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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 001-13609
SOFTWARE AG SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 54-1167173
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
11190 Sunrise Valley Drive
Reston, Virginia 20191
(Address of principal executive offices)
Registrant's telephone number, including area code: (703) 860-5050
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Title of each class Name of each exchange
Common Stock, $0.01 par value on which registered
New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the Registrant's common stock held by non-
affiliates of the Registrant based on the closing price at which stock was
sold on the New York Stock Exchange on March 13, 1998 was $171,925,514.
As of March 13, 1998, 29,515,000 shares of the Registrant's common stock
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Stockholders of
the registrant to be held on May 18, 1998 are incorporated by reference in
Part III (Items 10, 11, 12 and 13) of this Annual Report on Form 10-K from the
date such document is filed.
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TABLE OF CONTENTS
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Item Page
- ---- ----
PART I
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1.Business................................................................ 2
2.Properties.............................................................. 16
3.Legal Proceedings....................................................... 17
4.Submission of Matters to a Vote of Security Holders..................... 17
PART II
5.Market for Registrant's Common Equity and Related Stockholder Matters... 17
6. Selected Consolidated Financial Data................................... 19
7.Management's Discussion and Analysis of Financial Condition and Results
of Operations............................................................ 21
7A.Quantitative and Qualitative Disclosures About Market Risk............. 28
8.Consolidated Financial Statements and Supplementary Data................ 29
9.Changes in and Disagreements with Accountants on Accounting and Finan-
cial Disclosure.......................................................... 50
PART III
10.Directors and Executive Officers of the Registrant..................... 50
11.Executive Compensation................................................. 50
12.Security Ownership of Certain Beneficial Owners and Management......... 50
13.Certain Relationships and Related Transactions......................... 50
PART IV
14.Exhibits, Financial Statement Schedules, and Reports on Form 8-K....... 51
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PART I
ITEM 1. BUSINESS.
COMPANY BACKGROUND AND GENERAL DEVELOPMENT OF BUSINESS
Software AG Systems, Inc. and its subsidiaries (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 products are used to build and enhance mission-
critical applications that require reliability, scalability 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; 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, rightsizing and application
integration.
The Company has a 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 opened three Millennium Centers in Highlands Ranch, Colorado,
Ft. Lee, New Jersey, and Dallas, Texas for code analysis, remediation and
testing.
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 products of
Software AG, a German software company ("SAG"), 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 then 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, SAG sold approximately 89% of the Company's then
outstanding common stock to Thayer Equity Investors III, L.P. ("Thayer") and
certain senior management of the Company (the "Recapitalization"). After the
Recapitalization, SAG retained approximately 11% of the Company's then
outstanding common stock. 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 has provided
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.
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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 managing agent of and provides
management services to Thayer, 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. In 1997,
the Company paid a total of $225,000 of such fees plus out-of-pocket expenses.
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.
On November 21, 1997, the Company and certain stockholders of the Company
consummated the sale of 7,700,000 shares and an over allotment of 1,155,000
shares of the Company's common stock par value $0.01 per share (the "Common
Stock") in an initial public offering which was declared effective by the
Securities and Exchange Commission ("SEC") on November 17, 1997 ("IPO"). As a
result of the IPO, Thayer owns approximately 56% of the Company's outstanding
Common Stock and SAG owns approximately 9% of the Company's outstanding Common
Stock. Pursuant to the IPO, 7,700,000 shares of Common Stock were sold to the
public at a price of $10.00 per share. Of the 7,700,000 shares, 4,600,000
shares were newly issued shares sold by the Company and 3,100,000 shares were
outstanding shares sold by certain stockholders of the Company (the "Selling
Stockholders"). In addition, the underwriters exercised an option to purchase
an additional 1,155,000 shares of Common Stock on the same terms. Of the
1,155,000 additional shares purchased by the underwriters, 577,500 shares were
newly issued shares sold by the Company and 577,500 shares were outstanding
shares sold by the Selling Stockholders. The total proceeds, net of
underwriting discounts and commissions, from the IPO to the Company and to the
Selling Stockholders were approximately $48.2 million and $34.2 million,
respectively. Effective November 21, 1997 and December 18, 1997, Software AG
Americas, Inc., a wholly owned subsidiary of the Company, issued notes to the
Company in the amount of approximately $42.8 million and $5.4 million,
respectively, the proceeds, net of underwriting discounts and commissions,
received by the Company from the IPO.
Immediately prior to the Recapitalization, the Company renegotiated its
licensing agreement with SAG (as renegotiated, the "Cooperation Agreement")
which, among other things (i) provides 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 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 $21.0 million. As consideration for the Cooperation Agreement, the
Company paid SAG DM38.0 million (approximately US$22.6 million) on March 31,
1997. The Company anticipates that the Cooperation Agreement and SAG's equity
interest in the Company will promote close collaboration between the Company
and SAG.
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
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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 and Associates, Inc.
("R.D. Nickel") by merging R.D. Nickel with and into Software AG Systems
(Canada) Inc., a wholly owned subsidiary of SAG Systems (Canada) Holdings,
Ltd. (a 90% owned subsidiary of the Company and a 10% owned subsidiary of
Software AG Americas, Inc.) ("Software AG (Canada)"), with Software AG
(Canada) as the surviving entity. Software AG (Canada) is a software company
that develops, licenses and supports a family of application development
products, including CONSTRUCT and CONSTRUCT Spectrum. Additionally, R.D.
Nickel served as the exclusive distributor of the Company's products in Canada
since 1973. This acquisition was accounted for using the purchase method of
accounting. For 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
(approximately US$5.1 million) note payable and Cdn$7.0 million (approximately
US$5.1 million) in cash. In addition, the Company owed an additional payment
of Cdn$500,000 (approximately US$360,000) in connection with the acquisition.
Both the note payable and the additional payment were paid in November 1997
with the proceeds from the Company's IPO. In connection with this acquisition,
in the quarter ended September 30, 1997, the Company recorded US$5.0 million
of goodwill, which will be amortized on a straight-line basis over 10 years,
and took a one-time charge of US$6.1 million associated with the purchase of
in-process research and development.
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 generated 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 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 delayed the
timetable for certain of its products. At this time, most products delivered
to the Company pursuant to the Cooperation Agreement by SAG are year 2000
compliant. As of March 27, 1998, there remain three products that are not year
2000 compliant and the Company is awaiting delivery of products from SAG. In
addition, the Company has identified a few (less than ten) products that are
compliant but are not compatible with all other year 2000 compliant products.
At this time, these delays and non-compatibility problems have had no material
financial impact on the Company. There is a risk to future financial
performance and potential liability to the Company if SAG fails to deliver the
remaining products in a timely manner and resolve the compatibility issue of
the 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. In addition, 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.
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Because 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, 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.
COMPANY 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 middleware and year 2000 markets. Key elements of the
Company's strategy include enhancing existing product offerings with added
features and functionality, broadening product offerings, leveraging its
customer base, expanding professional service offerings and leveraging
distribution channels.
The Company intends to broaden its middleware product offerings through
internal product development, additional licensed products from third parties
and acquisitions. It is believed this strategy will enable the Company to
provide connectivity to complex enterprise-class IT solutions including
Enterprise Resource Planning (ERP) packages, client/server applications,
distributed computing applications, Internet/intranet application and
mainframe class legacy applications. The Company plans to extend Microsoft's
ActiveX and DCOM technologies into large enterprise-class computing
environments.
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 the Territory any new products developed or
acquired by SAG. See "Research and Development".
The Company also intends to leverage its customer base and distribution
channels and expand its services offered. Most of the Company's customers are
large, sophisticated organizations with complex information systems in
dispersed, heterogeneous computing environments. Typically, the information
technology ("IT") budget of a customer of the Company substantially exceeds
the annual amount that the 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. The Company intends to leverage its distribution channels through
which the Company, directly and indirectly, sells its products throughout the
Territory and outside the Territory via its relationship with SAG (other than
those products licensed from SAG), by developing and acquiring additional
products for distribution by SAG. See "Sales and Marketing" and "Company
Background and General Development of Business".
In addition, the Company believes that, due to the strategic nature of its
products, customers require the Company to provide comprehensive professional
services and support. As a result, the Company's strategy is to expand its key
professional services offerings, which are centered around application
development, application integration and the year 2000 problem, and the
Company intends to expand its efforts to cross sell its professional services
to its product customers.
PRODUCTS AND SERVICES
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.
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. 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, UNIX and MVS/VSE mainframe 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.
. Integration Services. The Company offers its customers a variety of
application and/or middleware 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.
. 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 analysis, remediation, testing and reimplementation 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 Highlands Ranch, 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.
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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 for the year ended December 31, 1996. For the year ended December
31, 1997, the Company had revenues of $6.9 million from its year 2000 program.
Although the Company believes that the market for products and professional
services relating to the year 2000 problem will grow as the year 2000
approaches, there can be no assurance that this market will develop to the
extent anticipated by the Company. Significant expenses for sales and
marketing may be required to educate potential clients of the year 2000
problem and the need for products and professional services addressing the
problem. In addition, there can be no assurance that potential clients will
understand or acknowledge the problem. Affected organizations may not be
willing or able to allocate the resources, financial or otherwise, to address
the year 2000 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. 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.
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.
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, application integration 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.
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 year ended December
31, 1997, approximately 95% of the Company's customers who were eligible
renewed at least one of their maintenance agreements.
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.
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RESEARCH AND 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 research and development expenses were $0.9 million and $1.4
million in 1995 and 1996, respectively.
Since the Recapitalization, the Company has begun building its internal
product development group. The first product resulting from the Company's
recent internal product development efforts is the 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. The Company's research and development expenses were $1.1
million in 1997.
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. SAG's product development costs were approximately $56.0 million for
both 1996 and 1997. In September 1997, SAG released EntireX DCOM, the first
product resulting from SAG's strategic relationship with Microsoft.
The process of developing new high-technology products is inherently complex
and uncertain and requires innovative designs anticipating customer demands
and technological trends. Without new products and services, the Company's
products and services are likely to become obsolete and the Company's
operating results are likely to be materially adversely affected. The Company
must quickly manufacture and deploy its products in a cost effective manner to
meet market needs.
The Company's success will depend in part on its ability to acquire product
enhancements and new products that keep pace with continuing changes in
technology and evolving customer preferences, and the timely delivery of
products and product enhancements from SAG. 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, that such products
or enhancements will be successful in the marketplace or that SAG will deliver
new products or product enhancements that will be successful in the
marketplace in a timely manner. 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.
In addition, 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.
CUSTOMERS AND MARKETS
Over 1,500 customers in the Territory 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. In 1995, 1996 and 1997, no single customer accounted
for more than 10% of the Company's total revenue.
Most of the Company's sales are made to its existing customers. Customers
typically pay a 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
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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.
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 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.
SALES AND MARKETING
The Company sells and markets its products through both direct and indirect
channels in North America, South America, Japan and Israel. The Company
reorganized its sales organization into three areas which focus separately on
the sale of Enterprise License Agreements ("ELAs"), professional services and
the year 2000 program. The reorganization of the sales force has resulted in
significantly increased productivity per salesperson.
In North America, the Company sells and markets its products and services
through a direct channel, operating 19 offices as of December 31, 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. Because the relationships with
the Company's distributors and SAG are integral to the Company's success, the
Company's continuing relationships with them are important to the Company's
success. The Company's financial results could be materially adversely
affected if the financial condition of these entities weakens or if the
Company's relationships with these entities deteriorate.
The Company's corporate marketing organization supports the Company's sales
and professional services channels through the efforts of professionals with
expertise in product marketing and marketing communications. The Company also
has strategic marketing relationships with certain vendors of computing
products and services, including IBM Corporation ("IBM"), Microsoft
Corporation ("Microsoft") and BDM International, Inc. ("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 market. The Company's competitors are numerous in all
business areas ranging from highly specialized small firms to some of the
largest corporations in the world. 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 Corporation ("Oracle"), Informix Corporation ("Informix"), Sybase,
Inc. ("Sybase") and Microsoft. In addition, the Company's 4GL applications
programming language, NATURAL, competes with offerings from both large and
small companies, including
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Oracle, Microsoft, IBM and Sterling Software, Inc. 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 and Microsoft. In the market for year 2000
products and professional services, the Company's competitors include Formal
Systems, Inc., Viasoft, Inc., BDM and Electronic Data Systems Corporation.
