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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 23, 1997
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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SCHEDULE 14D-9
SOLICITATION/RECOMMENDATION STATEMENT
PURSUANT TO SECTION 14(D)(4) OF THE
SECURITIES EXCHANGE ACT OF 1934
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SOFTWARE ARTISTRY, INC.
(Name of Subject Company)
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SOFTWARE ARTISTRY, INC.
(Name of Person Filing Statement)
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COMMON STOCK, NO PAR VALUE
(Title of Class of Securities)
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83402810
(CUSIP Number of Class of Securities)
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W. SCOTT WEBBER
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
SOFTWARE ARTISTRY, INC.
9449 PRIORITY WAY WEST DRIVE
INDIANAPOLIS, IN 46240
(317) 843-1663
(Name, address and telephone number of person authorized to
receive notices and communications on behalf of the person filing this
Statement)
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COPY TO:
Paul Bork, Esq.
Hinckley, Allen & Snyder
28 State Street
Boston, MA 02109
(617) 345-9000
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ITEM 1. SECURITY AND SUBJECT COMPANY.
The name of the subject company is Software Artistry, Inc., an Indiana
corporation, and the address of its principal executive offices is 9449 Priority
Way West Drive, Indianapolis, Indiana 46240.
The title of the class of equity securities to which this statement relates
is the Company's Common Stock, no par value (the "Common Stock"). Unless the
context otherwise requires, as used herein the term "Shares" shall mean shares
of the Common Stock.
ITEM 2. TENDER OFFER OF THE BIDDER.
This statement relates to the offer (the "Offer") by Hoosier Acquisition
Corp., an Indiana corporation (the "Purchaser") and a wholly-owned subsidiary of
International Business Machines Corporation, a New York corporation ("IBM"), to
purchase all outstanding Shares at a price of $24.50 per Share, net to the
seller in cash, without interest thereon (the "Offer Price"), upon the terms and
subject to the conditions set forth in the Purchaser's Offer to Purchase dated
December 23, 1997 and the related Letter of Transmittal (which together
constitute the "Offer Documents"), which Offer Documents constitute exhibits to
the Tender Offer Statement on Schedule 14D-1 dated December 23, 1997 (as amended
or supplemented, the "Schedule 14D-1"), filed by the Purchaser pursuant to the
Securities Exchange Act of 1934, as amended (the "Exchange Act") with the
Securities and Exchange Commission (the "Commission"). The Offer Documents
indicate that the principal executive offices of the Purchaser and IBM are
located at New Orchard Road, Armonk, New York 10504.
The Offer is being made pursuant to the Agreement and Plan of Merger dated
as of December 18, 1997 (the "Merger Agreement"), among the Company, IBM and the
Purchaser. A copy of the Merger Agreement is filed as Exhibit 1 to this
Solicitation/Recommendation Statement on Schedule 14D-9 (this "Schedule 14D-9")
and is incorporated herein by reference in its entirety. Pursuant to the Merger
Agreement, as soon as practicable following the consummation of the Offer and
the satisfaction or waiver of certain conditions, the Purchaser will be merged
with and into the Company (the "Merger"), with the Company continuing as the
surviving corporation. In the Merger, each Share outstanding at the effective
time of the Merger (other than Shares held in the treasury of the Company,
Shares owned by IBM, the Purchaser or any other subsidiary of IBM or of the
Company or by shareholders, if any, who are entitled to and who properly
exercise dissenters' rights under Indiana law in the event the Shares are not
registered on a national securities exchange or quoted for trading on the Nasdaq
National Market at the record date for any shareholder vote on the Merger (if
any such vote is required)) will, by virtue of the Merger and without any action
by the holder thereof, be converted into the right to receive an amount per
share in cash equal to the price per Share paid in the Offer (the "Merger
Consideration"), upon the surrender of the certificate formerly representing
such Share ("Certificate"). The Merger Agreement is summarized in Item 3 of this
Schedule 14D-9.
ITEM 3. IDENTITY AND BACKGROUND.
(a) The name and address of the Company, which is the person filing this
Schedule 14D-9, are set forth in Item 1 above. Unless the context otherwise
requires, references to the Company in this Schedule 14D-9 are to the Company
and its wholly-owned subsidiaries, viewed as a single entity.
(b) Certain contracts, agreements, arrangements or understandings between
the Company or its affiliates and certain of its executive officers, directors
or affiliates with respect to executive compensation and stock option plans are
described in the Company's Proxy Statement dated March 25, 1997, relating to its
April 25, 1997 Annual Meeting of Shareholders (the "Proxy Statement"), under the
headings "Voting Securities and Principal Holders--Ownership Information" and
"Executive Compensation--Executive Officer Compensation," "--Employment and
other Employee-Related Contracts" and "--Summary of
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Material Terms of Incentive Plan". A copy of such portions of the Proxy
Statement has been filed as Exhibit 2 to this Schedule 14D-9 and is incorporated
herein by reference.
The Company maintains two stock compensation plans to provide continuing
long-term incentives to selected eligible key employees, directors, and
consultants: the Nonstatutory Stock Option Incentive Plan ("Nonstatutory Plan"),
which covers an aggregate of 412,500 shares of Common Stock; and the Company's
Incentive Stock Option Plan, as amended ("Incentive Plan"), which covers an
aggregate of 2,075,000 Shares.
NONSTATUTORY PLAN. The Nonstatutory Plan is administered by the Board of
Directors or a committee thereof. The Board may interpret the Nonstatutory Plan
and, subject to its provisions, may prescribe, amend and rescind rules and make
all other determinations necessary or desirable for the administration of the
Nonstatutory Plan. Subject to certain limits set forth in the Nonstatutory Plan,
the Board has complete discretion to select the participants, establish the
manner in which options are granted and exercised, cancel or modify options in
certain situations, impose restrictions on transferability or repurchase rights
on shares of Common Stock issued thereunder, and otherwise prescribe all of the
terms and provisions of options granted under the Nonstatutory Plan. As of
December 18, 1997, options for 341,674 Shares had been granted under the
Nonstatutory Plan at an average exercise price of $7.46 per Share.
INCENTIVE PLAN. The Incentive Plan is administered by the Board of
Directors or a committee appointed thereby, a majority of the members of which
must be members of the Board. A more detailed description of the Incentive Plan
is contained in the portion of the Company's Proxy Statement attached as Exhibit
3 and is hereby incorporated herein by reference.
401(K) SAVINGS PLAN. The Company maintains the Software Artistry, Inc.
Employees' 401(k) Profit Sharing Plan, a defined contribution retirement plan
with a cash or deferred arrangement as described in Section 401(k) of the Code
(the "401(k) Plan"). The 401(k) Plan is intended to be qualified under Section
401(a) of the Code. All employees of the Company are eligible to participate in
the 401(k) Plan on the first day of the month concurrent with or following the
date of employment. The 401(k) Plan provides that each participant may make
elective contributions from 1% to 20% of his or her compensation, subject to
statutory limitations. The Company may also make discretionary profit sharing
contributions under the Plan. The amount of such contributions to be made during
any plan year, if any, is determined by the Company. Under the terms of the
401(k) Plan, allocation of discretionary profit sharing contributions is
integrated with Social Security, in accordance with applicable nondiscrimination
rules under the Code. To date, the Company has made no discretionary profit
sharing contributions under the 401(k) Plan.
Certain executive officers have employment agreements with the Company and
are eligible to receive benefits upon termination without cause or constructive
termination following a change in control, including payment of twelve months'
salary and health benefits, under the terms of the Executive Officer Severance
Provisions dated June 19, 1997, as supplemented by a Supplemental Memorandum
dated October 23, 1997 (collectively, the "Severance Provisions"). A summary of
the employment agreements is contained in the portion of the Company's Proxy
Statement attached as Exhibit 2 and is hereby incorporated herein by reference.
In connection with the Offer and the Merger, the executive officers have agreed,
pursuant to the severance pay waivers described below, to waive all or a part of
the benefits accruing to them pursuant to the Severance Provisions.
MERGER AGREEMENT
The Offer is being made pursuant to the Merger Agreement. The Merger
Agreement provides that following the satisfaction or waiver of the conditions
described below under "Conditions to the Merger", the Purchaser will be merged
with and into the Company, and each then outstanding Share (other than Shares
held in the treasury of the Company, Shares owned by IBM, the Purchaser or any
other subsidiary of IBM or of the Company or by shareholders, if any, who are
entitled to and who properly exercise
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dissenters' rights under Indiana law in the event the Shares are not registered
on a national securities exchange or quoted for trading on the Nasdaq National
Market at the record date for any shareholder vote on the Merger (if any such
vote is required)) will be converted into the right to receive an amount in cash
equal to the price per Share paid pursuant to the Offer.
VOTE REQUIRED TO APPROVE MERGER. The Indiana Business Corporation Law
("IBCL") requires, among other things, that any plan of merger or consolidation
of the Company must be adopted by the Board of Directors and, if the
"short-form" merger procedure described below is not available, approved by the
holders of the Company's outstanding voting securities. The Board of Directors
of the Company has adopted the Merger Agreement and approved the Offer and the
Merger; consequently, the only additional action of the Company that may be
necessary to effect the Merger is approval of the Merger Agreement by the
Company's shareholders, if such "short-form" merger procedure is not available.
Under the IBCL, if shareholder approval of the Merger Agreement is required in
order to consummate the Merger, the vote required is the affirmative vote of the
holders of a majority of the outstanding Shares. If the Purchaser acquires,
through the Offer, the Shareholder Agreement (as defined below) or otherwise,
voting power with respect to a majority of the outstanding Shares (which would
be the case if the Minimum Condition (as defined below) were satisfied and the
Purchaser were to accept for payment Shares tendered pursuant to the Offer), it
would have sufficient voting power to effect the Merger without the affirmative
vote of any other shareholder of the Company.
The IBCL also provides that if a parent company owns at least 90% of the
outstanding shares of each class of stock of a subsidiary, the parent company
and that subsidiary may merge without the approval of the shareholders of the
parent or the subsidiary. Accordingly, if, as a result of the Offer, the
Shareholder Agreement or otherwise, the Purchaser owns at least 90% of the
outstanding Shares, the Purchaser could effect the Merger without prior notice
to, or any action by, any shareholder of the Company.
CONDITIONS TO THE MERGER. The Merger Agreement provides that the respective
obligations of each party to effect the Merger is subject to the satisfaction or
waiver of the following conditions: (a) if required by applicable law, the
Merger having been approved by the affirmative vote of the holders of a majority
of the Shares; (b) no statute, law, ordinance, rule, or regulation (a "Law"), or
judgment, order, writ, preliminary or permanent injunction or decree (an
"Order") issued by any federal, state or local government or any court,
tribunal, administrative agency or commission or other governmental or other
regulatory authority or agency, domestic, foreign or supranational (a
"Governmental Entity"), or other legal restraint or prohibition preventing the
consummation of the Merger being in effect; PROVIDED, HOWEVER, that each of the
Company, the Purchaser and IBM has used reasonable efforts to prevent the entry
of any such Order and to appeal as promptly as possible any Order that may have
been entered; and (c) the Purchaser having previously accepted for payment and
paid for Shares pursuant to the Offer.
