ended September 30,
1997 and 1996, respectively, representing an increase of 14.8%. This increase
was primarily attributable to the Company's Year 2000 Program, which began in
1997 and contributed $3.7 million of professional services fees in the nine
months ended September 30, 1997.
Cost of Revenues
Software License. Software license costs consist primarily of royalties paid
to third parties. Software license costs were $12.6 million and $8.5 million
for the nine months ended September 30, 1997 and 1996, respectively,
representing 31.5% and 26.9% 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 $20.8 million and $19.3 million for the nine
months ended September 30, 1997 and 1996, respectively, representing 39.1% and
37.2% of maintenance fees for each respective period. This increase was
primarily attributable to the addition of staff to support new enterprise
enablement products.
24
<PAGE>
Professional Services. Professional services costs consist of labor and
related overhead costs for the people performing the services. Such costs
include costs for project management, quality control, proposal writing and
project review. Professional services costs were $27.2 million and $25.9
million for the nine months ended September 30, 1997 and 1996, respectively,
representing 87.7% and 95.8% 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 $0.6 million and
$1.4 million for the nine months ended September 30, 1997 and 1996,
respectively, representing 1.4% and 4.3% 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 $27.9 million and $31.1 million for the nine months ended
September 30, 1997 and 1996, respectively, representing 22.4% and 28.2% 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, which were undertaken to reduce the Company's cost of sales
relative to software license fees and were part of an overall cost reduction
program, began in 1995 and were 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 124 at September 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 $26.7 million and
$23.5 million for the nine months ended September 30, 1997 and 1996,
respectively, representing 21.5% and 21.2% 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.
Write-off of Acquired In-Process Research and Development Costs. The write-
off of acquired in-process research and development costs was attributable to
certain of the products acquired in the acquisition of R. D. Nickel. See Note
4 of the Unaudited Condensed Consolidated Financial Statements.
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 $2.4 million
and $2.2 million for the nine months ended September 30, 1997 and 1996,
respectively.
Income Tax Provision (Benefit). Income tax provision (benefit) was $4.5
million and $1.1 million for the nine months ended September 30, 1997 and
1996, respectively, resulting in effective tax rates of 41.6% (exclusive of
the write-off of acquired in-process research and development costs), and
37.4%, respectively. This increase in rate was primarily attributable to the
non-deductible expenses incurred as a result of the Recapitalization.
25
<PAGE>
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%.
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 maintenance fees 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 growth of
the Year 2000 Program 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.
26
<PAGE>
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. This planned reduction was combined
with changes in support processes designed to improve productivity and
customer service.
Professional Services. Professional services costs were $32.6 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 processes.
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 General. 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. Adjusting for a $1.2 million
reduction in bad debt expense during 1994 that resulted from the recovery of a
previously reserved receivable, administrative and general expenses decreased
$1.8 million in 1995, primarily due to the Company's cost reduction program.
27
<PAGE>
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.
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
--------------------------------------------------------- ------------------
QUARTER ENDED
----------------------------------------------------------------------------
DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30,
1995 1996 1996 1996 1996 1997 1997 1997
-------- --------- -------- --------- -------- --------- -------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
<CAPTION>
<S> <C> <C>
Revenues:
Software license fees............. $17,309 $ 6,609 $12,369 $12,785 $20,400 $ 7,341 $14,254 $18,458
Maintenance fees.................. 17,744 17,171 17,225 17,382 17,924 17,352 18,394 17,542
Professional services fees........ 8,206 8,506 7,515 10,959 7,995 9,948 10,299 10,729
------- ------- ------- ------- ------- ------- ------- -------
Total revenues.................... 43,259 32,286 37,109 41,126 46,319 34,641 42,947 46,729
------- ------- ------- ------- ------- ------- ------- -------
Cost of revenues:
Software license.................. 5,020 1,758 3,291 3,494 5,577 2,098 4,074 6,428
Maintenance....................... 6,389 6,614 6,376 6,273 6,622 6,205 6,577 8,062
Professional services............. 7,689 8,480 7,291 10,083 7,112 9,211 9,451 8,491
------- ------- ------- ------- ------- ------- ------- -------
Total cost of revenues............ 19,098 16,852 16,958 19,850 19,311 17,514 20,102 22,981
------- ------- ------- ------- ------- ------- ------- -------
Gross profit....................... 24,161 15,434 20,151 21,276 27,008 17,127 22,845 23,748
------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Software product development...... 260 410 591 371 -- -- 283 312
Sales and marketing............... 14,431 8,576 12,851 9,712 17,538 7,317 11,477 9,060
Administrative and general........ 6,774 7,349 8,784 7,339 5,067 8,500 8,932 9,317
Write-off of acquired in-process
research and development costs
(1).............................. -- -- -- -- -- -- -- 6,051
------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses.......... 21,465 16,335 22,226 17,422 22,605 15,817 20,692 24,740
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from operations...... 2,696 (901) (2,075) 3,854 4,403 1,310 2,153 (992)
Other income and expense, net...... 576 592 1,048 533 3,057 978 1,597 (221)
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before income taxes.. 3,272 (309) (1,027) 4,387 7,460 2,288 3,750 (1,213)
Income tax provision (benefit)..... 1,070 (97) (404) 1,642 3,161 915 1,599 2,014
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss).................. $ 2,202 $ (212) $ (623) $ 2,745 $ 4,299 $ 1,373 $ 2,151 $(3,227)
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
- --------
(1) The write-off of acquired in-process research and development costs for
the quarter ended September 30, 1997 relates to the Company's acquisition
of R.D. Nickel. Before deducting the nonrecurring write-off for this
period, income from operations was approximately $5.1 million and net
income was approximately $2.8 million.
28
<PAGE>
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.
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
--------------------------------------------------------- ------------------
QUARTER ENDED
----------------------------------------------------------------------------
DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30,
1995 1996 1996 1996 1996 1997 1997 1997
-------- --------- -------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Software license
fees.................. 40.0% 20.5% 33.3% 31.1% 44.0% 21.2% 33.2% 39.5%
Maintenance fees....... 41.0 53.2 46.4 42.3 38.7 50.1 42.8 37.5
Professional service
fees.................. 19.0 26.3 20.3 26.6 17.3 28.7 24.0 23.0
----- ----- ----- ----- ----- ----- ----- -----
Total revenues....... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ----- ----- ----- -----
Cost of revenue:
Software license....... 11.6 5.4 8.9 8.5 12.0 6.1 9.5 13.8
Maintenance............ 14.8 20.5 17.2 15.3 14.3 17.9 15.3 17.3
Professional service... 17.8 26.3 19.6 24.5 15.4 26.6 22.0 18.2
----- ----- ----- ----- ----- ----- ----- -----
Total cost of
revenues............ 44.2 52.2 45.7 48.3 41.7 50.6 46.8 49.3
----- ----- ----- ----- ----- ----- ----- -----
Gross profit............ 55.8 47.8 54.3 51.7 58.3 49.4 53.2 50.7
----- ----- ----- ----- ----- ----- ----- -----
Operating expenses:
Software product
development........... 0.6 1.3 1.6 0.9 -- -- 0.7 0.7
Sales and marketing.... 33.4 26.6 34.6 23.6 37.9 21.1 26.7 19.4
Administrative and
general............... 15.7 22.8 23.7 17.8 10.9 24.5 20.8 19.9
Write-off of acquired
in-process research
and development costs
(1)................... -- -- -- -- -- -- -- 12.9
----- ----- ----- ----- ----- ----- ----- -----
Total operating
expenses............ 49.7 50.7 59.9 42.3 48.8 45.6 48.2 52.9
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from oper-
ations................. 6.1 (2.9) (5.6) 9.4 9.5 3.8 5.0 (2.2)
Other income and
expense, net........... 1.3 1.8 2.8 1.3 6.6 2.8 3.7 (0.5)
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before
income taxes........... 7.4 (1.1) (2.8) 10.7 16.1 6.6 8.7 (2.7)
Income tax provision
(benefit).............. 2.5 (0.3) (1.1) 4.0 6.8 2.6 3.7 4.3
----- ----- ----- ----- ----- ----- ----- -----
Net income (loss)....... 4.9% (0.8)% (1.7)% 6.7% 9.3% 4.0% 5.0% (7.0)%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
(1)The write-off of acquired in-process research and development costs for the
quarter ended September 30, 1997 relates to the Company's acquisition of
R.D. Nickel. Before deducting the nonrecurring write-off for this period,
income from operations as a percentage of total revenues was 10.8% and net
income as a percentage of total revenues was 6.0%.
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 and third quarters 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. In addition, due to the
reorganization of the sales force and the increase in the number of ELAs, the
Company's historic trend of third and fourth quarter revenues that are
significantly larger than previous first and second quarter revenues may not
continue. 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 annual 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,
29
<PAGE>
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.
Software license costs have varied from period to period and can be expected
to fluctuate in the future primarily due to shifts in product mix since
royalty rates on third party products vary from 24% to 40%.
Historically, sales and marketing expenses have varied from quarter to
quarter in absolute dollar terms and as a percentage of revenues, as a result
of the size and timing of marketing programs. A significant portion of
marketing program costs are variable in nature and subject to management
discretion as to their timing and amount.
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. 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. 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 $27.9 million of long term customer receivable contracts,
primarily to fund the repayment of certain obligations incurred in connection
with the Recapitalization and to fund the acquisition 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 $27.1 million during 1994, 1995, 1996 and the nine months ended
September 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 $2.2 million during
1994, 1995, 1996 and the nine months ended September 30, 1997, respectively,
primarily for the repayment of long term obligations, the payment of
dividends, and the repurchase of Common Stock.
The Company has no long term debt, and as of September 30, 1997 had
approximately $18.3 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.
As of September 30, 1997, the Company remained contingently liable under the
recourse provisions associated with these sales in the amount of approximately
$50.7 million. The Company's accounts receivable days sales outstanding at
September 30, 1997 was 60.
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 operations
commenced in 1996 and represented less than 3% of total revenues in 1996. The
30
<PAGE>
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.
31
<PAGE>
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,
financial accounting systems and inventory management 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 1,500 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 customer billing systems, financial accounting systems
and inventory management 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.
32
<PAGE>
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, has 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 customer billing, financial accounting and inventory management.
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.
33
<PAGE>
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 services
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 acquired R.D. Nickel, a
software company with 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 and perpetual right to
license in North America, South America, Japan and Israel (the "Territory")
any new products developed or acquired 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 1,500 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 that 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 services 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.
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<PAGE>
Leverage Distribution Channels. The Company directly and indirectly sells its
products in over 20 countries throughout the Territory through exclusive
distributors. Through the Cooperation Agreement with SAG, the Company has
access to SAG's distribution channels for the Company's products (other than
those licensed from SAG) in over 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.
[FLOW CHART APPEARS HERE]
- -------------------------------------------------------------------------------
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 YEAR 2000
4GL Development Data Middleware & Remediation
Language Management Web Enabling
PROFESSIONAL SERVICES
Core Product . Web Integration . Data Warehouse . Year 2000 . Education
Technology . Support
35
<PAGE>
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.
<TABLE>
<CAPTION>
YEAR OF CURRENT PLATFORMS
PRODUCTS (1) INTRODUCTION VERSION SUPPORTED
ENTERPRISE DEVELOPMENT
- -------------------------------------------------------------
<S> <C> <C> <C>
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
ADABAS 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
</TABLE>
- --------
(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.
36
<PAGE>
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, a product 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 SDK, 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.
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<PAGE>
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.
. 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 and 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 services 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 Dallas, Texas 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 11
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.
38
<PAGE>
Since the Cooperation Agreement provides the Company with an exclusive and
perpetual 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 order to cultivate
advocacy by the Company's installed customer base. For the twelve months ended
September 30, 1997, approximately 96% of the Company's customers who were
eligible renewed at least one of their maintenance agreements. As of September
30, 1997, the Company had 119 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 1,500 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 Business 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 a client/server
windows architecture. To facilitate conversion of the online portion of the
system, the FAA 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 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
39
<PAGE>
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.
Vincent Metal Goods ("Vincent"). As a result of a merger in 1995, Vincent, a
large stainless steel and aluminum distributor, needed to consolidate and
convert its two existing computing systems into a single system for use by
Vincent's sales, warehouse and clerical employees located in 49 sites
throughout the United States. Vincent used the Company's professional services
offerings to develop, program and test new applications and selected a
mainframe system running on the Company's ADABAS and NATURAL products.
According to Vincent, its consolidated computer system is year 2000-ready and
was successfully completed three months ahead of schedule, within budget and
with minimal disruption to business functions and end-users.
The following is a representative list of some of the Company's customers
that produced revenues of at least $500,000 for the Company since January 1,
1996.
American Community Mutual Insurance Co. National Aeronautics and Space
American Electric Power Company, Inc. Administration
Banorte Bank Nissan Motor Co., LTD.
Brown University Ryerson Tull
Burlington Northern Santa Fe Corporation Rykoff-Sexton, Inc.
Cable and Wireless, PLC S.C. Johnson & Son Inc.
Centers for Disease Control Sprint Corporation
Central Hudson Gas & Electric Corporation State of California
City of New York State of Hawaii
City of Philadelphia State of Nevada
Commonwealth of Virginia State of New Jersey
Cutler-Hammer, Inc. State of Texas
Delta Air Lines, Inc. State of Washington
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 nine months of 1997, no single customer
accounted for more than 10% of the Company's total revenues.
SALES AND MARKETING
The Company sells and markets its products through both direct and indirect
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.
40
<PAGE>
In North America, the Company sells and markets its products through a
direct channel that included over 120 people in 19 offices as of September 30,
1997. The Company sells its products in over 20 additional countries through
six exclusive distributorships in South America, Japan and Israel. In
addition, the Company has access to SAG's distribution channels for the
Company's products (other than those licensed from SAG) in over 50 countries
outside North America, South America, Japan and Israel. As of September 30,
1997, in North America, the Company directly sold its professional services
through 29 people. In addition, as of September 30, 1997, the Company had nine
people in the United States focused on selling its Year 2000 Program.
As of September 30, 1997, the Company's corporate marketing organization
supported the Company's sales and professional services channels through the
efforts of 35 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 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.,
41
<PAGE>
ESPERANT and iXpress) and products developed or acquired by the Company (i.e.,
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 and other proprietary rights, 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.
Although the Company is not aware of any claims that its products,
trademarks or other proprietary rights 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 September 30, 1997, the Company employed 826 people, with 372 in
professional services and consulting, 124 in sales and marketing, 175 in
customer support, 14 in research and development and 141 in general and
administrative. As of September 30, 1997, the Company also utilized
approximately 106 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. See "Risk Factors--Dependence on Key
Personnel; Need to Hire Additional Personnel."
FACILITIES
The Company's executive offices, principal marketing and data center
facility are located in approximately 155,000 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 leases product sales and professional
services branch offices in the following cities in Canada: Calgary, Cambridge,
Edmonton, Montreal, Ottawa and Toronto.
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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.
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<PAGE>
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:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
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
</TABLE>
- --------
(1) Member of the Compensation Committee.
(2)Member of the Audit Committee.
In addition to the executive officers listed above, David S. Linthicum has
accepted the Company's offer of employment and will serve as Chief Technology
Officer of the Company, subject to his election to that office by the
Company's Board of Directors.
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 sole general partner and managing
agent of Thayer. 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 worked 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 Inc., 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 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 Inc. 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.
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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 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 of SAG 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 sole 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
45
<PAGE>
meeting of the stockholders to be held in 1998, a second class will hold
office initially for a term expiring at 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. Dauber will have terms expiring in
1998, Dr. Koenigs 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."
46
<PAGE>
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
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
----------------------------------
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION (1) COMPENSATION (2)
- --------------------------- -------- -------- ---------------- ----------------
<S> <C> <C> <C> <C>
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, 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 P. Cripe (6)
Vice President--Human
Resources................. 123,613 81,900 -- 97,060(6)
</TABLE>
- -------
(1) Consists of sales commissions paid to the Named Executive Officer. In
accordance with the rules of the Securities and Exchange Commission (the
"Commission"), other compensation in the form of perquisites and other
personal benefits has 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 the 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.
47
<PAGE>
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 1,017,225 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
and may be partially accelerated in connection with the executive officer's
termination of employment with the Company. See "--Stock Option Plan." Messrs.
Gillis, McCreery, Brigden, Daly and Gorley have also received grants of
nonstatutory stock options under the Stock Option Plan to purchase an
aggregate of 601,150 shares of Common Stock at an exercise price per share
equal to $9.60, which options are fully vested. In addition, immediately prior
to the time this offering becomes effective, the Company intends to grant to
Mr. Linthicum a nonstatutory stock option under the Stock Option Plan to
purchase 50,050 shares of Common Stock at an exercise price per share equal to
the initial public offering price.
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 11, 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. Immediately prior to the time this offering
becomes effective, the Company intends to grant to Eligible Individuals
additional nonstatutory stock options to acquire an aggregate of 124,025
shares of Common Stock at an exercise price per share equal to the initial
public offering price.
401(K) PLAN
The Company 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 as a 401(k) plan under the Code. The Company employees are generally
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 provides for the Company to make
matching contributions equal to 100% of pre-tax contributions up to 5% of the
participant's compensation for the payroll period or other period over which
contributions are made, as further limited by law. The 401(k) Plan also
permits the Company to make discretionary employer contributions, which if
made, are allocated in proportion to the compensation of each employee to the
total compensation for the year of all employees. The 401(k) Plan does not
allow contributions to exceed 6% of compensation. Earnings under the 401(k)
Plan accumulate tax free until distributed.
DEFERRED COMPENSATION AGREEMENTS
The Company has entered into deferred compensation agreements with Messrs.
Gillis, McCreery and Daly (the "Deferred Compensation Agreements"). Pursuant
to these agreements, each of Messrs. Gillis,
48
<PAGE>
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 the Company payments
totaling the vested portion of his deferred compensation account.
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 ($460,000 minimum payment), 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 the Company 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 (i) the
severance benefit due each such executive officer upon termination under his
respective memorandum of understanding is equal to twelve months of his then-
current salary plus a pro-rated bonus payment and (ii) 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 the
Company.
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, as amended.
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. During 1996, Michael J. King, President and
Chief Executive Officer of the Company until May 1996, participated in
deliberations of the Company's Board of Directors concerning executive officer
compensation. 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 sole general
partner of Thayer, a stockholder of the Company.
49
<PAGE>
CERTAIN RELATIONSHIPS AND TRANSACTIONS
At the closing of the Recapitalization, the senior management of the Company
and Thayer acquired approximately 89% of the outstanding voting equity of the
Company pursuant to an agreement among the Company, SAG, Thayer and the
following 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 ($33.9 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
85.4% and 3.2% 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, the Company
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, the Company 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, the Company 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 the Company in
connection with the operation and conduct of the Company's business. Through
September 30, 1997, the Company has paid $150,000 of such fees. TC Management
is the managing agent of and provides management services to Thayer. Dr. Stern
and Mr. Rickertsen, directors of the Company, are members of TC Management. In
connection with the Recapitalization, the Company also paid a one-time
advisory fee of $250,000 to MLC Group, Inc., a wholly owned operating
subsidiary of MLC Holdings, Inc. Mr. Rickertsen, a director of the Company, 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 the Company
on January 1, 1995 (the "License Agreement"). The License Agreement gave the
Company the exclusive right to license and service SAG products in North
America, South America, Japan and Israel, and gave SAG the exclusive right to
license and service the Company's products in all other areas. Immediately
prior to the Recapitalization, the Company and SAG entered into the
Cooperation Agreement dated March 31, 1997, which terminated and superseded
the License Agreement. The Cooperation Agreement 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. Except in certain circumstances, the Company's 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
nine months of 1997, the Company's royalty payments to SAG were approximately
$29.0 million, $23.9 million, $26.1 million and $19.8 million, respectively.
In the same periods,
50
<PAGE>
SAG's royalty payments to the Company were approximately $0.0, $0.3 million,
$0.3 million and $0.5 million, respectively. As consideration for the
Cooperation Agreement, the Company paid SAG 38,000,000 Deutsche Marks
(approximately $22.6 million) on March 31, 1997. See "Company Background."