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 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.
TRADEMARKS AND 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., 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.
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
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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 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. 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.
ENTIRE(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 Tool Kit(TM), CONSTRUCT(TM),
NATURAL Lightstorm(TM), CONSTRUCT Spectrum(TM), CONSTRUCT Spectrum SDK(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 report are the property of
their respective owners. The duration of each of the registered trademarks is
10 years and the duration of each of the common law trademarks is perpetual.
The trademarks are an integral part of the Company's product identification.
EMPLOYEES
As of February 28, 1998, the Company had approximately 900 employees. 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. 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
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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 December 31, 1997, the Company had approximately 110 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.
ENVIRONMENTAL MATTERS
The Company does not expect compliance with Federal, state and local,
provisions relating to the protection of the environment to have a material
effect on capital expenditures, earnings or the Company's competitive
position. Presently, there are no material expenditures anticipated for
environmental control facilities for 1998 or the near future.
BACKLOG
The Company believes that backlog is not a meaningful indicator of future
business prospects due to the relatively short period of time between
acceptance of an order and delivery and the portion of revenue related to its
service and support business. As of December 31, 1997, the Company does not
have a material backlog and the majority of the backlog will be filled by
December 31, 1998.
OTHER CONDITIONS RELATED TO THE BUSINESS
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. In addition, the
Company relies on the timely delivery of competitive products and enhancements
from SAG for a material part of its revenue. If any of these current or future
third-party vendors or SAG were to discontinue making their products available
to the Company or to licensees of the Company's products on a timely basis, 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, or the Company or its licensees may not be able to sell
the product at all. 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 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.
POTENTIAL FLUCTUATIONS IN QUARTERLY PERFORMANCE/SEASONALITY OF THE
BUSINESS. The Company has experienced significant quarterly and other
fluctuations in revenues and results of operations and, although future
results may vary, the Company 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
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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.
The Company offers its customers installment payment plans as a vehicle for
financing license fees. Customers have expressed a desire to finance large
purchases, therefore, the Company acts competitively in allowing them to do
so. The Company maintains its own financing plans rather than utilizing banks
or other third parties to arrange client financing, although historically
certain installment accounts receivable have been sold to third parties. See
Note 6 of Notes to Consolidated Financial Statements.
RELIANCE ON ACQUISITIONS. The Company believes that its future growth will
depend, in part, on its ability to successfully identify, acquire and then
develop promising technologies and products. In addition, the Company intends
to build its product development staff in part through acquisitions. The
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 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 effect 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.
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. There can be no assurance that such distributors will continue to
perform as they have historically and that they will
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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.
Royalty revenues from international distributors represented 14%, 17% and
15% of the Company's total revenues in 1995, 1996 and 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, and 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.
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 and
1997. With the acquisition of R.D. Nickel, the Company began direct sales in
Canada effective October 1, 1997. Revenues from this source were less than 7%
of total revenues in the fourth quarter of 1997. The Company, therefore, has
not to date, engaged in foreign currency hedging transactions. The Company may
enter into hedging transactions in the future.
Additional risks associated with international operations include costs of
localizing products for foreign countries, lack of acceptance of localized
products in foreign countries, difficulties in enforcing intellectual
property, 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.
See Note 14 of Notes to Consolidated Financial Statements for financial data
pertaining to the geographic distribution of the Company's operations.
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 24% of its total revenues in 1996 and 30% of its total revenues for
1997 from selling its products and professional services directly or
indirectly to state and local government agencies. In addition, the Company
derived 9% of its total revenues in 1996 and 11% of its total revenues for
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
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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% and 12% of the Company's total revenues for 1996 and 1997,
respectively. In making proposals for fixed price contracts, the Company
relies on its estimated costs for completing the project. These estimates
reflect, among other factors, judgments as to the efficiencies of the
Company's technology and services as applied to the project. Any increased or
unexpected costs or unanticipated delays in connection with the performance of
fixed price contracts could have a material adverse effect on the Company's
business, financial condition and results of operations. In the past, the
Company has suffered material losses on fixed price contracts.
CONTROL BY OFFICERS, DIRECTORS AND THAYER. The Company's officers and
directors, and their affiliates, in the aggregate, have voting control of
approximately 69% of the Company's outstanding Common Stock. In particular,
Thayer and its affiliates have voting control of approximately 56% 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.
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. 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.
SHARES ELIGIBLE FOR FUTURE SALE
As of December 31, 1997, the Company had outstanding 29,515,000 shares of
Common Stock. Of these shares, the 8,855,000 shares sold in the IPO are freely
tradable in the public market without restriction or further registration
under the Securities Act of 1933, as amended (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 20,660,000 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 became eligible for sale
beginning February 17, 1998 (all of which are subject to 180-day lock-up
agreements between the holders of such shares and the representatives of the
underwriters terminating on May 18, 1998), and 16,687,586, 449,291 and 137,500
additional shares (all of which are 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 approximately May 18, 1998, 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
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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, one of the managing underwriters. 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, on January 22, 1998, the Company filed a registration statement
on Form S-8 under the Securities Act in order to register all 6,875,000 shares
of Common Stock reserved for issuance under the Company's 1997 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.
YEAR 2000 COMPLIANCE
Substantially all of the Company's revenues have been derived from the
licensing and servicing of products developed or acquired by SAG. The Company
is in the process of identifying, evaluating and implementing changes to its
computer programs and systems necessary to address the year 2000 issue. The
issue affects computer programs sold to customers as well as internal computer
programs. 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. Although SAG has delayed the timetable set forth in the
Cooperation Agreement for certain products, SAG has subsequently delivered
most of the year 2000 compliant products set forth in the Cooperation
Agreement. There can be no assurance that SAG will deliver the remaining
products set forth in the Cooperation Agreement in a timely manner. At this
time, most products delivered to the Company pursuant to the Cooperation
Agreement by SAG are year 2000 compliant. As of March 27, 1998, there remain
three products that are not year 2000 compliant and the Company is awaiting
delivery of products from SAG. In addition, the Company has identified a few
(less than ten) products that are compliant but are not compatible with all
other year 2000 compliant products. At this time, these delays and non-
compatibility problems have had no material financial impact on the Company.
There is a risk to future financial performance and potential liability to the
Company if SAG fails to deliver the remaining products and resolve the
compatibility issue of the products in a timely manner. 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. In
addition, 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.
The Company is communicating with customers and others to give them notice
of the year 2000 issue so that they can elect to upgrade to a year 2000
compliant product. If necessary upgrades, modifications and conversions by the
Company and those with which it conducts business are not completed timely or
SAG fails to deliver year 2000 complaint products in a timely manner, the year
2000 issue may have a material adverse effect on the business, financial
condition and results of operations of the Company. The total cost associated
with making the Company's products and internal computer systems and programs
year 2000 compliant is not expected to be material to the Company's business,
financial condition or results of operations and these costs are being
expensed as incurred.
ITEM 2. PROPERTIES.
The Company's executive offices, principal marketing and data center
facility are located in approximately 170,000 square feet of space in a three
building campus that the Company leases in Reston, Virginia. The Company's
Customer Service and Support Center is located in approximately 85,000 square
feet that the Company leases in Highlands Ranch, Colorado. The Company
currently sublets approximately 30,000 and 25,000 square feet of the Reston
and Highlands Ranch locations, respectively.
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The Company's subsidiary in Mexico leases offices of approximately 30,000
square feet 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 of approximately 45,000 square feet in the following
cities in Canada: Calgary, Cambridge, Edmonton, Montreal, Ottawa and Toronto.
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 believes that its facilities are adequate for its current needs
and that suitable space will be available as needed to accommodate the
expansion of the Company's operations.
ITEM 3. 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
report, 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders during the
fourth quarter of the year covered by this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
RECENT SALES OF UNREGISTERED SECURITIES
Prior to February 25, 1997, the Company was an indirect wholly owned
subsidiary of SAG and on February 25, 1997, the Company became a direct wholly
owned subsidiary of SAG and SAG became the owner of the one then outstanding
share of the Company's common stock, par value $1.00 per share. On March 14,
1997, the Company issued a stock dividend to SAG resulting in 100,000
outstanding shares of common stock.
On March 31, 1997, the senior management of the Company and Thayer acquired
approximately 89% of the then outstanding Common Stock of the Company in 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 DM 57.0 million
(approximately US$33.9 million), (ii) 20,678,350 shares of Common Stock were
issued and sold to Thayer for an aggregate purchase price of approximately
$30.4 million and (iii) an aggregate of 771,650 shares of Common Stock were
issued and sold to the Managers for an aggregate purchase price of
approximately $1.1 million. 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. In consideration for the shares, each of Messrs. Gillis,
McCreery and Daly gave the Company a promissory note in an amount sufficient
to cover the purchase price of the shares. In consideration for the shares,
each of Messrs. Hayes, Brigden and Gorley paid the Company approximately
$74,900, $51,000, and $75,000 in cash, respectively, and gave the Company a
promissory note in an amount sufficient to cover the balance of the purchase
price of the shares. 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
17
<PAGE>
Stock for an aggregate purchase price of $202,095. As of December 31, 1997,
the Company has also granted options to purchase an aggregate of 5,069,900
shares of Common Stock under the Company's 1997 Stock Option Plan at a
weighted average exercise price equal to $4.66 per share. All such options and
shares of Common Stock were issued in private placements exempt from
registration under Section 4(2) of the Securities Act, or Rule 701 thereunder.
All such shares reflect a 275-for-1 stock split with respect to the Common
Stock which was effected as a dividend on or before November 17, 1997. No
underwriters were involved in the sales or issuances of the securities
described above.
USE OF PROCEEDS
The following use of proceeds from the IPO is being disclosed in regard to
the Company's Registration Statement No. 333-36567 filed on Form S-1 and
declared effective by the SEC on November 17, 1997 ("Registration Statement").
The IPO commenced on November 17, 1997 and terminated on November 21, 1997
after the sale of all securities registered by the Registration Statement
(including the sale of the 1,155,000 shares covered by an over-allotment
option granted to the underwriters, which sale was consummated on December 18,
1997). BancAmerica Robertson Stephens and Donaldson, Lufkin & Jenrette
Securities Corporation were the managing underwriters for the IPO.
Pursuant to the IPO, 8,855,000 shares of Common Stock were registered and
sold to the public at a price of $10.00 per share. Of the 8,855,000 shares
registered and sold, 5,177,500 shares were newly issued shares sold by the
Company and 3,657,641 and 19,859 shares were outstanding shares sold by Thayer
and TC Co-Investors, LLC ("TC Co-Investors"), respectively, for an aggregate
offering price to the Company, Thayer and TC Co-Investors of approximately
$51.8 million, $36.6 million and $0.2 million, respectively. The aggregate
proceeds, net of underwriting discounts and commissions, to the Company,
Thayer and TC Co-Investors as a result of the IPO were approximately $48.2
million, $34.0 million and $0.2 million, respectively.
For the period beginning November 17, 1997 and ending December 31, 1997, the
following actual expenses were incurred by the Company in connection with the
issuance and distribution of the securities registered and sold pursuant to
the IPO.
<TABLE>
<CAPTION>
<S> <C>
Underwriting discounts and commissions $3,624,250
Finders' fees $0
Expenses paid to or for underwriters $0
Other expenses(1) $1,524,000
----------
Total expenses $5,148,250
==========
(1) Consists of: SEC registration fee $37,567
NYSE listing & filing fee $179,100
NASD filing fees $12,897
Printing and engraving expenses $277,173
Legal fees and expenses $265,730
Accounting fees and expenses $548,790
Miscellaneous $202,743
</TABLE>
None of the preceding payments were made, either directly or indirectly, to
(i) a director, officer or general partner of the Company or their associates,
(ii) person(s) owning at least 10% of the Company's Common Stock, (iii) any
affiliate of the Company, or (iv) any other entity other than that listed
above.