TERMINATION OF THE MERGER AGREEMENT. The Merger Agreement may be terminated
at any time prior to the effective time of the Merger, whether before or after
approval of the terms of the Merger Agreement by the shareholders of the
Company:
(1) by mutual written consent of the Company and IBM;
(2) by either the Company or IBM (a) if (i) as a result of the failure
of any of the conditions to the Offer, the Offer has terminated or expired
in accordance with its terms without the Purchaser having accepted for
payment any Shares pursuant to the Offer or (ii) the Purchaser has not
accepted for payment any Shares pursuant to the Offer prior to June 30,
1998, PROVIDED, HOWEVER, that the right to terminate the Merger Agreement
described in this clause (2) is not available to any party whose failure to
perform any of its obligations under the Merger Agreement results in the
failure of any such condition or if the failure of such condition results
from facts or circumstances that constitute a breach of a representation or
warranty under the Merger Agreement by such party; or (b) if any
Governmental Entity has issued an Order or taken any other action
permanently enjoining, restraining or
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otherwise prohibiting the acceptance for payment of, or payment for, Shares
pursuant to the Offer or the Merger and such Order or other action has
become final and nonappealable;
(3) by the Purchaser or IBM (a) prior to the purchase of Shares pursuant
to the Offer in the event of a breach or failure to perform by the Company
of any representation, warranty, covenant or other agreement contained in
the Merger Agreement that (i) would give rise to the failure of a condition
described in paragraph (e) or (f) of the "Conditions of the Offer",
described below, and (ii) cannot be or has not been cured within 20 days
after the giving of written notice to the Company or (b) if either the
Purchaser or IBM is entitled to terminate the Offer as a result of the
occurrence of (i) the Board of Directors of the Company or any committee
thereof having withdrawn or modified in a manner adverse to the Purchaser or
IBM its approval or recommendation of the Offer or the Merger or its
adoption of the Merger Agreement, or approved or recommended any Takeover
Proposal (as defined below), (ii) the Company having entered into any
agreement with respect to any Superior Proposal (as defined below in
"Takeover Proposals") or (iii) the Board of Directors of the Company or any
committee thereof having resolved to take any of the actions described in
clauses (3)(b)(i) or (3)(b)(ii) above; or
(4) by the Company (a) in accordance with the terms of the Merger
Agreement described below under "Takeover Proposals", provided it has
complied with all provisions thereof, including the notice provisions
therein, and that it complies with the applicable requirements relating to
the payment (including the timing of any payment) of the Termination Fee (as
such term is defined below under "Fees and Expenses") or (b) if the
Purchaser or IBM has breached or failed to perform in any material respect
any of their respective representations, warranties, covenants or other
agreements contained in the Merger Agreement, which breach or failure to
perform is incapable of being cured or has not been cured within 20 days
after the giving of written notice to the Purchaser or IBM, as applicable,
except, in any case, such breaches and failures which are not reasonably
likely to affect adversely the Purchaser's or IBM's ability to consummate
the Offer or the Merger.
TAKEOVER PROPOSALS. The Merger Agreement provides that the Company will,
and will cause its officers, directors, employees, representatives and agents
to, immediately cease any discussions or negotiations with any parties that may
be ongoing with respect to a Takeover Proposal. The Merger Agreement provides
further that the Company will not, nor will it permit any of its subsidiaries
to, nor will it authorize or permit any of its directors, officers or employees
or any investment banker, financial advisor, attorney, accountant or other
representative or agent retained by it to, directly or indirectly, (a) solicit,
initiate or encourage (including by way of furnishing information), or take any
other action designed or reasonably likely to facilitate, any inquiries or the
making of any proposal which constitutes, or may reasonably be expected to lead
to, any Takeover Proposal or (b) participate in any discussions or negotiations
regarding any Takeover Proposal; PROVIDED, HOWEVER, that if, at any time prior
to the acceptance for payment of Shares pursuant to the Offer, the Board of
Directors of the Company determines in good faith, after consultation with
outside counsel, that it is necessary to do so in order to comply with its
fiduciary duties to the Company's shareholders under applicable law, the Company
may, in response to a Takeover Proposal that was not solicited subsequent to the
date of the Merger Agreement, and subject to compliance with the notification
provisions described below, (i) furnish information with respect to the Company
to any person pursuant to a confidentiality agreement in a form approved by IBM
(such approval not to be unreasonably withheld) and (ii) participate in
negotiations regarding such Takeover Proposal. The Merger Agreement defines
"Takeover Proposal" as any inquiry, proposal or offer, or any expression of
interest by any third party relating to the Company's willingness or ability to
receive or discuss a proposal or offer, other than a proposal or offer by IBM or
any of its subsidiaries, for a merger, consolidation or other business
combination involving, or any purchase of, more than 10% of the consolidated
assets of the Company or more than 10% of the Shares.
The Merger Agreement provides further that, except as described below,
neither the Board of Directors of the Company nor any committee thereof may (a)
withdraw or modify, or propose to withdraw
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or modify, in a manner adverse to IBM, the approval or recommendation by such
Board of Directors or such committee of the Offer, the Merger Agreement or the
Merger, (b) approve or recommend, or propose to approve or recommend, any
Takeover Proposal or (c) cause the Company to enter into any letter of intent,
agreement in principle, acquisition agreement or other similar agreement (each,
an "Acquisition Agreement") related to any Takeover Proposal. Notwithstanding
the foregoing, in the event that prior to the acceptance for payment of Shares
pursuant to the Offer the Board of Directors of the Company determines in good
faith, after consultation with outside counsel, that it is necessary to do so in
order to comply with its fiduciary duties to the Company's shareholders under
applicable law, such Board of Directors may, in response to a Superior Proposal
that was not solicited subsequent to the date of the Merger Agreement (subject
to the provisions described in this and the following sentences), (i) withdraw
or modify its approval or recommendation of the Offer, the Merger Agreement or
the Merger or (ii) approve or recommend such Superior Proposal or terminate the
Merger Agreement (and concurrently with or after such termination, if it so
chooses, cause the Company to enter into any Acquisition Agreement with respect
to such Superior Proposal), but in each of the cases set forth above, only at a
time that is after the second business day following IBM's receipt of written
notice advising IBM that the Board of Directors of the Company has received a
Superior Proposal, specifying the material terms and conditions of such Superior
Proposal and identifying the person making such Superior Proposal. The Merger
Agreement defines "Superior Proposal" as any bona fide Takeover Proposal (except
that references to "10%" in the definition of Takeover Proposal shall be deemed
to be "50%") made by a third party on terms which the Board of Directors of the
Company determines in its good faith judgment (based on the advice of a
financial advisor of nationally recognized reputation) to be more favorable to
the Company's shareholders than the Offer and the Merger and for which
financing, to the extent required, is then committed or which, in the good faith
judgment of the Board of Directors of the Company, is reasonably capable of
being financed by such third party.
In addition to the obligations of the Company described in the preceding two
paragraphs, the Merger Agreement provides that the Company will immediately
advise IBM orally and in writing of any request for information or of any
Takeover Proposal, the material terms and conditions of such request or Takeover
Proposal and the identity of the person making any such request or Takeover
Proposal. The Company is further required under the terms of the Merger
Agreement to immediately inform IBM of any material change in the details
(including amendments or proposed amendments) of any such request or Takeover
Proposal.
The Merger Agreement provides that nothing contained therein will prohibit
the Company from taking and disclosing to its shareholders a position
contemplated by Rule 14e-2(a) promulgated under the Exchange Act or from making
any disclosure to the Company's shareholders if, in the good faith judgment of
the Board of Directors of the Company, after consultation with outside counsel,
failure so to disclose would be inconsistent with applicable law; PROVIDED,
HOWEVER, that neither the Company nor its Board of Directors nor any committee
thereof may, except as specifically permitted by the Merger Agreement and as
described above, withdraw or modify, or propose to withdraw or modify, its
position with respect to the Offer, the Merger or the Merger Agreement or
approve or recommend, or propose to approve or recommend, a Takeover Proposal.
FEES AND EXPENSES. The Merger Agreement provides that, except as described
below, all fees and expenses incurred in connection with the Offer, the Merger,
the Merger Agreement and the transactions contemplated by the Merger Agreement
will be paid by the party incurring such fees or expenses, whether or not the
Offer or the Merger is consummated. The Merger Agreement further provides that
the Company will pay, or cause to be paid, in same day funds to IBM the sum of
$6,000,000 (the "Termination Fee") under the circumstances and at the times set
forth as follows: (a) if the Company terminates the Merger Agreement in
accordance with the provisions described above in clause (4)(a) under
"Termination of the Merger Agreement", the Company will pay the Termination Fee
upon demand; (b) if the Purchaser or IBM terminates the Merger Agreement in
accordance with the provisions described above in clause
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(3)(b) under "Termination of the Merger Agreement", the Company will pay the
Termination Fee upon demand; and (c) if, at the time of any other termination of
the Merger Agreement (other than in accordance with the provisions described
above in clause (1) or clause (2)(b) under "Termination of the Merger Agreement"
or by the Company in accordance with the provisions described above in clause
(4)(b) under "Termination of the Merger Agreement"), a Takeover Proposal has
been made (other than a Takeover Proposal made prior to the date of the Merger
Agreement), and within 12 months of such termination the Company enters into an
Acquisition Agreement providing for a Takeover Proposal or a transaction
resulting from a Takeover Proposal is consummated, the Company will pay the
Termination Fee concurrently with the earlier of the entering into of such
Acquisition Agreement or the consummation of such transaction.