On December 5, 1993, the Company and SAG entered into a Products and
Research & Development Operations Transfer Agreement (the "R&D Agreement")
which required the Company to provide certain services relating to certain SAG
employees who utilized the Company's facilities. In connection with the
Recapitalization, on March 31, 1997, the Company entered into an
Administrative Services Agreement (the "ASA") with SAG, terminating the R&D
Agreement and requiring that the Company provide services similar to those
required under the R&D Agreement. SAG is required under the ASA to reimburse
the Company for its costs incurred in connection with the ASA and to pay the
Company $500,000 per year during the years 1997, 1998 and 1999 for the use of
certain machinery leased by the Company. In 1994, 1995, 1996 and the first
nine months of 1997, payments to the Company under the R&D Agreement and the
ASA were approximately $7.5 million, $8.8 million, $15.9 million and $8.7
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 1994, 1995 and 1996, the Company paid aggregate dividends to SAG
of $0.6 million, $1.7 million 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 cause or if Mr.
Hill voluntarily terminates his employment prior to August 17, 1999. The
Company's repurchase right terminates in the event of a change of control of
the Company. In addition, 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 as of September 26, 1997 of "restricted securities"
of the Company within the meaning of Rule 144 of the Commission, and certain
transferees of such holders. 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.
Messrs. Gillis, McCreery, Daly and Gorley borrowed $250,000, $250,000,
$182,605 and $75,000, respectively, from the Company under individual
promissiory notes, each of which is dated March 24, 1997, and Messrs. McCreery
and Daly borrowed $363,000 and $120,740, respectively, from the Company under
individual promissory notes, each of which is dated August 9, 1996. Each of
the promissory notes accrues interest at the rate of 6% per annum and is due
and payable upon termination of its maker's employment with the Company. None
of the promissory notes require periodic interest or principal payments. As of
September 30, 1997, the amount outstanding under each promissory note equaled
the entire amount borrowed plus accrued interest.
51
<PAGE>
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 October 15,
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.
<TABLE>
<CAPTION>
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
- -------------------- ------------- ----------------------- ---------- -------
<S> <C> <C> <C> <C> <C>
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).................... 24,664,200 98.9% 3,100,000 21,564,200 73%
</TABLE>
- --------
* 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.
52
<PAGE>
(2) The number of shares of Common Stock outstanding prior to this offering
includes (i) 24,337,500 shares outstanding as of October 15, 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 October 15, 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 sole general partner is TC Equity
Partners, LLC, a Delaware limited liability company ("TC Equity
Partners"). TC Equity Partners 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).
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<PAGE>
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 October 15, 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 cash 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
54
<PAGE>
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 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's
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,
after consummation of an underwritten public offering of the Company's Common
Stock, 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.
55
<PAGE>
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
stockholder 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 the Bylaws may be adopted,
amended, altered, changed or repealed by the affirmative vote of the majority
of the members of the Board of Directors. After consummation of an
underwritten public offering of the Company's Common Stock, 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 generally in the election of directors, voting as
a single class.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Company's Common Stock is Bank of
New York.
56
<PAGE>
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.
Of the Restricted Shares, 2,750,000 shares will be eligible for sale
beginning 90 days after the date of this Prospectus (all of which will be
subject to 180-day lock-up agreements between certain shareholders and the
Representatives of the Underwriters), and 17,880,850, 469,150 and 137,500
additional shares (all of which will be subject to 180-day lock-up agreements)
will be eligible for sale beginning March 31, 1998, June 30, 1998 and August
22, 1998, respectively.
All of the holders of Restricted Shares have agreed with the Representatives
that, until 180 days from the effective date of the Registration Statement of
which this Prospectus is a part, 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 BancAmerica Robertson Stephens. BancAmerica Robertson
Stephens 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.
Rule 701 permits resales of shares in reliance upon Rule 144 but without
compliance with certain restrictions, including the holding period
requirement, of Rule 144. Any employee, officer or director of or consultant
to the Company who purchased his or her shares pursuant to a written
compensatory plan or contract may be entitled to rely on the resale provisions
of Rule 701. Rule 701 permits affiliates to sell their Rule 701 shares under
Rule 144 without complying with the holding period requirements of Rule 144.
Rule
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<PAGE>
701 further provides that non-affiliates may sell such shares in reliance on
Rule 144 without having to comply with the holding period, public information,
volume limitation or notice provisions of Rule 144. In both cases, a holder of
Rule 701 shares is required to wait until 90 days after the date of this
Prospectus before selling such shares.
As of October 15, 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 and reserved for issuance under the Stock Option Plan.
Such registration statement is expected to be filed and become effective 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.
All holders of 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."
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<PAGE>
UNDERWRITING
The Underwriters named below, acting through their representatives,
BancAmerica Robertson Stephens 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.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
BancAmerica Robertson Stephens..................................
Donaldson, Lufkin & Jenrette Securities Corporation.............
---------
Total....................................................... 7,700,000
=========
</TABLE>
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 1,155,000 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 and liability
arising from breaches of representations and warranties contained in the
Underwriting Agreement or the inaccuracy of certain information set forth
herein that was provided by the Underwriters.
All current executive officers, directors and stockholders of the Company
will have agreed with the Representatives that, until 180 days from the
effective date of the Registration Statement of which this Prospectus is a
part, 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 BancAmerica Robertson
Stephens. BancAmerica
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<PAGE>
Robertson Stephens 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 the date of this
Prospectus, the Company will not, without the prior written consent of
BancAmerica Robertson Stephens, 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".
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<PAGE>
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 Underwriters 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 the prior auditors' audit of the consolidated
financial statements for the years ended December 31, 1995 and 1996, there
were no disagreements with the Company 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 with respect to each such contract or other document
filed as an exhibit to the Registration Statement reference is made to the
exhibit, and each such statement is qualified in all respects by such
reference. 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.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
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 September 30, 1997... F-18
Unaudited Condensed Consolidated Statements of Operations for the nine
months ended September 30, 1996, the three months ended March 31, 1997,
and the six months ended September 30, 1997.............................. F-19
Unaudited Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 1996, the three months ended March 31, 1997,
and the six months ended September 30, 1997.............................. F-20
Notes to Unaudited Condensed Consolidated Financial Statements............ F-21
</TABLE>
F-1
<PAGE>
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
<PAGE>
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
-------- --------
(in thousands)
<S> <C> <C>
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
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
------------- ------------- -------------
(in thousands, except per share amounts)
<S> <C> <C> <C>
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
============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
COMMON STOCK
$0.01 PAR VALUE ADDITIONAL TOTAL
---------------- PAID-IN- RETAINED STOCKHOLDER'S
SHARES AMOUNT CAPITAL EARNINGS EQUITY
-------- ------- ---------- -------- -------------
(in thousands)
<S> <C> <C> <C> <C> <C>
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
======== ====== ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
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,
financial accounting 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 North America,
South America, Japan and Israel.
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
1995 1996
------- -------
(in thousands)
<S> <C> <C>
Domestic:
Currently billed......................................... $31,305 $25,988
Advanced billings on maintenance......................... -- 14,593
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
======= =======
</TABLE>
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:
<TABLE>
<CAPTION>
1995 1996
------- -------
(in thousands)
<S> <C> <C>
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
======= =======
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31, AMOUNT
------------------------- --------------
(in thousands)
<S> <C>
1997..................................................... $15,884
1998..................................................... 4,874
1999..................................................... 4,034
2000..................................................... 1,260
2001..................................................... 1,206
-------
$27,258
=======
</TABLE>
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:
<TABLE>
<CAPTION>
1995 1996
------- -------
(in thousands)
<S> <C> <C>
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
======= =======
</TABLE>
F-10
<PAGE>
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994, 1995 AND 1996
(4) PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1995 1996
------- -------
(in thousands)
<S> <C> <C>
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
======= =======
</TABLE>
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
In 1994, the Company licensed and serviced SAG products under a pre-existing
license agreement pursuant to which the Company was required to make payments
to SAG based on a specified percentage of the net sales amount for licenses
of, and technical services on, SAG's products. Effective January 1, 1995, the
Company and SAG entered into a new license agreement whereby the Company was
required to pay royalties of 24% of such net sales amounts. 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, prior to the Recapitalization, the
Company and SAG entered into a Cooperation Agreement on March 31, 1997.
Cost Reimbursements
As an accommodation to SAG, the Company houses certain of SAG's 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
<PAGE>
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:
<TABLE>
<CAPTION>
1994 1995 1996
------ ------ -------
(in thousands)
<S> <C> <C> <C>
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
====== ====== =======
</TABLE>
F-12
<PAGE>
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:
<TABLE>
<CAPTION>
1994 1995 1996
------ ------ ------
(in thousands)
<S> <C> <C> <C>
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
====== ====== ======
</TABLE>
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:
<TABLE>
<CAPTION>
1995 1996
------- -------
(in thousands)
<S> <C> <C>
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
======= =======
</TABLE>
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, 1995,
and 1996, the Company's matching (and total) contributions were $1,967,000,
$1,789,000, and $1,854,000, respectively.
F-13
<PAGE>
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:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31, FACILITIES EQUIPMENT TOTAL
- ------------------------- ---------- --------- -------
(in thousands)
<S> <C> <C> <C>
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
======= ====== =======
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>
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 consummated a Recapitalization Agreement
under which the Company repurchased from its parent 24,750,000 shares of
common stock and sold 21,450,000 shares of common stock to an unrelated entity
and certain of the Company's senior managers.
F-15
<PAGE>
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994, 1995 AND 1996
(14) SUBSEQUENT EVENTS--(CONTINUED)
Prior to the consummation of the Recapitalization Agreement, the Company
entered into a perpetual (unless otherwise terminated by the written agreement
of the parties) Cooperation Agreement with SAG that terminated and 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, each of the Company and SAG are required to pay the other
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 decrease in
SAG's worldwide revenues, the minimum annual royalty requirement will be reduced
proportionately.
In connection with the Recapitalization Agreement, which was consummated on
March 31, 1997, the Company authorized the granting of stock options to
acquire an aggregate of 3,300,000 shares of common stock at an exercise price
of $1.47, of which options to acquire an aggregate of 3,059,650 shares have
been granted. This exercise price represents the amount per share that Thayer
and management paid to acquire approximately an 89% interest in the Company on
March 31, 1997 pursuant to the Recapitalization Agreement. The Company adopted
the Software AG Systems, Inc. 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.
On September 30, 1997, the Company acquired 100% of the issued and
outstanding shares of the common stock of R.D. Nickel and Associates, Inc.
("Nickel"). The transaction was accounted for using the purchase method of
accounting for a business combination. The aggregate purchase price of
Cdn$14,000,000 (US$10,130,000) was funded through a cash payment of
Cdn$7,000,000 (US$5,065,000) and a note payable of Cdn$7,000,000
(US$5,065,000).
Nickel is a software company that has a family of application development
products and that has been the exclusive distributor of SAG's products in
Canada since 1973.
In connection with the transaction, the Company recorded a $6,051,000 non-
recurring charge against earnings for in-process research and development
costs. The remaining excess purchase price of $4,864,000 represents goodwill,
and has been recorded as other intangible assets. The related amortization
period for the goodwill is ten years.
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 to be effected prior to the closing of the initial public offering
of the Company's common stock. Common share and per share data in these
consolidated financial statements have been retroactively adjusted to reflect
the stock split. Additionally, the Company's Certificate of Incorporation was
amended and restated to authorize an additional 20,000,000 shares of $.01 par
value common stock and an additional 11,250,000 shares of $.01 par value
preferred stock, for a total of 75,000,000 authorized shares of common stock
and 25,000,000 authorized shares of $.01 par value preferred stock. The
Company had previously authorized 13,750,000 shares of $.01 par value
preferred stock on March 14, 1997.
F-16
<PAGE>
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
DECEMBER 31, 1994, 1995 AND 1996
(15) QUARTERLY FINANCIAL DATA (UNAUDITED)
Unaudited summarized financial data by quarters for 1995 and 1996 is as
follows:
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
1995 (in thousands, except per share data)
----
<S> <C> <C> <C> <C>
Revenue......................... $32,623 $38,763 $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
<CAPTION>
1996
----
<S> <C> <C> <C> <C>
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
</TABLE>
F-17
<PAGE>
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
--------------
(in thousands)
<S> <C>
ASSETS
Current:
Cash and cash equivalents.................................... $ 18,322
Accounts receivable, net of allowance for doubtful accounts.. 58,857
Current portion of deferred income taxes..................... 3,411
Other current assets......................................... 4,721
--------
Total current assets....................................... 85,311
Installment accounts receivable, net of current portion........ 8,028
Property, equipment and leasehold improvements, net of
accumulated depreciation and amortization..................... 9,213
Deferred income taxes.......................................... 1,469
Cooperation agreement, net of accumulated amortization......... 22,325
Other intangible asset, net of accumulated amortization........ 11,042
Other assets................................................... 3,668
--------
Total assets............................................. $141,056
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current:
Accounts payable............................................. $ 6,066
Accrued payroll and employee benefits........................ 12,133
Payable to SAG............................................... 8,650
Other current liabilities.................................... 12,222
Current portion of deferred revenues, net of deferred
royalties................................................... 43,121
--------
Total current liabilities.................................. 82,192
Deferred revenues, net of deferred royalties................... 22,463
--------
Total liabilities ....................................... 104,655
--------
Stockholders' equity........................................... 36,401
--------
Total liabilities and stockholders' equity............. $141,056
========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial
statements.
F-18
<PAGE>
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
-------------------------- -------------
NINE MONTHS THREE MONTHS SIX MONTHS
ENDED ENDED ENDED
SEPTEMBER 30, MARCH 31, SEPTEMBER 30,
1996 1997 1997
------------- ------------ -------------
(in thousands, except per share amounts)
<S> <C> <C> <C>
Revenues:
Software license fees.............................................................. $31,763 $ 7,341 $32,712
Maintenance fees................................................................... 51,778 17,352 35,936
Professional services fees......................................................... 26,980 9,948 21,028
------- ------- -------
Total revenues................................................................... 110,521 34,641 89,676
------- ------- -------
Cost of revenues:
Software license................................................................... 8,543 2,098 10,502
Maintenance........................................................................ 19,263 6,205 14,639
Professional services.............................................................. 25,854 9,211 17,942
------- ------- -------
Total cost of revenues........................................................... 53,660 17,514 43,083
------- ------- -------
Gross profit......................................................................... 56,861 17,127 46,593
------- ------- -------
Operating expenses:
Software product development....................................................... 1,372 -- 595
Sales and marketing................................................................ 31,139 7,317 20,537
Administrative and general......................................................... 23,472 8,500 18,249
Write-off of acquired in-process research and development costs.................... -- -- 6,051
------- ------- -------
Total operating expenses......................................................... 55,983 15,817 45,432
------- ------- -------
Income (loss) from operations........................................................ 878 1,310 1,161
Other income and expense, net........................................................ 2,173 978 1,376
------- ------- -------
Income (loss) before income taxes.................................................... 3,051 2,288 2,537
Income tax expense (benefit)......................................................... 1,141 915 3,613
------- ------- -------
Net income (loss).................................................................... $ 1,910 $ 1,373 $(1,076)
======= ======= =======
Net income (loss) per share.......................................................... $ 0.06 $ 0.04 $ (0.04)
======= ======= =======
Shares used in computing net income (loss) per share................................. 30,584 30,584 27,422
- --------------------------------------------------
======= ======= =======
</TABLE>
See accompanying notes to unaudited condensed consolidated financial
statements.
F-19
<PAGE>
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
-------------------------- -------------
NINE MONTHS THREE MONTHS SIX MONTHS
ENDED ENDED ENDED
SEPTEMBER 30, MARCH 31, SEPTEMBER 30,
1996 1997 1997
------------- ------------ -------------
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................................................................. $ 1,910 $ 1,373 $ (1,076)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization.................................................... 2,743 941 3,429
Gain on sales of property and equipment.......................................... (8) -- (4)
Deferred gain.................................................................... -- (36) --
Net proceeds from sales of accounts receivable................................... 9,258 -- 27,859
Write-off of acquired in-process research and development costs.................. -- -- 6,051
Stock options issued............................................................. -- -- 129
Changes in operating accounts, net of effect of acquisition...................... (16,068) 8,148 (25,860)
------- ------- --------
(2,165) 10,426 10,528
------- ------- --------
Cash flows from investing activities:
Additions to property, equipment and leasehold improvements........................ (2,064) (208) (2,134)
Proceeds from sales of property and equipment...................................... 8,699 -- 2
Purchase of Cooperation Agreement.................................................. -- -- (22,612)
Acquisition, net of cash received.................................................. -- -- (1,260)
------- ------- --------
6,635 (208) (26,004)
------- ------- --------
Cash flows from financing activities:
Repurchase of common stock......................................................... -- -- (33,920)
Issuance of common stock........................................................... -- -- 31,727
Dividends paid..................................................................... (3,000) -- --
------- ------- --------
(3,000) -- (2,193)
------- ------- --------
Net increase (decrease) in cash and cash equivalents................................. 1,470 10,218 (17,669)
Cash and cash equivalents, beginning................................................. 1,573 25,773 35,991
------- ------- --------
Cash and cash equivalents, ending.................................................... $ 3,043 $35,991 $ 18,322
- --------------------------------------------------
======= ======= ========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial
statements.
F-20
<PAGE>
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
September 30, 1997, and the results of its operations for the nine months
ended September 30, 1996, and the three-month period ended March 31, 1997 and
the six month period ended September 30, 1997. These condensed consolidated
financial statements are unaudited and do not include all related footnote
disclosures. The September 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 nine months ended September 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 six
month period ended September 30, 1997. The results of operations for the three
month period ended March 31, 1997 and the six month period ended September 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 consummated a Recapitalization Agreement
under which the Company repurchased from its former parent, Software AG, a
German corporation ("SAG"), 24,750,000 shares of common stock and sold
21,450,000 shares of common stock to Thayer and certain of the Company's
managers. As a result of this change in control, the acquisition by Thayer and
such managers 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.
Prior to the consummation of the Recapitalization Agreement, the Company
entered into a perpetual (unless otherwise terminated by the written agreement
of the parties) Cooperation Agreement with SAG that terminated and 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, each of the Company and SAG are required to pay the
other 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 decrease in SAG's worldwide revenues, the minimum annual royalty
requirement will be reduced proportionately.
Pursuant to the Recapitalization Agreement, Thayer and certain of the
Company's managers acquired approximately an 89% interest in the Company for
approximately $31.5 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 amortization period for
the Cooperation Agreement is ten years. 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-21
<PAGE>
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(3) STOCK OPTION PLAN
In connection with the Recapitalization Agreement which was consummated on
March 31, 1997, the Company authorized the granting of stock options to
acquire an aggregate of 3,300,000 shares of common stock at an exercise price
of $1.47, of which options to acquire an aggregate of 3,059,650 shares have
been granted. This exercise price represents the amount per share that Thayer
and management paid to acquire approximately an 89% interest in the Company on
March 31, 1997 pursuant to the Recapitalization Agreement. The Company adopted
the Software AG Systems, Inc. 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. The Company accounts for issuances of stock
options under APB 25, "Accounting for Stock Issued to Employees."
(4) ACQUISITION
On September 30, 1997, the Company acquired 100% of the issued and
outstanding shares of the common stock of R.D. Nickel and Associates, Inc.
("Nickel"). The transaction was accounted for using the purchase method of
accounting for a business combination. The aggregate purchase price of
Cdn$14,000,000 (US$10,130,000) was funded through a cash payment of
Cdn$7,000,000 (US$5,065,000) and a note payable of Cdn$7,000,000
(US$5,065,000).
Nickel is a software company that has a family of application development
products and that has been the exclusive distributor of SAG's products in
Canada since 1973.
In connection with the transaction, the Company recorded a $6,051,000 non-
recurring charge against earnings for in-process research and development
costs. The remaining excess purchase price of $4,864,000 represents goodwill,
and has been recorded as other intangible assets. The related amortization
period for the goodwill is ten years.
At September 30, 1997, the net assets acquired have been reported in the
Company's unaudited condensed consolidated financial statements.
The Nickel acquisition was not determined to be significant to the
operations or balance sheet of the Company; accordingly, the pro forma
financial information has not been presented.
(5) SUBSEQUENT EVENTS
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 to be effected prior to the closing of the initial public offering
of the Company's Common Stock. 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 Certificate of
Incorporation was amended and restated to authorize an additional 20,000,000
shares of $.01 par value Common Stock and an additional 11,250,000 shares of
$.01 par value preferred stock, for a total of 75,000,000 authorized shares of
common stock and 25,000,000 authorized shares of $.01 par value preferred
stock. The Company had previously authorized 13,750,000 shares of $.01 par
value preferred stock on March 14, 1997.