As of December 31, 1997, the Company used approximately US$5.1 million
(Cdn$7.0 million) and US $360,000 (Cdn$500,000) of the proceeds from the IPO
to pay a note payable and an additional payment, respectively, due in
connection with the acquisition of R.D. Nickel by the Company. The remaining
net IPO proceeds, net of other expenses incurred as disclosed above, of
approximately $41.2 million were invested by the Company in short-term money
market accounts. Effective November 21, 1997 and December 18, 1997,
18
<PAGE>
Software AG Americas, Inc., issued notes to the Company in the amount of
approximately $42.8 million and $5.4 million, respectively, the proceeds, net
of underwriting discounts and commissions, received by the Company from the
IPO. None of the net IPO proceeds were used by the Company for the
construction of plant, building or facilities; the purchase and installation
of machinery and equipment; purchases of real estate; or acquisition of other
business(es). None of these payments were, either direct or indirect, payments
to (i) a director, officer or general partner of the Company or their
associates, (ii) person(s) owning at least 10% of the Company's Common Stock,
(iii) any affiliate of the Company, or (iv) any other entity other than that
described above.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock trades on the New York Stock Exchange ("NYSE")
under the symbol AGS. As the Company's IPO went effective on November 17, 1997
and trading began in the Company's Common Stock on November 18, 1997, the
quarterly high and low prices reported by the NYSE composite transactions are
available only for the fourth quarter ended December 31, 1997.
<TABLE>
<CAPTION>
1997
----------
QUARTER ENDED HIGH LOW
------------- ------ ---
<S> <C> <C>
December 31, 1997................................................. 14 1/2 10
</TABLE>
DIVIDENDS
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 did not pay any cash dividends in 1997 and does not
anticipate paying any cash dividends on its Common Stock in the foreseeable
future. Certain of the Company's relationships with third parties may 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".
HOLDERS OF RECORD
The Company had approximately 1,542 holders of record of its Common Stock at
March 13, 1998.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The consolidated statement of operations data set forth below for each of
the years ended December 31, 1994, 1995, 1996 and 1997 and the consolidated
balance sheet data as of December 31, 1994, 1995, 1996 and 1997 have been
derived from the Company's consolidated financial statements, which statements
have been audited by KPMG Peat Marwick LLP, independent certified public
accountants. The financial data presented as of and for the year ended
December 31, 1993 are derived from the Company's financial statements, which
statements have been audited by other auditors. 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 Form 10-K. 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 reflects the results of operations and balance
sheet data subsequent to the Recapitalization and is captioned as "Successor".
19
<PAGE>
<TABLE>
<CAPTION>
PREDECESSOR COMBINED(1) PREDECESSOR SUCCESSOR
-------------------------------- ----------- ----------- ---------
TWELVE THREE NINE
MONTHS MONTHS MONTHS
ENDED ENDED ENDED
YEARS ENDED DECEMBER 31, DEC. 31, MAR. 31, DEC. 31,
-------------------------------- ----------- ----------- ---------
1993 1994 1995 1996 1997 1997 1997
------- ------- ------- ------- ----------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Software license fees................................... $51,672 $51,832 $52,061 $52,163 $64,137 $7,341 | $56,796
Maintenance fees........................................ 57,264 65,871 65,307 69,702 72,689 17,352 | 55,337
Professional service fees............................... 31,175 29,552 35,194 34,975 44,398 9,948 | 34,450
------- ------- ------- ------- ------- ------ | -------
Total revenues.......................................... 140,111 147,255 152,562 156,840 181,224 34,641 | 146,583
Gross profit............................................ 70,149 77,429 81,239 83,869 94,984 17,127 | 77,857
Operating expenses before write-off..................... 75,120 76,534 78,051 78,588 75,171 15,817 | 59,354
Write-off of acquired in-process |
research and development costs(2)....................... -- -- -- -- 6,051 -- | 6,051
Income (loss) from operations........................... (4,971) 895 3,188 5,281 13,762 1,310 | 12,452
Net income.............................................. $ 6,380 $ 1,382 $ 3,326 $ 6,209 $ 6,711 $1,373 | $ 5,338
======= ======= ======= ======= ======= ====== | =======
Net income per common share(3).......................... $ 0.23 $ 0.05 $ 0.12 $ 0.23 $ 0.27 $ 0.06 | $ 0.21
======= ======= ======= ======= ======= ====== | =======
Net income per common share-- |
assuming dilution(3).................................... $ 0.22 $ 0.05 $ 0.11 $ 0.21 $ 0.25 $ 0.05 | $ 0.20
======= ======= ======= ======= ======= ====== | =======
Dividends............................................... $ -- $ 600 $ 1,700 $ 9,000 $ -- $ -- | $ --
======= ======= ======= ======= ======= ====== | =======
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
------------------------------ ---------
DECEMBER 31,
----------------------------------------
1993 1994 1995 1996 1997
------ ------ ------- ------- ---------
(IN THOUSANDS)
----------------------------------------
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Working capital (deficit)............. $6,355 $5,167 $(2,465) $30,421 |$62,052
Total assets.......................... 74,175 86,466 125,612 158,088 |196,126
Long-term debt, less current maturi- |
ties................................. 3,212 431 -- -- | --
Total stockholders' equity............ 30,190 30,972 32,599 29,808 | 89,818
</TABLE>
- --------
(1) Reflects combined data for the three months ended March 31, 1997 (prior to
the Recapitalization) and for the nine months ended December 31, 1997
(subsequent to the Recapitalization).
(2) The write-off of acquired in-process research and development costs for
the year ended December 31, 1997 relates to the Company's acquisition of
R.D. Nickel. Before deducting the nonrecurring write-off for this period,
income from operations was $19.8 million, net income was $12.8 million and
basic and diluted earnings per share for net income was $0.51 and $0.48,
respectively.
(3) In accordance with the Financial Accounting Standards No. 128 "Earnings
Per Share" ("SFAS No. 128") issued by Financial Accounting Standards
Board, the Company calculated and presented basic and diluted earnings per
share for the current period. The Company also retroactively adopted the
SFAS No. 128 for all prior periods presented in calculating and presenting
the earnings per share. Basic earnings per share is based on income
available to common shareholders divided by the weighted average number of
common shares outstanding. Diluted earnings per share is also based on
income available to common shareholders divided by the sum of the weighted
average number of common shares outstanding and all potential common
shares which are dilutive. See Note 1 of Notes to Consolidated Financial
Statements.
20
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
On March 31, 1997, the Company consummated the Recapitalization, pursuant to
which the certain senior management of the Company and Thayer acquired
approximately 89% of the outstanding Common Stock of the Company from SAG for
approximately $31.5 million. 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. 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.
Immediately prior to the consummation of the Recapitalization, 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 $22.6 million. 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 $21.0 million,
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, the determination of fair value allocated
to the identifiable assets and liabilities of the Company has been made by
management based on the nature of the assets and liabilities acquired, and
general economic factors. Based on this allocation, the fair value of the
Company's Cooperation Agreement has been recorded at $23.5 million, 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 allocation of the purchase price to the net assets
and liabilities, an excess of purchase price over net assets acquired
(goodwill) of $6.4 million was recorded. Such goodwill is being amortized on a
straight-line basis over 10 years.
In September 1997, the Company's Board of Directors authorized the Company
to file a Registration Statement with the SEC permitting the Company to sell
shares of its Common Stock to the public. On November 21, 1997 through the
IPO, 7,700,000 shares of the Company's Common Stock were sold at $10 per share
to the public, of which 3,100,000 shares were sold by certain shareholders of
the Company, and 4,600,000 shares were sold by the Company. As a result of the
IPO, the Company received proceeds, net of underwriting discounts and
commissions, of $42.8 million and the selling shareholders received proceeds,
net of underwriting discounts and commissions, of $28.8 million. On December
17, 1997, the Company and certain shareholders sold each an additional 577,500
shares (for a total of 1,155,000 shares sold) at $10 per share to cover the
over-allotment option exercised by the underwriters. Exercise of the over
allotment option by the underwriters resulted in proceeds, net of underwriting
discounts and commissions, of $5.4 million to each of the Company and selling
shareholders (for a total of $10.7 million).
On September 30, 1997, the Company acquired 100% of the issued and
outstanding shares of the Common Stock of R.D. Nickel. R.D. Nickel is a
software company that has a family of application development products and
that has been the exclusive distributor of the Company's product in Canada
since 1973. The transaction was accounted for using the purchase method of
accounting for a business combination. The aggregate purchase price of
Cdn$14.0 million (US$10.1 million) was funded through a cash payment of
Cdn$7.0 million (US$5.1 million) and a note payable of Cdn$7.0 million (US$5.1
million). The note payable was repaid in November 1997 with the proceeds from
the IPO. In connection with the acquisition, the Company recorded a $6.1
million non-recurring charge against earnings for in-process research and
development costs. The remaining excess purchase price of $5.0 million
represents goodwill, and has been recorded as other intangible assets. The
related amortization period for the goodwill is ten years. At December 31,
1997, accumulated amortization of the
21
<PAGE>
goodwill was approximately $125,000. At September 30, 1997, the net assets
acquired have been reported in the Company's consolidated financial
statements. As of October 1, 1997, the operating results of R.D. Nickel have
been consolidated with the Company's operating results.
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 on
September 30, 1997.
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, and INSIGHT 2000 Tool Kit, a
software product that addresses the year 2000 problem. 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.
The Company markets and sells its software products and services, as well as
third-party products, through direct and indirect channels in its Territory.
In North America, a direct sales and support structure is utilized through the
Company's wholly 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 generated the majority of its revenues from sales
within the United States. Royalty revenues from international distributors
represented 14%, 17% and 15% of the Company's total revenues in 1995, 1996 and
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 offers its products and professional services to certain
customers under ELAs. ELAs are typically long-term contracts of three to five
years which include 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. Revenue from professional services
and maintenance support are recognized as provided. As of December 31, 1997,
123 of the Company's customers had entered into ELAs with the Company.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 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 $181.2 million and
$156.8 million in 1997 and 1996, respectively, representing an increase of
16%.
22
<PAGE>
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 $64.1 million and
$52.2 million in 1997 and 1996, respectively, representing an increase of 23%.
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. In 1997, the Company
entered into 47 ELAs, compared to 30 ELAs in 1996. The increase in revenue was
also impacted by the acquisition of R.D. Nickel which added $1.9 million of
software license fees since the acquisition in September 1997.
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 $72.7 million and $69.7 million in 1997 and 1996, respectively,
representing an increase of 4%. This increase was primarily attributable to
the effect of price increases, combined with an increase in the maintenance
base from the sale of new software licenses and inclusion of the maintenance
fees recorded by Software AG (Canada) of $1.7 million since the R.D. Nickel
acquisition in September 1997.
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 $44.4 million and $35.0 million in 1997 and 1996, respectively,
representing an increase of 27%. This increase was primarily attributable to
the Company's year 2000 program, which began in 1997 and contributed $6.6
million of professional services fees in 1997.
COST OF REVENUES
Software License. Software license costs consist primarily of royalties paid
to third parties. Software license costs were $19.9 million and $14.1 million
in 1997 and 1996, respectively, representing 31% and 27% 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 $28.8 million and $25.9 million in 1997 and
1996, respectively, representing 40% and 37% of maintenance fees for each
respective period. This increase was primarily attributable to the hiring of
additional staff to support new enterprise enablement products.