CONDUCT OF BUSINESS BY THE COMPANY. The Merger Agreement provides that,
except as expressly contemplated or permitted by the Merger Agreement or to the
extent that IBM shall otherwise consent in writing, until such time as IBM's
designees constitute a majority of the Board of Directors of the Company, (a)
the Company will, and will cause its subsidiaries to, carry on their respective
business in the usual, regular and ordinary course in substantially the same
manner as conducted prior to the execution of the Merger Agreement and in
compliance in all material respects with all applicable laws and regulations and
will use all reasonable efforts to preserve intact their present business
organizations, keep available the services of their present officers and
employees and preserve their relationships with customers, suppliers and others
having business dealings with the Company and its subsidiaries; (b) the Company
will not, and will not permit any of its subsidiaries to, (i) declare or pay any
dividends on or make other distributions in respect of any of its capital stock
(except for dividends by a direct or indirect wholly owned subsidiary of the
Company to its parent), (ii) split, combine or reclassify any of its capital
stock or issue or authorize or propose the issuance of any other securities in
respect of, in lieu of or in substitution for shares of its capital stock or
(iii) repurchase, redeem or otherwise acquire any shares of capital stock of the
Company or any of its subsidiaries or any other securities thereof or any
rights, warrants or options to acquire any such shares or other securities; (c)
the Company will not, and will not permit any of its subsidiaries to, issue,
deliver, sell, pledge or encumber, or authorize or propose the issuance,
delivery, sale, pledge or encumbrance of, any shares of its capital stock of any
class or any securities convertible into, or rights, warrants, calls,
subscriptions or options to acquire, any such shares or convertible securities,
or any other ownership interest (including stock appreciation rights or phantom
stock) other than the issuance of Shares (i) upon the exercise of Stock Options
outstanding on the date of the Merger Agreement and in accordance with the terms
of such Stock Options and (ii) in accordance with the terms of the Software
Artistry, Inc. 1996 Employee Stock Purchase Plan as in effect on the date of the
Merger Agreement (the "Share Purchase Plan"); (d) the Company will not, and will
not permit any of its subsidiaries to, amend or propose to amend its articles of
incorporation or by-laws (or similar organizational documents); (e) the Company
will not, and will not permit any of its subsidiaries to, acquire or agree to
acquire (i) by merging or consolidating with, or by purchasing a substantial
equity interest in or substantial portion of the assets of, or by any other
manner, any business or any corporation, partnership, joint venture, association
or other business organization or division thereof or (ii) any assets that are
material, individually or in the aggregate, to the Company and its subsidiaries
taken as a whole, except purchases of inventory in the ordinary course of
business consistent with past practice; (f) the Company will not, and will not
permit any of its subsidiaries to, sell, lease, license, encumber or otherwise
dispose of, or agree to sell, lease, license, encumber or otherwise dispose of,
any of its assets, other than sales or licenses of its products in the ordinary
course of business consistent with past practice; (g) the Company will not, and
will not permit any of its subsidiaries to, (i) incur or suffer to exist any
indebtedness for borrowed money or guarantee any such indebtedness or issue or
sell any debt securities or warrants or rights to acquire any debt securities of
the Company or any of its subsidiaries, guarantee any debt securities of others,
enter into any "keep-well" or other agreement to maintain any financial
statement condition of another person or enter into any arrangement having the
economic effect of any of the foregoing, except for working capital borrowings
incurred in the ordinary course of business consistent with practice, or (ii)
make any loans, advances or
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capital contributions to, or investments in, any other person, other than to the
Company or to or in any direct or indirect wholly owned subsidiary of the
Company; (h) the Company will confer on a regular and frequent basis with IBM,
as reasonably requested by IBM, report to IBM on operational matters and
promptly advise IBM orally and in writing of any material adverse change with
respect to the Company, and promptly provide to IBM (or its counsel) copies of
all filings made by the Company with any Governmental Entity in connection with
the Merger Agreement and the transactions contemplated thereby; (i) the Company
will not make any tax election that would have a material adverse effect on the
tax liability or tax attributes of the Company or any of its subsidiaries or
settle or compromise any tax liability of the Company or any of its
subsidiaries, and the Company will, before filing or causing to be filed any tax
return of the Company or any of its subsidiaries or settling any tax liability
not described in the previous clause, consult with IBM and its advisors as to
the positions and elections that may be taken or made with respect to such
return, and take such positions or make such elections as the Company and IBM
shall jointly agree; (j) except as set forth on its disclosure schedule to the
Merger Agreement, neither the Company nor any of its subsidiaries will make or
agree to make any new capital expenditure or expenditures, which capital
expenditures would exceed $100,000 in the aggregate; (k) the Company will not,
and will not permit any of its subsidiaries to, pay, discharge, settle or
satisfy any claims, liabilities or obligations other than the payment,
discharge, settlement or satisfaction, in the ordinary course of business
consistent with past practice or in accordance with their terms, of claims,
liabilities or obligations recognized or disclosed in the most recent financial
statements (or notes thereto) of the Company included in the documents required
to be filed by the Company since January 1, 1996 under the Exchange Act which
are filed and publicly available prior to the date of the Merger Agreement or
incurred since the date of such financial statements; (l) except in the ordinary
course of business neither the Company nor any of its subsidiaries will (i)
modify, amend or terminate any material note, bond, mortgage, indenture, lease,
license, permit, concession, franchise, contract, agreement or other instrument
or obligation to which the Company or such subsidiary is a party, (ii) waive,
release or assign any material rights or claims or (iii) waive the benefits of,
or agree to modify in any manner, any confidentiality, standstill or similar
agreement to which the Company or such subsidiary is a party; (m) the Company
will not, and will not permit any of its subsidiaries to, (i) increase the
compensation or benefits of any director, officer or employee, except for
increases in the ordinary course that are consistent with past practice, (ii)
adopt any amendment to any benefit plan or similar arrangement of the Company
specified in the Merger Agreement that materially increases the cost thereof,
(iii) enter into any employment or consulting agreement with any director,
officer or employee or (iv) accelerate the payment of compensation or benefits
to any director, officer or employee; and (n) the Company will not, and will not
permit any of its subsidiaries to, authorize any of, or commit or agree to take
any of, the foregoing actions.
In addition to the foregoing, in the Merger Agreement the Company has agreed
that it will not, and will not permit any of its subsidiaries to, take any
action that would, or that could reasonably be expected to, result in (a) any of
the representations and warranties of the Company set forth in the Merger
Agreement that are qualified as to materiality becoming untrue, (b) any of such
representations and warranties that are not so qualified becoming untrue in any
material respect or (c) any of the conditions to the Offer described in
"Conditions of the Offer" below not being satisfied, provided that these
obligations of the Company are subject to the Company's right to take actions
specifically permitted by the Merger Agreement described above in "Takeover
Proposals".
BOARD OF DIRECTORS. The Merger Agreement provides that promptly upon the
acceptance for payment of, and payment for, Shares by the Purchaser pursuant to
the Offer, the Purchaser will be entitled to designate such number of directors
on the Board of Directors of the Company as will give the Purchaser a majority
of such directors and, subject to compliance with Section 14(f) of the Exchange
Act, the Company will, at such time, cause the Purchaser's designees to be so
elected by its existing Board of Directors; PROVIDED HOWEVER, that from the time
that the Purchaser's designees are so elected to the Board of Directors of the
Company until the effective time of the Merger, the Board of Directors of the
Company will include at least two directors who were directors of the Company as
of the date of the Merger
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Agreement and who are not officers of the Company. Subject to applicable law,
the Company has agreed to take all action requested by IBM necessary to effect
any such election, including mailing to its shareholders the Information
Statement containing the information required by Section 14(f) of the Exchange
Act and Rule l4f-1 promulgated thereunder, which Information Statement is
attached as Appendix A to this Schedule 14D-9. IBM has designated the
individuals set forth on such information statement as the persons to be elected
to the Board of Directors immediately following the Purchaser's acquisition of
Shares pursuant to the Offer.
STOCK OPTIONS. The Merger Agreement provides that as soon as practicable
following the date of the Merger Agreement, the Board of Directors of the
Company (or, if appropriate, any committee administering the Incentive Stock
Option Plan (the "Stock Plans")) will adopt such resolutions or take other
actions as may be required to (a) adjust the terms of all outstanding Stock
Options granted under the Stock Plans as necessary to provide that, at the
effective time of the Merger, each outstanding Stock Option granted thereunder
will be converted into an option to acquire, on the same terms and conditions as
were applicable under such Stock Option, the number of shares of common stock of
IBM, par value $.50 per share ("IBM Common Stock") (rounded down to the nearest
whole share) determined by multiplying the number of Shares subject to such
Stock Option by a fraction, the numerator of which is the Offer Price and the
denominator of which is the average closing price of IBM Common Stock on the New
York Stock Exchange Composite Transactions Tape on the ten trading days
immediately preceding the date on which the effective time of the Merger occurs
(the "Exchange Ratio"), at a price per share of IBM Common Stock (rounded up to
the nearest tenth of a cent) equal to (i) the aggregate exercise price for the
Shares otherwise purchasable pursuant to such Stock Option divided by (ii) the
Exchange Ratio (each, as so adjusted, a "Substitute Option") and (b) amend the
Stock Plan to eliminate the final sentence of Section 4(c) thereof relating to
the lapse of such Stock Options upon the consummation of the transactions
contemplated by the Merger Agreement and (c) make such other changes to the
Stock Plans as IBM and the Company may agree are appropriate to give effect to
the Merger.
The Merger Agreement further provides that (a) by virtue of the Merger and
without the need of any further corporate action, upon the effective time of the
Merger, IBM will assume all obligations of the Company under the Stock Plans,
including with respect to the outstanding Stock Options granted thereunder, (b)
no later than the effective time of the Merger, IBM will prepare and file with
the Commission a registration statement on Form S-8 (or another appropriate
form) registering a number of shares of IBM Common Stock equal to the number of
shares subject to the Substitute Options and will keep such registration
statement effective (and maintain the current status of the initial offering
prospectus or prospectuses required thereby) at least for so long as any
Substitute Options remain outstanding, (c) except as otherwise contemplated
under this caption and except to the extent required under the respective terms
of the Stock Options or other applicable agreements, all restrictions or
limitations on transfer and vesting with respect to Stock Options awarded under
the Stock Plans or any other plan, program or arrangement of the Company, to the
extent that such restrictions or limitations shall not have already lapsed, will
remain in full force and effect with respect to such options after giving effect
to the Merger and the assumption by IBM as described above, and notwithstanding
the foregoing, the Substitute Options will not be subject to the provision of
the Stock Plan providing for the lapse of Stock Options upon the consummation of
the transactions contemplated by the Merger Agreement and (d) the Company will
amend the Stock Purchase Plan to terminate the commencement of any Offering (as
defined therein) that is scheduled to commence after the date of the Merger
Agreement.
Except as described below, all Stock Options will become fully vested as a
result of the transaction unless the holder of Stock Options that would
otherwise accelerate elects to waive such acceleration.
In connection with the execution of the Merger Agreement, the Stock Option
Agreements between the Company and W. Scott Webber, the Company's Chief
Executive Officer, and Michael J. Robbins, the Company's Senior Vice President,
Worldwide Operations, were amended to provide that the unvested Stock Options
held by them (i) would not be accelerated as a result of the transaction, (ii)
would be
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assumed by IBM and (iii) would vest in two equal segments, one segment becoming
fully vested on the first anniversary of the effective time of the Merger and
the second segment becoming fully vested on the second anniversary of the
effective time of the Merger; PROVIDED HOWEVER, that all unvested Stock Options
held by Mr. Webber and Mr. Robbins would vest immediately upon any termination
of Mr. Webber or Mr. Robbins, as the case may be, without "good cause" and, in
the case of Mr. Robbins, upon a Special Termination Event (as hereinafter
defined).
In connection therewith, IBM agreed to make payments to Mr. Webber equal to
$150,000 and to Mr. Robbins equal to $125,000 upon the vesting of each segment
of Stock Options (other than, in the case of Mr. Robbins, a vesting pursuant to
the occurrence of a Special Termination Event); PROVIDED that all such payments
would be paid immediately to Mr. Webber or Mr. Robbins, as the case may be, upon
any termination of Mr. Webber or Mr. Robbins, as the case may be, without "good
cause".
INDEMNIFICATION; INSURANCE. In the Merger Agreement, the Purchaser and IBM
have agreed that all rights to indemnification for acts or omissions occurring
prior to the effective time of the Merger that are in existence as of the date
of the Merger Agreement in favor of the current or former directors or officers
of the Company and its subsidiaries as provided in their respective articles of
incorporation or by-laws (or similar organizational documents) will survive the
Merger and will continue in full force and effect in accordance with their
terms. Pursuant to the Merger Agreement, IBM will, for a period of six years
from the effective time of the Merger, unless IBM agrees in writing to guarantee
the indemnification obligations described above, maintain in effect the
Company's current directors' and officers' liability insurance covering those
persons who are currently covered by the Company's directors' and officers'
liability insurance policy or, in lieu of maintaining such insurance, cause
coverage to be provided under any policy maintained for the benefit of IBM or
any of its subsidiaries or otherwise obtained by IBM, so long as the terms
thereof are no less advantageous to the intended beneficiaries thereof than to
those of the Company policy, except that in either case, to the extent that such
coverage is not obtainable at less than or equal to 200% of the current annual
premiums, IBM will be obligated to purchase only so much coverage as may then be
obtained for such amount.
REASONABLE EFFORTS. The Merger Agreement provides that each of the Company,
IBM and the Purchaser will use its reasonable efforts to take, or cause to be
taken, all actions necessary to comply promptly with all legal requirements that
may be imposed on itself with respect to the Offer and the Merger and will
promptly cooperate with and furnish information to each other in connection with
any such requirements imposed upon any of them or any of their subsidiaries in
connection with the Offer and the Merger and will, and will cause each of its
subsidiaries, to use its reasonable efforts to take all reasonable actions
necessary to obtain (and will cooperate with each other in obtaining) any
consent, authorization, order or approval of, or any exemption by, any
Governmental Entity or other public or private third party required to be
obtained or made by any of them or any of their subsidiaries in connection with
the Offer and the Merger or the taking of any action contemplated thereby or by
the Merger Agreement, except that no party need waive any substantial rights or
agree to any substantial limitation on its operations or to dispose of any
assets. The Merger Agreement further provides that IBM will cause the Purchaser
to comply with its obligations under the Merger Agreement.
REPRESENTATIONS AND WARRANTIES. The Merger Agreement contains various
customary representations and warranties.