F-22
<PAGE>
[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. Each of the four smaller screens has 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 Extra Service
. ESPERANT
. DSS AGENT
4. PROFESSIONAL SERVICES
Customized Consulting
. Core Services
. Web Integration
. Data Warehouse
. Year 2000
. Education
<PAGE>
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.
<TABLE>
<S> <C>
SEC registration fee............................................. $ 37,567
NASD filing fee.................................................. 12,897
New York Stock Exchange listing fee.............................. 179,100
Blue Sky fees and expenses....................................... 15,000
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.................................................... 43,436
----------
Total........................................................ $1,100,000
==========
</TABLE>
--------
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. In addition, the Company
expects to pay approximately $100,000 to obtain further director and officer
liability insurance coverage in connection with this offering.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law sets forth conditions
and limitations governing the indemnification of officers and directors of the
Company and certain other persons. The Company has adopted provisions in its
Second Amended and Restated Certificate of Incorporation and Second 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 Company's 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 Underwriting
Agreement or the inaccuracy of certain information set forth herein that was
provided by the Underwriters.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Prior to February 25, 1997, the Company was an indirect wholly owned
subsidiary of Software AG ("SAG"), and on February 25, 1997, the Company
became a direct wholly owned subsidiary of SAG
II-1
<PAGE>
and SAG became the owner of the one outstanding share of the Company's common
stock, par value $1.00 per share.
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, SAG, Thayer and the following 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) 24,750,000 shares of
Common Stock were repurchased by the Company from SAG for an aggregate
purchase price of 57,000,000 Deutsche Marks ($33.9 million), (ii) 20,678,350
shares of Common Stock were issued and sold to Thayer for an aggregate
purchase price of $30,392,662.86 and (iii) an aggregate of 771,650 shares of
Common Stock were issued and sold to the Managers for an aggregate purchase
price of $1,134,157.14. 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 of 1933, as amended (the "Securities Act"), or Rule 701
thereunder. All such shares reflect a 275-for-1 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 Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question 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
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT HAS DULY
CAUSED THIS AMENDMENT NO. 2 TO REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN RESTON, VIRGINIA ON
NOVEMBER 4, 1997.
Software AG Systems, Inc.
/s/ Daniel F. Gillis
By: _________________________________
DANIEL F. GILLIS
Director, President and Chief
Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THIS AMENDMENT NO. 2 TO
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED ON NOVEMBER 4, 1997.
/s/ Daniel F. Gillis
By: _________________________________
DANIEL F. GILLIS
Director, President and Chief
Executive Officer
(Principal Executive Officer)
/s/ Harry K. McCreery
By: _________________________________
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
/s/ Harry K. McCreery
*By: ________________________________
Harry K. McCreery
Attorney-In-Fact
II-3
<PAGE>
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
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS DEDUCTIONS
---------- ----------
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF PERIOD EXPENSES WRITE-OFFS OF PERIOD
----------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
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
</TABLE>
S-2
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO.
-------
<C> <S>
** 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, as amended
*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. McCreery 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. (dated as of September 26, 1997)
*10.16 Subscription Agreement between Timothy L. Hill and Software AG
Systems, Inc. (dated as of August 22, 1997), as amended
*10.17 Shareholders Agreement among Software AG Systems, Inc., Thayer Equity
Investors III, L.P. and certain shareholders of Software AG Systems,
Inc. (dated as of April 1, 1997)
*10.18 Promissory Note made by Thomas E. Gorley (effective date March 24,
1997)
*10.19 Promissory Note made by Daniel F. Gillis (effective date March 24,
1997)
*10.20 Promissory Note made by Harry K. McCreery (effective date March 24,
1997)
*10.21 Promissory Note made by James H. Daly (effective date March 24, 1997)
**10.22 Promissory Note made by Harry K. McCreery (effective date August 9,
1996)
**10.23 Promissory Note made by James H. Daly (effective date August 9, 1996)
*11 Computations of Earnings per Share
**16 Letter regarding Change in Certifying Accountant
**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
</TABLE>
- --------
* Previously filed
** Filed herewith
E-1
<PAGE>
DRAFT 11/03/97
7,700,000 Shares/1/
SOFTWARE AG SYSTEMS, INC.
Common Stock
UNDERWRITING AGREEMENT
----------------------
, 1997
------------
BANCAMERICA ROBERTSON STEPHENS
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
As Representatives of the several Underwriters
c/o BancAmerica Robertson Stephens
555 California Street
Suite 2600
San Francisco, California 94104
Ladies/Gentlemen:
SOFTWARE AG SYSTEMS, INC., a Delaware corporation (the "Company"), and
certain stockholders of the Company named in Schedule B hereto (hereafter called
the "Selling Stockholders") address you as the representatives (the
"Representatives") of each of the persons, firms and corporations listed in
Schedule A hereto (herein collectively called the "Underwriters") and hereby
confirm their respective agreements with the several Underwriters as follows:
1. Description of Shares. The Company proposes to issue and sell
---------------------
4,600,000 shares of its authorized and unissued common stock, $.01 par value per
share, to the several Underwriters. The Selling Stockholders, acting severally
and not jointly, propose to sell an aggregate of 3,100,000 shares of the
Company's authorized and outstanding common stock, $.01 par value per share, to
the several Underwriters. The 4,600,000 shares of common stock, $.01 par value
per share, of the Company to be sold by the Company are hereinafter called the
"Company Shares" and the 3,100,000 shares of common stock, $.01 par value per
share, to be sold by the Selling Stockholders are hereinafter called the
"Selling Stockholder Shares." The Company Shares and the Selling Stockholder
Shares are hereinafter collectively referred to as the "Firm Shares." The
- ---------------------
/1/ Plus an option to purchase up to 1,155,000 additional shares from the
Company and certain Selling Stockholders to cover over-allotments.
<PAGE>
Company and the Selling Stockholders also propose to grant, severally and not
jointly, to the Underwriters an option to purchase up to 1,155,000 additional
shares of the Company's common stock, $.01 par value per share (the "Option
Shares"), as provided in Section 7 hereof. As used in this Agreement, the term
"Shares" shall include the Firm Shares and the Option Shares. All shares of
common stock, $.01 par value per share, of the Company to be outstanding after
giving effect to the sales contemplated hereby, including the Shares, are
hereinafter referred to as "Common Stock."
2. Representations, Warranties and Agreements of the Company and the
-----------------------------------------------------------------
Selling Stockholders.
- --------------------
I. The Company represents and warrants to and agrees with each
Underwriter and each Selling Stockholder that:
(a) A registration statement on Form S-1 (File No. 333-36567)
with respect to the Shares, including a prospectus subject to completion, has
been prepared by the Company in conformity with the requirements of the
Securities Act of 1933, as amended (the "Act"), and the applicable rules and
regulations (the "Rules and Regulations") of the Securities and Exchange
Commission (the "Commission") under the Act and has been filed with the
Commission; such amendments to such registration statement, such amended
prospectuses subject to completion and such abbreviated registration statements
pursuant to Rule 462(b) of the Rules and Regulations as may have been required
prior to the date hereof have been similarly prepared and filed with the
Commission; and the Company will file such additional amendments to such
registration statement, such amended prospectuses subject to completion and such
abbreviated registration statements as may hereafter be required. Copies of such
registration statement and amendments, of each related prospectus subject to
completion (all such prospectuses subject to completion other than the
prospectus dated September 26, 1997 being referred to herein as the "Preliminary
Prospectuses") and of any abbreviated registration statement pursuant to Rule
462(b) of the Rules and Regulations have been delivered to you.
If the registration statement relating to the Shares has been
declared effective under the Act by the Commission, the Company will prepare and
promptly file with the Commission the information omitted from the registration
statement pursuant to Rule 430A(a) or, if BancAmerica Robertson Stephens, on
behalf of the several Underwriters, shall agree to the utilization of Rule 434
of the Rules and Regulations, the information required to be included in any
term sheet filed pursuant to Rule 434(b) or (c), as applicable, of the Rules and
Regulations pursuant to subparagraph (1), (4) or (7) of Rule 424(b) of the Rules
and Regulations or as part of a post-effective amendment to the registration
statement (including a final form of prospectus). If the registration statement
relating to the Shares has not been declared effective under the Act by the
Commission, the Company will prepare and promptly file an amendment to the
registration statement, including a final form of prospectus, or, if BancAmerica
Robertson
-2-
<PAGE>
Stephens, on behalf of the several Underwriters, shall agree to the
utilization of Rule 434 of the Rules and Regulations, the information required
to be included in any term sheet filed pursuant to Rule 434(b) or (c), as
applicable, of the Rules and Regulations. The term "Registration Statement" as
used in this Agreement shall mean such registration statement, including
financial statements, schedules and exhibits, in the form in which it became or
becomes, as the case may be, effective (including, if the Company omitted
information from the registration statement pursuant to Rule 430A(a) or files a
term sheet pursuant to Rule 434 of the Rules and Regulations, the information
deemed to be a part of the registration statement at the time it became
effective pursuant to Rule 430A(b) or Rule 434(d) of the Rules and Regulations)
and, in the event of any amendment thereto or the filing of any abbreviated
registration statement pursuant to Rule 462(b) of the Rules and Regulations
relating thereto after the effective date of such registration statement, shall
also mean (from and after the effectiveness of such amendment or the filing of
such abbreviated registration statement) such registration statement as so
amended, together with any such abbreviated registration statement. The term
"Prospectus" as used in this Agreement shall mean the prospectus relating to the
Shares as included in such Registration Statement at the time it becomes
effective (including, if the Company omitted information from the Registration
Statement pursuant to Rule 430A(a) of the Rules and Regulations, the information
deemed to be a part of the Registration Statement at the time it became
effective pursuant to Rule 430A(b) of the Rules and Regulations); provided,
--------
however, that if in reliance on Rule 434 of the Rules and Regulations and with
- -------
the consent of BancAmerica Robertson Stephens, on behalf of the several
Underwriters, the Company shall have provided to the Underwriters a term sheet
pursuant to Rule 434(b) or (c), as applicable, prior to the time that a
confirmation is sent or given for purposes of Section 2(10)(a) of the Act, the
term "Prospectus" shall mean the "prospectus subject to completion" (as defined
in Rule 434(g) of the Rules and Regulations) last provided to the Underwriters
by the Company and circulated by the Underwriters to all prospective purchasers
of the Shares (including the information deemed to be a part of the Registration
Statement at the time it became effective pursuant to Rule 434(d) of the Rules
and Regulations). Notwithstanding the foregoing, if any revised prospectus shall
be provided to the Underwriters by the Company for use in connection with the
offering of the Shares that differs from the prospectus referred to in the
immediately preceding sentence (whether or not such revised prospectus is
required to be filed with the Commission pursuant to Rule 424(b) of the Rules
and Regulations), the term "Prospectus" shall refer to such revised prospectus
from and after the time it is first provided to the Underwriters for such use.
If in reliance on Rule 434 of the Rules and Regulations and with the consent of
BancAmerica Robertson Stephens, on behalf of the several Underwriters, the
Company shall have provided to the Underwriters a term sheet pursuant to Rule
434(b) or (c), as applicable, prior to the time that a confirmation is sent or
given for purposes of Section 2(10)(a) of the Act, the Prospectus and the term
sheet, together, will not be materially different from the prospectus in the
Registration Statement.
-3-
<PAGE>
(b) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus or instituted proceedings for
that purpose, and each such Preliminary Prospectus has conformed in all material
respects to the requirements of the Act and the Rules and Regulations and, as of
its date, has not included any untrue statement of a material fact or omitted to
state a material fact necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading; and at the time
the Registration Statement became or becomes, as the case may be, effective and
at all times subsequent thereto up to and on the Closing Date (hereinafter
defined) and on any later date on which Option Shares are to be purchased, (i)
the Registration Statement and the Prospectus, and any amendments or supplements
thereto, contained and will contain all material information required to be
included therein by the Act and the Rules and Regulations and will in all
material respects conform to the requirements of the Act and the Rules and
Regulations, (ii) the Registration Statement, and any amendments or supplements
thereto, did not and will not include any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein not misleading, and (iii) the Prospectus, and any
amendments or supplements thereto, did not and will not include any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that none of the representations and
-------- -------
warranties contained in this subparagraph (b) shall apply to information
contained in or omitted from the Registration Statement, any Preliminary
Prospectus or the Prospectus, or any amendment or supplement thereto, in
reliance upon, and in conformity with, written information relating to any
Underwriter furnished to the Company by such Underwriter specifically for use in
the preparation thereof.
(c) Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of the jurisdiction of its incorporation with full power and authority
(corporate and other) to own, lease and operate its properties and conduct its
business as described in the Prospectus; the Company owns all of the outstanding
capital stock of its subsidiaries free and clear of any pledge, lien, security
interest, encumbrance, claim or equitable interest; each of the Company and its
subsidiaries is duly qualified to do business as a foreign corporation and is in
good standing in each jurisdiction in which the ownership or leasing of its
properties or the conduct of its business requires such qualification, except
where the failure to be so qualified or be in good standing would not have a
material adverse effect on the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company and its subsidiaries
considered as one enterprise; no proceeding has been instituted in any such
jurisdiction, revoking, limiting or curtailing, or seeking to revoke, limit or
curtail, such power and authority or qualification; each of the Company and its
subsidiaries is in possession of and operating in compliance with all
authorizations, licenses, certificates, consents, orders and permits from state,
federal and other regulatory authorities which are material to the conduct of
its business, all of which are valid and in full force and effect; neither the
Company nor
-4-
<PAGE>
any of its subsidiaries is in violation of its respective charter or bylaws or
in default in the performance or observance of any material obligation,
agreement, covenant or condition contained in any material bond, debenture, note
or other evidence of indebtedness, or in any material lease, contract,
indenture, mortgage, deed of trust, loan agreement, joint venture or other
agreement or instrument to which the Company or any of its subsidiaries is a
party or by which it or any of its subsidiaries or their respective properties
may be bound; and neither the Company nor any of its subsidiaries is in material
violation of any law, order, rule, regulation, writ, injunction, judgment or
decree of any court, government or governmental agency or body, domestic or
foreign, having jurisdiction over the Company or any of its subsidiaries or over
their respective properties of which it has knowledge. The Company does not own
or control, directly or indirectly, any corporation, association or other entity
other than those listed on Exhibit 21 to the Registration Statement.
(d) The Company has full legal right, power and authority to enter
into this Agreement and perform the transactions contemplated hereby. This
Agreement has been duly authorized, executed and delivered by the Company and is
a valid and binding agreement on the part of the Company, enforceable in
accordance with its terms, except as rights to indemnification hereunder may be
limited by applicable law and except as the enforcement hereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other similar
laws relating to or affecting creditors' rights generally or by general
equitable principles; the performance of this Agreement and the consummation of
the transactions herein contemplated will not result in a material breach or
violation of any of the terms and provisions of, or constitute a default under,
(i) any bond, debenture, note or other evidence of indebtedness, or under any
lease, contract, indenture, mortgage, deed of trust, loan agreement, joint
venture or other agreement or instrument to which the Company or any of its
subsidiaries is a party or by which it or any of its subsidiaries or their
respective properties may be bound, (ii) the charter or bylaws of the Company or
any of its subsidiaries or (iii) any law, order, rule, regulation, writ,
injunction, judgment or decree of any court, government or governmental agency
or body, domestic or foreign, having jurisdiction over the Company or any of its
subsidiaries or over their respective properties. No consent, approval,
authorization or order of or qualification with any court, government or
governmental agency or body, domestic or foreign, having jurisdiction over the
Company or any of its subsidiaries or over their respective properties is
required for the execution and delivery of this Agreement and the consummation
by the Company or any of its subsidiaries of the transactions herein
contemplated, except such as may be required under the Act, the Securities
Exchange Act of 1934, as amended (the "Exchange Act") (if applicable), or under
state or other securities or Blue Sky laws, all of which requirements have been
satisfied in all material respects.
(e) There is not any pending or, to the best of the Company's
knowledge, threatened action, suit, claim or proceeding against the Company, any
of its
-5-
<PAGE>
subsidiaries or any of their respective officers or any of their respective
properties, assets or rights before any court, government or governmental agency
or body, domestic or foreign, having jurisdiction over the Company or any of its
subsidiaries or over their respective officers or properties or otherwise which
(i) might result in any material adverse change in the condition (financial or
otherwise), earnings, operations, business or business prospects of the Company
and its subsidiaries considered as one enterprise or might materially and
adversely affect their properties, assets or rights, (ii) might prevent
consummation of the transactions contemplated hereby or (iii) is required to be
disclosed in the Registration Statement or Prospectus and is not so disclosed;
and there are no agreements, contracts, leases or documents of the Company or
any of its subsidiaries of a character required to be described or referred to
in the Registration Statement or Prospectus or to be filed as an exhibit to the
Registration Statement by the Act or the Rules and Regulations which have not
been accurately described in all material respects in the Registration Statement
or Prospectus or filed as exhibits to the Registration Statement.
(f) All outstanding shares of capital stock of the Company (including
the Selling Stockholder Shares) have been duly authorized and validly issued and
are fully paid and nonassessable, have been issued in compliance with all
federal and state securities laws, were not issued in violation of or subject to
any preemptive rights or other rights to subscribe for or purchase securities,
and the authorized and outstanding capital stock of the Company is as set forth
in the Prospectus under the caption "Capitalization" and conforms in all
material respects to the statements relating thereto contained in the
Registration Statement and the Prospectus (and such statements correctly state
the substance of the instruments defining the capitalization of the Company);
the Company Shares and the Option Shares to be purchased from the Company
hereunder have been duly authorized for issuance and sale to the Underwriters
pursuant to this Agreement and, when issued and delivered by the Company against
payment therefor in accordance with the terms of this Agreement, will be duly
and validly issued and fully paid and nonassessable, and will be sold free and
clear of any pledge, lien, security interest, encumbrance, claim or equitable
interest; and no preemptive right, co-sale right, registration right, right of
first refusal or other similar right of stockholders exists with respect to any
of the Company Shares or Option Shares to be purchased from the Company
hereunder or the issuance and sale thereof other than those that have been
expressly waived prior to the date hereof and those that will automatically
expire upon and will not apply to the consummation of the transactions
contemplated on the Closing Date. No further approval or authorization of any
stockholder, the Board of Directors of the Company or others is required for the
issuance and sale or transfer of the Shares except as may be required under the
Act or under state or other securities or Blue Sky laws. All issued and
outstanding shares of capital stock of each subsidiary of the Company have been
duly authorized and validly issued and are fully paid and nonassessable, and
were not issued in violation of or subject to any preemptive right, or other
rights to subscribe for or purchase shares and are owned by the Company free and
clear of any pledge, lien, security interest, encumbrance, claim or
-6-
<PAGE>
equitable interest. Except as disclosed in the Prospectus and the financial
statements of the Company, and the related notes thereto, included in the
Prospectus, neither the Company nor any subsidiary has outstanding any options
to purchase, or any preemptive rights or other rights to subscribe for or to
purchase, any securities or obligations convertible into, or any contracts or
commitments to issue or sell, shares of its capital stock or any such options,
rights, convertible securities or obligations. The description of the Company's
stock option, stock bonus and other stock plans or arrangements, and the options
or other rights granted and exercised thereunder, set forth in the Prospectus
accurately and fairly presents the information required to be shown with respect
to such plans, arrangements, options and rights.
(g) KPMG Peat Marwick LLP, which has examined the consolidated
financial statements of the Company, together with the related schedules and
notes, as of December 31, 1996 and 1997 and for each of the years in the three
years ended December 31, 1997 filed with the Commission as a part of the
Registration Statement, which are included in the Prospectus, are independent
accountants within the meaning of the Act and the Rules and Regulations; the
audited consolidated financial statements of the Company, together with the
related schedules and notes, and the unaudited consolidated financial
information, forming part of the Registration Statement and Prospectus, fairly
present the financial position and the results of operations of the Company and
its subsidiaries at the respective dates and for the respective periods to which
they apply; and all audited consolidated financial statements of the Company,
together with the related schedules and notes, and the unaudited consolidated
financial information, filed with the Commission as part of the Registration
Statement, have been prepared in accordance with generally accepted accounting
principles consistently applied throughout the periods involved except as may be
otherwise stated therein. The selected and summary financial and statistical
data included in the Registration Statement present fairly the information shown
therein and have been compiled on a basis consistent with the audited financial
statements presented therein. No other financial statements or schedules are
required to be included Registration Statement.