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 $37.6 million and $33.0
million in 1997 and 1996, respectively, representing 85% and 94% 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
23
<PAGE>
costs were $1.1 million and $1.4 million in 1997 and 1996, respectively,
representing 2% and 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. This decrease was partially off set by the product
development costs recorded by Software AG (Canada) of $138,000 since the
acquisition of R.D. Nickel. 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, marketing programs, public
relations, trade shows, seminars, advertising and related communications and
associated overhead costs. Sales and marketing expenses were $38.3 million and
$48.7 million in 1997 and 1996, respectively, representing 21% and 31% 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
overall decrease in the sales and marketing expenses was slightly offset by
the sales and marketing expenses recorded by Software AG (Canada) of $343,000
since the acquisition of R.D. Nickel.
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, accounting and legal expenses.
Administrative and general expenses were $35.8 million and $28.5 million in
1997 and 1996, respectively, representing 20% and 18% of total revenues for
each respective period. The increased dollar amount was primarily attributable
to increases in personnel related expenses and infrastructure required to
support an independent company and the inclusion of Software AG (Canada)
administrative and general expenses of $672,000 since the acquisition of R.D.
Nickel.
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 Notes to 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 $2.0 million
and $5.2 million in 1997 and 1996, respectively. This decrease was primarily
attributable to the interest income recorded on $30.0 million in loans made to
SAG combined with income received for the sale of the rights to one of the
Company's products in 1996. The loans to SAG were offset against payables due
SAG in March 1997 prior to the Recapitalization.
Income Tax Provision. The income tax provision was $9.0 million and $4.3
million in 1997 and 1996, respectively, resulting in effective tax rates of
41.5% (exclusive of the write-off of acquired in-process research and
development costs), and 40.9%, respectively. This increase in rate was
primarily attributable to the non-deductible expenses incurred as a result of
the Recapitalization.
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 3%.
Software License Fees. Software license fees were $52.2 million in 1996 and
$52.1 million in 1995, or 33% and 34% of total revenues for each respective
period.
24
<PAGE>
Maintenance Fees. Maintenance fees were $69.7 million in 1996 and $65.3
million in 1995, representing an increase of 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% and 23% 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% and 29% 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% and 36% 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% and 93% 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 3% and 2% 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% and 34% 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% and 16% 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 increase 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.
Income Tax Provision. The 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.
SELECTED UNAUDITED QUARTERLY INFORMATION
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
25
<PAGE>
audited financial statements, 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 quarters are not necessarily indicative
of results for any future periods.
<TABLE>
<CAPTION>
PREDECESSOR
-----------------------------------------
THREE MONTHS ENDED
-----------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1996 1996 1996 1996
------------ -------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<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) 0.10 0.16
Net income (loss) per share-assum-
ing dilution...................... $ (.01) $ (.02) $ 0.09 $ 0.15
<CAPTION>
PREDECESSOR SUCCESSOR
------------ ----------------------------
THREE MONTHS
ENDED THREE MONTHS ENDED
------------ ----------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1997
------------ -------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenue............................ $34,641 | $42,947 $46,729 $56,907
Gross profit....................... 17,127 | 22,845 23,748 31,264
Net income (loss).................. 1,373 | 2,151 (3,227) 6,414
Net income (loss) per share........ 0.06 | 0.09 (0.13) 0.24
Net income (loss) per share-assum- |
ing dilution...................... $ 0.05 | $ 0.08 $ (0.13) $ 0.23
</TABLE>
Net income (loss) for the quarter ended September 30, 1997 includes the
write-off of acquired in-process research and development costs of $6.1
million which relates to the Company's acquisition of R.D. Nickel. Before
deducting the nonrecurring write-off for this period, net income was $2.8
million, net income per share was $0.12 and net income per share--assuming
dilution was $0.11.
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 offerings that address the year
2000 problem and acquiring R.D. Nickel. The revenue and profit improvements in
1997 from the first quarter to the second, third and fourth 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 although future results are uncertain, they 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.
26
<PAGE>
Although past results may not be indicative of future results, 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, 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.
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. Net cash
provided by operating activities was $13.3 million, $37.5 million and $29.6
million for 1997, 1996 and 1995, respectively.
Investing activities used net cash of $33.2 million, $4.3 million, and $23.8
million during 1997, 1996, and 1995, respectively, primarily to fund capital
expenditures needed to support expansion of the Company's business, to provide
loans to SAG, to purchase the Cooperation Agreement from SAG and the
acquisition of R.D. Nickel.
Financing activities provided net cash of $44.6 million for 1997, primarily
from the proceeds from the sale of Common Stock from the IPO. During 1996 and
1995, financing activities used net cash of $9.0 million and $4.8 million,
respectively, primarily for the repayment of long term obligations and the
payment of dividends.
The Company has no long term debt, and as of December 31, 1997 and 1996, had
$50.4 million and $25.8 million in cash and cash equivalents, respectively.
The Company currently has relationships with two third parties whereby 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 December 31, 1997 and 1996, the Company
remained contingently liable under the recourse provisions associated with
these sales in the amount of $47.9 million and $44.8 million, respectively.
The Company's accounts receivable days sales outstanding at December 31, 1997
was 62.
27
<PAGE>
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 1997 and
1996, respectively. With the acquisition of R.D. Nickel, the Company began
direct sales in Canada effective October 1, 1997. Revenues from this source
were less than 7% of total revenues in the fourth quarter of 1997. The
Company, therefore, has not to date engaged in foreign currency hedging
transactions. The Company may enter into hedging transactions in the future.
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 through the IPO, together with its existing cash balances, funds
generated from operations and funds received from the sale of receivables, if
any, 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. The Company had no material capital commitments
or planned expenditures as of December 31, 1997.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company has no material holdings of market risk sensitive instruments.
SAFE HARBOR PROVISION FOR FORWARD-LOOKING STATEMENTS
The statements contained in this report and in documents incorporating this
report by reference include forward-looking statements subject to the safe
harbor created by the Private Securities Litigation Reform Act of 1995. These
forward-looking statements are based on the Company's current knowledge,
beliefs, expectations and specific assumptions with respect to future business
decisions. Accordingly, the statements are subject to significant risks,
contingencies and uncertainties that could cause actual operating results,
performance or business prospects to differ materially from those expressed
in, or implied by, these statements. These risks, contingencies and
uncertainties include, but are not limited to, significant quarterly and other
fluctuations in revenues and results of operations; reliance on SAG for
development and timely delivery of products; reliance on acquisitions and the
timely development, production, marketing and delivery of new products and
services; increased demand for year 2000 products and services: risks
associated with conducting a professional services business; reliance on the
mainframe computing environment and demand for the Company's products; changes
in the Company's product and service mix and product and service pricing;
interoperability of the Company's products with leading software application
products; risks of protecting intellectual property rights and litigation;
dependence on third-party technology; risks associated with international
sales, distributors and operations; dependence on government contracts;
control of the Company by affiliates; the Company's ability to implement its
acquisition strategy, successfully integrate any acquired products, services
and businesses, adjust to changes in technology, customer preferences,
enhanced competition and new competitors in software and professional services
markets, maintain and enhance its relationships with vendors, and attract and
retain key employees; general economic and business conditions; and other
risks detailed from time to time in the Company's Securities and Exchange
Commission reports, including, but not limited to, the Company's Registration
Statement filed on Form S-1 (File No. 333-36567).
28
<PAGE>
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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 (Successor) as of December 31, 1997, and of
Software AG Systems, Inc. and subsidiaries (a wholly owned subsidiary of
Software AG, a German software company) (Predecessor) as of December 31, 1996,
and the related consolidated statements of operations, stockholders' equity
and cash flows for the periods from April 1, 1997 to December 31, 1997
(Successor periods), and from January 1, 1997 to March 31, 1997 and for each
of the years in the two-year period ended December 31, 1996 (Predecessor
periods). In connection with our audits of the consolidated financial
statements, we have also audited the accompanying financial statement Schedule
II--Valuation and Qualifying Accounts. These consolidated financial statements
and financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and financial statement schedule 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 aforementioned Successor consolidated financial
statements present fairly, in all material respects, the financial position of
Software AG Systems, Inc. and subsidiaries as of December 31, 1997 and the
results of their operations and their cash flows for the Successor period, in
conformity with generally accepted accounting principles. Further, in our
opinion, the aforementioned Predecessor consolidated financial statements
present fairly, in all material respects, the financial position of Software
AG Systems, Inc. and subsidiaries (a wholly owned subsidiary of Software AG, a
German software company) as of December 31, 1996, and the results of their
operations and their cash flows for the Predecessor periods, in conformity
with generally accepted accounting principles. Also in our opinion, the
related financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, effective
April 1, 1997, Software AG Systems, Inc. consummated a Recapitalization under
which a majority of the Company's common stock changed control. The change in
control of the Company's common stock was accounted for as a purchase business
combination. As a result of the Recapitalization, the consolidated financial
information for the periods after the Recapitalization is presented on a
different cost basis than that for the periods before the Recapitalization
and, therefore, is not comparable.
KPMG Peat Marwick LLP
Washington, D.C.