PROCEDURE FOR TERMINATION, AMENDMENT, EXTENSION OR WAIVER. The Merger
Agreement provides that in the event the Purchaser's designees are appointed or
elected to the Board of Directors of the Company as described above under "Board
of Directors", after the acceptance for payment of Shares pursuant to the Offer
and prior to the effective time of the Merger, the affirmative vote of the
directors of the Company not designated by the Purchaser or IBM is required for
the Company to amend or terminate the Merger Agreement, exercise or waive any of
its rights or remedies under the Merger Agreement or extend the time for
performance of IBM's and the Purchaser's respective obligations under the Merger
Agreement.
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The foregoing summary of the Merger Agreement is qualified in its entirety
by reference to the Merger Agreement, a copy of which is filed as Exhibit 1 to
this Schedule 14D-9. The Merger Agreement should be read in its entirety for a
more complete description of the matters summarized above.
SHAREHOLDER AGREEMENT. In connection with the execution of the Merger
Agreement, the Purchaser and IBM entered into a Shareholder Agreement dated as
of December 18, 1997 (the "Shareholder Agreement"), with certain of the
directors and executive officers of the Company and certain other persons
(collectively, the "Selling Shareholders"). Pursuant to the Shareholder
Agreement, each of the Selling Shareholders has unconditionally agreed to tender
into the Offer, and not to withdraw therefrom, all the Shares that such Selling
Shareholder owned on December 18, 1997 (comprising 1,487,516 Shares for all of
the Selling Shareholders), as well as any Shares thereafter acquired by such
Selling Shareholder after such time, including upon the exercise of Stock
Options. As of December 18, 1997, the Selling Shareholders held stock options to
purchase 1,064,503 Shares, of which Stock Options to purchase 949,503 Shares
would be exercisable immediately prior to the expiration of the Offer. In
addition, each of the Selling Shareholders has agreed to sell to the Purchaser,
and the Purchaser has agreed to purchase, all of such Selling Shareholder's
Shares (including those acquired after the execution of the Shareholder
Agreement) at a price per Share equal to the Offer Price, PROVIDED that (a) such
obligation of the Purchaser to purchase such Shares is subject to the Purchaser
having accepted Shares for payment pursuant to the Offer and the Minimum
Condition having been satisfied, which conditions to such obligation may be
waived by the Purchaser in its reasonable discretion, and (b) such obligation of
such Selling Shareholder to sell such Shares is subject to either the Minimum
Condition having been satisfied or a Takeover Proposal having been made.
Each of the Selling Shareholders has further agreed in the Shareholder
Agreement that it will not (a) sell, transfer, pledge, assign or otherwise
dispose of, or enter into any contract, option or other arrangement (including
any profit sharing arrangement) or understanding with respect to the sale,
transfer, pledge, assignment or other disposition of Shares to any person other
than the Purchaser or the Purchaser's designee, (b) enter into any voting
arrangement, whether by proxy, voting agreement, voting trust, power-of-attorney
or otherwise, with respect to Shares or (c) take any other action that would in
any way restrict, limit or interfere with the performance of its obligations
under the Shareholder Agreement or the transactions contemplated by the
Shareholder Agreement. Each of the Selling Shareholders has also agreed in the
Shareholder Agreement that it will not solicit, initiate or encourage (including
by way of furnishing information), or participate in any discussions or
negotiations regarding, any Takeover Proposal.
Under the Shareholder Agreement, each Selling Shareholder has granted to
certain individuals designated by IBM an irrevocable proxy with respect to the
Shares subject to the Shareholder Agreement to IBM to vote such Shares in favor
of the Merger, the adoption of the Merger Agreement and the approval of the
other transactions contemplated by the Merger Agreement and against (i) any
merger agreement or merger (other than the Merger Agreement and the Merger),
consolidation, combination, sale of substantial assets, reorganization, joint
venture, recapitalization, dissolution, liquidation or winding up of or by the
Company and (ii) any amendment of the Company's Third Amended and Restated
Articles of Incorporation or its By-Laws, as amended and restated, or other
proposal or transaction (including any consent solicitation to remove or elect
any directors of the Company) involving the Company, which amendment or other
proposal or transaction would in any manner impede, frustrate, prevent or
nullify, or result in a breach of any covenant, representation or warranty or
any other obligation or agreement of the Company under or with respect to, the
Offer, the Merger, the Merger Agreement or any of the other transactions
contemplated by the Merger Agreement.
The foregoing summary of the Shareholder Agreement is qualified in its
entirety by reference to the Shareholder Agreement, a copy of which is filed as
Exhibit 3 to this Schedule 14D-9. The Shareholder Agreement should be read in
its entirety for a more complete description of the matters summarized above.
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In addition, in connection with his execution of the Shareholder Agreement,
Donald E. Brown, M.D., a shareholder and former director of the Company and
Interactive Intelligence, Inc., a Company established by Dr. Brown
("Interactive"), executed an agreement that had the effect of confirming the
absence of certain claims by them with respect to intellectual property used by
the Company.
NONCOMPETITION AGREEMENTS. Mr. Webber, Mr. Robbins, William M. Godfrey, the
Company's Vice President, Channel Marketing; Steven Ehrlich, the Company's Vice
President, Enterprise Support Management Business Unit; Jon E. Stevenson, the
Company's Vice President, Domestic Sales; Scott S. McCorkle, the Company's Vice
President, Customer Relationship Management Business Unit; Robert Davies, the
Company's Vice President and General Manager, Asia/Pacific Operations; Peter
Prince, the Company's Vice President, European Operations; and Thomas E.
Vanneman, Vice President, Finance, Chief Financial Officer, Secretary and
Treasurer; have entered into noncompetition agreements with IBM pursuant to
which each such person has agreed that for a period up to three years following
the termination of such person's employment with IBM or any of its subsidiaries
(such period may be less than three years depending upon the timing and
circumstances of such termination of employment), such person shall not, among
other things, have any Relationship (as defined below) with any entity in the
course of which Relationship such person engages in or assists such entity with
respect to the development, marketing or sales of systems management products or
services for use in host-based or distributed environments or on the Internet.
The noncompetition agreements provide that any such person will be deemed to
have a "Relationship" with an entity if such person (i) owns, manages, operates,
joins or is employed by such entity, (ii) is a director, member, agent,
shareholder, owner or general partner of such entity, (iii) acts as a consultant
or advisor to such entity or (iv) controls or participates in the ownership,
management or operation of, such entity; PROVIDED, HOWEVER, that the foregoing
provisions of the noncompetition agreements do not prohibit any such person from
acquiring, solely as an investment and through market purchases, less than 5% of
the outstanding equity securities of any corporation that is registered under
Section 12(b) or Section 12(g) of the Exchange Act and that is publicly traded
so long as such person is not part of any control group of such corporation.
WAIVER OF SEVERANCE PAY. In connection with the execution of the Merger
Agreement, (i) Mr. Godfrey, Mr. Ehrlich, Mr. McCorkle and Mr. Webber waived
their rights to receive severance payments as a result of a constructive
termination occurring at any time or as a result of any termination occurring
after the first anniversary of the effective time of the Merger, (ii) Mr.
Vanneman waived his right to receive severance payments in exchange for a lump
sum payment of $170,000 and (iii) Mr. Robbins agreed that, for purposes of
determining whether severance payments would be due to him as a result of a
constructive termination, a constructive termination would be defined as a
reduction in his base compensation or a relocation of his place of employment to
a location that is more than fifty miles from his current place of employment (a
"Special Termination Event") and waived his right to receive severance payments
as a result of any termination occurring after the first anniversary of the
effective time of the Merger.
CERTAIN ARRANGEMENTS. In connection with the execution of the Merger
Agreement, IBM agreed to the payment by the Company to Mr. Webber and Mr.
Robbins of special bonuses of $450,000 and $300,000, respectively, and to the
making of certain future stock option grants in connection with the Company's
sales compensation program.
SEVERANCE AND CONSULTING AGREEMENT. In October 1994, the Company and Dr.
Brown, agreed to a severance and consulting arrangement (the "Consulting
Agreement"), under which Dr. Brown's options to purchase 120,070 Shares, granted
under the Incentive Plan, were cancelled and Dr. Brown was granted in exchange
therefor options under the Nonstatutory Plan for 120,070 Shares immediately
exercisable at $2.31 per Share for a term expiring February 26, 2001. The
Consulting Agreement also contained license, confidentiality, and non-compete
provisions. In May 1997, the Company initiated litigation against Interactive,
Dr. Brown and another Interactive executive, which was settled pursuant to a
Settlement Agreement and General Release (the "Settlement Agreement"). Under the
Settlement Agreement, the
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Company and Interactive, for the shorter of the period from the date of the
Settlement Agreement until September 30, 1999 or five months after a change in
control, agreed not to employ (with certain exceptions) any person who is an
employee of the Company or Interactive, as the case may be.
CONFIDENTIAL DISCLOSURE AGREEMENT. The Company and Tivoli Systems, Inc.
("Tivoli"), a subsidiary of IBM, entered into a Confidential Disclosure
Agreement dated as of October 13, 1997 (the "Disclosure Agreement"). The parties
agreed that, to the extent that either of Tivoli or the Company discloses to the
other Confidential Information (as defined in the Disclosure Agreement) within
one year of the date of the Disclosure Agreement, such information may only be
used for the purpose of furthering a partnership between the parties. The
parties to the Disclosure Agreement agreed to hold such disclosed information
confidential for five years after the date of the Disclosure Agreement.
INDEMNIFICATION
Sections 23-1-37-1--23-1-37-15 of the IBCL permits a corporation to
indemnify directors and officers against liability incurred in certain
proceedings if the individual's conduct was in good faith and the individual
reasonably believed, in the case of conduct in the individual's official
capacity, that such conduct was in the best interest of the corporation and, in
all other cases, believed such conduct was at least not opposed to the best
interests of the corporation. If the proceeding is criminal, the individual must
have had either (a) no reasonable cause to believe the conduct was unlawful or
(b) reasonable cause to believe the conduct was lawful. The statute requires a
corporation to indemnify an individual who is wholly successful in the defense
of any such proceeding against reasonable expenses incurred by such individual,
unless the Articles of Incorporation provide otherwise. The corporation may pay
for or reimburse the reasonable expenses incurred by a director or officer who
is a party to a proceeding in advance of final disposition of the proceeding if
certain conditions are satisfied. Unless otherwise provided in Articles of
Incorporation, a director or officer may apply for court ordered indemnification
which will include reasonable expenses incurred to obtain the indemnification
order if the court determines that the director is entitled to mandatory
indemnification or that the director is fairly and reasonably entitled to
indemnification in view of all the relevant circumstances. Except in the case of
mandatory indemnification, a corporation may indemnify a director or officer
only after it is determined that the individual meets the standard of conduct
described above. In addition, a corporation may also indemnify and advance
expenses to an officer, whether or not a director, to the extent, consistent
with public policy, that may be provided by its articles of incorporation,
by-laws, general or specific action of is Board of Directors or contract.
Section 23-1-37-14 of the IBCL empowers an Indiana corporation to purchase and
maintain insurance on behalf of any director or officer against any liability
asserted against, or incurred by, such individual in any such capacity or
arising out of his or her status as such, whether or not the corporation would
have had the power to indemnify against such liability.
The Restated By-Laws of the Company require the Company to indemnify any
person who is or was a director, officer or employee of the Company or agent of
any other corporation, partnership, joint venture, trust or other enterprise
(collectively, "Agent") against any and all liabilities and reasonable expense
incurred by such person in connection with or resulting from any threatened,
pending or completed action or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that such person is or
was a director, officer or other employee of the Company or Agent, or is or was
serving at the request of the Company as a director, officer, employee or agent
of another corporation, partnership, joint venture, trust or other enterprise,
provided that it is determined: (i) that such person's conduct was in good
faith; (ii) such person reasonably believed his conduct was in or not opposed to
the best interests of the Company and (iii) in the case of criminal proceedings,
such person had no reasonable cause to believe his conduct was unlawful. The
Restated By-Laws of the Company also set forth that the directors of the Company
shall be entitled to the fullest indemnification by the Company permitted under
applicable law.