(h) Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus, there has not been (i) any
material adverse change in the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company and its subsidiaries
considered as one enterprise, (ii) any transaction that is material to the
Company and its subsidiaries considered as one enterprise, except transactions
entered into in the ordinary course of business, (iii) any obligation, direct or
contingent, that is material to the Company and its subsidiaries considered as
one enterprise, incurred by the Company or its subsidiaries, except obligations
incurred in the ordinary course of business, (iv) any change in the capital
stock or outstanding indebtedness of the Company or any of its subsidiaries that
is material to the Company and its subsidiaries considered as one enterprise,
(v) any dividend or distribution of any kind declared, paid or made on the
capital stock of the Company or any of its subsidiaries, or (vi) any loss or
damage (whether or not insured)
-7-
<PAGE>
to the property of the Company or any of its subsidiaries which has been
sustained or will have been sustained which has a material adverse effect on the
condition (financial or otherwise), earnings, operations, business or business
prospects of the Company and its subsidiaries considered as one enterprise.
(i) Except as set forth in the Registration Statement and Prospectus,
(i) each of the Company and its subsidiaries has good and marketable title to
all properties and assets described in the Registration Statement and Prospectus
as owned by it, free and clear of any pledge, lien, security interest,
encumbrance, claim or equitable interest, other than such as would not have a
material adverse effect on the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company and its subsidiaries
considered as one enterprise, (ii) the agreements to which the Company or any of
its subsidiaries is a party described in the Registration Statement and
Prospectus are valid agreements, enforceable by the Company and its subsidiaries
(as applicable), except as the enforcement thereof may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by general equitable
principles and, to the best of the Company's knowledge, the other contracting
party or parties thereto are not in material breach or material default under
any of such agreements, and (iii) each of the Company and its subsidiaries has
valid and enforceable leases for all properties described in the Registration
Statement and Prospectus as leased by it, except as the enforcement thereof may
be limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws relating to or affecting creditors' rights generally or by
general equitable principles. Except as set forth in the Registration Statement
and Prospectus, the Company owns or leases all such properties as are necessary
to its operations as now conducted or as proposed to be conducted.
(j) The Company and its subsidiaries have timely filed all necessary
federal, state and foreign income and franchise tax returns and have paid all
taxes shown thereon as due, and there is no tax deficiency that has been or, to
the best of the Company's knowledge, might be asserted against the Company or
any of its subsidiaries that might have a material adverse effect on the
condition (financial or otherwise), earnings, operations, business or business
prospects of the Company and its subsidiaries considered as one enterprise; and
all tax liabilities are adequately provided for on the books of the Company and
its subsidiaries.
(k) The Company and its subsidiaries maintain insurance with insurers
of recognized financial responsibility of the types and in the amounts generally
deemed adequate for their respective businesses and consistent with insurance
coverage maintained by similar companies in similar businesses, including, but
not limited to, insurance covering real and personal property owned or leased by
the Company or its subsidiaries against theft, damage, destruction, acts of
vandalism and all other risks customarily insured against, all of which
insurance is in full force and effect; neither the Company nor any such
subsidiary has been refused any insurance coverage sought or
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applied for; and neither the Company nor any such subsidiary has any reason to
believe that it will not be able to renew its existing insurance coverage as and
when such coverage expires or to obtain similar coverage from similar insurers
as may be necessary to continue its business at a cost that would not materially
and adversely affect the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company and its subsidiaries
considered as one enterprise.
(l) To the best of the Company's knowledge, no labor disturbance by
the employees of the Company or any of its subsidiaries exists or is imminent;
and the Company is not aware of any existing or imminent labor disturbance by
the employees of any of its principal suppliers, subassemblers, value added
resellers, subcontractors, original equipment manufacturers, authorized dealers
or international distributors that might be expected to result in a material
adverse change in the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company and its subsidiaries considered as
one enterprise. No collective bargaining agreement exists with any of the
Company's employees and, to the best of the Company's knowledge, no such
agreement is imminent.
(m) Each of the Company and its subsidiaries owns or possesses
adequate rights to use all patents, patent rights, inventions, trade secrets,
know-how, trademarks, service marks, trade names and copyrights which are
necessary to conduct its businesses as described in the Registration Statement
and Prospectus; the expiration of any patents, patent rights, trade secrets,
trademarks, service marks, trade names or copyrights would not have a material
adverse effect on the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company and its subsidiaries considered as
one enterprise; the Company has not received any notice of, and has no knowledge
of, any infringement of or conflict with asserted rights of the Company by
others with respect to any patent, patent rights, inventions, trade secrets,
know-how, trademarks, service marks, trade names or copyrights; and the Company
has not received any notice of, and has no knowledge of, any infringement of or
conflict with asserted rights of others with respect to any patent, patent
rights, inventions, trade secrets, know-how, trademarks, service marks, trade
names or copyrights which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, might have a material adverse effect on
the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and its subsidiaries considered as one
enterprise.
(n) The Common Stock has been approved for listing on the New York
Stock Exchange subject to official notice of issuance.
(o) The Company has been advised concerning the Investment Company Act
of 1940, as amended (the "1940 Act"), and the rules and regulations thereunder,
and has in the past conducted, and intends in the future to conduct, its affairs
in such a manner as to ensure that it will not become an "investment company"
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or a company "controlled" by an "investment company" within the meaning of the
1940 Act and such rules and regulations.
(p) The Company has not distributed and will not distribute prior to
the later of (i) the Closing Date, or any date on which Option Shares are to be
purchased, as the case may be, and (ii) completion of the distribution of the
Shares, any offering material in connection with the offering and sale of the
Shares other than any Preliminary Prospectuses, the Prospectus, the Registration
Statement and other materials, if any, permitted by the Act.
(q) Neither the Company nor any of its subsidiaries has at any time
during the last five (5) years (i) made any unlawful contribution to any
candidate for foreign office or failed to disclose fully any contribution in
violation of law, or (ii) made any payment to any federal or state governmental
officer or official, or other person charged with similar public or quasi-public
duties, other than payments required or permitted by the laws of the United
States or any jurisdiction thereof.
(r) The Company has not taken and will not take, directly or
indirectly, any action designed to or that might reasonably be expected to cause
or result in stabilization or manipulation of the price of the Common Stock to
facilitate the sale or resale of the Shares.
(s) Each officer and director of the Company, each Selling Stockholder
and each beneficial owner of shares of Common Stock has agreed in writing that
such person will not, for a period of 180 days from the date that the
Registration Statement is declared effective by the Commission (the "Lock-up
Period"), offer to sell, contract to sell, or otherwise sell, dispose of, loan,
pledge or grant any rights with respect to (collectively, a "Disposition") any
shares of Common Stock, any options or warrants to purchase any shares of Common
Stock or any securities convertible into or exchangeable for shares of Common
Stock (collectively, "Securities") now owned or hereafter acquired directly by
such person or with respect to which such person has or hereafter acquires the
power of disposition, otherwise than (i) as a bona fide gift or gifts, provided
the donee or donees thereof agree in writing to be bound by this restriction,
(ii) as a distribution to partners or shareholders of such person, provided that
the distributees thereof agree in writing to be bound by the terms of this
restriction, or (iii) with the prior written consent of BancAmerica Robertson
Stephens. The foregoing restriction has been expressly agreed to preclude the
holder of the Securities from engaging in any hedging or other transaction which
is designed to or reasonably expected to lead to or result in a Disposition of
Securities during the Lock-up Period, even if such Securities would be disposed
of by someone other than such holder. Such prohibited hedging or other
transactions would include, without limitation, any short sale (whether or not
against the box) or any purchase, sale or grant of any right (including, without
limitation, any put or call option) with respect to any Securities or with
respect to any security (other than a broad-based market basket or index) that
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includes, relates to or derives any significant part of its value from
Securities. Furthermore, such person has also agreed and consented to the entry
of stop transfer instructions with the Company's transfer agent against the
transfer of the Securities held by such person except in compliance with this
restriction. The Company has provided to counsel for the Underwriters a
complete and accurate list of all securityholders of the Company and the number
and type of securities held by each securityholder. The Company has provided to
counsel for the Underwriters true, accurate and complete copies of all of the
agreements pursuant to which its officers, directors and stockholders have
agreed to such or similar restrictions (the "Lock-up Agreements") presently in
effect or effected hereby. The Company hereby represents and warrants that it
will not release any of its officers, directors or other stockholders from any
Lock-up Agreements currently existing or hereafter effected without the prior
written consent of BancAmerica Robertson Stephens.
(t) Except as set forth in the Registration Statement and Prospectus,
(i) the Company is in compliance with all rules, laws and regulations relating
to the use, treatment, storage and disposal of toxic substances and protection
of health or the environment ("Environmental Laws") which are applicable to its
business, (ii) the Company has received no notice from any governmental
authority or third party of an asserted claim under Environmental Laws, which
claim is required to be disclosed in the Registration Statement and the
Prospectus, (iii) the Company will not be required to make future material
capital expenditures to comply with Environmental Laws and (iv) no property
which is owned, leased or occupied by the Company has been designated as a
Superfund site pursuant to the Comprehensive Response, Compensation, and
Liability Act of 1980, as amended (42 U.S.C. (S) 9601, et seq.), or otherwise
-- ----
designated as a contaminated site under applicable state or local law.
(u) The Company and each of its subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurances that
(i) transactions are executed in accordance with management's general or
specific authorizations, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets, (iii) access to
assets is permitted only in accordance with management's general or specific
authorization and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(v) There are no outstanding loans, advances (except normal advances
for business expenses in the ordinary course of business) or guarantees of
indebtedness by the Company to or for the benefit of any of the officers or
directors of the Company or any of the members of the families of any of them,
except as disclosed in the Registration Statement and the Prospectus.
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(w) The Company has complied with all provisions of Section 517.075,
Florida Statutes, relating to doing business with the Government of Cuba or with
any person or affiliate located in Cuba.
II. Each Selling Stockholder, severally and not jointly, represents and
warrants to and agrees with each Underwriter and the Company that:
(a) Such Selling Stockholder now has and on the Closing Date, and on
any later date on which Option Shares are purchased, will have valid marketable
title to the Shares to be sold by such Selling Stockholder, free and clear of
any pledge, lien, security interest, encumbrance, claim or equitable interest
other than pursuant to this Agreement; and upon delivery of such Shares
hereunder and payment of the purchase price as herein contemplated, each of the
Underwriters will obtain valid marketable title to the Shares purchased by it
from such Selling Stockholder, free and clear of any pledge, lien, security
interest pertaining to such Selling Stockholder or such Selling Stockholder's
property, encumbrance, claim or equitable interest, including any liability for
estate or inheritance taxes, or any liability to or claims of any creditor,
devisee, legatee or beneficiary of such Selling Stockholder.
(b) Such Selling Stockholder has duly authorized (if applicable),
executed and delivered, in the form heretofore furnished to the Representatives,
an irrevocable Power of Attorney (the "Power of Attorney") appointing
___________ and ___________ as attorneys-in-fact (collectively, the "Attorneys"
and individually, an "Attorney") and a Letter of Transmittal and Custody
Agreement (the "Custody Agreement") with ______________________________, as
custodian (the "Custodian"); each of the Power of Attorney and the Custody
Agreement constitutes a valid and binding agreement on the part of such Selling
Stockholder, enforceable in accordance with its terms, except as the enforcement
thereof may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting creditors' rights
generally or by general equitable principles; and each of such Selling
Stockholder's Attorneys, acting alone, is authorized to execute and deliver this
Agreement and the certificate referred to in Section 6(i) hereof on behalf of
such Selling Stockholder, to determine the purchase price to be paid by the
several Underwriters to such Selling Stockholder as provided in Section 3
hereof, to authorize the delivery of the Selling Stockholder Shares and the
Option Shares to be sold by such Selling Stockholder under this Agreement and to
duly endorse (in blank or otherwise) the certificate or certificates
representing such Shares or a stock power or powers with respect thereto, to
accept payment therefor, and otherwise to act on behalf of such Selling
Stockholder in connection with this Agreement.
(c) All consents, approvals, authorizations and orders required for
the execution and delivery by such Selling Stockholder of the Power of Attorney
and the Custody Agreement, the execution and delivery by or on behalf of such
Selling
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Stockholder of this Agreement and the sale and delivery of the Selling
Stockholder Shares and the Option Shares to be sold by such Selling Stockholder
under this Agreement (other than, at the time of the execution hereof (if the
Registration Statement has not yet been declared effective by the Commission),
the issuance of the order of the Commission declaring the Registration Statement
effective and such consents, approvals, authorizations or orders as may be
necessary under state or other securities or Blue Sky laws) have been obtained
and are in full force and effect; such Selling Stockholder, if other than a
natural person, has been duly organized and is validly existing in good standing
under the laws of the jurisdiction of its organization as the type of entity
that it purports to be; and such Selling Stockholder has full legal right, power
and authority to enter into and perform its obligations under this Agreement and
such Power of Attorney and Custody Agreement, and to sell, assign, transfer and
deliver the Shares to be sold by such Selling Stockholder under this Agreement.
(d) Such Selling Stockholder will not, during the Lock-up Period,
effect the Disposition of any Securities now owned or hereafter acquired
directly by such Selling Stockholder or with respect to which such Selling
Stockholder has or hereafter acquires the power of disposition, otherwise than
(i) as a bona fide gift or gifts, provided the donee or donees thereof agree in
writing to be bound by this restriction, (ii) as a distribution to partners or
shareholders of such Selling Stockholder, provided that the distributees thereof
agree in writing to be bound by the terms of this restriction, or (iii) with the
prior written consent of BancAmerica Robertson Stephens. The foregoing
restriction is expressly agreed to preclude the holder of the Securities from
engaging in any hedging or other transaction which is designed to or reasonably
expected to lead to or result in a Disposition of Securities during the Lock-up
Period, even if such Securities would be disposed of by someone other than the
Selling Stockholder. Such prohibited hedging or other transactions would
include, without limitation, any short sale (whether or not against the box) or
any purchase, sale or grant of any right (including, without limitation, any put
or call option) with respect to any Securities or with respect to any security
(other than a broad-based market basket or index) that includes, relates to or
derives any significant part of its value from Securities. Such Selling
Stockholder also agrees and consents to the entry of stop transfer instructions
with the Company's transfer agent against the transfer of the securities held by
such Selling Stockholder except in compliance with this restriction.
(e) Certificates in negotiable form for all Shares to be sold by such
Selling Stockholder under this Agreement, together with a stock power or powers
duly endorsed in blank by such Selling Stockholder, have been placed in custody
with the Custodian for the purpose of effecting delivery hereunder.
(f) This Agreement has been duly authorized by each Selling
Stockholder that is not a natural person and has been duly executed and
delivered by or on behalf of such Selling Stockholder and is a valid and binding
agreement of such Selling Stockholder, enforceable in accordance with its terms,
except as rights to
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<PAGE>
indemnification hereunder may be limited by applicable law and except as the
enforcement hereof may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting creditors' rights
generally or by general equitable principles; and the performance of this
Agreement and the consummation of the transactions herein contemplated will not
result in a breach or violation of any of the terms and provisions of or
constitute a default under any bond, debenture, note or other evidence of
indebtedness, or under any lease, contract, indenture, mortgage, deed of trust,
loan agreement, joint venture or other agreement or instrument to which such
Selling Stockholder is a party or by which such Selling Stockholder, or any
Selling Stockholder Shares or any Option Shares to be sold by such Selling
Stockholder hereunder, may be bound or, to the best of such Selling
Stockholder's knowledge, result in any violation of any law, order, rule,
regulation, writ, injunction, judgment or decree of any court, government or
governmental agency or body, domestic or foreign, having jurisdiction over such
Selling Stockholder or over the properties of such Selling Stockholder, or, if
such Selling Stockholder is other than a natural person, result in any violation
of any provisions of the charter, bylaws or other organizational documents of
such Selling Stockholder.
(g) Such Selling Stockholder has not taken and will not take, directly
or indirectly, any action designed to or that might reasonably be expected to
cause or result in stabilization or manipulation of the price of the Common
Stock to facilitate the sale or resale of the Shares.
(h) Such Selling Stockholder has not distributed and will not
distribute any prospectus or other offering material in connection with the
offering and sale of the Shares.
(i) All information furnished by or on behalf of such Selling
Stockholder relating to such Selling Stockholder and the Selling Stockholder
Shares that is contained in the representations and warranties of such Selling
Stockholder in such Selling Stockholder's Power of Attorney or set forth in the
Registration Statement or the Prospectus is, and at the time the Registration
Statement became or becomes, as the case may be, effective and at all times
subsequent thereto up to and on the Closing Date, and on any later date on which
Option Shares are to be purchased, was or will be, true, correct and complete,
and does not, and at the time the Registration Statement became or becomes, as
the case may be, effective and at all times subsequent thereto up to and on the
Closing Date (hereinafter defined), and on any later date on which Option Shares
are to be purchased, will not, contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make such information not misleading.
(j) Such Selling Stockholder will review the Prospectus and will
comply with all agreements and satisfy all conditions on its part to be complied
with or satisfied pursuant to this Agreement on or prior to the Closing Date, or
any later date
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<PAGE>
on which Option Shares are to be purchased, as the case may be, and will advise
one of its Attorneys and BancAmerica Robertson Stephens prior to the Closing
Date or such later date on which Option Shares are to be purchased, as the case
may be, if any statement to be made on behalf of such Selling Stockholder in the
certificate contemplated by Section 6(i) would be inaccurate if made as of the
Closing Date or such later date on which Option Shares are to be purchased, as
the case may be.
(k) Such Selling Stockholder does not have, or has waived prior to the
date hereof, any preemptive right, co-sale right or right of first refusal or
other similar right to purchase any of the Shares that are to be sold by the
Company or any of the other Selling Stockholders to the Underwriters pursuant to
this Agreement; such Selling Stockholder does not have, or has waived prior to
the date hereof, any registration right or other similar right to participate in
the offering made by the Prospectus, other than such rights of participation as
have been satisfied by the participation of such Selling Stockholder in the
transactions to which this Agreement relates in accordance with the terms of
this Agreement; and such Selling Stockholder does not own any warrants, options
or similar rights to acquire, and does not have any right or arrangement to
acquire, any capital stock, rights, warrants, options or other securities from
the Company, other than those described in the Registration Statement and the
Prospectus.
(l) Such Selling Stockholder is not aware that any of the
representations and warranties of the Company set forth in Section 2.I. above is
untrue or inaccurate in any material respect. The sale of the Selling
Stockholders Shares and the Option Shares by such Selling Stockholders is not
prompted by any information concerning the Company which is not set forth in the
Registration Statement and Prospectus. The information pertaining to such
Selling Stockholder under the caption "Principal and Selling Stockholders" in
the Prospectus is complete and accurate in all material respects.
(m) At the time the Registration Statement became effective, the
Registration Statement and any amendment or supplement thereto did not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading, and the
Prospectus, or any supplement or amendment thereto, on the date it was filed
pursuant to the Rules and Regulations and as of the Closing Date or any later
date on which the Option Shares are to be purchased, as the case may be, did not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading.
3. Purchase, Sale and Delivery of Shares. On the basis of the
-------------------------------------
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, the Company and the Selling Stockholders
agree, severally and not
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jointly, to sell to the Underwriters, and each Underwriter agrees, severally and
not jointly, to purchase from the Company and the Selling Stockholders,
respectively, at a purchase price of $_____ per share, the respective number of
Company Shares as hereinafter set forth and Selling Stockholder Shares set forth
opposite the names of the Company and the Selling Stockholders in Schedule B
hereto. The obligation of each Underwriter to the Company and to each Selling
Stockholder shall be to purchase from the Company or such Selling Stockholder
that number of Company Shares or Selling Stockholder Shares, as the case may be,
which (as nearly as practicable, as determined by you) is in the same proportion
to the number of Company Shares or Selling Stockholder Shares, as the case may
be, set forth opposite the name of the Company or such Selling Stockholder in
Schedule B hereto as the number of Firm Shares which is set forth opposite the
name of such Underwriter in Schedule A hereto (subject to adjustment as provided
in Section 10) is to the total number of Firm Shares to be purchased by all the
Underwriters under this Agreement.