February 6, 1998
29
<PAGE>
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
----------- ---------
DEC. 31, DEC. 31,
1996 1997
----------- ---------
(IN THOUSANDS)
<S> <C> <C>
Assets
Current:
Cash and cash equivalents.............................................................................. $ 25,773 | $ 50,429
Accounts receivable: |
Invoiced and currently due............................................................................ 35,369 | 40,212
Advanced billings on maintenance...................................................................... 14,593 | 10,287
Unbilled services..................................................................................... 6,029 | 10,384
Installment........................................................................................... 15,300 | 24,434
Other................................................................................................. 1,059 | 2,858
Less: allowance for doubtful accounts................................................................. (4,980)| (9,301)
-------- | --------
Total accounts receivable............................................................................ 67,370 | 78,874
Notes receivable, SAG.................................................................................. 30,000 | --
Current portion of deferred income taxes............................................................... 3,412 | 6,217
Prepaid expenses....................................................................................... 3,298 | 1,371
Other current assets................................................................................... 2,686 | 2,663
-------- | --------
Total current assets................................................................................. 132,539 | 139,554
Cooperation agreement, net of accumulated amortization................................................... -- | 21,737
Installment accounts receivable, net of current portion.................................................. 10,955 | 8,932
Property, equipment and leasehold improvements, net of accumulated depreciation and amortization......... 8,923 | 10,077
Goodwill, net of accumulated amortization................................................................ 589 | 11,286
Deferred income taxes.................................................................................... 1,469 | 2,848
Other assets............................................................................................. 3,613 | 1,692
-------- | --------
Total assets......................................................................................... $158,088 | $196,126
======== | ========
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE>
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS-(CONTINUED)
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
----------- ---------
DEC. 31, DEC. 31,
1996 1997
----------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Liabilities and Stockholders' Equity
Current:
Accounts payable....................................... $ 6,773 | $ 8,545
Accrued payroll and employee benefits.................. 10,792 | 10,170
Payable to SAG......................................... 33,317 | 10,050
Income taxes payable................................... 3,106 | 1,752
Other current liabilities.............................. 5,265 | 4,274
Current portion of deferred revenues, net of deferred |
royalties of $7,923,000 in 1996 and $11,245,000 in |
1997.................................................. 42,865 | 42,711
-------- | --------
Total current liabilities............................ 102,118 | 77,502
Deferred revenues, net of deferred royalties of |
$7,415,000 in 1996 and $8,880,000 in 1997............... 23,472 | 28,806
Deferred gain............................................ 2,690 | --
-------- | --------
Total liabilities.................................... 128,280 | 106,308
Commitments and contingencies |
Stockholders' equity: |
Common stock ($.01par value; 55,000,000 shares autho- |
rized, 27,500,000 shares issued and outstanding in |
1996; and 75,000,000 shares authorized, 32,677,500 |
shares issued in 1997)................................ 275 | 327
Additional paid-in capital............................. 11,877 | 84,185
Retained earnings...................................... 17,656 | 5,338
Treasury stock, at cost-no shares in 1996 and 3,162,500 |
shares in 1997........................................ -- | (32)
-------- | --------
Total stockholders' equity........................... 29,808 | 89,818
-------- | --------
Total liabilities and stockholders' equity........... $158,088 | $196,126
======== | ========
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE>
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
------------------------------ -----------
YEAR YEAR THREE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
DEC. 31, DEC. 31, MAR. 31, DEC. 31,
1995 1996 1997 1997
-------- -------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DOLLAR
AMOUNTS)
<S> <C> <C> <C> <C>
Revenues:
Software license fees............ $52,061 $52,163 $7,341 | $56,796
Maintenance fees................. 65,307 69,702 17,352 | 55,337
Professional services fees....... 35,194 34,975 9,948 | 34,450
------- ------- ------ | -------
Total revenues................. 152,562 156,840 34,641 | 146,583
------- ------- ------ | -------
Cost of revenues: |
Software license................. 15,244 14,120 2,098 | 17,811
Maintenance...................... 23,488 25,885 6,205 | 22,559
Professional services............ 32,591 32,966 9,211 | 28,356
------- ------- ------ | -------
Total cost of revenues......... 71,323 72,971 17,514 | 68,726
------- ------- ------ | -------
Gross profit....................... 81,239 83,869 17,127 | 77,857
------- ------- ------ | -------
Operating expenses: |
Software product Development..... 900 1,372 -- | 1,093
Sales and marketing.............. 52,512 48,677 7,317 | 31,003
Administrative and general....... 24,639 28,539 8,500 | 27,258
Write-off of acquired in-process |
R&D costs....................... -- -- -- | 6,051
------- ------- ------ | -------
Total operating expenses....... 78,051 78,588 15,817 | 65,405
------- ------- ------ | -------
Income from operations............. 3,188 5,281 1,310 | 12,452
Other income and expense, net.... 2,449 5,230 978 | 1,017
------- ------- ------ | -------
Income before income taxes......... 5,637 10,511 2,288 | 13,469
Income tax provision............. 2,311 4,302 915 | 8,131
------- ------- ------ | -------
Net income......................... $ 3,326 $ 6,209 $1,373 | $ 5,338
======= ======= ====== | =======
Dividends.......................... $ 1,700 $ 9,000 $ -- | $ --
======= ======= ====== | =======
Net income per common share........ $ 0.12 $ 0.23 $ 0.06 | $ 0.21
======= ======= ====== | =======
Net income per common share-assum- |
ing dilution...................... $ 0.11 $ 0.21 $ 0.05 | $ 0.20
======= ======= ====== | =======
Shares used in computing net income |
per common share: |
Net income per common share...... 27,500 27,500 24,338 | 25,119
Net income per common share-as- |
suming dilution................. 29,056 29,056 25,894 | 26,685
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE>
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
$0.01 PAR VALUE
----------------
ADDITIONAL TOTAL
PAID-IN- RETAINED TREASURY STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS STOCK EQUITY
-------- ------- ---------- -------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Predecessor:
Balances 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)
-------- ------ ------- ------- ------ -------
Balances 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)
-------- ------ ------- ------- ------ -------
Balances at December
31, 1996............. 27,500 275 11,877 17,656 -- 29,808
Net Income............ -- -- -- 1,373 -- 1,373
-------- ------ ------- ------- ------ -------
Balances at March 31,
1997................. 27,500 $ 275 $11,877 $19,029 $ -- $31,181
======== ====== ======= ======= ====== =======
- -------------------------------------------------------------------------------------
Successor:
Initial capitaliza-
tion................. 27,500 $ 275 $37,108 $ -- $ (32) $37,351
Compensation expense
on options granted. -- -- 323 -- -- 323
Net proceeds from Ini-
tial Public Of-
fering............... 5,178 52 46,754 -- -- 46,806
Net income............ -- -- -- 5,338 -- 5,338
-------- ------ ------- ------- ------ -------
Balances at December
31, 1997............. 32,678 $ 327 $84,185 $ 5,338 $ (32) $89,818
======== ====== ======= ======= ====== =======
</TABLE>
See accompanying notes to consolidated financial statements.
33
<PAGE>
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
----------------------------------------- ------------
YEAR YEAR THREE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
DEC. 31, 1995 DEC. 31, 1996 MAR. 31, 1997 DEC.31, 1997
------------- ------------- ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash flows from operat-
ing activities:
Net income............ $ 3,326 $ 6,209 $ 1,373 | $ 5,338
Adjustments to |
reconcile net income |
to net cash provided |
by operating |
activities: |
Depreciation and am- |
ortization......... 3,921 3,660 941 | 6,205
Loss (gain) on sales |
of property and |
equipment.......... 67 156 -- | (5)
Deferred income tax- |
es................. (408) (1,242) -- | (4,184)
Deferred gain....... -- (140) (36) | --
Net proceeds from |
sales of accounts |
receivable......... 28,852 28,448 -- | 24,314
Write-off of ac- |
quired in-process |
R&D costs.......... -- -- -- | 6,051
Write-off of short- |
term investment.... -- -- -- | 1,529
Compensation ex- |
penses on options |
granted............ -- -- -- | 323
Change in: |
Accounts receiv- |
able, excluding |
net proceeds from |
sales............ (47,331) (28,674) 10,996 | (43,074)
Prepaid expenses.. 348 (1,698) (3,894) | 4,313
Other current as- |
sets............. 225 (1,870) 3,083 | (2,988)
Accounts payable.. (817) 3,472 673 | 779
Accrued payroll |
and employee ben- |
efits............ 3,181 (2,194) (3,632) | 2,059
Payable to SAG.... 8,495 16,185 6,265 | (1,336)
Other current lia- |
bilities......... 646 1,571 (927) | (558)
Income taxes pay- |
able............. 1,678 1,285 (1,711) | (399)
Deferred revenues, |
net.............. 27,435 12,285 (2,705) | 4,476
------- ------- ------- | -------
Net cash |
provided by |
operating |
activities..... 29,618 37,453 10,426 | 2,843
------- ------- ------- | -------
Cash flows from invest- |
ing activities: |
Additions to property, |
equipment and |
leasehold |
improvements......... (1,839) (3,740) (208) | (4,084)
Proceeds from sales of |
property and equip- |
ment................. 200 9,044 -- | 2
Notes receivable, SAG. (20,000) (10,000) -- | --
Purchase of Coopera- |
tion Agreement....... -- -- -- | (22,612)
Change in other as- |
sets, net............ (2,137) 443 -- | --
Acquisition, net of |
cash received........ -- -- -- | (6,325)
------- ------- ------- | -------
Net cash used in |
investing ac- |
tivities....... (23,776) (4,253) (208) | (33,019)
------- ------- ------- | -------
Cash flows from financ- |
ing activities: |
Payment of long-term |
obligations.......... (3,124) -- -- | --
Dividends paid........ (1,700) (9,000) -- | --
Net proceeds from is- |
suance of common |
stock................ -- -- -- | 46,806
Repurchase of common |
stock................ -- -- -- | (33,919)
Issuance of common |
stock................ -- -- -- | 31,727
------- ------- ------- | -------
Net cash |
provided by |
(used in) |
financing |
activities..... (4,824) (9,000) -- | 44,614
------- ------- ------- | -------
Net increase in cash and |
cash equivalents....... 1,018 24,200 10,218 | 14,438
Cash and cash equiva- |
lents, beginning....... 555 1,573 25,773 | 35,991
------- ------- ------- | -------
Cash and cash equiva- |
lents, ending.......... $ 1,573 $25,773 $35,991 | $50,429
======= ======= ======= | =======
Non-cash investing and |
financing activity: |
Deferred gain on sale |
leaseback of customer |
support facility..... $ -- $ 2,830 $ -- | $ --
======= ======= ======= | =======
Supplemental disclo- |
sures: |
Interest paid......... $ 350 $ 103 $ -- | $ 14
======= ======= ======= | =======
Income taxes paid, net |
of refunds............ $ 387 $ 3,481 $ 3,026 | $ 7,661
======= ======= ======= | =======
</TABLE>
See accompanying notes to consolidated financial statements.
34
<PAGE>
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reporting Entity and Principles of Consolidation
Prior to March 31, 1997, Software AG Systems, Inc. and subsidiaries (the
"Company") was a wholly owned subsidiary of Software AG, a German software
company ("SAG"). As is more fully described in Note 2, on March 31, 1997, the
Company consummated a recapitalization agreement under which the Company
repurchased from SAG 24,750,000 shares of common stock, and certain 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").
The consolidated financial statements include the accounts of Software AG
Systems, Inc. and its wholly owned subsidiaries. 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, scalability 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.
35
<PAGE>
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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.
Intangible Assets
Goodwill, which represents the excess of purchase price over fair market
value of net assets acquired, and other intangible assets, are amortized on a
straight-line basis over the expected periods to be benefited, generally 10
years. The Company assesses the recoverability of intangible assets by
determining whether the amortization of the assets over the remaining lives
can be recovered through undiscounted future operating cash flows. The amount
of impairment, if any, is measured based on projected discounted future
operating cash flows. The assessment of the recoverability of intangible
assets will be impacted if estimated future operating cash flows are not
achieved.
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.
Foreign Currency Translation
The local currencies of the Company's foreign subsidiaries are the
functional currencies. The assets and liabilities of foreign subsidiaries are
translated into U.S. dollars at current exchange rates, and the resulting
translation gains and losses are included as an adjustment to stockholders'
equity. Revenue and expense accounts of these operations are translated at
average exchange rates prevailing during the year. Transaction gains and
losses relate to foreign currency denominated receivables recorded in the
financial statements of the Company's US operations, and are reflected in
income. There were no material foreign currency adjustments.
Net Income per Common Share
The Company reports earnings per share under Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128"). In
accordance with SFAS No. 128 requirements, the Company presents basic and
diluted earnings per share and has amended all previous earnings per share
calculations. Basic earnings per share is based on income available to common
shareholders divided by the weighted average number of common shares
outstanding. Diluted earnings per share is based on income available to common
shareholders divided by the
36
<PAGE>
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
sum of the weighted average number of common shares outstanding and all
potential common shares which are dilutive. The following information is a
reconciliation of the amounts used in these calculations:
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
----------------------------------------- -------------
YEAR YEAR THREE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
DEC. 31, 1995 DEC. 31, 1996 MAR. 31, 1997 DEC. 31, 1997
------------- ------------- ------------- -------------
(IN THOUSANDS, EXCEPT FOR PER SHARE DOLLAR AMOUNTS)
<S> <C> <C> <C> <C>
Numerator:
Net income............ $3,326 $6,209 $1,373 | $5,338
====== ====== ====== | ======
Denominator: |
Basic: |
Weighted average |
shares outstanding... 27,500 27,500 24,338 | 25,119
Effect of dilutive secu- |
rities: |
Stock options......... 1,556 1,556 1,556 | 1,566
------ ------ ------ | ------
Diluted: |
Weighted average |
shares outstanding -- |
assuming dilution.... 29,056 29,056 25,894 | 26,685
====== ====== ====== | ======
EPS: |
Net income per common |
share................ $ 0.12 $ 0.23 $ 0.06 | $ 0.21
Net income per common |
share--assuming dilu- |
tion................. 0.11 0.21 0.05 | 0.20
</TABLE>
Stock Option Plan
The Company accounts for issuance of stock options in accordance with
Statement of Financial Accounting Standards No. 123 Accounting for Stock-Based
Compensation ("SFAS No. 123"). SFAS No. 123 permits entities to recognize as
expense over the vesting period the fair value of all stock-based awards on
the date of grant. Alternatively, SFAS No. 123 also allows entities to
continue to apply the provisions of APB Opinion No. 25 and provide pro forma
net income and pro forma earnings per share disclosures for employee stock
option grants made in 1997 and future years as if the fair-value based method
defined in SFAS No. 123 had been applied. Under APB Opinion No. 25,
compensation expense would be recorded on the date of the grant only if the
current market price of the underlying stock exceeded the exercise price. The
Company has elected to continue to apply the provisions of APB Opinion No. 25
and provide the pro forma disclosure provisions of SFAS No. 123.