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CONDITIONS OF THE OFFER
Notwithstanding any other term of the Offer or the Merger Agreement, the
Purchaser will not be required to accept for payment or, subject to any
applicable rules and regulations of the Commission, including Rule 14e-1(c)
under the Exchange Act (relating to the Purchaser's obligation to pay for or
return tendered Shares promptly after the termination or withdrawal of the
Offer), to pay for any Shares tendered pursuant to the Offer unless prior to the
Expiration Date (as defined below) (i) there have been validly tendered and not
withdrawn that number of Shares that would constitute a majority of all
outstanding Shares on a fully diluted basis on the date of purchase (the
"Minimum Condition") and (ii) any waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, and the regulations thereunder
(the "HSR Act") applicable to the purchase of Shares pursuant to the Offer
having expired or been terminated (the "HSR Condition"). The "Expiration Date"
shall mean 11:59 p.m., New York City time, on Friday, January 23, 1998, unless
and until the Purchaser, in its sole discretion (but subject to the terms of the
Merger Agreement), shall have extended the period of time during which the Offer
is open, in which event the term "Expiration Date" shall mean the latest time
and date on which the Offer, as so extended by the Purchaser, will expire.
Furthermore, notwithstanding any other term of the Offer or the Merger
Agreement, the Purchaser will not be required to accept for payment or, subject
as aforesaid, to pay for any Shares not theretofore accepted for payment or paid
for, and may terminate the Offer if, at any time on or after the date of the
Merger Agreement and prior to the Expiration Date, any of the following
conditions exists (other than as a result of any action or inaction of IBM or
any of its subsidiaries that constitutes a breach of the Merger Agreement):
(a) there shall be threatened, instituted or pending by any Governmental
Entity any suit, action or proceeding (i) challenging the acquisition by IBM
or the Purchaser of any Shares under the Offer, seeking to restrain or
prohibit the making or consummation of the Offer or the Merger or seeking to
obtain from the Company, IBM or the Purchaser any damages that are material
in relation to the Company and its subsidiaries taken as a whole, (ii)
seeking to prohibit or materially limit the ownership or operation by the
Company, IBM or any of their respective subsidiaries of a material portion
of the business or assets of the Company and its subsidiaries, taken as a
whole, or IBM and its subsidiaries, taken as a whole, or to compel the
Company and its subsidiaries, taken as a whole, or IBM to dispose of or hold
separate any material portion of the business or assets of the Company or
IBM and its subsidiaries, taken as a whole, in each case as a result of the
Offer or any of the other transactions contemplated by the Merger Agreement,
(iii) seeking to impose material limitations on the ability of IBM or the
Purchaser to acquire or hold, or exercise full rights of ownership of, any
Shares to be accepted for payment pursuant to the Offer, including, without
limitation, the right to vote such Shares on all matters properly presented
to the shareholders of the Company, (iv) seeking to prohibit IBM or any of
its subsidiaries from effectively controlling in any material respect any
material portion of the business or operations of the Company or its
subsidiaries or (v) which otherwise is reasonably likely to have any effect
(or any development that, insofar as can reasonably be foreseen, is likely
to result in any effect) that, individually or in the aggregate with any
such other effects, is materially adverse to the business, properties,
financial condition or results of operations of the Company.
(b) there shall be any Law or Order enacted, entered, enforced,
promulgated or deemed applicable to the Offer or the Merger, by any
Governmental Entity, other than the application to the Offer or the Merger
of applicable waiting periods under the HSR Act, that is reasonably likely
to result, directly or indirectly, in any of the consequences referred to in
clauses (i) through (v) of paragraph (a) above;
(c) there shall have occurred any change (or any development that,
insofar as reasonably can be foreseen, is reasonably likely to result in any
change) that, individually or in the aggregate with any other such changes,
is materially adverse to the business, properties, financial condition or
results of operations of the Company;
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(d) (i) the Board of Directors of the Company or any committee thereof
shall have withdrawn or modified in a manner adverse to IBM or the Purchaser
its approval or recommendation of the Offer or the Merger or its adoption of
the Merger Agreement, or approved or recommended any Takeover Proposal, (ii)
the Company shall have entered into any agreement with respect to any
Superior Proposal or (iii) the Board of Directors of the Company or any
committee thereof shall have resolved to take any of the foregoing actions
(see "The Merger Agreement--Takeover Proposals" above);
(e) any of the representations and warranties of the Company set forth
in the Merger Agreement that are qualified as to materiality shall not be
true and correct or any such representations and warranties that are not so
qualified shall not be true and correct in any material respect, in each
case at the date of the Merger Agreement and at the scheduled or extended
expiration of the Offer;
(f) the Company shall have failed to perform in any material respect any
material obligation or to comply in any material respect with any material
agreement or covenant of the Company to be performed or complied with by it
under the Merger Agreement, which failure to perform or comply has not been
cured within five business days after the giving of written notice to the
Company; or
(g) the Merger Agreement shall have been terminated in accordance with
its terms.
The foregoing conditions are for the sole benefit of the Purchaser and IBM
and may, subject to the terms of the Merger Agreement, be waived by the
Purchaser and IBM in whole or in part at any time and from time to time in their
reasonable discretion. The failure by the Purchaser or IBM at any time to
exercise any of the foregoing rights will not be deemed a waiver of any such
right, the waiver of any such right with respect to particular facts and
circumstances will not be deemed a waiver with respect to any other facts and
circumstances and each such right will be deemed an ongoing right that may be
asserted at any time and from time to time.
Except as described herein or as otherwise disclosed in this Schedule 14D-9,
to the knowledge of the Company, as of the date hereof there are no material
contracts, agreements, arrangements or understandings with respect to the Offer
or the Merger Agreement, or any potential or actual conflicts of interest,
between the Company, or any potential or actual conflicts of interest, between
the Company or its affiliates and (i) the Company, its directors, executive
officers or affiliates or (ii) the Purchaser, IBM or their directors, executive
officers or affiliates.
ITEM 4. THE SOLICITATION OR RECOMMENDATION.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Company's Board of Directors has unanimously approved the Offer and
determined that the terms of the Offer and the Merger are fair to and in the
best interests of the shareholders of the Company. Accordingly, the Board of
Directors unanimously recommends that all shareholders of the Company accept the
Offer and tender all their Shares pursuant to the Offer. This recommendation is
based in part on an opinion received by the Company from Broadview Associates
("Broadview Associates") that the per Share consideration to be received by the
Company's shareholders in the Offer and in the Merger, taken as a whole, is fair
to the shareholders from a financial point of view. THE FULL TEXT OF THE
FAIRNESS OPINION RECEIVED BY THE COMPANY FROM BROADVIEW IS FILED AS EXHIBIT 5 TO
THIS SCHEDULE 14D-9 AND IS ALSO ATTACHED HERETO AS ANNEX A. SHAREHOLDERS ARE
URGED TO READ SUCH OPINION IN ITS ENTIRETY.
As set forth in the Offer Documents, the Purchaser will purchase Shares
tendered prior to the Expiration Date if the Minimum Condition has been
satisfied by that time and if all other conditions to the Offer have been
satisfied (or waived). Shareholders considering not tendering their Shares in
order to wait for the Merger should note that if the Minimum Condition is not
satisfied or any of the other conditions to the Offer is not satisfied, the
Purchaser is not obligated to purchase any Shares, and can terminate the Offer
and the Merger Agreement and not proceed with the Merger. Under the IBCL, the
approval of the
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Board and the affirmative vote of the holders of a majority of the outstanding
Shares are required to approve the Merger. Accordingly, if the Minimum Condition
is satisfied, the Purchaser will have sufficient voting power to cause the
approval of the Merger without the affirmative vote of any of other
Shareholders.
The Offer is scheduled to expire at 11:59 p.m., New York City time, on
Friday, January 23, 1998, unless the Purchaser, in its sole discretion, elects
to extend the period of time for which the Offer is open. A copy of the press
release issued jointly by the Company and the Purchaser on December 19, 1997
announcing the Merger and the Offer is filed as Exhibit 6 to this Schedule 14D-9
and is incorporated herein by reference in its entirety.
BACKGROUND OF THE OFFER; REASONS FOR THE RECOMMENDATION
BACKGROUND
The Company develops, markets and supports suites of internal and external
customer support software applications. Tivoli Systems, Inc. ("Tivoli"), a
wholly owned subsidiary of IBM, provides TME 10, a leading solution for end to
end management of distributed computing environments. Tivoli and the Company
have had a business relationship for several years. The Company is a member of
the Tivoli 10/Plus Association for business partners, and has worked together
with Tivoli and other help desk vendors to enable greater integration options
for all applications desiring inventory data.
During the summer of 1997, representatives of the Company and Tivoli had
several discussions and meetings about ways to achieve a closer business
relationship or strategic partnership between the Company and Tivoli.
In October 1997, the discussions between the Company and Tivoli that had
begun over the summer evolved into discussions of a possible acquisition of the
Company by IBM. The discussions included at various times Mr. Webber, Mr.
Vanneman, Stephen J. O'Leary, Managing Director of Broadview Associates,
financial advisor to the Company, Jan Lindelow, President and Chief Executive
Officer of Tivoli, and Archie W. Colburn, Business Development Executive of IBM.
On October 13, 1997, the Company and Tivoli entered into a confidentiality
agreement with respect to information exchanged between the parties in the
course of due diligence investigations.
Between October 13 and November 21, 1997, representatives of the Company,
including Mr. Webber, Mr. Vanneman and Mr. O'Leary, and representatives of IBM
and Tivoli, including Mr. Colburn and Mr. Lindelow, continued their discussions
regarding a possible acquisition, and discussed in greater detail the Company's
products, business prospects and financial plan and the benefits of an
acquisition of the Company by IBM.
On November 21, 1997, Lee Dayton, Vice President, Corporate Development and
Real Estate, of IBM, Mr. Lindelow and Mr. Colburn met with Mr. Webber, Mr.
Vanneman and Mr. O'Leary to discuss the possible acquisition of the Company by
IBM. At this meeting, IBM indicated it might be interested in acquiring the
Company at a price in the range of $16 to $21 per share. Broadview Associates
delivered a presentation with regard to the Company's views as to valuation. The
representatives of the Company indicated that they would be looking for a price
substantially above the levels indicated by IBM.
The parties had additional conversations over the next week as to possible
means for bridging the valuation gap between them and ways to address IBM's
concerns with respect to employee retention.
On November 24, 1997 the Board of Directors of the Company held a telephonic
meeting and discussed the status of the negotiations. The Board directed
Broadview Associates to call IBM and indicate the Board's view that the
acquisition price should be higher than $24 per share, which call was made the
next day. On November 26, 1997, Mr. Colburn advised Broadview Associates that
IBM would be at or close to the top of the range of values it would be willing
to pay for the Company at $24 per share. On
15
<PAGE>
December 3, 1997, Mr. O'Leary called Mr. Colburn and advised him that the Board
of Directors of the Company had met and requested that IBM provide its best and
final offer.
On December 5, 1997, Mr. Dayton called Mr. O'Leary and told him IBM would be
prepared to increase its offer to $24.50 per share, but that IBM's offer would
be contingent on satisfactory completion of due diligence and resolution of
several other concerns of IBM with respect to employee retention, the obtaining
of an agreement from certain significant Company shareholders to sell their
shares to IBM and noncompetition agreements with several members of the
Company's management.
Mr. O'Leary called Mr. Dayton back on December 5, 1997 and advised him that
the Company's Board had met and agreed to go forward on the basis proposed by
IBM, subject to the satisfactory negotiation of definitive documentation.