The certificates in negotiable form for the Selling Stockholder Shares
and the Option Shares to be sold by the Selling Stockholders have been placed in
custody (for delivery under this Agreement) under the Custody Agreement. Each
Selling Stockholder agrees that the certificates for the Selling Stockholder
Shares and the Option Shares of such Selling Stockholder so held in custody are
subject to the interests of the Underwriters hereunder, that the arrangements
made by such Selling Stockholder for such custody, including the Power of
Attorney is to that extent irrevocable and that the obligations of such Selling
Stockholder hereunder shall not be terminated by the act of such Selling
Stockholder or by operation of law, whether by the death or incapacity of such
Selling Stockholder or the occurrence of any other event, except as specifically
provided herein or in the Custody Agreement. If any Selling Stockholder should
die or be incapacitated, or if any other such event should occur, before the
delivery of the certificates for the Selling Stockholder Shares and the Option
Shares hereunder, the Selling Stockholder Shares and the Option Shares to be
sold by such Selling Stockholder shall, except as specifically provided herein
or in the Custody Agreement, be delivered by the Custodian in accordance with
the terms and conditions of this Agreement as if such death, incapacity or other
event had not occurred, regardless of whether the Custodian shall have received
notice of such death or other event.
Delivery of definitive certificates for the Firm Shares to be
purchased by the Underwriters pursuant to this Section 3 shall be made against
payment of the purchase price therefor by the several Underwriters by wire
transfer or by certified or official bank check or checks drawn in same-day
funds, payable to the order of the Company with regard to the Shares being
purchased from the Company, and to the order of the Custodian for the respective
accounts of the Selling Stockholders with regard to the Shares being purchased
from such Selling Stockholders, at the offices of Arnold & Porter (or at such
other place as may be agreed upon among the Representatives and the Company and
the Attorneys), at 7:00 A.M., San Francisco time (a) on the third (3rd) full
business day following the first day that Shares are traded, (b)
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if this Agreement is executed and delivered after 1:30 P.M., San Francisco time,
the fourth (4th) full business day following the day that this Agreement is
executed and delivered or (c) at such other time and date not later than seven
(7) full business days following the first day that Shares are traded as the
Representatives and the Company and the Attorneys may determine (or at such time
and date to which payment and delivery shall have been postponed pursuant to
Section 10 hereof), such time and date of payment and delivery being herein
called the "Closing Date;" provided, however, that if the Company has not made
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available to the Representatives copies of the Prospectus within the time
provided in Section 4(d) hereof, the Representatives may, in their sole
discretion, postpone the Closing Date until no later than two (2) full business
days following delivery of copies of the Prospectus to the Representatives. The
certificates for the Firm Shares to be so delivered will be made available to
you at such office or such other location including, without limitation, in New
York City, as you may reasonably request for checking at least one (1) full
business day prior to the Closing Date and will be in such names and
denominations as you may request, such request to be made at least two (2) full
business days prior to the Closing Date. If the Representatives so elect,
delivery of the Firm Shares may be made by credit through full fast transfer to
the accounts at The Depository Trust Company designated by the Representatives.
It is understood that you, individually, and not as the
Representatives of the several Underwriters, may (but shall not be obligated to)
make payment of the purchase price on behalf of any Underwriter or Underwriters
whose check or checks shall not have been received by you prior to the Closing
Date for the Firm Shares to be purchased by such Underwriter or Underwriters.
Any such payment by you shall not relieve any such Underwriter or Underwriters
of any of its or their obligations hereunder.
After the Registration Statement becomes effective, the several
Underwriters intend to make an initial public offering (as such term is
described in Section 11 hereof) of the Firm Shares at an initial public offering
price of $_____ per share. After the initial public offering, the several
Underwriters may, in their discretion, vary the public offering price.
The information set forth in the last paragraph on the front cover
page (insofar as such information relates to the Underwriters), on the inside
front cover concerning stabilization and over-allotment by the Underwriters, and
in the table included within the first paragraph and the second, sixth and
seventh paragraphs under the caption "Underwriting" in any Preliminary
Prospectus and in the Prospectus constitutes the only information furnished by
the Underwriters to the Company for inclusion in any Preliminary Prospectus, the
Prospectus or the Registration Statement, and you, on behalf of the respective
Underwriters, represent and warrant to the Company and the Selling Stockholders
that the statements made therein do not include any untrue statement of a
material fact or omit to state a material fact required to be
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stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
4. Further Agreements of the Company. The Company agrees with the
---------------------------------
several Underwriters that:
(a) The Company will use its best efforts to cause the Registration
Statement and any amendment thereof, if not effective at the time and date that
this Agreement is executed and delivered by the parties hereto, to become
effective as promptly as possible; the Company will use its best efforts to
cause any abbreviated registration statement pursuant to Rule 462(b) of the
Rules and Regulations as may be required subsequent to the date the Registration
Statement is declared effective to become effective as promptly as possible; the
Company will notify you, promptly after it shall receive notice thereof, of the
time when the Registration Statement, any subsequent amendment to the
Registration Statement or any abbreviated registration statement has become
effective or any supplement to the Prospectus has been filed; if the Company
omitted information from the Registration Statement at the time it was
originally declared effective in reliance upon Rule 430A(a) of the Rules and
Regulations, the Company will provide evidence satisfactory to you that the
Prospectus contains such information and has been filed, within the time period
prescribed, with the Commission pursuant to subparagraph (1) or (4) of Rule
424(b) of the Rules and Regulations or as part of a post-effective amendment to
such Registration Statement as originally declared effective which is declared
effective by the Commission; if the Company files a term sheet pursuant to Rule
434 of the Rules and Regulations, the Company will provide evidence satisfactory
to you that the Prospectus and term sheet meeting the requirements of Rule
434(b) or (c), as applicable, of the Rules and Regulations, have been filed,
within the time period prescribed, with the Commission pursuant to subparagraph
(7) of Rule 424(b) of the Rules and Regulations; if for any reason the filing of
the final form of Prospectus is required under Rule 424(b)(3) of the Rules and
Regulations, it will provide evidence satisfactory to you that the Prospectus
contains such information and has been filed with the Commission within the time
period prescribed; it will notify you promptly of any request by the Commission
for the amending or supplementing of the Registration Statement or the
Prospectus or for additional information; promptly upon your request, it will
prepare and file with the Commission any amendments or supplements to the
Registration Statement or Prospectus which, in the opinion of counsel for the
several Underwriters ("Underwriters' Counsel"), may be necessary or advisable in
connection with the distribution of the Shares by the Underwriters; it will
promptly prepare and file with the Commission, and promptly notify you of the
filing of, any amendments or supplements to the Registration Statement or
Prospectus which may be necessary to correct any statements or omissions, if, at
any time when a prospectus relating to the Shares is required to be delivered
under the Act, any event shall have occurred as a result of which the Prospectus
or any other prospectus relating to the Shares as then in effect would include
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in the light of the
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circumstances under which they were made, not misleading; in case any
Underwriter is required to deliver a prospectus nine (9) months or more after
the effective date of the Registration Statement in connection with the sale of
the Shares, it will prepare promptly upon request, but at the expense of such
Underwriter, such amendment or amendments to the Registration Statement and such
prospectus or prospectuses as may be necessary to permit compliance with the
requirements of Section 10(a)(3) of the Act; and it will file no amendment or
supplement to the Registration Statement or Prospectus which shall not
previously have been submitted to you a reasonable time prior to the proposed
filing thereof or to which you shall reasonably object in writing, subject,
however, to compliance with the Act and the Rules and Regulations and the
provisions of this Agreement.
(b) The Company will advise you, promptly after it shall receive
notice or obtain knowledge, of the issuance of any stop order by the Commission
suspending the effectiveness of the Registration Statement or of the initiation
or threat of any proceeding for that purpose; and it will promptly use its best
efforts to prevent the issuance of any stop order or to obtain its withdrawal at
the earliest possible moment if such stop order should be issued.
(c) The Company will use its best efforts to qualify the Shares for
offering and sale under the securities laws of such jurisdictions as you may
designate and to continue such qualifications in effect for so long as may be
required for purposes of the distribution of the Shares, except that the Company
shall not be required in connection therewith or as a condition thereof to
qualify as a foreign corporation or to execute a general consent to service of
process in any jurisdiction in which it is not otherwise required to be so
qualified or to so execute a general consent to service of process. In each
jurisdiction in which the Shares shall have been qualified as above provided,
the Company will make and file such statements and reports in each year as are
or may be required by the laws of such jurisdiction.
(d) The Company will furnish to you, as soon as available, and, in the
case of the Prospectus and any term sheet or abbreviated term sheet under Rule
434, in no event later than the first (1st) full business day following the
first day that Shares are traded, copies of the Registration Statement (three of
which will be signed and which will include all exhibits), each Preliminary
Prospectus, the Prospectus and any amendments or supplements to such documents,
including any prospectus prepared to permit compliance with Section 10(a)(3) of
the Act, all in such quantities as you may from time to time reasonably request.
Notwithstanding the foregoing, if BancAmerica Robertson Stephens, on behalf of
the several Underwriters, shall agree to the utilization of Rule 434 of the
Rules and Regulations, the Company shall provide to you copies of a Preliminary
Prospectus updated in all respects through the date specified by you in such
quantities as you may from time to time reasonably request.
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(e) The Company will make generally available to its stockholders as
soon as practicable, but in any event not later than the forty-fifth (45th) day
following the end of the fiscal quarter first occurring after the first
anniversary of the effective date of the Registration Statement, an earnings
statement (which will be in reasonable detail but need not be audited) complying
with the provisions of Section 11(a) of the Act and covering a twelve (12) month
period beginning after the effective date of the Registration Statement.
(f) During a period of five (5) years after the date hereof, the
Company will furnish to its stockholders as soon as practicable after the end of
each respective period, annual reports (including financial statements audited
by independent certified public accountants) and unaudited quarterly reports of
operations for each of the first three quarters of the fiscal year, and will
furnish to the Representatives (i) concurrently with furnishing such reports to
its stockholders, statements of operations of the Company for each of the first
three (3) quarters in the form furnished to the Company's stockholders, (ii)
concurrently with furnishing to its stockholders, a balance sheet of the Company
as of the end of such fiscal year, together with statements of operations, of
stockholders' equity, and of cash flows of the Company for such fiscal year,
accompanied by a copy of the certificate or report thereon of independent
certified public accountants, (iii) as soon as they are available, copies of all
reports (financial or other) mailed to stockholders, (iv) as soon as they are
available, copies of all reports and financial statements furnished to or filed
with the Commission, any securities exchange or the National Association of
Securities Dealers, Inc. ("NASD"), and (v) every material press release in
respect of the Company or its affairs which was generally released to
stockholders or prepared by the Company or any of its subsidiaries. During
such five (5) year period, if the Company shall have active subsidiaries, the
foregoing financial statements shall be on a consolidated basis to the extent
that the accounts of the Company and its subsidiaries are consolidated, and
shall be accompanied by similar financial statements for any significant
subsidiary which is not so consolidated.
(g) The Company will apply the net proceeds from the sale of the
Shares being sold by it in the manner set forth under the caption "Use of
Proceeds" in the Prospectus.
(h) The Company will maintain a transfer agent and, if necessary under
the jurisdiction of incorporation of the Company, a registrar (which may be the
same entity as the transfer agent) for its Common Stock.
(i) If the transactions contemplated hereby are not consummated by
reason of any failure, refusal or inability on the part of the Company or any
Selling Stockholder to perform any agreement on their respective parts to be
performed hereunder or to fulfill any condition of the Underwriters' obligations
hereunder, or if the Company shall terminate this Agreement pursuant to Section
11(a) hereof, or if the Underwriters shall terminate this Agreement pursuant to
Section 11(b)(i), the Company
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will reimburse the several Underwriters for all out-of-pocket expenses
(including fees and disbursements of Underwriters' Counsel) incurred by the
Underwriters in investigating or preparing to market or marketing the Shares.
(j) If at any time during the ninety (90) day period after the
Registration Statement becomes effective, any rumor, publication or event
relating to or affecting the Company shall occur as a result of which in your
opinion the market price of the Common Stock has been or is likely to be
materially affected (regardless of whether such rumor, publication or event
necessitates a supplement to or amendment of the Prospectus), the Company will
consult with you concerning the substance of and the advisability of
disseminating a press release or other public statement responding to or
commenting on such rumor, publication or event.
(k) During the Lock-up Period, the Company will not, without the prior
written consent of BancAmerica Robertson Stephens, effect the Disposition of,
directly or indirectly, any Securities other than the sale of the Company Shares
and the Option Shares to be sold by the Company hereunder and the Company's
issuance of options or Common Stock under the Company's presently authorized
1997 Stock Option Plan (the "Option Plan").
5. Expenses.
--------
(a) The Company and the Selling Stockholders agree with each
Underwriter that:
(i) The Company and the Selling Stockholders will pay and
bear all costs and expenses in connection with the preparation, printing and
filing of the Registration Statement (including financial statements, schedules
and exhibits), Preliminary Prospectuses and the Prospectus and any amendments or
supplements thereto; the printing of this Agreement, the Agreement Among
Underwriters, the Selected Dealer Agreement, the Preliminary Blue Sky Survey and
any Supplemental Blue Sky Survey, the Underwriters' Questionnaire and Power of
Attorney, and any instruments related to any of the foregoing; the issuance and
delivery of the Shares hereunder to the several Underwriters, including transfer
taxes, if any, the cost of all certificates representing the Shares and transfer
agents' and registrars' fees; the fees and disbursements of counsel for the
Company; all fees and other charges of the Company's independent certified
public accountants; the cost of furnishing to the several Underwriters copies of
the Registration Statement (including appropriate exhibits), Preliminary
Prospectus and the Prospectus, and any amendments or supplements to any of the
foregoing; NASD filing fees and the cost of qualifying the Shares under the laws
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of such jurisdictions as you may designate (including filing fees and fees and
disbursements of Underwriters' Counsel in connection with such NASD filings and
Blue Sky qualifications); and all other expenses directly incurred by the
Company and the Selling Stockholders in connection with the performance of their
obligations hereunder. Any additional expenses incurred as a result of the sale
of the Shares by the Selling Stockholders will be borne collectively by the
Company and the Selling Stockholders. The provisions of this Section 5(a)(i) are
intended to relieve the Underwriters from the payment of the expenses and costs
which the Selling Stockholders and the Company hereby agree to pay, but shall
not affect any agreement which the Selling Stockholders and the Company may
make, or may have made, for the sharing of any of such expenses and costs. Such
agreements shall not impair the obligations of the Company and the Selling
Stockholders hereunder to the several Underwriters.
(ii) In addition to its other obligations under Section 8(a)
hereof, the Company agrees that, as an interim measure during the pendency of
any claim, action, investigation, inquiry or other proceeding described in
Section 8(a) hereof, it will reimburse the Underwriters on a monthly basis for
all reasonable legal or other expenses incurred in connection with investigating
or defending any such claim, action, investigation, inquiry or other proceeding,
notwithstanding the absence of a judicial determination as to the propriety and
enforceability of the Company's obligation to reimburse the Underwriters for
such expenses and the possibility that such payments might later be held to have
been improper by a court of competent jurisdiction. To the extent that any such
interim reimbursement payment is so held to have been improper, the Underwriters
shall promptly return such payment to the Company together with interest,
compounded daily, determined on the basis of the prime rate (or other commercial
lending rate for borrowers of the highest credit standing) listed from time to
time in The Wall Street Journal which represents the base rate on corporate
loans posted by a substantial majority of the nation's thirty (30) largest banks
(the "Prime Rate"). Any such interim reimbursement payments which are not made
to the Underwriters within thirty (30) days of a request for reimbursement shall
bear interest at the Prime Rate from the date of such request.
(iii) In addition to their other obligations under Section 8(b)
hereof, each Selling Stockholder agrees that, as an interim measure during the
pendency of any claim, action, investigation, inquiry or other proceeding
described in Section 8(b) hereof relating to such Selling Stockholder, it will
reimburse the Underwriters on a monthly basis for all reasonable legal or other
expenses incurred in connection with investigating or defending any such claim,
action, investigation, inquiry or other proceeding, notwithstanding the absence
of a judicial determination as to the propriety and enforceability of such
Selling Stockholder's obligation to reimburse the Underwriters for such expenses
and the possibility that such payments might later be held to have been improper
by a court of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, the Underwriters shall
promptly return such payment to the Selling Stockholders, together with
interest,
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compounded daily, determined on the basis of the Prime Rate. Any such interim
reimbursement payments which are not made to the Underwriters within thirty (30)
days of a request for reimbursement shall bear interest at the Prime Rate from
the date of such request.
(b) In addition to their other obligations under Section 8(c) hereof,
the Underwriters severally and not jointly agree that, as an interim measure
during the pendency of any claim, action, investigation, inquiry or other
proceeding described in Section 8(c) hereof, they will reimburse the Company and
each Selling Stockholder on a monthly basis for all reasonable legal or other
expenses incurred in connection with investigating or defending any such claim,
action, investigation, inquiry or other proceeding, notwithstanding the absence
of a judicial determination as to the propriety and enforceability of the
Underwriters' obligation to reimburse the Company and each such Selling
Stockholder for such expenses and the possibility that such payments might later
be held to have been improper by a court of competent jurisdiction. To the
extent that any such interim reimbursement payment is so held to have been
improper, the Company and each such Selling Stockholder shall promptly return
such payment to the Underwriters together with interest, compounded daily,
determined on the basis of the Prime Rate. Any such interim reimbursement
payments which are not made to the Company and each such Selling Stockholder
within thirty (30) days of a request for reimbursement shall bear interest at
the Prime Rate from the date of such request.
(c) It is agreed that any controversy arising out of the operation of
the interim reimbursement arrangements set forth in Sections 5(a)(ii), 5(a)(iii)
and 5(b) hereof, including the amounts of any requested reimbursement payments,
the method of determining such amounts and the basis on which such amounts shall
be apportioned among the reimbursing parties, shall be settled by arbitration
conducted under the provisions of the Constitution and Rules of the Board of
Governors of the New York Stock Exchange, Inc. or pursuant to the Code of
Arbitration Procedure of the NASD. Any such arbitration must be commenced by
service of a written demand for arbitration or a written notice of intention to
arbitrate, therein electing the arbitration tribunal. In the event the party
demanding arbitration does not make such designation of an arbitration tribunal
in such demand or notice, then the party responding to said demand or notice is
authorized to do so. Any such arbitration will be limited to the operation of
the interim reimbursement provisions contained in Sections 5(a)(ii), 5(a)(iii)
and 5(b) hereof and will not resolve the ultimate propriety or enforceability of
the obligation to indemnify for expenses which is created by the provisions of
Sections 8(a), 8(b) and 8(c) hereof or the obligation to contribute to expenses
which is created by the provisions of Section 8(e) hereof.
6. Conditions of Underwriters' Obligations. The obligations of the
---------------------------------------
several Underwriters to purchase and pay for the Shares as provided herein shall
be subject to the accuracy, as of the date hereof and the Closing Date and any
later date on which Option Shares are to be purchased, as the case may be, of
the representations and
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warranties of the Company and the Selling Stockholders herein, to the
performance by the Company and the Selling Stockholders of their respective
obligations hereunder and to the following additional conditions:
(a) The Registration Statement shall have become effective not later
than 2:00 P.M., San Francisco time, on the date following the date of this
Agreement, or such later date as shall be consented to in writing by you; and no
stop order suspending the effectiveness thereof shall have been issued and no
proceedings for that purpose shall have been initiated or, to the knowledge of
the Company, any Selling Stockholder or any Underwriter, threatened by the
Commission, and any request of the Commission for additional information (to be
included in the Registration Statement or the Prospectus or otherwise) shall
have been complied with to the satisfaction of Underwriters' Counsel.
(b) All corporate proceedings and other legal matters in connection
with this Agreement, the form of Registration Statement and the Prospectus, and
the registration, authorization, issue, sale and delivery of the Shares, shall
have been reasonably satisfactory to Underwriters' Counsel, and such counsel
shall have been furnished with such papers and information as they may
reasonably have requested to enable them to pass upon the matters referred to in
this Section.