Financial Statement Presentation
The historical financial information set forth in these consolidated
financial statements for the periods ended, or as of the dates prior to March
31 1997 reflect the results of operations 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 reflects the consolidated financial position and results of
operations subsequent to the Recapitalization and is captioned as "Successor".
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
37
<PAGE>
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications
Certain amounts in 1996 and 1995 have been reclassified to conform to the
fiscal 1997 presentation.
(2) RECAPITALIZATION OF THE COMPANY
On March 31, 1997, the Company consummated the Recapitalization under which
the Company repurchased from its former parent, 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 senior 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, the Company entered into
a perpetual (unless otherwise terminated by the written agreement of the
parties) cooperation agreement ("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 is 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, Thayer and certain of the Company's senior
managers acquired approximately an 89% interest in the Company for
approximately $31,500,000. The determination of fair value allocated to the
identifiable assets and liabilities of the Company has been made by management
based on the nature of the assets and liabilities acquired, and general
economic factors. Based on this allocation, the fair value of the Company's
Cooperation Agreement has been recorded at $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 allocation of the purchase price to the net assets and
liabilities, an excess of purchase price over net assets acquired (goodwill)
of $6,402,000 was recorded. Such goodwill is being amortized on a straight-
line basis over ten years. At December 31, 1997, accumulated amortization on
the Cooperation Agreement and the goodwill was $1,763,000 and $480,000,
respectively.
(3) INITIAL PUBLIC OFFERING
In September 1997, the Company's Board of Directors authorized the Company
to file a Registration Statement on Form S-1 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
which became effective on November 17, 1997. Common share and per share data
in these consolidated financial statements have been retroactively adjusted to
reflect such stock split. Additionally, the Company's Certificate of
Incorporation was amended and restated to authorize an additional 20,000,000
shares of $0.01 par value common stock and an additional 11,250,000 shares of
$0.01 par value preferred stock, for a total of 75,000,000 authorized shares
of common stock and 25,000,000 authorized shares of $0.01 par value preferred
stock. The Company had previously authorized 13,750,000 shares of $0.01 par
value preferred stock on March 14, 1997.
38
<PAGE>
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On November 21, 1997, 7,700,000 shares of the Company's common stock was
sold to the public at $10 per share, of which 3,100,000 shares were sold by
certain shareholders of the Company, and 4,600,000 shares were sold by the
Company ("IPO"). On December 17, 1997, the Company and certain shareholders
combined sold 1,155,000 shares of common stock at $10 per share to cover the
over-allotment option exercised by the underwriters. The aggregate proceeds,
net of underwriting discounts and commissions, to the Company and certain
shareholders from these transactions were $48,151,000 and $34,201,000,
respectively.
(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.
("R.D. Nickel"). R.D. 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. 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). The note payable was paid in November 1997 with
the proceeds from the IPO.
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 $4,960,000 represents goodwill.
The related amortization period for the goodwill is ten years.
As of October 1, 1997, the operating results of R.D. Nickel have been
consolidated with the Company's operating results.
The R.D. Nickel acquisition was not determined to be significant to the
operations or financial position of the Company; accordingly, the pro forma
financial information has not been presented.
(5) 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, cash and cash equivalents. 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, 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.
The carrying amount of installment accounts receivable, net of related
deferred revenues approximates the fair value.
39
<PAGE>
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(6) ACCOUNTS RECEIVABLE
Total current and non-current accounts receivable (including installment)
consist of the following:
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
----------- ---------
DEC. 31, DEC. 31,
1996 1997
----------- ---------
(IN THOUSANDS)
<S> <C> <C>
Domestic............................................... $73,924 $83,659
International.......................................... 9,381 13,448
Less: allowance for doubtful accounts.................. (4,980) (9,301)
------- -------
$78,325 $87,806
======= =======
</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.
Installment accounts receivable include:
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
----------- ---------
DEC. 31, DEC. 31,
1996 1997
----------- ---------
(IN THOUSANDS)
<S> <C> <C>
Gross installment accounts receivable.................. $27,258 $35,172
Less: unearned interest................................ 1,003 1,806
------- -------
26,255 33,366
Less: current portion.................................. 15,300 24,434
------- -------
$10,955 $ 8,932
======= =======
</TABLE>
The effective interest rate on the installment accounts receivable, net of
related deferred revenues, at December 31, 1996 and 1997 was approximately 9%.
At December 31, 1997, installment accounts receivable are scheduled to be
invoiced as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31, AMOUNT
------------------------- --------------
(IN THOUSANDS)
<S> <C>
1998........................................................ $25,894
1999........................................................ 6,535
2000........................................................ 1,558
2001........................................................ 1,185
-------
$35,172
=======
</TABLE>
In 1996 and 1997, 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 $28,448,000 and
$24,314,000, 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%.
40
<PAGE>
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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, 1996 and 1997, the Company remained contingently liable under the
recourse provisions for $44,801,000 and $47,927,000, 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.
Unbilled services include:
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
----------- ---------
DEC. 31, DEC. 31,
1996 1997
----------- ---------
(IN THOUSANDS)
<S> <C> <C>
Unbilled work in process.................................. $6,775 $ 9,524
Retainage................................................. 1,474 1,761
------ -------
......................................................... 8,249 11,285
Less: advance billings and prepayments.................... 2,220 901
------ -------
$6,029 $10,384
====== =======
</TABLE>
(7) PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
----------- ---------
DEC. 31, DEC. 31,
1996 1997
----------- ---------
(IN THOUSANDS)
<S> <C> <C>
Computer equipment........................................ $18,138 $22,524
Leasehold improvements.................................... 9,021 9,188
Furniture and other equipment............................. 7,713 8,162
------- -------
34,872 39,874
Less: accumulated depreciation and amortization........... 25,949 29,797
------- -------
$ 8,923 $10,077
======= =======
</TABLE>
Depreciation and amortization for 1995, 1996, three months ended March 31,
1997 and nine months ended December 31, 1997, was $3,733,000, $3,473,000,
$896,000 and $2,952,000, respectively.
41
<PAGE>
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(8) 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 was being recognized on a straight-line basis over the term
of the related operating lease. In connection with the Recapitalization of the
Company (Note 2) in March 1997, no value was recorded in the financial
statements for this deferred gain.
(9) 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 1995, 1996 and
for the three months ended March 31, 1997, royalty expense related to SAG's
products was $23,887,000, $26,058,000, and $5,683,000, respectively.
Under the license agreement, SAG pays royalties to the Company on sales of
the Company's products under the same terms. For 1995, 1996 and for the three
months ended March 31, 1997, royalty revenues related to the Company's
products were $295,000, $294,000 and $339,000, respectively.
In connection with the Recapitalization (Note 2), the Company entered into
the Cooperation Agreement under which the Company paid $23,595,000 of
royalties to SAG and SAG paid royalties of $300,000 to the Company for the
nine months ended December 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 1995, 1996, for the three months ended March
31, 1997 and for the nine months ended December 31, 1997 were $8,767,000,
$15,931,000, $3,416,000 and $7,406,000, respectively.
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, was payable quarterly on the 1995 and
1996 loans. 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. Interest earned for 1995, 1996 and for the three months ended
March 31, 1997 was $280,000, $1,590,000 and $333,000, respectively.
The payable to SAG of $33,317,000 and $10,050,000 at December 31, 1996 and
1997, respectively, includes royalties due under the previous license
agreement and under the Cooperation 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 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%.
42
<PAGE>
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Dividends
In 1995 and 1996 the Company paid dividends of $1,700,000 and $9,000,000,
respectively, to SAG, which at the time owned 100% of the outstanding common
stock of the Company. No dividends were paid during 1997 to SAG and there are
no plans for future dividend payments.
(10) INCOME TAXES
Income tax expense consisted of:
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
-------------------------- ---------
THREE NINE
YEAR YEAR MONTHS MONTHS
ENDED ENDED ENDED ENDED
DEC. 31, DEC. 31, MAR. 31, DEC. 31,
1995 1996 1997 1997
-------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Current expense:
Federal............................................................................... $1,744 $4,167 $1,196 | $6,226
State................................................................................. 274 586 258 | 1,551
Foreign............................................................................... 701 791 604 | 3,395
------ ------ ------ | ------
2,719 5,544 2,058 | 11,172
------ ------ ------ | ------
Deferred expense (benefit) |
Federal............................................................................... (265) (1,136) (959)| (2,560)
State................................................................................. (143) (106) (184)| (481)
------ ------ ------ | ------
(408) (1,242) (1,143)| (3,041)
------ ------ ------ | ------
$2,311 $4,302 $ 915 | $8,131
====== ====== ====== | ======
</TABLE>
Income tax expense for 1995, 1996, three months ended March 31, 1997 and
nine months ended December 31, 1997, differed from the amounts computed by
applying the U.S. federal income tax rate of 34%, 34%, 35% and 35%,
respectively, to pretax income as a result of the following:
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
-------------------------- ---------
THREE NINE
YEAR YEAR MONTHS MONTHS
ENDED ENDED ENDED ENDED
DEC. 31, DEC. 31, MAR. 31, DEC. 31,
1995 1996 1997 1997
-------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Computed "expected" tax expense......................................................... $1,917 $3,573 $801 | $4,714
Increase (reduction) in income taxes resulting from: |
State income taxes, net of federal benefit............................................ 86 314 48 | 696
Expenses, principally meals and entertainment, not deductible......................... 277 224 6 | 209
Amortization and write-off of intangibles............................................. -- -- 49 | 2,439
Other, net............................................................................ 31 191 11 | 73
------ ------ ---- | ------
$2,311 $4,302 $915 | $8,131
====== ====== ==== | ======
</TABLE>
43
<PAGE>
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of deferred income tax assets and liabilities consist of:
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
----------- ---------
DEC. 31, DEC. 31,
1996 1997
----------- ---------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets arising from deductible temporary
differences:
Accrued compensation costs and other expenses......... $1,533 $2,679
Allowance for doubtful accounts....................... 1,879 3,617
Depreciation and amortization......................... 917 1,473
Deferred gain--installment method..................... 1,022 1,000
Investments........................................... -- 642
------ ------
5,351 9,411
Deferred tax liabilities arising from taxable temporary
differences:
Leases of product licenses............................ 470 346
------ ------
Net deferred income taxes............................... 4,881 9,065
Less: current portion, deferred tax assets.............. 3,412 6,217
------ ------
Non-current portion, deferred tax assets................ $1,469 $2,848
====== ======
</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.
(11) 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 1995, 1996,
three months ended March 31, 1997 and nine months ended December 31, 1997, the
Company's matching (and total) contributions were $1,789,000, $1,854,000,
$696,000 and $1,190,000, respectively.
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 $1,504,000 and $1,068,000 at
December 31, 1996 and 1997, respectively, net of loans of $558,000 and
$1,164,000, respectively. The expense for these agreements was $653,000,
$1,218,000, $150,000 and $160,000 for 1995, 1996, three months ended March 31,
1997 and nine months ended December 31, 1997, 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 $668,000 and $764,000 at
December 31, 1996 and 1997, respectively.
(12) STOCK OPTION PLAN
The Company adopted the Software AG Systems, Inc. 1997 Stock Option Plan
(the "Stock Option Plan") on April 29, 1997. The Stock Option Plan permits a
maximum of 6,875,000 shares of common stock to be issued
44
<PAGE>
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
Pursuant to the Stock Option Plan, the exercise price per share shall not be
less than the fair market value of each share at the date of grant. All
options issued generally have vesting periods of zero to four years from the
grant date and expire after the seventh anniversary from the date of grant. At
December 31, 1997, 1,831,775 shares were available for grant under the Stock
Option Plan.