During the period from December 10 to December 13, 1997, representatives of
IBM met with representatives of the Company to continue IBM's due diligence
review of the Company and to discuss, among other things, personnel retention
matters. IBM's legal counsel distributed draft documentation on December 12,
1997. During the period from December 15, 1997 to December 17, 1997,
representatives of IBM, including IBM's legal counsel, on the one hand, and
representatives of the Company, including the Company's legal counsel and
financial advisor, on the other hand, negotiated the documentation for the
contemplated transaction.
REASONS FOR THE RECOMMENDATION. In reaching its recommendation described
above, the Board of Directors of the Company considered a number of factors,
including, without limitation, the following:
(i) the financial and other terms and conditions of the Offer and the
Merger;
(ii) the fact that the $24.50 per Share price to be received by the
Company's shareholders in both the Offer and the Merger represents a
substantial premium over the closing market price of $17.75 per Share on
December 18, 1997, the last full trading day prior to the first public
announcement by the Company and IBM of the Merger Agreement;
(iii) the oral opinion of Broadview Associates, confirmed in writing,
that the consideration to be received by the Company's shareholders pursuant
to the Offer and the Merger, taken as a whole, is fair to such shareholders
from a financial point of view. A copy of Broadview Associates written
opinion is attached to this Schedule 14D-9 as Annex A and is incorporated
herein by reference. Such opinion should be read in its entirety for a
description of the procedures followed, assumptions and qualifications made,
matters considered and limitations of the review undertaken by Broadview
Associates;
(iv) the presentation of Broadview Associates to the Board of Directors
at its meeting on December 18, 1997, as to various financial and other
matters deemed relevant to the Board of Director's consideration, including,
among other things, (a) a review of the Company's historical and projected
operating performance, (b) a review of valuation multiples of companies that
are comparable to the Company, (c) an analysis of the premium represented by
the Offer Price compared to other premiums paid for publicly-traded software
companies, (d) a review of the historical stock prices and trading volumes
of the Shares, (e) a projected hypothetical public market valuation of the
Company, (f) an analysis of the Offer Price as a multiple of various
measures of the Company's historical and projected operating performance,
and (g) a review of the present value of the projected Share price;
(v) the fact that, even though the Company received and evaluated other
inquiries regarding a potential acquisition, no other potential strategic
partner had expressed an interest in engaging in a business combination or
other strategic transaction that included a fully funded (or financed) all
cash offer for all Shares at or above the Offer Price or any other offer on
terms as favorable to the Company's shareholders as those of the Offer and
Merger; and
16
<PAGE>
(vi) the fact that, under the Merger Agreement, the Company may respond
to an unsolicited Takeover Proposal and may approve a Superior Proposal
(defined as a bona fide Takeover Proposal that the Board of Directors
determines in its good faith judgment (based on the advice of a financial
advisor of nationally recognized reputation) to be more favorable to the
Company's shareholders than the Offer and the Merger and for which
financing, to the extent required, is then committed or which, in the good
faith judgment of the Board of Directors of the Company, is reasonably
capable of being financed by such third party) if the Board of Directors
determines in good faith, after consultation with outside counsel, that it
is necessary to do so in order to comply with its fiduciary duties to the
Company's shareholders under applicable law and the Company complies with
the other requirements set forth in the Merger Agreement including without
limitation the payment of a termination fee of $6,000,000 under certain
circumstances.
On December 16, 1997, the executive committee of the Board of Directors of
IBM approved the contemplated transactions, subject to the satisfactory
negotiation of definitive documentation.
On December 18, 1997, the Board of Directors of the Company and the
Purchaser each adopted the Merger Agreement and approved the other documentation
for the contemplated transactions.
Following such approvals, the Merger Agreement and the other related
agreements were executed and delivered and the transactions were publicly
announced before the financial markets opened on December 19, 1997.
ITEM 5. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED.
Broadview is acting as the Company's financial advisor in connection with
the Offer and the Merger. Pursuant to its agreement with the Company, Broadview
Associates will receive a success fee, equal to 1.5% of the first $100 million
of consideration received in the transaction plus 1% of any consideration
received in the transaction in excess of $100 million. In addition, whether or
not the Offer or the Merger is completed, the Company has agreed to reimburse
Broadview Associates periodically for its reasonable out-of-pocket expenses,
including the fees and disbursements of its counsel, and to indemnify Broadview
Associates against certain expenses and liabilities incurred in connection with
its engagement, including liabilities under Federal securities laws. Upon
delivery of its fairness opinion, Broadview Associates became entitled to
receive $300,000, which will be credited against the obligation to pay the
success fee described above.
Except as set forth above, neither the Company nor any person acting on its
behalf has or currently intends to employ, retain or compensate any person to
make solicitations or recommendations to the shareholders of the Company on its
behalf with respect to the Offer.
ITEM 6. RECENT TRANSACTIONS AND INTENT WITH RESPECT TO SECURITIES.
(a) During the past sixty days, no transactions in the Shares have been
effected by the Company or, to the best of the Company's knowledge, by any
executive officer, director, affiliate, or subsidiary of the Company, except as
set forth in this Item 6.
(b) On November 17, 1997, Robert Davies, the Vice President and Managing
Director of Asia Pacific Operations, exercised 12,250 outstanding Stock Options
at $16.25 per share.
(c) On November 21, 1997, Jon Stevenson, the Vice President of Domestic
Sales of the Company, exercised 5,000 outstanding Stock Options at $15.125 per
share.
(d) On December 18, 1997, the Board of Directors of the Company granted to
Mr. Piscopo, the Chairman of the Board of Directors, 6,000 Stock Options
exercisable at $17.75 per share.
17
<PAGE>
(e) See Item 3 above for a description of certain amendments made to the
terms of the Stock Option Agreements between the Company and each of Mr. Webber
and Mr. Robbins.
(f) To the best of the Company's knowledge, all of the Company's executive
officers and directors who own Shares of Common Stock currently intend to tender
all of their Shares pursuant to the Offer. All the Selling Shareholders have
agreed pursuant to the Shareholder Agreement to tender into the Offer all Shares
that they now own or may hereafter acquire.
ITEM 7. CERTAIN NEGOTIATIONS AND TRANSACTIONS BY THE SUBJECT COMPANY.
(a) Except as set forth herein, no negotiation is being undertaken or is
underway by the Company in response to the Offer which relates to or would
result in (i) an extraordinary transaction, such as a merger or reorganization,
involving the Company or any subsidiary thereof; (ii) a purchase, sale or
transfer or a material amount of assets by the Company or any subsidiary
thereof; (iii) a tender offer for or other acquisition of securities by or of
the Company; or (iv) any material change in the present capitalization or
dividend policy of the Company.
(b) Except as set forth herein, there is no transaction, board resolution,
agreement in principle or signed contract in response to the Offer that relate
to or would result in one or more of the events referred to in Item 7(a) above.
ITEM 8. ADDITIONAL INFORMATION TO BE FURNISHED.
DISSENTERS' RIGHTS
Holders of Shares do not have dissenters' rights as a result of the Offer.
However, in the event the Shares are not registered on a national securities
exchange or quoted for trading on the Nasdaq National Market at the record date
for any shareholder vote on the Merger (if any such vote is required) holders of
Shares at the effective time of the Merger will have certain rights pursuant to
the provisions of Chapter 44 of the IBCL ("Chapter 44") to dissent and demand
fair value of their Shares, PROVIDED that dissenters' rights will not be
available if the Merger is effected pursuant to the short-form merger provisions
of the IBCL as described in Section 12. Under Chapter 44, dissenting
shareholders who comply with the applicable statutory procedures will be
entitled to receive a judicial determination of the fair value of their Shares
(excluding any appreciation or depreciation in anticipation of the Merger unless
such exclusion would be inequitable) and to receive payment of such fair value
in cash, together with a fair rate of interest, if any. Any such judicial
determination of the fair value of Shares could be based upon factors other
than, or in addition to, the price per Share to be paid in the Merger or the
market value of the Shares. The value so determined could be more or less than
the price per Share to be paid in the Merger.
The foregoing summary of Chapter 44 does not purport to be complete and is
qualified in its entirety by reference to Chapter 44. FAILURE TO FOLLOW THE
STEPS REQUIRED BY CHAPTER 44 OF THE IBCL FOR PERFECTING DISSENTERS' RIGHTS MAY
RESULT IN THE LOSS OF SUCH RIGHTS.
INCORPORATION BY REFERENCE.
The information contained in Exhibits 1, 2, 3, 4 and 5 referred to in Item 9
below is incorporated herein by reference.
18
<PAGE>
ITEM 9. MATERIAL TO BE FILED AS EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------- --------------------------------------------------------------------------------------------------------
<C> <S>
1.......... Merger Agreement
2.......... Pages 9-16 of the Proxy Statement
3.......... Shareholder Agreement
4.......... Article VI of the Restated By-laws of the Company
5.......... Opinion of Broadview Associates dated December 18, 1997*
6.......... Press Release of the Company and IBM, issued December 19, 1997
7.......... Letter, dated December 23, 1997, from the Chairman of the Board and President to the shareholders of the
Company
</TABLE>
- ------------------------
* Attached hereto as Annex A.
19
<PAGE>
SIGNATURE
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct.
<TABLE>
<S> <C> <C>
SOFTWARE ARTISTRY, INC.
By: /s/ THOMAS E. VANNEMAN
-----------------------------------------
Thomas E. Vanneman
VICE PRESIDENT, FINANCE, CHIEF FINANCIAL
OFFICER,
SECRETARY AND TREASURER
</TABLE>
December 23, 1997
20
<PAGE>
ANNEX A
[LOGO]
[LETTERHEAD OF BROADVIEW ASSOCIATES LLC]
One Bridge Plaza
Fort Lee, New Jersey 07024
201/346-9000
Fax 201/346-9191
http://www.broadview.com
December 18, 1997
CONFIDENTIAL
Board of Directors
Software Artistry, Inc.
9449 Priority Way West Drive
Indianapolis, IN 46240
Dear Members of the Board:
We understand that Software Artistry, Inc. ("Software Artistry" or the
"Company"), IBM Corporation ("IBM") and Hoosier Acquisition Corp., a wholly
owned subsidiary of IBM (the "Sub"), propose to enter into an Agreement and Plan
of Merger (the "Agreement") pursuant to which the Sub will offer to purchase
(the "Offer") all of the outstanding shares of Software Artistry common stock,
no par value ("Software Artistry Common Stock"), for $24.50 cash per share (the
"Consideration") and subsequently merge with and into Software Artistry (the
"Merger"). Pursuant to the Merger, each issued and outstanding share of Software
Artistry not acquired in the Offer will be converted into the right to receive
an amount of cash equal to the Consideration. The terms and conditions of the
above described Offer and Merger (together the "Transaction") are more fully
detailed in the Agreement.
You have requested our opinion as to whether the Consideration to be
received by Software Artistry shareholders in the Transaction is fair, from a
financial point of view, to Software Artistry shareholders.
Broadview Associates focuses on providing merger and acquisition advisory
services to information technology ("IT") companies. In this capacity, we are
continually engaged in valuing such businesses, and we maintain an extensive
database of IT mergers and acquisitions for comparative purposes. We are
currently acting as financial advisor to Software Artistry's Board of Directors
and will receive a fee from Software Artistry upon the successful conclusion of
the Transaction.