(c) Subsequent to the execution and delivery of this Agreement and
prior to the Closing Date, or any later date on which Option Shares are to be
purchased, as the case may be, there shall not have been any change in the
condition (financial or otherwise), earnings, operations, business or business
prospects of the Company and its subsidiaries considered as one enterprise from
that set forth in the Registration Statement or Prospectus, which, in your sole
judgment, is material and adverse and that makes it, in your sole judgment,
impracticable or inadvisable to proceed with the public offering of the Shares
as contemplated by the Prospectus.
(d) You shall have received on the Closing Date and on any later date
on which Option Shares are to be purchased, as the case may be, the following
opinion of Arnold & Porter, counsel for the Company and the Selling
Stockholders, dated the Closing Date or such later date on which Option Shares
are to be purchased addressed to the Underwriters and with reproduced copies or
signed counterparts thereof for each of the Underwriters, to the effect that:
(i) The Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the jurisdiction of its
incorporation;
(ii) The Company has the corporate power and authority to own,
lease and operate its properties and to conduct its business as described in the
Prospectus;
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(iii) To such counsel's knowledge, the Company does not own or
control, directly or indirectly, any corporation, association or other entity
other than Systems Software I, Inc., Software AG Americas, Inc., Insight
Consulting, Inc., Software AG Professional Services, Inc., Argenta, Inc.,
Software AG Insurance Solutions, Inc., Software AG Venezuelano, S.A. de C.V.,
Software AG de Mexico S.A. de C.V., SAG Systems (Canada) Holding, Ltd. and
Software AG Systems (Canada) Inc. Other than Software AG Americas, Inc., none of
such subsidiaries constitutes a "significant subsidiary" (as that term is
defined in Regulation S-X of the Act) and all such subsidiaries (excluding
Software AG Americas, Inc.), considered in the aggregate as a single subsidiary,
would not constitute a "significant subsidiary;"
(iv) The authorized, issued and outstanding capital stock of the
Company is as set forth in the Prospectus under the caption "Capitalization" as
of the dates stated therein, the issued and outstanding shares of capital stock
of the Company (including the Selling Stockholder Shares) have been duly and
validly issued and are fully paid and nonassessable, and, to such counsel's
knowledge, will not have been issued in violation of or subject to any
preemptive right, co-sale right, registration right, right of first refusal or
other similar right;
(v) The Firm Shares or the Option Shares, as the case may be,
to be issued by the Company pursuant to the terms of this Agreement have been
duly authorized and, upon issuance and delivery against payment therefor in
accordance with the terms hereof, will be duly and validly issued and fully paid
and nonassessable, and will not have been issued in violation of or subject to
any preemptive right, co-sale right, registration right, right of first refusal
or other similar right arising under Delaware law or the charter or the bylaws
of the Company or, to such counsel's knowledge, otherwise.
(vi) The Company has the corporate power and authority to enter
into this Agreement and to issue, sell and deliver to the Underwriters the
Shares to be issued and sold by it hereunder;
(vii) This Agreement has been duly authorized by all necessary
corporate action on the part of the Company and has been duly executed and
delivered by the Company and, assuming due authorization, execution and delivery
by you, is a valid and binding agreement of the Company, enforceable in
accordance with its terms, except insofar as indemnification provisions may be
limited by applicable law and except as enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws relating to
or affecting creditors' rights generally or by general equitable principles;
(viii) The Registration Statement has become effective under the
Act and, to such counsel's knowledge, no stop order suspending the effectiveness
of
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the Registration Statement has been issued and no proceedings for that purpose
have been instituted or are pending or threatened under the Act;
(ix) The Registration Statement and the Prospectus, and each
amendment or supplement thereto (other than the financial statements (including
supporting schedules) and financial data derived therefrom as to which such
counsel need express no opinion), as of the effective date of the Registration
Statement, complied as to form in all material respects with the requirements of
the Act and the applicable Rules and Regulations;
(x) The information in the Prospectus under the caption
"Description of Capital Stock," to the extent that it constitutes matters of law
or legal conclusions, has been reviewed by such counsel and is a fair summary of
such matters and conclusions; and the forms of certificates evidencing the
Common Stock and filed as exhibits to the Registration Statement comply with
Delaware law;
(xi) The description in the Registration Statement and the
Prospectus of the charter and bylaws of the Company and of statutes are accurate
and fairly present the information required to be presented by the Act and the
applicable Rules and Regulations;
(xii) To such counsel's knowledge, there are no agreements,
contracts, leases or documents to which the Company is a party of a character
required to be described or referred to in the Registration Statement or
Prospectus or to be filed as an exhibit to the Registration Statement which are
not described or referred to therein or filed as required;
(xiii) The performance of this Agreement and the consummation of
the transactions herein contemplated (other than performance of the Company's
indemnification obligations hereunder, concerning which no opinion need be
expressed) will not (a) result in any violation of the Company's charter or
bylaws or (b) to such counsel's knowledge, result in a material breach or
violation of any of the terms and provisions of, or constitute a default under,
any bond, debenture, note or other evidence of indebtedness, or any lease,
contract, indenture, mortgage, deed of trust, loan agreement, joint venture or
other agreement or instrument filed as an exhibit to the Registration Statement,
or any applicable statute, rule or regulation known to such counsel or, to such
counsel's knowledge, any order, writ or decree of any court, government or
governmental agency or body having jurisdiction over the Company or any of its
subsidiaries, or over any of their properties or operations;
(xiv) No consent, approval, authorization or order of or
qualification with any court, government or governmental agency or body having
jurisdiction over the Company or any of its subsidiaries, or over any of their
properties or operations is necessary in connection with the consummation by the
Company of the
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transactions herein contemplated, except such as have been
obtained under the Act or such as may be required under state or other
securities or Blue Sky laws in connection with the purchase and the distribution
of the Shares by the Underwriters;
(xv) To such counsel's knowledge, there are no legal or governmental
proceedings pending or threatened against the Company or any of its subsidiaries
of a character required to be disclosed in the Registration Statement or the
Prospectus by the Act or the Rules and Regulations, other than those described
therein;
(xvi) To such counsel's knowledge, neither the Company nor any of its
subsidiaries is presently (a) in material violation of its respective charter or
bylaws or (b) in material breach of any applicable statute, rule or regulation
or any order, writ or decree of any court or governmental agency or body having
jurisdiction over the Company or any of its subsidiaries, or over any of their
properties or operations;
(xvii) To such counsel's knowledge, except as set forth in the
Registration Statement and Prospectus, no holders of Common Stock or other
securities of the Company have registration rights with respect to securities of
the Company and, except as set forth in the Registration Statement and
Prospectus, all holders of securities of the Company having rights known to such
counsel to registration of such shares of Common Stock or other securities,
because of the filing of the Registration Statement by the Company have, with
respect to the offering contemplated thereby, waived such rights or such rights
have expired by reason of lapse of time following notification of the Company's
intent to file the Registration Statement or have included securities in the
Registration Statement pursuant to the exercise of and in full satisfaction of
such rights;
(xviii) Each Selling Stockholder which is not a natural person has
full right, power and authority to enter into and to perform its obligations
under the Power of Attorney and Custody Agreement to be executed and delivered
by it in connection with the transactions contemplated herein; the Power of
Attorney and Custody Agreement of each Selling Stockholder that is not a natural
person has been duly authorized by such Selling Stockholder; the Power of
Attorney and Custody Agreement of each Selling Stockholder has been duly
executed and delivered by or on behalf of such Selling Stockholder; and the
Power of Attorney and Custody Agreement of each Selling Stockholder constitutes
the valid and binding agreement of such Selling Stockholder, enforceable in
accordance with its terms, except as the enforcement thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by general equitable
principles;
(xix) Each of the Selling Stockholders has full right, power and
authority to enter into and to perform its obligations under this Agreement and
to sell, transfer, assign and deliver the Shares to be sold by such Selling
Stockholder hereunder;
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(xx) This Agreement has been duly authorized by each Selling
Stockholder that is not a natural person and has been duly executed and
delivered by or on behalf of each Selling Stockholder; and
(xxi) Upon the delivery of and payment for the Shares as contemplated
in this Agreement, each of the Underwriters will receive valid marketable title
to the Shares purchased by it from such Selling Stockholder, free and clear of
any pledge, lien, security interest, encumbrance, claim or equitable interest.
In rendering such opinion, such counsel may assume that the Underwriters are
without notice of any defect in the title of the Shares being purchased from the
Selling Stockholders.
In addition, such counsel shall state that such counsel has
participated in conferences with officials and other representatives of the
Company, the Representatives, Underwriters' Counsel and the independent
certified public accountants of the Company, at which such conferences the
contents of the Registration Statement and Prospectus and related matters were
discussed, and although they have not verified the accuracy or completeness of
the statements contained in the Registration Statement or the Prospectus,
nothing has come to the attention of such counsel which leads them to believe
that, at the time the Registration Statement became effective and at all times
subsequent thereto up to and on the Closing Date and on any later date on which
Option Shares are to be purchased, the Registration Statement and any amendment
or supplement thereto (other than the financial statements including supporting
schedules and other financial and statistical information derived therefrom, as
to which such counsel need express no comment) contained any untrue statement of
a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, or at the
Closing Date or any later date on which the Option Shares are to be purchased,
as the case may be, the Registration Statement, the Prospectus and any amendment
or supplement thereto (except as aforesaid) contained any untrue statement of a
material fact or omitted to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
Counsel rendering the foregoing opinion may rely as to questions of
law not involving the laws of the United States or the State of Delaware upon
opinions of local counsel, and as to questions of fact upon representations or
certificates of officers of the Company, the Selling Stockholders or officers of
the Selling Stockholders (when the Selling Stockholder is not a natural person),
and of government officials, in which case their opinion is to state that they
are so relying and that they have no knowledge of any material misstatement or
inaccuracy in any such opinion, representation or certificate. Copies of any
opinion, representation or certificate so relied upon shall be delivered to you,
as Representatives of the Underwriters, and to Underwriters' Counsel.
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(e) You shall have received on the Closing Date and on any later date
on which Option Shares are to be purchased, as the case may be, the following
opinion of the General Counsel of the Company dated the Closing Date or such
later date on which Option Shares are to be purchased addressed to the
Underwriters and with reproduced copies or signed counterparts thereof for each
of the Underwriters, to the effect that:
(i) The Company is duly qualified to do business as a foreign
corporation and is in good standing in each jurisdiction, if any, in which the
ownership or leasing of its properties or the conduct of its business requires
such qualification, except where the failure to be so qualified or be in good
standing would not have a material adverse effect on the condition (financial or
otherwise), earnings, operations or business of the Company and its subsidiaries
considered as one enterprise. The Company does not own or control, directly or
indirectly, any corporation, association or other entity other than Systems
Software I, Inc., Software AG Americas, Inc., Insight Consulting, Inc., Software
AG Professional Services, Inc., Argenta, Inc., Software AG Insurance Solutions,
Inc., Software AG Venezuelano, S.A. de C.V., Software AG de Mexico, S.A. de
C.V., SAG Systems (Canada) Holding, Ltd. and Software AG Systems (Canada) Inc.;
(ii) All issued and outstanding shares of capital stock of
each subsidiary of the Company have been duly authorized and validly issued and
are fully paid and nonassessable, and, to such counsel's knowledge, have not
been issued in violation of or subject to any preemptive right, co-sale right,
registration right, right of first refusal or other similar right and are owned
by the Company free and clear of any pledge, lien, security interest,
encumbrance, claim or equitable interest;
(iii) The Firm Shares or the Option Shares, as the case may
be, to be issued by the Company pursuant to the terms of this Agreement will not
have been issued in violation of or subject to any preemptive right, co-sale
right, registration right, right of first refusal or other similar right;
(iv) The performance of this Agreement and the consummation
of the transactions herein contemplated (other than performance of the Company's
indemnification obligations hereunder, concerning which no opinion need be
expressed) will not (a) result in any violation of the Company's charter or
bylaws or (b) result in a material breach or violation of any of the terms and
provisions of, or constitute a default under, any bond, debenture, note or other
evidence of indebtedness, or any lease, contract, indenture, mortgage, deed of
trust, loan agreement, joint venture or other agreement or instrument known to
such counsel to which the Company is a party or by which its properties are
bound, or any applicable statute, rule or regulation known to such counsel or
any order, writ or decree known to such counsel
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of any court, government or governmental agency or body having jurisdiction over
the Company or any of its subsidiaries, or over any of their properties or
operations;
(v) No consent, approval, authorization or order of or qualification with
any court, government or governmental agency or body having jurisdiction over
the Company or any of its subsidiaries, or over any of their properties or
operations is necessary in connection with the consummation by the Company of
the transactions herein contemplated, except such as have been obtained under
the Act or such as may be required under state or other securities or Blue Sky
laws in connection with the purchase and the distribution of the Shares by the
Underwriters;
(vi) To such counsel's knowledge, there are no legal or governmental
proceedings pending or threatened against the Company or any of its subsidiaries
of a character required to be disclosed in the Registration Statement or the
Prospectus by the Act or the Rules and Regulations, other than those described
therein;
(vii) To such counsel's knowledge, neither the Company nor
any of its subsidiaries is presently (a) in material violation of its respective
charter or bylaws or (b) in material breach of any applicable statute, rule or
regulation or any order, writ or decree of any court or governmental agency or
body having jurisdiction over the Company or any of its subsidiaries, or over
any of their properties or operations; and
(viii) To such counsel's knowledge, except as set forth in the
Registration Statement and Prospectus, no holders of Common Stock or other
securities of the Company have registration rights with respect to securities of
the Company and, except as set forth in the Registration Statement and
Prospectus, all holders of securities of the Company having rights known to such
counsel to registration of such shares of Common Stock or other securities,
because of the filing of the Registration Statement by the Company have, with
respect to the offering contemplated thereby, waived such rights or such rights
have expired by reason of lapse of time following notification of the Company's
intent to file the Registration Statement or have included securities in the
Registration Statement pursuant to the exercise of and in full satisfaction of
such rights.
(f) You shall have received on the Closing Date and on any later date
on which Option Shares are to be purchased, as the case may be, an opinion of
Hale and Dorr LLP, in form and substance satisfactory to you, with respect to
the sufficiency of all such corporate proceedings and other legal matters
relating to this Agreement and the transactions contemplated hereby as you may
reasonably require, and the Company shall have furnished to such counsel such
documents as they may have requested for the purpose of enabling them to pass
upon such matters.
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(g) You shall have received on the Closing Date and on any later date
on which Option Shares are to be purchased, as the case may be, a letter from
KPMG Peat Marwick LLP addressed to the Underwriters, dated the Closing Date or
such later date on which Option Shares are to be purchased, as the case may be,
confirming that they are independent certified public accountants with respect
to the Company within the meaning of the Act and the applicable published Rules
and Regulations and based upon the procedures described in such letter delivered
to you concurrently with the execution of this Agreement (herein called the
"Original Letter"), but carried out to a date not more than five (5) business
days prior to the Closing Date or such later date on which Option Shares are to
be purchased, as the case may be, (i) confirming, to the extent true, that the
statements and conclusions set forth in the Original Letter are accurate as of
the Closing Date or such later date on which Option Shares are to be purchased,
as the case may be, and (ii) setting forth any revisions and additions to the
statements and conclusions set forth in the Original Letter which are necessary
to reflect any changes in the facts described in the Original Letter since the
date of such letter, or to reflect the availability of more recent financial
statements, data or information. The letter shall not disclose any change in
the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and its subsidiaries considered as one
enterprise from that set forth in the Registration Statement or Prospectus,
which, in your sole judgment, is material and adverse and that makes it, in your
sole judgment, impracticable or inadvisable to proceed with the public offering
of the Shares as contemplated by the Prospectus. The Original Letter from KPMG
Peat Marwick LLP shall be addressed to or for the use of the Underwriters in
form and substance satisfactory to the Underwriters and shall (i) represent, to
the extent true, that they are independent certified public accountants with
respect to the Company within the meaning of the Act and the applicable
published Rules and Regulations, (ii) set forth their opinion with respect to
their examination of the consolidated balance sheets of the Company as of
December 31, 1997 and related consolidated statements of operations,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1997, (iii) state that KPMG Peat Marwick LLP has
performed the procedures set out in Statement on Auditing Standards No. 71 ("SAS
71") for a review of interim financial information and providing the report of
KPMG Peat Marwick LLP as described in SAS 71 on the financial statements for the
nine month periods ended September 30, 1997 and September 30, 1996, the three
month period ended March 31, 1997 and the six month period ended September 30,
1997 (the "Quarterly Financial Statements"), (iv) state that in the course of
such review, nothing came to their attention that leads them to believe that any
material modifications need to be made to any of the Quarterly Financial
Statements in order for them to be in compliance with generally accepted
accounting principles consistently applied across the periods presented, and (v)
address other matters agreed upon by KPMG Peat Marwick LLP and you. In
addition, you shall have received from KPMG Peat Marwick LLP a letter addressed
to the Company and made available to you for the use of the Underwriters stating
that their review of the Company's system of internal accounting controls, to
the extent they deemed necessary in establishing the scope of their examination
of the Company's
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consolidated financial statements as of December 31, 1997, did not disclose any
weaknesses in internal controls that they considered to be material weaknesses.
(h) You shall have received on the Closing Date and on any later date
on which Option Shares are to be purchased, as the case may be, a certificate of
the Company, dated the Closing Date or such later date on which Option Shares
are to be purchased, as the case may be, signed by the Chief Executive Officer
and Chief Financial Officer of the Company, to the effect that, and you shall be
satisfied that:
(i) The representations and warranties of the Company in this
Agreement are true and correct, as if made on and as of the Closing Date or any
later date on which Option Shares are to be purchased, as the case may be, and
the Company has complied with all the agreements and satisfied all the
conditions on its part to be performed or satisfied at or prior to the Closing
Date or any later date on which Option Shares are to be purchased, as the case
may be;
(ii) No stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that purpose have
been instituted or are pending or threatened under the Act;
(iii) When the Registration Statement became effective and at
all times subsequent thereto up to the delivery of such certificate, the
Registration Statement and the Prospectus, and any amendments or supplements
thereto, contained all material information required to be included therein by
the Act and the Rules and Regulations and in all material respects conformed to
the requirements of the Act and the Rules and Regulations, the Registration
Statement, and any amendment or supplement thereto, did not and does not include
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading, the Prospectus, and any amendment or supplement thereto, did not and
does not include any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, and, since the
effective date of the Registration Statement, there has occurred no event
required to be set forth in an amended or supplemented Prospectus which has not
been so set forth; and
(iv) Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus, there has not been (a) any
material adverse change in the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company and its subsidiaries
considered as one enterprise, (b) any transaction that is material to the
Company and its subsidiaries considered as one enterprise, except transactions
entered into in the ordinary course of business, (c) any obligation, direct or
contingent, that is material to the Company and its subsidiaries considered as
one enterprise, incurred by the Company or its subsidiaries, except obligations
incurred in the ordinary course of business, (d) any
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change in the capital stock or outstanding indebtedness of the Company or any of
its subsidiaries that is material to the Company and its subsidiaries considered
as one enterprise, (e) any dividend or distribution of any kind declared, paid
or made on the capital stock of the Company or any of its subsidiaries or (f)
any loss or damage (whether or not insured) to the property of the Company or
any of its subsidiaries which has been sustained or will have been sustained
which has a material adverse effect on the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company and its
subsidiaries considered as one enterprise.
(i) You shall be satisfied that, and you shall have received a
certificate, dated the Closing Date, or any later date on which Option Shares
are to be purchased, as the case may be, from the Attorneys for each Selling
Stockholder to the effect that, as of the Closing Date, or any later date on
which Option Shares are to be purchased, as the case may be, they have not been
informed that:
(i) The representations and warranties made by such Selling
Stockholder herein are not true or correct in any material respect on the
Closing Date or on any later date on which Option Shares are to be purchased, as
the case may be; or
(ii) Such Selling Stockholder has not complied with any
obligation or satisfied any condition which is required to be performed or
satisfied on the part of such Selling Stockholder at or prior to the Closing
Date or any later date on which Option Shares are to be purchased, as the case
may be.