Following is a summary of activity under the Stock Option Plan for the year
ended December 31, 1997:
<TABLE>
<CAPTION>
PRICE PER SHARE
----------------------
WEIGHTED
SHARES RANGE AVERAGE
--------- ------------- --------
<S> <C> <C> <C>
Granted........................................ 5,069,900 $1.47 - 12.00 $4.66
Exercised...................................... -- -- --
Terminated/Forfeited........................... 26,675 1.47 - 9.60 2.90
--------- ------------- -----
Balance, December 31, 1997..................... 5,043,225 $1.47 - 12.00 $5.02
========= ============= =====
</TABLE>
The following table summarizes information about the Stock Option Plan at
December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- ------------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE SHARES EXERCISE
OUTSTANDING LIFE (YRS) PRICE EXERCISABLE PRICE
----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
3,142,975 6.26 $1.47 1,100 $1.47
744,975 6.61 9.60 592,625 9.60
152,900 6.85 10.00 -- --
1,002,375 6.73 12.00 -- --
--------- ---- ----- ------- -----
5,043,225 6.42 $5.02 593,725 $9.58
========= ==== ===== ======= =====
</TABLE>
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123") was issued. SFAS
No. 123 is effective for fiscal years beginning after December 15, 1995. SFAS
No. 123 encourages companies to adopt the fair value method for compensation
expenses recognition related to employee stock options. Existing accounting
requirements of Accounting Principles Board Opinion No. 25 ("APB No. 25") use
the intrinsic value method in determining compensation expense which
represents the excess of the market price of the stock over the exercise price
on the measurement date. The Company has elected to remain under APB No. 25
rules for stock options, under which no compensation cost has been recognized,
and is required to provide pro forma disclosure of the net income and earnings
per share that would have been had the Company adopted the new fair value
method for recognition purposes. The following information is presented as if
the Company had adopted SFAS No. 123 and restated its results for the nine
months ended December 31, 1997:
<TABLE>
<S> <C>
Net income--as reported................................................. $5,338
Net income--pro forma................................................... $4,741
Earnings per share--as reported......................................... $ 0.21
Earnings per share (assuming dilution)--as reported..................... $ 0.20
Earnings per share--pro forma........................................... $ 0.19
Earnings per share (assuming dilution)--pro forma....................... $ 0.18
</TABLE>
45
<PAGE>
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
For the above information, the fair value of each option grant was estimated
on the date of grant using the Black-Scholes option pricing model with the
following assumptions used for grants in 1997: dividend yield of zero
percent: risk-free interest rate of 6%; expected volatility of 40%; expected
lives ranging from two to six years; and a forfeitures rate of 2.9%. The
weighted average fair value of options granted during the nine months ended
December 31, 1997 was $1.97 per option.
The full impact of calculating cost for stock options under SFAS No. 123 is
not reflected in the pro forma net income amounts presented above because
compensation cost is reflected over the options vesting period of four years.
(13) 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 $5,116,000 expected to be received from subleasing of a portion of the
customer support facility and another facility, at December 31, 1997, are:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31, FACILITIES EQUIPMENT TOTAL
- ------------------------- ---------- --------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
1998............................................. $ 4,901 $2,002 $ 6,903
1999............................................. 5,596 1,592 7,188
2000............................................. 5,585 527 6,112
2001............................................. 5,311 41 5,352
2002............................................. 4,776 11 4,787
Thereafter....................................... 23,111 -- 23,111
------- ------ -------
$49,280 $4,173 $53,453
======= ====== =======
</TABLE>
Facility rent expense for 1995, 1996, three months ended March 31, 1997 and
nine months ended December 31, 1997, was $6,105,000, $7,002,000 $1,722,000 and
$5,179,000, 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 1995, 1996, three months ended March 31, 1997
and nine months ended December 31, 1997, was $l,532,000, $1,678,000 $339,000
and $1,018,000, 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.
46
<PAGE>
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(14) GEOGRAPHIC INFORMATION
Net revenue, operating income, and identifiable assets by geographic area
were as follows:
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
------------------------------ -----------
YEAR YEAR THREE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
DEC. 31, DEC. 31, MAR. 31, DEC. 31,
1995 1996 1997 1997
-------- -------- ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenue
U.S. operations................................................................. $130,997 $129,879 $ 30,424 $116,378
Canadian operations............................................................. -- -- -- 3,861
Mexican operations.............................................................. -- -- -- 4,507
Other operations................................................................ 21,565 26,961 4,217 23,329
Intercompany elimination........................................................ -- -- -- (1,492)
-------- -------- -------- --------
Total revenue................................................................. $152,562 $156,840 $ 34,641 $146,583
======== ======== ======== ========
Income (loss) from operations
U.S. operations................................................................. $ 3,188 $ 5,281 $ 1,310 18,732
Canadian operations............................................................. -- -- -- (5,129)
Mexican operations.............................................................. -- -- -- (1,151)
Other operations................................................................ -- -- -- --
-------- -------- -------- --------
Total operating income........................................................ $ 3,188 $ 5,281 $ 1,310 $ 12,452
======== ======== ======== ========
Identifiable assets
U.S. operations................................................................. $125,612 $158,088 $127,749 $187,892
Canadian operations............................................................. -- -- -- 9,143
Mexican operations.............................................................. -- -- -- 1,538
Other operations................................................................ -- -- -- --
Intercompany elimination........................................................ -- -- -- (2,447)
-------- -------- -------- --------
Total identifiable assets..................................................... $125,612 $158,088 $127,749 $196,126
======== ======== ======== ========
</TABLE>
Canadian operations include one subsidiary, R.D. Nickel, which was acquired
in September 1997. Mexican operations include one subsidiary located in
Mexico. The Company's Mexican operations commenced in 1996 and operated as a
branch office until it became a wholly owned subsidiary in May 1997. Other
operations include royalty revenue from international distributors.
Royalty revenues from international distributors are as follows:
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
-------------------------- ---------
THREE NINE
YEAR YEAR MONTHS MONTHS
ENDED ENDED ENDED ENDED
DEC. 31, DEC. 31, MAR. 31, DEC. 31,
1995 1996 1997 1997
-------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Japan................................................................................... $ 8,607 $ 9,207 $ 971 $10,481
Brazil.................................................................................. 5,931 7,000 1,500 7,500
Canada.................................................................................. 3,981 4,640 805 2,026
Other................................................................................... 3,046 6,114 941 3,322
------- ------- ------ -------
Total royalty revenues from international distributors.................................. $21,565 $26,961 $4,217 $23,329
======= ======= ====== =======
</TABLE>
47
<PAGE>
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Royalty revenues from international distributors included in software
license fees and maintenance fees on the consolidated statements of operations
were approximately $13,316,000 and $8,249,000, respectively, in 1995,
$16,982,000 and $9,979,000, respectively, in 1996, $2,331,000 and $1,886,000,
respectively, for the three months ended March 31, 1997, and $16,105,000 and
$7,224,000, respectively, for the nine months ended December 31, 1997.
Royalties from Canada includes royalties received from R.D. Nickel prior to
the acquisition in September 1997.
Sales and transfers between geographic areas are accounted for at prices
which the Company believes are arm's length, and in accordance with the rules
and regulations of the respective governing tax authorities.
(15) OTHER INCOME AND EXPENSE, NET
Other income and expense, net, on the consolidated statements of operations
primarily includes interest income of $1,406,000 in 1995; interest income of
$2,914,000 and gain on sale of other assets of $1,000,000 in 1996; interest
income of $779,000 for the three months ended March 31, 1997; and interest
income of $728,000 for the nine months ended December 31, 1997.
(16) 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.
(17) NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standard Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 130, "Reporting
Comprehensive Income," which is effective for annual and interim periods
beginning after December 15, 1997. This statement established standards for
the reporting and display of comprehensive income and its components in the
financial statements. Upon its adoption the Company will be required to
reclassify previously reported annual and interim financial statements.
In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"), which is effective for
annual periods ending after December 15, 1997. SFAS No. 131 established
standards for the way public business enterprises are to report information
about operating segments in interim financial reports issued to shareholders.
It also establishes standards for related disclosures about products and
services, geographic areas and major customers.
On October 27, 1997, the AICPA Accounting Standards Executive Committee
issued Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2")
which supersedes statement of Position 91-1, "Software Revenue Recognition".
SOP 97-2 focuses on when and in what amounts revenue should be recognized for
licensing, selling leasing or otherwise marketing computer software, and is
effective for transactions entered into in fiscal years beginning after
December 15, 1997.
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.
48
<PAGE>
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(18) QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized financial data by quarters is as follows:
<TABLE>
<CAPTION>
PREDECESSOR
--------------------------------------------
THREE MONTHS ENDED
--------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1996 1996 1996 1996
--------- --------- ---------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<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) 0.10 0.16
Net income (loss) per
share-assuming dilution......... $ (.01) $ (.02) $ 0.09 $ 0.15
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
------------ ---------------------------
THREE MONTHS
ENDED THREE MONTHS ENDED
------------ ---------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1997
------------ -------- --------- --------
<S> <C> <C> <C> <C>
Revenue............................... $34,641 $42,947 $46,729 $56,907
Gross profit.......................... 17,127 22,845 23,748 31,264
Net income (loss)..................... 1,373 2,151 (3,227) 6,414
Net income (loss) per share........... 0.06 0.09 (0.13) 0.24
Net income (loss) per share-assuming
dilution............................. $ 0.05 $ 0.08 $ (0.13) $ 0.23
</TABLE>
(19) SUBSEQUENT EVENTS
On February 19, 1998, the Company's Board of Directors approved a qualified
employee stock purchase plan ("ESPP") and authorized the issuance of 1,500,000
shares of common stock, for purchase pursuant to the ESPP. The ESPP is to
commence on June 1, 1998. Under the terms of the ESPP, employees may
contribute, through payroll deduction, up to 15% of eligible compensation to
purchase stock with the limitation of $25,000 annually in fair market value of
the shares. Employees may elect to withdraw from the ESPP at any time during
the two six months offering periods which are December to May and June to
November and have their contribution for the period returned to them. Also,
employees may elect to change the rate of contribution only once during the
offering periods. The price at which employees may purchase shares is 85% of
the lower of the fair market value of the stock at the beginning or end of the
six months offering period. The ESPP is qualified under Section 423 of the
Internal Revenue Code of 1986, as amended. ESPP is subject to stockholders
approval which will be voted at the annual Shareholders' meeting to be held on
May 18, 1998.
49
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
The consolidated financial statements and schedule of the Company as of
December 31, 1996 and 1997, and for each of the years in the three-year period
ended December 31, 1997 have been included in this Annual Report on Form 10-K.
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 in this section of the Annual Report on
Form 10-K.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information concerning the directors and executive officers of the Company
is set forth in the Proxy Statement dated April 13, 1998 in connection with
the Company's 1998 Annual Meeting of Shareholders (the "Proxy Statement")
under the heading "Proposal No. 1--Election of Directors", which information
is incorporated herein by reference. Information concerning compliance with
Section 16 of the Securities Exchange Act of 1934, as amended, by persons
subject to such section is set forth in the Proxy Statement under the heading
"Section 16 (a) Beneficial Ownership Reporting Compliance", which information
is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
Information concerning compensation of the Company's named executive
officers and directors is set forth in the Proxy Statement under the heading
"Proposal No. 1--Election of Directors--Executive Compensation", which
information is incorporated herein by reference. Information contained in the
Proxy Statement under the caption "Executive Compensation--Report of the
Compensation Committee of the Board of Directors on Executive Compensation"
and "--Stock Performance Chart" is not incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information concerning security ownership of certain beneficial owners and
management is set forth in the Proxy Statement under the heading "Security
Ownership of Certain Beneficial Owners and Management", which information is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information concerning certain relationships and related transactions is set
forth in the Proxy Statement under the headings "Proposal No. 1--Election of
Directors--Certain Relationships and Transactions", and "--Transactions and
Legal Actions Involving Directors and Management", which information is
incorporated herein by reference.