In rendering our opinion, we have, among other things:
1.) reviewed the terms of the Agreement dated December 18, 1997 furnished to us
by Cravath, Swaine & Moore on December 18, 1997;
2.) reviewed Software Artistry's annual reports and Forms 10-K for the fiscal
years ended December 31, 1995 and 1996, including the audited financial
statements included therein, and Software Artistry's
[LOGO]
<PAGE>
[LOGO]
Form 10-Q for the nine months ended September 30, 1997, including the
unaudited financial statements included therein;
3.) reviewed certain internal financial and operating information, including
certain projections, relating to Software Artistry prepared by Software
Artistry management;
4.) participated in discussions with Software Artistry management concerning the
operations, business strategy, financial performance and prospects for
Software Artistry;
5.) reviewed the recent reported closing prices and trading activity for
Software Artistry Common Stock;
6.) compared certain aspects of the financial performance of Software Artistry
with public companies we deemed comparable;
7.) analyzed available information, both public and private, concerning other
mergers and acquisitions we believe to be comparable in whole or in part to
the Transaction;
8.) reviewed IBM's annual reports and Forms 10-K for the fiscal years ended
December 31, 1995 and 1996, including the audited financial statements
included therein, and IBM's Form 10-Q for the nine months ended September
30, 1997, including the unaudited financial statements included therein;
9.) reviewed the recent reported closing prices and trading activity for IBM
common stock;
10.) discussed with IBM management its view of the strategic rationale for the
Transaction;
11.) reviewed recent equity research analyst reports covering Software Artistry
and IBM;
12.) assisted in negotiations and discussions related to the Transaction among
Software Artistry, IBM and their respective legal advisors; and
13.) conducted other financial studies, analyses and investigations as we deemed
appropriate for purposes of this opinion.
In rendering our opinion, we have relied, without independent verification,
on the accuracy and completeness of all the financial and other information
(including without limitation the representations and warranties contained in
the Agreement) that was publicly available or furnished to us by Software
Artistry. With respect to the financial projections examined by us, we have
assumed that they were reasonably prepared and reflected the best available
estimates and good faith judgments of the management of Software Artistry as to
the future performance of Software Artistry. We have neither made nor obtained
an independent appraisal or valuation of any of Software Artistry's assets.
Based upon and subject to the foregoing, we are of the opinion that the
Consideration to be received by Software Artistry shareholders in the
Transaction is fair, from a financial point of view, to Software Artistry
shareholders.
For purposes of this opinion, we have assumed that Software Artistry is not
currently involved in any material transaction other than the Transaction and
those activities undertaken in the ordinary course of conducting its business.
Our opinion is necessarily based upon market, economic, financial and other
conditions as they exist and can be evaluated as of the date of this opinion,
and any change in such conditions may impact this opinion. We express no opinion
as to the price at which IBM common stock will trade subsequent to the Effective
Time (as defined in the Agreement).
This opinion speaks only as of the date hereof. It is understood that this
opinion is for the information of the Board of Directors of Software Artistry in
connection with its consideration of the Transaction and does not constitute a
recommendation to any Software Artistry shareholder as to whether such
shareholder should tender its shares in the Offer or as to how such shareholder
should vote on the Merger. Broadview Associates does not believe that any other
person other than the Board of Directors of Software Artistry has the legal
right under state law to rely on this opinion, and, in the absence of any
governing precedents, we would resist any assertion otherwise by any such
person. This opinion may not be published or referred to, in whole or part,
without our prior written permission, which shall not be
<PAGE>
[LOGO]
unreasonably withheld. Broadview Associates hereby consents to references to and
the inclusion of this opinion in its entirety in the Schedule 14D-9 to be
distributed to Software Artistry shareholders in connection with the
Transaction.
Sincerely,
/s/ Broadview Associates LLC
Broadview Associates LLC
<PAGE>
APPENDIX A
SOFTWARE ARTISTRY, INC.
9449 PRIORITY WAY WEST DRIVE
INDIANAPOLIS, INDIANA 46240
INFORMATION STATEMENT PURSUANT TO
SECTION 14(F) OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED, AND
RULE 14F-1 THEREUNDER
This Information Statement is being mailed on or about December 23, 1997 as
part of the Solicitation/ Recommendation Statement on Schedule 14D-9 (the
"Schedule 14D-9") of Software Artistry, Inc. (the "Company") to the holders of
record of shares of Common Stock, no par value (the "Shares"), of the Company at
the close of business on or about December 22, 1997. You are receiving this
Information Statement in connection with the possible election of persons
designated by the Purchaser (as defined below) to a majority of the seats on the
Board of Directors of the Company.
On December 18, 1997, International Business Machines Corporation, a New
York corporation ("IBM"), Hoosier Acquisition Corp., an Indiana corporation (the
"Purchaser") and a wholly owned subsidiary of IBM, and the Company entered into
an Agreement and Plan of Merger (the "Merger Agreement") in accordance with the
terms and subject to the conditions of which (i) the Purchaser is commencing a
tender offer (the "Offer") for all outstanding Shares at a price of $24.50 per
Share, net to the seller in cash, without interest thereon, and (ii) the
Purchaser will be merged with and into the Company (the "Merger"). In the
Merger, each outstanding Share (other than Shares owned by IBM, the Purchaser or
any other subsidiary of IBM or by shareholders, if any, who are entitled to and
who properly exercise dissenters' rights under Indiana law, in the event the
Shares are not registered on a national securities exchange or quoted for
trading on the Nasdaq National Market at the record date for any shareholder
vote on the Merger (if any such vote is required)), will be converted into the
right to receive an amount in cash equal to the price paid in the Offer, without
interest thereon.
The Merger Agreement requires the Company to take all action necessary to
cause the Purchaser Designees (as defined below) to be elected to the Board of
Directors under the circumstances described therein. See "Board of Directors and
Executive Officers of the Company."
This Information Statement is required by Section 14(f) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and Rule 14f-1
thereunder. You are urged to read this Information Statement carefully. You are
not, however, required to take any action. Capitalized terms used herein and not
otherwise defined herein shall have the meanings set forth in the Schedule
14D-9.
Pursuant to the Merger Agreement, the Purchaser commenced the Offer on
December 23, 1997. The Offer is scheduled to expire at 11:59 p.m., New York City
time, on Friday, January 23, 1997 unless the Offer is extended.
The information contained in this Information Statement concerning the
Purchaser and the Purchaser Designees has been furnished to the Company by the
Purchaser, and the Company assumes no responsibility for the accuracy or
completeness of such information.
A-1
<PAGE>
BOARD OF DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
GENERAL
The Shares are the only class of voting securities of the Company. Each
Share has one vote. As of December 17, 1997, there were 7,085,433 Shares
outstanding. The Board of Directors currently consists of one class with five
members. At each annual meeting of shareholders, all directors are elected for
one year terms. The officers serve at the discretion of the Board.
PURCHASER DESIGNEES
Pursuant to the Merger Agreement, upon the Purchaser having paid for Shares
pursuant to the Offer, the Purchaser will be entitled to designate such number
of directors to the Board of Directors of the Company as will give the
Purchaser, subject to compliance with Section 14(f) of the Exchange Act, a
majority of such directors (the "Purchaser Designees"), and the Company will, at
such time, cause the Purchaser Designees to be so elected by its existing Board;
provided, however, that in the event that the Purchaser Designees are elected to
the Board, until the effective time of the Merger such Board will have at least
two directors who are directors on the date of the Merger Agreement and who are
not officers of the Company (the "Independent Directors"); and provided further,
that, in such event, if the number of Independent Directors is reduced below two
for any reason whatsoever, the remaining Independent Director will designate a
person to fill such vacancy, who will be deemed to be an Independent Director
for purposes of the Merger Agreement or, if no Independent Directors then
remain, the other directors are required to designate two persons to fill such
vacancies who are not officers or affiliates of the Company, or officers or
affiliates of IBM or any of its subsidiaries, and such persons will be deemed to
be Independent Directors for purposes of the Merger Agreement. Pursuant to the
Merger Agreement, subject to applicable law, the Company agreed to take all
action requested by IBM that is necessary to effect any such election, including
mailing to its shareholders an information statement containing the information
required by Section 14(f) of the Exchange Act and Rule 14f-1 promulgated
thereunder, and the Company agreed to make such mailing with the mailing of the
Schedule 14D-9. In connection with the foregoing, the Company agreed to
promptly, at the option of IBM, either increase the size of the Board and/or
obtain the resignation of such number of its current directors as is necessary
to enable the Purchaser Designees to be elected or appointed to, and to
constitute a majority of the directors on, the Board.
Pursuant to the provisions of the Merger Agreement described in the
foregoing paragraph, the Purchaser has informed the Company that it will require
the Company to obtain resignations from all directors of the Company, other than
two persons who qualify as Independent Directors, and will designate Lee A.
Dayton, Donald D. Westfall and Archie W. Colburn as the Purchaser Designees. The
Purchaser has informed the Company that each of the Purchaser Designees has
consented to act as a director. None of the Purchaser Designees (i) is currently
the director of, or holds any position with, the Company, (ii) has a familial
relationship with any of the directors or executive officers of the Company or
(iii), to the best knowledge of the Purchaser, beneficially owns any securities
(or rights to acquire any securities) of the Company. The Company has been
advised by the Purchaser that, to the best of the Purchaser's knowledge, none of
the Purchaser Designees has been involved in any transaction with the Company or
any of its directors, executive officers or affiliates that is required to be
disclosed pursuant to the rules and regulations of the Securities and Exchange
Commission.
It is expected that the Purchaser Designees may assume office at any time
following the purchase by the Purchaser of Shares pursuant to the Offer, and
that, upon assuming office, the Purchaser Designees will thereafter constitute
at least a majority of the Board of Directors. Biographical information
concerning each of the Purchaser Designees is presented below.
LEE A. DAYTON, 54, is a Director and the President of the Purchaser, and has
been Vice President, Corporate Development and Real Estate of IBM since 1996.
Mr. Dayton was General Manager, Real
A-2
<PAGE>
Estate and Business Development of IBM from 1994 to 1996; General Manager, Real
Estate and Procurement Services, General Manager, Real Estate Services, and IBM
Director, Real Estate and Construction Staff, from 1990 to 1994; and Senior
Managing Director, Asia Pacific, from 1988 to 1990.
DONALD D. WESTFALL, 59, is a Director, Vice President and Secretary of the
Purchaser and has been Associate General Counsel of IBM since 1988.
ARCHIE W. COLBURN, 45, is Director and the Vice President, Treasurer and
Assistant Secretary of the Purchaser and has been a Business Development
Executive of IBM since 1995. Mr. Colburn was a Business Development Consultant
of IBM from 1994 to 1995 and a Business Development Associate from 1989 to 1994.
CURRENT DIRECTORS AND EXECUTIVE OFFICERS
Biographical information concerning each of the Company's current directors
and executive officers follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Joseph A. Piscopo.................................... 52 Chairman of the Board of Directors
Lawrence W. Olson.................................... 51 Director
Brendan J. Dawson.................................... 57 Director
Blair C. Fensterstock................................ 47 Director
W. Scott Webber...................................... 44 President, Chief Executive Officer and Director
Michael J. Robbins................................... 38 Sr. Vice President, Worldwide Operations
Steven M. Ehrlich.................................... 35 Vice President, ESM Business Unit
Scott S. McCorkle.................................... 30 Vice President, CRM Business Unit
Thomas E. Vanneman................................... 41 Vice President, Finance, Chief Financial Officer,
Secretary and Treasurer
</TABLE>
JOSEPH A. PISCOPO has served as a Director of the Company since 1992 and as
Chairman of the Board since January 1, 1996. He has been self-employed as an
outside director and investor in a variety of public and private corporations
since 1987, including: Open Port Technology, Inc., a private software company
based in Chicago, since 1995; Microsystems Engineering Company, a private
software firm based in Lombard, Illinois, since 1993; National Sleep Alert,
Inc., a private publishing company based in Oak Brook, Illinois, since 1992; and
Hobson Hollow, Inc., a private real estate developer in Naperville, Illinois,
since 1988. Mr. Piscopo was the founder of Pansophic Systems, Inc., a software
firm, in 1969, and served as its President, Chairman, and Chief Executive
Officer until his retirement in 1987. Pansophic was acquired and merged into
Computer Associates in 1991.