(j) The Company shall have obtained and delivered to you an agreement
from each officer and director of the Company, each Selling Stockholder and each
beneficial owner of shares of Common Stock in writing prior to the date hereof
that such person will not, during the Lock-up Period, effect the Disposition of
any Securities now owned or hereafter acquired directly by such person or with
respect to which such person has or hereafter acquires the power of disposition,
otherwise than (i) as a bona fide gift or gifts, provided the donee or donees
thereof agree in writing to be bound by this restriction, (ii) as a distribution
to partners or shareholders of such person, provided that the distributees
thereof agree in writing to be bound by the terms of this restriction, or (iii)
with the prior written consent of BancAmerica Robertson Stephens. The foregoing
restriction shall have been expressly agreed to preclude the holder of the
Securities from engaging in any hedging or other transaction which is designed
to or reasonably expected to lead to or result in a Disposition of Securities
during the Lock-up Period, even if such Securities would be disposed of by
someone other than the such holder. Such prohibited hedging or other
transactions would including, without limitation, any short sale (whether or not
against the box) or any purchase, sale or grant of any right (including, without
limitation, any put or call option) with respect to any Securities or with
respect to any security (other than a broad-based market basket or index) that
includes, relates to or derives any significant part of its value from
Securities.
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Furthermore, such person will have also agreed and consented to the entry of
stop transfer instructions with the Company's transfer agent against the
transfer of the Securities held by such person except in compliance with this
restriction.
(k) The Company and the Selling Stockholders shall have furnished to
you such further certificates and documents as you shall reasonably request
(including certificates of officers of the Company, the Selling Stockholders or
officers of the Selling Stockholders (when the Selling Stockholder is not a
natural person) as to the accuracy of the representations and warranties of the
Company and the Selling Stockholders herein, as to the performance by the
Company and the Selling Stockholders of their respective obligations hereunder
and as to the other conditions concurrent and precedent to the obligations of
the Underwriters hereunder.
All such opinions, certificates, letters and documents will be in
compliance with the provisions hereof only if they are reasonably satisfactory
to Underwriters' Counsel. The Company and the Selling Stockholders will furnish
you with such number of conformed copies of such opinions, certificates, letters
and documents as you shall reasonably request.
7. Option Shares.
-------------
(a) On the basis of the representations, warranties and agreements
herein contained, but subject to the terms and conditions herein set forth, the
Company and certain Selling Stockholders hereby grant, severally and not
jointly, to the several Underwriters, for the purpose of covering over-
allotments in connection with the distribution and sale of the Firm Shares only,
a nontransferable option to purchase up to an aggregate of 1,155,000 Option
Shares at the purchase price per share for the Firm Shares set forth in Section
3 hereof. Such option may be exercised by the Representatives on behalf of the
several Underwriters on one (1) or more occasions in whole or in part during the
period of thirty (30) days after the date on which the Firm Shares are initially
offered to the public, by giving written notice to the Company and the
Attorneys. The maximum aggregate number of shares of Option Stock to be sold by
the Company and each such Selling Stockholder is set forth opposite their
respective names on Schedule B hereto. The number of Option Shares to be
purchased by each Underwriter upon the exercise of such option shall be the same
proportion of the total number of Option Shares to be purchased by the several
Underwriters pursuant to the exercise of such option as the number of Firm
Shares purchased by such Underwriter (set forth in Schedule A hereto) bears to
the total number of Firm Shares purchased by the several Underwriters (set forth
in Schedule A hereto), adjusted by the Representatives in such manner as to
avoid fractional shares. In the case of a partial exercise of such option, the
number of Option Shares to be sold by the Company and each such Selling
Stockholder shall be the same proportion of the total number of Option Shares to
be purchased pursuant to such exercise as the number of Option Shares set
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forth opposite the Company's or such Selling Stockholder's name, as the case may
be, on Schedule B hereto bears to the aggregate maximum number of Option Shares
to be sold by the Company and all of such Selling Stockholders as set forth on
Schedule B, adjusted by the Representatives in such manner as to avoid
fractional shares.
Delivery of definitive certificates for the Option Shares to be
purchased by the several Underwriters pursuant to the exercise of the option
granted by this Section 7 shall be made against payment of the purchase price
therefor by the several Underwriters by certified or official bank check or
checks drawn in same-day funds, payable to the order of the Company with regard
to Option Shares being purchased from the Company, and to the order of the
Custodian for the respective accounts of such Selling Stockholders with regard
to the Option Shares being purchased from such Selling Stockholders (and the
Company and such Selling Stockholders agree not to deposit (and such Selling
Stockholders shall cause the Custodian not to deposit) any such checks in the
bank on which they are drawn, and not to take any other action with the purpose
or effect of receiving immediately available funds, until the business day
following the date of their delivery to the Company or the Custodian, as the
case may be). In the event of any breach of the foregoing, the Company or such
Selling Stockholders, as the case may be, shall reimburse the Underwriters for
the interest lost and any other expenses borne by them by reason of such breach.
Such delivery and payment shall take place at the offices of Arnold & Porter or
at such other place as may be agreed upon among the Representatives, the Company
and the Attorneys (i) on the Closing Date, if written notice of the exercise of
such option is received by the Company and the Attorneys at least two (2) full
business days prior to the Closing Date, or (ii) on a date which shall not be
later than the third (3rd) full business day following the date the Company and
the Attorneys receive written notice of the exercise of such option, if such
notice is received by the Company and the Attorneys less than two (2) full
business days prior to the Closing Date.
The certificates for the Option Shares to be so delivered will be made
available to you at such office or such other location including, without
limitation, in New York City, as you may reasonably request for checking at
least one (1) full business day prior to the date of payment and delivery and
will be in such names and denominations as you may request, such request to be
made at least two (2) full business days prior to such date of payment and
delivery. If the Representatives so elect, delivery of the Option Shares may be
made by credit through full fast transfer to the accounts at The Depository
Trust Company designated by the Representatives.
It is understood that you, individually, and not as the
Representatives of the several Underwriters, may (but shall not be obligated to)
make payment of the purchase price on behalf of any Underwriter or Underwriters
whose check or checks shall not have been received by you prior to the date of
payment and delivery for the Option Shares to be purchased by such Underwriter
or Underwriters.
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<PAGE>
Any such payment by you shall not relieve any such Underwriter or Underwriters
of any of its or their obligations hereunder.
(b) Upon exercise of any option provided for in Section 7(a) hereof,
the obligations of the several Underwriters to purchase such Option Shares will
be subject (as of the date hereof and as of the date of payment and delivery for
such Option Shares) to the accuracy of and compliance with the representations,
warranties and agreements of the Company and the Selling Stockholders herein, to
the accuracy of the statements of the Company, the Selling Stockholders and
officers of the Company made pursuant to the provisions hereof, to the
performance by the Company and the Selling Stockholders of their respective
obligations hereunder, to the conditions set forth in Section 6 hereof, and to
the condition that all proceedings taken at or prior to the payment date in
connection with the sale and transfer of such Option Shares shall be
satisfactory in form and substance to you and to Underwriters' Counsel, and you
shall have been furnished with all such documents, certificates and opinions as
you may request in order to evidence the accuracy and completeness of any of the
representations, warranties or statements, the performance of any of the
covenants or agreements of the Company and the Selling Stockholders or the
satisfaction of any of the conditions herein contained.
8. Indemnification and Contribution.
--------------------------------
(a) The Company agrees to indemnify and hold harmless each
Underwriter against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject (including, without
limitation, in its capacity as an Underwriter or as a "qualified independent
underwriter" within the meaning of the Bylaws of the NASD), under the Act, the
Exchange Act or otherwise, specifically including, but not limited to, losses,
claims, damages or liabilities (or actions in respect thereof) arising out of or
based upon (i) any breach of any representation, warranty, agreement or covenant
of the Company herein contained, (ii) any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement or any
amendment or supplement thereto, or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, or (iii) any untrue statement or alleged
untrue statement of any material fact contained in any Preliminary Prospectus or
the Prospectus or any amendment or supplement thereto, or the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, and agrees to reimburse each
Underwriter for any legal or other expenses reasonably incurred by it in
connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the Company shall not be liable in
-------- -------
any such case to the extent that any such loss, claim, damage, liability or
action arises out of or is based upon an untrue statement or alleged untrue
statement or omission or
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<PAGE>
alleged omission made in the Registration Statement, such Preliminary Prospectus
or the Prospectus, or any such amendment or supplement thereto, in reliance
upon, and in conformity with, written information relating to any Underwriter
furnished to the Company by such Underwriter, directly or through you,
specifically for use in the preparation thereof and, provided further, that the
-------- -------
indemnity agreement provided in this Section 8(a) with respect to any
Preliminary Prospectus shall not inure to the benefit of any Underwriter from
whom the person asserting any losses, claims, damages, liabilities or actions
based upon any untrue statement or alleged untrue statement of material fact or
omission or alleged omission to state therein a material fact purchased Shares,
if a copy of the Prospectus in which such untrue statement or alleged untrue
statement or omission or alleged omission was corrected had not been sent or
given to such person within the time required by the Act and the Rules and
Regulations, unless such failure is the result of noncompliance by the Company
with Section 4(d) hereof.
The indemnity agreement in this Section 8(a) shall extend upon the
same terms and conditions to, and shall inure to the benefit of, each person, if
any, who controls any Underwriter within the meaning of the Act or the Exchange
Act. This indemnity agreement shall be in addition to any liabilities which the
Company may otherwise have.
(b) Subject to subsection 8(f) below, each Selling Stockholder,
severally and not jointly, agrees to indemnify and hold harmless each
Underwriter against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject (including, without
limitation, in its capacity as an Underwriter or as a "qualified independent
underwriter" within the meaning of the Bylaws of the NASD) under the Act, the
Exchange Act or otherwise, specifically including, but not limited to, losses,
claims, damages or liabilities (or actions in respect thereof) arising out of or
based upon (i) any breach of any representation, warranty, agreement or covenant
of such Selling Stockholder herein contained, (ii) any untrue statement or
alleged untrue statement of any material fact contained in the Registration
Statement or any amendment or supplement thereto, or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or (iii) any untrue
statement or alleged untrue statement of any material fact contained in any
Preliminary Prospectus or the Prospectus or any amendment or supplement thereto,
or the omission or alleged omission to state therein a material fact necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading; provided, however, that the indemnity agreement
-------- -------
provided in this Section 8(b) with respect to any Preliminary Prospectus shall
not inure to the benefit of any Underwriter from whom the person asserting any
losses, claims, damages, liabilities or actions based upon any untrue statement
or alleged untrue statement of a material fact or omission or alleged omission
to state therein a material fact purchased Shares, if a copy of the Prospectus
in which such untrue statement or alleged untrue statement or omission or
alleged omission was corrected had not been sent or given to such person within
the time required by the Act
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<PAGE>
and the Rules and Regulations, unless such failure is the result of
noncompliance by the Company with Section 4(d) hereof.
The indemnity agreement in this Section 8(b) shall extend upon the
same terms and conditions to, and shall inure to the benefit of, each person, if
any, who controls any Underwriter within the meaning of the Act or the Exchange
Act. This indemnity agreement shall be in addition to any liabilities which
such Selling Stockholder may otherwise have.
(c) Each Underwriter, severally and not jointly, agrees to indemnify
and hold harmless the Company and each Selling Stockholder against any losses,
claims, damages or liabilities, joint or several, to which the Company or such
Selling Stockholder may become subject under the Act or otherwise, specifically
including, but not limited to, losses, claims, damages or liabilities (or
actions in respect thereof) arising out of or based upon (i) any breach of any
representation, warranty, agreement or covenant of such Underwriter herein
contained, (ii) any untrue statement or alleged untrue statement of any material
fact contained in the Registration Statement or any amendment or supplement
thereto, or the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, or (iii) any untrue statement or alleged untrue statement of any
material fact contained in any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto, or the omission or alleged omission to state
therein a material fact necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading, in the case of
subparagraphs (ii) and (iii) of this Section 8(c) to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or omission or
alleged omission was made in reliance upon and in conformity with written
information furnished to the Company by such Underwriter, directly or through
you, specifically for use in the preparation thereof, and agrees to reimburse
the Company and each such Selling Stockholder for any legal or other expenses
reasonably incurred by the Company and each such Selling Stockholder in
connection with investigating or defending any such loss, claim, damage,
liability or action.
The indemnity agreement in this Section 8(c) shall extend upon the same
terms and conditions to, and shall inure to the benefit of, each officer of the
Company who signed the Registration Statement and each director of the Company,
each Selling Stockholder and each person, if any, who controls the Company or
any Selling Stockholder within the meaning of the Act or the Exchange Act. This
indemnity agreement shall be in addition to any liabilities which each
Underwriter may otherwise have.
(d) Promptly after receipt by an indemnified party under this Section
8 of notice of the commencement of any action, such indemnified party shall, if
a claim in respect thereof is to be made against any indemnifying party under
this
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Section 8, notify the indemnifying party in writing of the commencement
thereof but the omission so to notify the indemnifying party will not relieve it
from any liability which it may have to any indemnified party otherwise than
under this Section 8. In case any such action is brought against any
indemnified party, and it notified the indemnifying party of the commencement
thereof, the indemnifying party will be entitled to participate therein and, to
the extent that it shall elect by written notice delivered to the indemnified
party promptly after receiving the aforesaid notice from such indemnified party,
to assume the defense thereof, with counsel reasonably satisfactory to such
indemnified party; provided, however, that if the defendants in any such action
-------- -------
include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be legal
defenses available to it and/or other indemnified parties which are different
from or additional to those available to the indemnifying party, the indemnified
party or parties shall have the right to select separate counsel to assume such
legal defenses and to otherwise participate in the defense of such action on
behalf of such indemnified party or parties. Upon receipt of notice from the
indemnifying party to such indemnified party of the indemnifying party's
election so to assume the defense of such action and approval by the indemnified
party of counsel, the indemnifying party will not be liable to such indemnified
party under this Section 8 for any legal or other expenses subsequently incurred
by such indemnified party in connection with the defense thereof unless (i) the
indemnified party shall have employed separate counsel in accordance with the
proviso to the next preceding sentence (it being understood, however, that the
indemnifying party shall not be liable for the expenses of more than one
separate counsel (together with appropriate local counsel) approved by the
indemnifying party representing all the indemnified parties under Section 8(a),
8(b) or 8(c) hereof who are parties to such action), (ii) the indemnifying party
shall not have employed counsel satisfactory to the indemnified party to
represent the indemnified party within a reasonable time after notice of
commencement of the action or (iii) the indemnifying party has authorized the
employment of counsel for the indemnified party at the expense of the
indemnifying party. In no event shall any indemnifying party be liable in
respect of any amounts paid in settlement of any action unless the indemnifying
party shall have approved the terms of such settlement; provided that such
--------
consent shall not be unreasonably withheld. No indemnifying party shall,
without the prior written consent of the indemnified party, effect any
settlement of any pending or threatened proceeding in respect of which any
indemnified party is or could have been a party and indemnification could have
been sought hereunder by such indemnified party, unless such settlement includes
an unconditional release of such indemnified party from all liability on all
claims that are the subject matter of such proceeding.
(e) In order to provide for just and equitable contribution in any
action in which a claim for indemnification is made pursuant to this Section 8
but it is judicially determined (by the entry of a final judgment or decree by a
court of competent jurisdiction and the expiration of time to appeal or the
denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that
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this Section 8 provides for indemnification in such case, all the parties hereto
shall contribute to the aggregate losses, claims, damages or liabilities to
which they may be subject (after contribution from others) in such proportion so
that, except as set forth in Section 8(f) hereof, the Underwriters severally and
not jointly are responsible pro rata for the portion represented by the
percentage that the underwriting discount bears to the initial public offering
price, and the Company and the Selling Stockholders are responsible for the
remaining portion, provided, however, that (i) no Underwriter shall be required
-------- -------
to contribute any amount in excess of the amount by which the underwriting
discount applicable to the Shares purchased by such Underwriter exceeds the
amount of damages which such Underwriter has otherwise required to pay and (ii)
no person guilty of a fraudulent misrepresentation (within the meaning of
Section 11(f) of the Act) shall be entitled to contribution from any person who
is not guilty of such fraudulent misrepresentation. The contribution agreement
in this Section 8(e) shall extend upon the same terms and conditions to, and
shall inure to the benefit of, each person, if any, who controls any
Underwriter, the Company or any Selling Stockholder within the meaning of the
Act or the Exchange Act and each officer of the Company who signed the
Registration Statement and each director of the Company.
(f) No Selling Stockholder shall be required to provide
indemnification hereunder until the Underwriter or any person controlling within
the meaning of the Act or the Exchange Act seeking indemnification shall have
first made a demand for payment on the Company with respect to any such loss,
claim, damage or liability and the Company shall have either rejected such
demand or failed to make such requested payment within 60 days after receipt
thereof. In addition, the liability of each Selling Stockholder under the
representations, warranties and agreements contained herein and under the
indemnity agreements contained in the provisions of this Section 8 shall be
limited to an amount equal to the initial public offering price of the Selling
Stockholder Shares sold by such Selling Stockholder to the Underwriters minus
the amount of the underwriting discount paid thereon to the Underwriters by such
Selling Stockholder. The Company and such Selling Stockholders may agree, as
among themselves and without limiting the rights of the Underwriters under this
Agreement, as to the respective amounts of such liability for which they each
shall be responsible.
(g) The parties to this Agreement hereby acknowledge that they are
sophisticated business persons who were represented by counsel during the
negotiations regarding the provisions hereof including, without limitation, the
provisions of this Section 8, and are fully informed regarding said provisions.
They further acknowledge that the provisions of this Section 8 fairly allocate
the risks in light of the ability of the parties to investigate the Company and
its business in order to assure that adequate disclosure is made in the
Registration Statement and Prospectus as required by the Act and the Exchange
Act.
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9. Representations, Warranties, Covenants and Agreements to Survive
----------------------------------------------------------------
Delivery. All representations, warranties, covenants and agreements of the
- --------
Company, the Selling Stockholders and the Underwriters herein or in certificates
delivered pursuant hereto, and the indemnity and contribution agreements
contained in Section 8 hereof shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of any Underwriter
or any person controlling any Underwriter within the meaning of the Act or the
Exchange Act, or by or on behalf of the Company or any Selling Stockholder, or
any of their officers, directors or controlling persons within the meaning of
the Act or the Exchange Act, and shall survive the delivery of the Shares to the
several Underwriters hereunder or termination of this Agreement.
10. Substitution of Underwriters. If any Underwriter or Underwriters
----------------------------
shall fail to take up and pay for the number of Firm Shares agreed by such
Underwriter or Underwriters to be purchased hereunder upon tender of such Firm
Shares in accordance with the terms hereof, and if the aggregate number of Firm
Shares which such defaulting Underwriter or Underwriters so agreed but failed to
purchase does not exceed 10% of the Firm Shares, the remaining Underwriters
shall be obligated, severally in proportion to their respective commitments
hereunder, to take up and pay for the Firm Shares of such defaulting Underwriter
or Underwriters.
If any Underwriter or Underwriters so defaults and the aggregate
number of Firm Shares which such defaulting Underwriter or Underwriters agreed
but failed to take up and pay for exceeds 10% of the Firm Shares, the remaining
Underwriters shall have the right, but shall not be obligated, to take up and
pay for (in such proportions as may be agreed upon among them) the Firm Shares
which the defaulting Underwriter or Underwriters so agreed but failed to
purchase. If such remaining Underwriters do not, at the Closing Date, take up
and pay for the Firm Shares which the defaulting Underwriter or Underwriters so
agreed but failed to purchase, the Closing Date shall be postponed for twenty-
four (24) hours to allow the several Underwriters the privilege of substituting
within twenty-four (24) hours (including non-business hours) another underwriter
or underwriters (which may include any nondefaulting Underwriter) satisfactory
to the Company. If no such underwriter or underwriters shall have been
substituted as aforesaid by such postponed Closing Date, the Closing Date may,
at the option of the Company, be postponed for a further twenty-four (24) hours,
if necessary, to allow the Company the privilege of finding another underwriter
or underwriters, satisfactory to you, to purchase the Firm Shares which the
defaulting Underwriter or Underwriters so agreed but failed to purchase. If it
shall be arranged for the remaining Underwriters or substituted underwriter or
underwriters to take up the Firm Shares of the defaulting Underwriter or
Underwriters as provided in this Section 10, (i) the Company shall have the
right to postpone the time of delivery for a period of not more than seven (7)
full business days, in order to effect whatever changes may thereby be made
necessary in the Registration Statement or the Prospectus, or in any other
documents or arrangements, and the Company agrees promptly to file any
amendments to the Registration Statement, supplements to the Prospectus or other
such documents
-41-
<PAGE>
which may thereby be made necessary, and (ii) the respective number of Firm
Shares to be purchased by the remaining Underwriters and substituted underwriter
or underwriters shall be taken as the basis of their underwriting obligation. If
the remaining Underwriters shall not take up and pay for all such Firm Shares so
agreed to be purchased by the defaulting Underwriter or Underwriters or
substitute another underwriter or underwriters as aforesaid and the Company
shall not find or shall not elect to seek another underwriter or underwriters
for such Firm Shares as aforesaid, then this Agreement shall terminate.