50
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. The following consolidated financial statements are included in Part II,
Item 8 of this report:
Report of Independent Auditors
Consolidated Balance Sheet--December 31, 1996 and 1997
Consolidated Statements of Operations--For the years ended December 31,
1995, 1996, three months ended March 31, 1997 and nine months ended
December 31, 1997
Consolidated Statements of Stockholders' Equity--For the years ended
December 31, 1995, 1996, three months ended March 31, 1997 and nine
months ended December 31, 1997
Consolidated Statements of Cash Flows--For the years ended December 31,
1995, 1996, three months ended March 31, 1997 and nine months ended
December 31, 1997
Supplementary Financial Information
2. The following financial statement schedule is filed as a part of this
Annual Report:
Financial statement schedule covered by report of Independent Auditors:
Schedule II--Valuation and Qualifying Accounts, as of and for the
three years in the period ended December 31, 1997.
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are
omitted because they are not required under the related instructions
or are not applicable.
3. Exhibits
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*
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), as amended*
51
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
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 Daniel F. Gillis (effective date March 24,
1997)*
10.19 Promissory Note made by Harry K. McCreery (effective date March 24,
1997)*
10.20 Promissory Note made by James H. Daly (effective date March 24, 1997)*
10.21 Promissory Note made by Harry K. McCreery (effective date August 9,
1996)*
10.22 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 Consent of KPMG Peat Marwick LLP***
24 Powers of Attorney***
27 Financial Data Schedule***
</TABLE>
- --------
* Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (File No. 333-36567) and incorporated herein by reference.
** Previously filed as an exhibit to the Company's Registration Statement on
Form S-8 (File No. 333-44687) and incorporated herein by reference.
*** Filed herewith.
52
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
Software AG Systems, Inc.
/s/ Daniel F. Gillis
By: ----------------------------------
DANIEL F. GILLIS DIRECTOR,
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
DATE: MARCH 30, 1998 (PRINCIPAL EXECUTIVE OFFICER)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURES TITLE DATE
/s/ Daniel F. Gillis
By: -------------------------------- Director, President March 30, 1998
DANIEL F. GILLIS andChief Executive
Officer (Principal
Executive Officer)
/s/ Harry K. McCreery Vice President, March 30, 1998
By: -------------------------------- Treasurer and Chief
HARRY K. MCCREERY Financial Officer
(Principal
Financial and
Accounting Officer)
* Chairman of the March 30, 1998
By: ________________________________ Board of Directors
CARL J. RICKERTSEN
* Director March 30, 1998
By: ________________________________
DR. PHILIP S. DAUBER
* Director March 30, 1998
By: ________________________________
DR. ERWIN KOENIGS
* Director March 30, 1998
By: ________________________________
EDWARD E. LUCENTE
* Director March 30, 1998
By: ________________________________
DR. PAUL G. STERN
/s/ Harry K. McCreery
*By:--------------------------------
HARRY K. MCCREERY ATTORNEY-IN-FACT
53
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND DEDUCTIONS AT END
DESCRIPTION OF PERIOD EXPENSES WRITE-OFFS OF PERIOD
----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
PREDECESSOR:
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
1/1/97 - 3/31/97
Allowance for Doubtful
Accounts............... 4,980,304 204,406 (138,274) 5,322,984
- -----------------------------------------------------------------------
SUCCESSOR:
4/1/97 - 12/31/97
Allowance for Doubtful
Accounts............... $5,322,984 $4,964,967 $987,355 $9,300,596
</TABLE>
<PAGE>
EXHIBIT 11
SOFTWARE AG SYSTEMS, INC.
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
---------------------------------------- -------------
THREE MONTHS
ENDED NINE MONTHS
YEAR ENDED YEAR ENDED MAR. 31, ENDED
DEC. 31, 1995 DEC. 31, 1996 1997 DEC. 31, 1997
------------- ------------- ------------ -------------
(IN THOUSANDS, EXCEPT FOR PER SHARE DOLLAR AMOUNTS)
<S> <C> <C> <C> <C>
Weighted average common shares outstanding............................ 27,500 27,500 24,338 | 25,119
Effect of dilutive securities......................................... 1,556 1,556 1,556 | 1,566
------- ------- ------- | -------
Weighted average common shares outstanding-- assuming dilution........ 29,056 29,056 25,894 | 26,685
======= ======= ======= | =======
Calculation of net income per share: |
Net income.......................................................... $ 3,326 $ 6,209 $ 1,373 | $ 5,338
======= ======= ======= | =======
Net income per share................................................ $ 0.12 $ 0.23 $ 0.06 | $ 0.21
======= ======= ======= | =======
Net income per share-assuming dilution.............................. $ 0.11 $ 0.21 $ 0.05 | $ 0.20
======= ======= ======= | =======
</TABLE>
<PAGE>
EXHIBIT 23
ACCOUNTANT'S CONSENT
The Board of Directors
Software AG Systems, Inc.
We consent to incorporation by reference in the registration statement of
Software AG Systems, Inc. on Form S-8 (No. 333-44687) of our report dated
February 6, 1998, with respect to the consolidated balance sheets of Software
AG Systems, Inc. and subsidiaries (Successor) as of December 31, 1997, and of
Software AG Systems, Inc. and subsidiaries (a wholly owned subsidiary of
Software AG, a German software company) (Predecessor) as of December 31, 1996,
and the related consolidated statements of operations, stockholders' equity,
and cash flows, and the related schedule for the periods from April 1, 1997 to
December 31, 1997 (Successor period), and from January 1, 1997 to March 31,
1997 and for each of the years in the two-year period ended December 31, 1996
(Predecessor periods), which report appears in the December 31, 1997, annual
report on Form 10-K of Software AG Systems, Inc.
KPMG Peat Marwick LLP
Washington, D.C.
March 26, 1998
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENCE, that the undersigned director of
Software AG Systems, Inc., a corporation organized under the laws of the State
of Delaware, hereby constitutes and appoints Daniel F. Gillis, Harry K.
McCreery and James H. Daly, and each of them (with full power to each of them
to act alone), his true and lawful attorneys-in-fact and agents for him and on
his behalf and in his name, place and stead, in all cases with full power of
substitution and resubstitution, in any and all capacities, to sign, execute
and affix his seal to and file with the Securities and Exchange Commission (or
any other governmental or regulatory authority) an Annual Report on Form 10-K
or any other appropriate form and all amendments or supplements thereto with
all exhibits and any and all documents required to be filed with respect
thereto, and grants to each of them full power and authority to do and to
perform each and every act and thing requisite and necessary to be done in and
about the premises in order to effectuate the same as fully to all intents and
purposes as he himself might or could do if personally present, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned director has hereunto set his hand and
seal, as of the date specified.
/s/ Dr. Philip S. Dauber
_____________________________________
Signature
Dr. Philip S. Dauber
_____________________________________
Name
Dated: 3/13/98
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENCE, that the undersigned director of
Software AG Systems, Inc., a corporation organized under the laws of the State
of Delaware, hereby constitutes and appoints Daniel F. Gillis, Harry K.
McCreery and James H. Daly, and each of them (with full power to each of them
to act alone), his true and lawful attorneys-in-fact and agents for him and on
his behalf and in his name, place and stead, in all cases with full power of
substitution and resubstitution, in any and all capacities, to sign, execute
and affix his seal to and file with the Securities and Exchange Commission (or
any other governmental or regulatory authority) an Annual Report on Form 10-K
or any other appropriate form and all amendments or supplements thereto with
all exhibits and any and all documents required to be filed with respect
thereto, and grants to each of them full power and authority to do and to
perform each and every act and thing requisite and necessary to be done in and
about the premises in order to effectuate the same as fully to all intents and
purposes as he himself might or could do if personally present, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned director has hereunto set his hand and
seal, as of the date specified.
/s/ Dr. Erwin Koenigs
Signature
Dr. Erwin Koenigs
Name
Dated: March 16, 1998
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENCE, that the undersigned director of
Software AG Systems, Inc., a corporation organized under the laws of the State
of Delaware, hereby constitutes and appoints Daniel F. Gillis, Harry K.
McCreery and James H. Daly, and each of them (with full power to each of them
to act alone), his true and lawful attorneys-in-fact and agents for him and on
his behalf and in his name, place and stead, in all cases with full power of
substitution and resubstitution, in any and all capacities, to sign, execute
and affix his seal to and file with the Securities and Exchange Commission (or
any other governmental or regulatory authority) an Annual Report on Form 10-K
or any other appropriate form and all amendments or supplements thereto with
all exhibits and any and all documents required to be filed with respect
thereto, and grants to each of them full power and authority to do and to
perform each and every act and thing requisite and necessary to be done in and
about the premises in order to effectuate the same as fully to all intents and
purposes as he himself might or could do if personally present, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned director has hereunto set his hand and
seal, as of the date specified.
/s/ Edward E. Lucente
_____________________________________
Signature
Edward E. Lucente
_____________________________________
Name
Dated: 3/12/98
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENCE, that the undersigned director of
Software AG Systems, Inc., a corporation organized under the laws of the State
of Delaware, hereby constitutes and appoints Daniel F. Gillis, Harry K.
McCreery and James H. Daly, and each of them (with full power to each of them
to act alone), his true and lawful attorneys-in-fact and agents for him and on
his behalf and in his name, place and stead, in all cases with full power of
substitution and resubstitution, in any and all capacities, to sign, execute
and affix his seal to and file with the Securities and Exchange Commission (or
any other governmental or regulatory authority) an Annual Report on Form 10-K
or any other appropriate form and all amendments or supplements thereto with
all exhibits and any and all documents required to be filed with respect
thereto, and grants to each of them full power and authority to do and to
perform each and every act and thing requisite and necessary to be done in and
about the premises in order to effectuate the same as fully to all intents and
purposes as he himself might or could do if personally present, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned director has hereunto set his hand and
seal, as of the date specified.
/s/ Carl J. Rickertsen
_____________________________________
Signature
Carl J. Rickertsen
_____________________________________
Name
Dated: March 13, 1998
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENCE, that the undersigned director of
Software AG Systems, Inc., a corporation organized under the laws of the State
of Delaware, hereby constitutes and appoints Daniel F. Gillis, Harry K.
McCreery and James H. Daly, and each of them (with full power to each of them
to act alone), his true and lawful attorneys-in-fact and agents for him and on
his behalf and in his name, place and stead, in all cases with full power of
substitution and resubstitution, in any and all capacities, to sign, execute
and affix his seal to and file with the Securities and Exchange Commission (or
any other governmental or regulatory authority) an Annual Report on Form 10-K
or any other appropriate form and all amendments or supplements thereto with
all exhibits and any and all documents required to be filed with respect
thereto, and grants to each of them full power and authority to do and to
perform each and every act and thing requisite and necessary to be done in and
about the premises in order to effectuate the same as fully to all intents and
purposes as he himself might or could do if personally present, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned director has hereunto set his hand and
seal, as of the date specified.
/s/ Dr. Paul G. Stern
-------------------------------------
Signature
Dr. Paul G. Stern
-------------------------------------
Name
Dated: March 13, 1998
<TABLE> <S> <C>
<PAGE>
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<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1997 JAN-01-1996 JAN-01-1995
<PERIOD-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<CASH> 50,429 25,773 1,573
<SECURITIES> 0 0 0
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<PP&E> 39,874 34,872 38,736
<DEPRECIATION> 29,797 25,949 23,710
<TOTAL-ASSETS> 196,126 158,088 125,612
<CURRENT-LIABILITIES> 77,502 102,118 69,103
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0 0 0
0 0 0
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<TOTAL-REVENUES> 181,224 156,840 152,562
<CGS> 86,240 72,971 71,323
<TOTAL-COSTS> 86,240 72,971 71,323
<OTHER-EXPENSES> 81,222 78,588 78,051
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 14 0 0
<INCOME-PRETAX> 15,757 10,511 5,637
<INCOME-TAX> 9,046 4,302 2,311
<INCOME-CONTINUING> 6,711 6,209 3,326
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 6,711 6,209 3,326
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