In the event of any termination of this Agreement pursuant to the
preceding paragraph of this Section 10, neither the Company nor any Selling
Stockholder shall be liable to any Underwriter (except as provided in Sections 5
and 8 hereof) nor shall any Underwriter (other than an Underwriter who shall
have failed, otherwise than for some reason permitted under this Agreement, to
purchase the number of Firm Shares agreed by such Underwriter to be purchased
hereunder, which Underwriter shall remain liable to the Company, the Selling
Stockholders and the other Underwriters for damages, if any, resulting from such
default) be liable to the Company or any Selling Stockholder (except to the
extent provided in Sections 5 and 8 hereof).
The term "Underwriter" in this Agreement shall include any person
substituted for an Underwriter under this Section 10.
11. Effective Date of this Agreement and Termination.
------------------------------------------------
(a) This Agreement shall become effective at the earlier of (i)
6:30 A.M., San Francisco time, on the first full business day following the
effective date of the Registration Statement or (ii) the time of the initial
public offering of any of the Shares by the Underwriters after the Registration
Statement becomes effective. The time of the initial public offering shall mean
the time of the release by you, for publication, of the first newspaper
advertisement relating to the Shares, or the time at which the Shares are first
generally offered by the Underwriters to the public by letter, telephone,
telegram or telecopy, whichever shall first occur. By giving notice as set forth
in Section 12 before the time this Agreement becomes effective, you, as
Representatives of the several Underwriters, or the Company, may prevent this
Agreement from becoming effective without liability of any party to any other
party, except as provided in Sections 4(i), 5 and 8 hereof.
(b) You, as Representatives of the several Underwriters, shall
have the right to terminate this Agreement by giving notice as hereinafter
specified at any time on or prior to the Closing Date or on or prior to any
later date on which Option Shares are to be purchased, as the case may be, (i)
if the Company or any Selling Stockholder shall have failed, refused or been
unable to perform any agreement on its part to be performed, or because any
other condition of the Underwriters' obligations hereunder required to be
fulfilled is not fulfilled, including, without limitation, any
-42-
<PAGE>
change in the condition (financial or otherwise), earnings, operations, business
or business prospects of the Company and its subsidiaries considered as one
enterprise from that set forth in the Registration Statement or Prospectus,
which, in your sole judgment, is material and adverse, or (ii) if additional
material governmental restrictions, not in force and effect on the date hereof,
shall have been imposed upon trading in securities generally or minimum or
maximum prices shall have been generally established on the New York Stock
Exchange or on the American Stock Exchange or in the over the counter market by
the NASD, or trading in securities generally shall have been suspended on either
such exchange or in the over the counter market by the NASD, or if a banking
moratorium shall have been declared by federal, New York or California
authorities, or (iii) if the Company shall have sustained a loss by strike,
fire, flood, earthquake, accident or other calamity of such character as to
interfere materially with the conduct of the business and operations of the
Company regardless of whether or not such loss shall have been insured, or (iv)
if there shall have been a material adverse change in the general political or
economic conditions or financial markets as in your reasonable judgment makes it
inadvisable or impracticable to proceed with the offering, sale and delivery of
the Shares, or (v) if there shall have been an outbreak or escalation of
hostilities or of any other insurrection or armed conflict or the declaration by
the United States of a national emergency which, in the reasonable opinion of
the Representatives, makes it impracticable or inadvisable to proceed with the
public offering of the Shares as contemplated by the Prospectus. In the event of
termination pursuant to subparagraph (i) above, the Company shall remain
obligated to pay costs and expenses pursuant to Sections 4(i), 5 and 8 hereof.
Any termination pursuant to any of subparagraphs (ii) through (v) above shall be
without liability of any party to any other party except as provided in Sections
5 and 8 hereof.
If you elect to prevent this Agreement from becoming effective or to
terminate this Agreement as provided in this Section 11, you shall promptly
notify the Company by telephone, telecopy or telegram, in each case confirmed by
letter. If the Company shall elect to prevent this Agreement from becoming
effective, the Company shall promptly notify you by telephone, telecopy or
telegram, in each case, confirmed by letter.
12. Notices. All notices or communications hereunder, except as herein
-------
otherwise specifically provided, shall be in writing and if sent to you shall be
mailed, delivered, telegraphed (and confirmed by letter) or telecopied (and
confirmed by letter) to you c/o BancAmerica Robertson Stephens, 555 California
Street, Suite 2600, San Francisco, California 94104, telecopier number (415)
781-0278, Attention: General Counsel, with a copy to Hale and Dorr LLP, 60
State Street, Boston, Massachusetts 02109, telecopier number (617) 526-5000,
Attention: Peter B. Tarr; if sent to the Company, such notice shall be mailed,
delivered, telegraphed (and confirmed by letter) or telecopied (and confirmed by
letter) to 11190 Sunrise Valley Drive, Reston, Virginia 20191, telecopier number
(703) 391-8290, Attention: Daniel F. Gillis, Chief Executive Officer, with a
copy to Arnold & Porter, 555 12th Street, N.W., Washington, D.C. 20004,
-43-
<PAGE>
telecopier number (202) 942-5999, Attention: Robert Ott; if sent to one or more
of the Selling Stockholders, such notice shall be sent mailed, delivered,
telegraphed (and confirmed by letter) or telecopied (and confirmed by letter) to
[NAME OF ATTORNEY-IN-FACT FOR SELLING STOCKHOLDERS], as Attorney-in-Fact for the
Selling Stockholders, at 11190 Sunrise Valley Drive, Reston, Virginia 20191,
telecopier number (703) 391-8290, with a copy to Arnold & Porter, 555 12th
Street, N.W., Washington, D.C. 20004, telecopier number (202) 942-5999,
Attention: Robert Ott.
13. Parties. This Agreement shall inure to the benefit of and be binding
-------
upon the several Underwriters and the Company and the Selling Stockholders and
their respective executors, administrators, successors and assigns. Nothing
expressed or mentioned in this Agreement is intended or shall be construed to
give any person or entity, other than the parties hereto and their respective
executors, administrators, successors and assigns, and the controlling persons
within the meaning of the Act or the Exchange Act, officers and directors
referred to in Section 8 hereof, any legal or equitable right, remedy or claim
in respect of this Agreement or any provisions herein contained, this Agreement
and all conditions and provisions hereof being intended to be and being for the
sole and exclusive benefit of the parties hereto and their respective executors,
administrators, successors and assigns and said controlling persons and said
officers and directors, and for the benefit of no other person or entity. No
purchaser of any of the Shares from any Underwriter shall be construed a
successor or assign by reason merely of such purchase.
In all dealings with the Company and the Selling Stockholders under
this Agreement, you shall act on behalf of each of the several Underwriters, and
the Company and the Selling Stockholders shall be entitled to act and rely upon
any statement, request, notice or agreement made or given by you jointly or by
BancAmerica Robertson Stephens on behalf of you.
14. Applicable Law. This Agreement shall be governed by, and construed in
--------------
accordance with, the laws of the State of California.
15. Counterparts. This Agreement may be signed in several counterparts,
------------
each of which will constitute an original.
-44-
<PAGE>
If the foregoing correctly sets forth the understanding among the
Company, the Selling Stockholders and the several Underwriters, please so
indicate in the space provided below for that purpose, whereupon this letter
shall constitute a binding agreement among the Company, the Selling Stockholders
and the several Underwriters.
Very truly yours,
SOFTWARE AG SYSTEMS, INC.
By
----------------------------
SELLING STOCKHOLDERS
By
----------------------------
Attorney-in-Fact for the
Selling Stockholders noted
above and named in
Schedule B hereto
Accepted as of the date first above written:
BANCAMERICA ROBERTSON STEPHENS
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
On their behalf and on behalf of each of the
several Underwriters named in Schedule A hereto.
By BANCAMERICA ROBERTSON STEPHENS
By
----------------------------
Authorized Signatory
-45-
<PAGE>
SCHEDULE A
Underwriters Number of Firm Shares To Be Purchased
------------ -------------------------------------
BancAmerica Robertson Stephens
Donaldson, Lufkin & Jenrette
Securities Corporation
<PAGE>
SCHEDULE B
Number of Company Number of Option
Company Shares To Be Sold Shares To Be Sold
------- --------------------- -----------------
Software AG Systems, Inc. 4,600,000 577,500
Total:
4,600,000 577,500
========= =======
Number of
Name of Selling Selling Stockholder Number of Option
Stockholder Shares To Be Sold Shares To Be Sold
----------------- ----------------- -----------------
Thayer Equity Investors 3,083,260 574,381
III, L.P.
TC Co-Investors, LLC 16,740 3,119
Total:
3,100,000 577,500
========= =======
<PAGE>
Exhibit 4
INCORPORATED UNDER THE LAWS COMMON STOCK
OF THE STATE OF DELAWARE $.01 PAR VALUE
NUMBER SHARES
LOGO SEE REVERSE FOR CERTAIN DEFINITIONS
SOFTWARE AG SYSTEMS, INC.
THIS CERTIFIES THAT
IS THE OWNER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK OF
SOFTWARE AG SYSTEMS, INC. transferable on the books of the Corporation by the
holder hereof in person or by duly authorized attorney upon surrender of this
Certificate properly endorsed. This Certificate and the shares represented
hereby are issued under and shall be held subject to all the provisions of the
Second Amended and Restated Certificate of Incoporation and the Second Amended
and Restated Bylaws of the Corporation and to all amendments thereto, copies of
which are on file at the principal office of the Corporation, to all of which
the holder, by acceptance hereof, assents. This Certificate is not valid until
countersigned by the Transfer Agent and registered by the Registrar.
WITNESS WHEREOF, the Corporation has caused this Certificate to be signed by its
duly authorized officers and its facsimile seal to be affixed hereto.
Dated
SECRETARY PRESIDENT AND CHIEF
EXECUTIVE OFFICER
COUNTERSIGNED AND REGISTERED
THE BANK OF NEW YORK
TRANSFER AGENT AND REGISTRAR
AUTHORIZED SIGNATURE
SOFTWARE AG SYSTEMS, INC.
CORPORATE
SEAL
1981
DELAWARE
The Corporation has more than one class of stock authorized to be issued. The
Corporation will furnish without charge to each stockholder who so requests, a
statement of the powers, designations, preferences and relative, participating
optional or other special rights of each class of stock of the Corporation or
series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights. Such requests shall be made to the Corporation at the
<PAGE>
principal office of the Corporation or to the Transfer Agent named on the face
of this Certificate.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as through they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT - ______ Custodian _______
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with Under Uniform Gifts to Minors
right of survivorship and not
as tenants in common Act ___________________________
(State)
Additional abbreviations may also be used though not in the above list.
For Value received, __________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE.
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING ZIP CODE OF ASSIGNEE:
______________________________
Shares of capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint _____________________
Attorney to transfer the said stock on the books of the within-named Corporation
with full power of substitution in the premises.
Dated,
---------------------- X (SIGNATURE)
X (SIGNATURE)
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME(S) AS WRITTEN UPON
THE FACE OF THE CERTIFICATE, IN EVERY PARTICULAR
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE
WHATEVER.
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKER, SAVINGS
AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP
IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM),
PURSUANT TO S.E.C. RULE 17Ad-15.
SIGNATURE(S) GUARANTEED BY:
<PAGE>
November 4, 1997
Board of Directors.
Software AG Systems, Inc.
11190 Sunrise Valley Drive
Reston, VA 20191
Ladies and Gentlemen:
We are acting as counsel to Software AG Systems, Inc., a Delaware
corporation (the "Company"), in connection with the Company's filing with the
Securities and Exchange Commission pursuant to the Securities Act of 1933, as
amended (the "1933 Act"), of a registration statement on Form S-1 (the
"Registration Statement") relating to the proposed public offering by the
Company of 4,600,000 shares (5,177,500 shares if the Underwriter's over-
allotment option is fully exercised) (the "Primary Shares") of the Company's
common stock, par value $.01 per share (the "Common Stock"), and 3,100,000
shares (3,677,500 shares if the Underwriter's over-allotment option is fully
exercised) (the "Secondary Shares") of Common Stock to be offered by certain
stockholders of the Company as set forth in the Registration Statement (the
"Selling Stockholders"). This opinion is furnished to you at your request to
enable you to fulfill the requirements of Item 601(b)(5) of Regulation S-K, 17
C.F.R. (S) 229.601(b)(5), in connection with the Registration Statement.
For purposes of this opinion, we have examined such corporate records
of the Company, including executed copies of the Registration Statement and
Amendment No. 1 and Amendment No. 2 thereto, the Company's Second Amended and
Restated Certificate of Incorporation, the Company's Second Amended and Restated
Bylaws, resolutions of the Company's Board of Directors (including resolutions
relating to the issuance and sale of the Primary Shares and arrangements in
connection therewith and resolutions relating to the original issuance of the
Secondary Shares) and the proposed form of underwriting agreement by and among
the Company, the Selling Stockholders, Donaldson, Lufkin & Jenrette
<PAGE>
Software AG Systems, Inc.
November 4, 1997
Page 2
Securities Corporation and BancAmerica Robertson Stephens filed as Exhibit 1 to
the Registration Statement (the "Underwriting Agreement"), and such other
documents as we deem necessary for rendering the opinion hereafter expressed.
In our examination of the aforesaid documents, we assumed the
genuineness of all signatures, the legal capacity of all natural persons, the
accuracy and completeness of all documents submitted to us, the authenticity of
all original documents and the conformity to authentic original documents of all
documents submitted to us as copies (including telecopies). We also have
assumed the accuracy, completeness and authenticity of statements of fact on
which we are relying and have made no independent investigations thereof. This
opinion is given, and all statements herein are made, in the context of the
foregoing.
This opinion is based as to matters of law solely on the General
Corporation Law of the State of Delaware. We express no opinion herein as to
any other laws, statutes, regulations or ordinances.
Based upon, subject to and limited by the foregoing, we are of the
opinion that:
(a) Following (i) final action of the Special Securities Committee of
the Board of Directors of the Company approving the price of the Primary Shares
and (ii) the issuance and sale of the Primary Shares pursuant to the terms of
the Underwriting Agreement, the Primary Shares will be validly issued, fully
paid and nonassessable under the General Corporation Law of the State of
Delaware; and
(b) The Secondary Shares are validly issued, fully paid and
nonassessable under the General Corporation Law of the State of Delaware.
We assume no obligation to advise you of any changes in the foregoing
subsequent to the delivery of this opinion.
We hereby consent to the filing of this opinion as Exhibit 5 to the
Registration Statement and to the
<PAGE>
Software AG Systems, Inc.
November 4, 1997
Page 3
reference to this firm under the caption "Legal Matters" in the prospectus
constituting a part of the Registration Statement. In giving this consent, we do
not thereby admit that we are an "expert" within the meaning of the 1933 Act.
Sincerely yours,
/s/ Arnold & Porter
Arnold & Porter
<PAGE>
Exhibit 10.22
PROMISSORY NOTE
Fairfax County Virginia
$363,000.00 August 9, 1996
FOR VALUE RECEIVED, the undersigned promise to pay to the order of Software AG
Americas, Inc. ("SAGA"), the principal sum of THREE HUNDRED SIXTY THREE
THOUSAND & NO/00 ($363,000.00) DOLLARS
This note is made to evidence a loan to the undersigned. The effective date of
the loan is August 9, 1996.
The note will accrue interest at the rate of 6% per annum on the principal
amount.
Said principal and interest shall be payable as follows.
1. There shall be no required periodic payments of either the principal or
interest for the term of this note.
2. The principal and all accrued interest shall be due and payable by the
undersigned to SAGA at such time as the undersigned leaves the employment
of SAGA.
3. To the extent that the undersigned has severance, vacation, deferred
compensation, or other types of payment due from SAGA at the time of
termination, such sums will be used to pay the principal and interest of
this note, after the withholding of applicable taxes.
4. The undersigned may prepay this Note in whole or in part without penalty.
Signed under seal this 9th day of August , 1996.
------ --------- ----
Harry K. McCreery
/s/ Harry K. McCreery
- --------------------------------
/s/ Daniel F. Gillis
- --------------------------
<PAGE>
Exhibit 10.23
PROMISSORY NOTE
Fairfax County Virginia
$120,740.00 August 9, 1996
FOR VALUE RECEIVED, the undersigned promise to pay to the order of Software AG
Americas, Inc. ("SAGA"), the principal sum of ONE HUNDRED TWENTY THOUSAND,SEVEN
HUNDRED FORTY & NO/00 ($120,740.00) DOLLARS
This note is made to evidence a loan to the undersigned. The effective date of
the loan is August 9, 1996.
The note will accrue interest at the rate of 6% per annum on the principal
amount.
Said principal and interest shall be payable as follows.
1. There shall be no required periodic payments of either the principal or
interest for the term of this note.
2. The principal and all accrued interest shall be due and payable by the
undersigned to SAGA at such time as the undersigned leaves the employment
of SAGA.
3. To the extent that the undersigned has severance, vacation, deferred
compensation, or other types of payment due from SAGA at the time of
termination, such sums will be used to pay the principal and interest of
this note, after the withholding of applicable taxes.
4. The undersigned may prepay this Note in whole or in part without penalty.
Signed under seal this 13th day of March , 1997.
------ --------- ----
James H. Daly
/s/ James H. Daly
- ------------------------
<PAGE>
Exhibit 16
[LETTERHEAD OF GOCIAL & COMPANY APPEARS HERE]
October 23, 1997
Securities and Exchange Commission
450 5th Street, N.W.
Judiciary Plaza
Washington, DC 20549
RE: Software AG Systems, Inc.
Ladies and Gentlemen:
We have read the statements made by Software AG Systems, Inc. (the Company)
(copy attached), which we understand have been included pursuant to Item 304 of
Regulation S-K as part of Amendment No. 1 to the Company's Registration
Statement on Form S-1, dated October 15, 1997 (File No. 333-36567), as filed
with the Securities and Exchange Commission. We agree with the statements
concerning our firm.
Very truly yours,
/s/ Gocial and Company, P.C.
Gocial and Company, P.C.
Attachment
<PAGE>
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 the prior auditors' audit of the consolidated
financial statements for the years ended December 31, 1995 and 1996, there were
no disagreements with the Company 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.
<PAGE>
Exhibit 21
Subsidiaries of the Registrant
The companies listed below are directly or indirectly owned 100% by
Software AG Systems, Inc. and are included in its consolidated financial
statements. Software AG Americas, Inc. and Systems Software I, Inc. are wholly
owned subsidiaries of Software AG Systems, Inc. Argenta, Inc., Insight
Consulting, Inc., SAG Systems (Canada) Holding, Ltd., Software AG Insurance
Solutions, Inc., Software AG Professional Services, Inc., Software AG de Mexico
S.A. de C.V. and Software AG de Venezuelano S.A. de C.V. are wholly owned
subsidiaries of Software AG Americas, Inc. Software AG Systems (Canada), Inc. is
a wholly owned subsidiary of SAG Systems (Canada) Holding, Ltd.
<TABLE>
<CAPTION>
Name Jurisdiction of Incorporation
- ------------------- ------------------------------
<S> <C>
Software AG Americas, Inc. Commonwealth of Virginia
Systems Software I, Inc. State of Delaware
Argenta, Inc. Commonwealth of Virginia
Insight Consulting, Inc. Commonwealth of Virginia
SAG Systems (Canada) Canada
Holding, Ltd.
Software AG Insurance Solutions, Inc. Commonwealth of Virginia
Software AG Professional
Services, Inc. Commonwealth of Virginia
Software AG de Mexico S.A.
de C.V. Mexico
Software AG de Venezuelano Venezuela
S.A. de C.V.
Software AG Systems (Canada), Inc. Canada
</TABLE>
<PAGE>
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
November 4, 1997