LAWRENCE W. OLSON has served as a Director of the Company since 1994. Mr.
Olson has been President of Corporate Counselors, Inc., a private management
consulting company, since 1992; President, Chief Executive Officer, and a
director of Natural Golf Corporation, a private golf equipment manufacturing
company, since 1995; and serves as a Director of American Chartered Bank and BK
Controls Inc., an electrical parts distributor. Mr. Olson was President and
Chief Executive Officer from 1983 to 1992 of LPC Inc., a Pitney Bowes computer
software subsidiary.
BRENDAN J. DAWSON has served as a Director of the Company since May 1997.
Since July 1997, Mr. Dawson has served as President and Chief Operating Officer
and a Director of Information Analysis, Inc., a publicly traded provider of year
2000 software solutions. From January 1996 to January 1997, he was President and
Chief Executive Officer of MAXM Systems Corporation, and from March 1992 to
August 1995, he was Executive Vice President and Chief Operating Officer of
Legent Corporation, a publicly traded systems management software company.
A-3
<PAGE>
BLAIR C. FENSTERSTOCK, an attorney, has served as a director of the Company
since May 1997. Mr. Fensterstock has been a Senior Member of the New York City
law firm of Brock, Fensterstock, Silverstein & McAuliffe LLC since 1995. From
1993 to 1995, he was a partner in the New York City office of the law firm of
Sutherland, Asbill & Brennan. Prior thereto, Mr. Fensterstock was Senior Vice
President, General Counsel and Secretary of Frank B. Hall & Co., Inc. (insurance
brokerage).
W. SCOTT WEBBER has served as President and a Director of the Company since
January 1991, and as Chief Executive Officer since December 1994. From 1981 to
1990, Mr. Webber was employed by Pansophic Systems, Inc., a computer software
company, most recently as Director, North American Sales Operations. Mr. Webber
serves on the Board of Directors of the Indiana Software Association. He holds a
MM degree from Northwestern University and a BA degree from Carleton University,
Ottawa, Canada.
MICHAEL J. ROBBINS has served as Senior Vice President, Worldwide Operations
of the Company since July 1996. From 1995 to 1996, he served as Vice President
and General Manager, European Operations, and from 1991 to 1994, he served as
Vice President, Domestic Sales. From 1986 to 1991, he was employed by Pansophic
Systems, Inc., most recently as Director, Midwest Area Sales. From 1980 to 1986,
Mr. Robbins held various positions at Xerox Corporation and Honeywell
Corporation. He holds a BA degree from the University of Detroit.
STEVEN M. EHRLICH has served as Vice President, ESM Business Unit of the
Company since November 1996. Prior to that, he served as Vice President, Client
Services since May 1991. From 1986 to 1991, he was employed by Pansophic
Systems, Inc., most recently as Product Manager, Systems Software Division. Mr.
Ehrlich holds an MBA from Northern Illinois University and a BA in Computer
Science from Southern Illinois University at Carbondale.
SCOTT S. McCORKLE has served as Vice President, CRM Business Unit of the
Company since November 1996. From May 1996 to October 1996, he was Director of
Development. Prior to that, he was Manager of Information Technology from
November, 1995 to April, 1996, after beginning as an Information Systems Analyst
in August 1995. From 1989 to 1995, he was Senior Scientific Analyst for Lilly
Research Laboratories. He holds an MBA from Indiana University and a BS from
Ball State University.
THOMAS E. VANNEMAN has served as Chief Financial Officer, Vice President,
Finance, Secretary, and Treasurer of the Company since December 1996. From 1992
to 1996, he was Vice President and Treasurer for Acordia, Inc. Prior to joining
Acordia, Mr. Vanneman served as Assistant Treasurer and in various other
management positions with Alexander and Alexander Services, Inc. in Baltimore,
Maryland, and Chicago, Illinois. He holds an MA and a BBA degree from the
University of Iowa.
A-4
<PAGE>
MEETINGS OF THE BOARD
The Board meets on a regularly scheduled basis during the year to review
significant developments affecting the Company and to act on matters requiring
Board approval. It also holds special meetings when an important matter requires
Board action between regularly scheduled meetings. The Board of Directors met
six times during the Company's fiscal year ended December 31, 1996. No incumbent
member attended fewer than 75% of the total number of meetings of the Board of
Directors and of any Board committees of which he was a member during that
fiscal year.
COMMITTEES OF THE BOARD
Committees of the Board consist of an Audit Committee and a Compensation
Committee. The Audit Committee, currently composed of Messrs. Dawson,
Fensterstock, Olson and Piscopo, consults with and reviews the services provided
by the Company's independent auditors. The Audit Committee met twice during the
fiscal year ended December 31, 1996. The Compensation Committee, composed of
Messrs. Dawson, Fensterstock, Olson and Piscopo, reviews and recommends to the
Board the compensation and benefits to be provided to the Company's executive
officers and reviews general policy matters relating to employee compensation
and benefits. The Compensation Committee met three times during the fiscal year
ended December 31, 1996.
COMPENSATION OF DIRECTORS
Each Director who is not also an employee of the Company (an "Independent
Director") receives an annual fee of $2,500, payable quarterly, and a fee of
$300 for each Board of Directors meeting attended.
In addition, under the Amended Nonstatutory Stock Option Incentive Plan (the
"Nonstatutory Plan") approved by the Company's shareholders in 1996, a stock
option grant covering 6,000 Shares is automatically made to each Independent
Director on the initial date and each anniversary of such Director's election to
the Board of Directors. The exercise price under each option is the fair market
value of the Company's Common Stock on the date of grant. The grant vests at the
rate of 2,000 shares on each anniversary date of such grant, provided the
Director continues to serve on the Board.
During the year ended December 31, 1996, Mr. Piscopo received options for
2,500 Shares on January 22, 1996 at an exercise price of $14.25 per Share and
which were vested on that date, and options for 6,000 Shares on January 22,
1996, his Board membership anniversary date, at an exercise price of $14.25 per
Share and which, in the absence of the Offer and the Merger, would vest at the
rate of 2,000 Shares on January 22, 1997, 1998 and 1999. Mr. Olson received
options for 6,000 Shares on October 28, 1996, his Board membership anniversary
date, at an exercise price of $8.88 per Share and which, in the absence of the
Offer and the Merger, would vest at the rate of 2,000 shares on October 28,
1997, 1998, and 1999.
On January 19, 1996 and April 19, 1996, certain of the unexercised and
unvested options were cancelled and re-issued as follows: Mr. Piscopo's option
for 3,500 Shares granted October 18, 1995 at an exercise price of $17.75 per
share was replaced on April 19, 1996 with a new option for 3,500 Shares at an
exercise price of $6.88 per Share, with vesting of 1,750 Shares on April 19,
1997 and 1,750 Shares on April 19, 1998. Mr. Piscopo's option for 6,000 Shares
granted January 22, 1996 at an exercise price of $14.25 per Share was replaced
on April 19, 1996 with a new option for 6,000 Shares at an exercise price of
$6.88 per Share, with vesting of 2,000 Shares on April 19, 1997, 1998 and 1999.
Mr. Olson's option for 6,000 Shares granted October 28, 1995 at an exercise
price of $15.75 per Share was replaced on April 19, 1996 with a new option for
6,000 Shares at an exercise price of $6.88 per Share, with vesting of 2,000
Shares on April 19, 1997, 1998 and 1999. See "Repricing of Options."
In addition to options granted automatically under the Nonstatutory Plan, on
December 18, 1997, Mr. Piscopo received options for 6,000 Shares at an exercise
price of $17.75 per share.
A-5
<PAGE>
EXECUTIVE COMPENSATION
EXECUTIVE OFFICER COMPENSATION
The following table sets forth information regarding the dollar value of all
compensation received for services rendered in all capacities of the Company for
the Chief Executive Officer, the four other highest paid executive officers of
the Company and an additional individual who would have been a named executive
officer of the Company but for the fact that he was not serving as an executive
officer of the Company on December 31, 1996 for the fiscal year ended December
31, 1996, and the immediately preceding fiscal years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------------------------ -------------
OTHER SECURITIES
ANNUAL UNDERLYING
SALARY BONUS COMPENSATION OPTIONS
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) (# OF SHARES)
- ------------------------------------------------------- --------- --------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
W. Scott Webber 1996 220,000 8,291(1) 1,099(2) 120,000(4)
President and Chief Executive Officer 1995 198,750 192,166(1) -- --
1994 181,250 121,919(1) -- --
Steven M. Ehrlich 1996 115,000 37,704(1) 1,099(2) 60,000(5)
Vice President, 1995 98,870 38,043 -- 20,000
ESM Business Unit 1994 80,720 40,461 -- --
Jeremiah J. Fleming 1996 123,333 62,948(1) -- 68,750(6)
Former Vice President, 1995 100,000 109,241(1) -- 26,250
Domestic Sales 1994 60,000 148,202(1) -- 5,000
Stephen R. Head 1996 116,250 -- -- 60,000(5)
Former Vice President, Finance, 1995 109,167 67,982 -- 20,000
Chief Financial Officer, 1994 94,552 40,310 -- 47,500
Secretary, and Treasurer
Michael J. Robbins 1996 150,000 377,267 31,634(2 (3) 80,000(7)
Senior Vice Preisident, 1995 130,000 -- 178,202(3) 20,000
Worldwide Operations 1994 115,717 143,489(1) -- --
</TABLE>
- ------------------------------
(1) Includes participation in the annual Company-sponsored trip awarded to
persons meeting specified sales quotas and/or tax preparation expense.
(2) Represents expense for tax preparation.
(3) Paid in connection with overseas assignment, including tax equalization.
(4) In 1996, a total of 60,000 new options were granted and 60,000 options were
subsequently exchanged, with vesting to re-start as of the new date of
issue.
(5) In 1996, a total of 10,000 new options were granted and 50,000 options were
exchanged, with vesting to re-start as of the new date of issue.
(6) In 1996, a total of 10,000 new options were granted and 58,750 options were
exchanged, with vesting to re-start as of the new date of issue.
(7) In 1996, a total of 20,000 new options were granted and 60,000 options were
exchanged, with vesting to re-start as of the new date of issue.
OPTION GRANTS
The following table shows information concerning options granted during the
Company's fiscal year ended December 31, 1996 to the executive officers named in
the Summary Compensation Table (the "Named Executive Officers").
A-6
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM
OPTIONS EMPLOYEES IN PRICE EXPIRATION ----------------------
NAME GRANTED (#)(1) FISCAL YEAR ($/SHARE) DATE 5%($) 10%($)
- ---------------------------------- --------------- ------------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
W. Scott Webber................... 60,000 5.01% $ 13.75 1/19/06 $ 518,838 $ 1,314
60,000(3) 5.01% 6.88 4/19/06 259,608 657,897
Steven M. Ehrlich................. 10,000 .84% 13.75 1/19/06 86,473 219,139
20,000(3) 1.67% 13.75 1/19/06 172,946 438,279
10,000(3) .84% 6.88 4/19/06 43,268 109,649
20,000(3) 1.67% 6.88 4/19/06 86,536 219,299
Jeremiah J. Fleming............... 10,000 .84% 13.75 1/19/06 88,473 65,790
20,000(2) 1.67% 13.75 1/19/06 172,946 438,279
10,000(3) .84% 6.88 4/19/06 43,268 109,649
20,000(3) 1.67% 6.88 4/19/06 86,536 219,299
6,250(2) .52% 6.88 4/19/06 27,042 68,531
2,500(2) .21% 6.88 4/19/06 10,817 27,412
Stephen R. Head................... 10,000 .84% 13.75 1/19/06 86,473 219,139
20,000(3) 1.67% 13.75 1/19/06 172,946 438,279
10,000(3) .84% 6.88 4/19/06 43,268 109,649
20,000(3) 1.67% 6.88 4/19/06 86,536 219,299
Michael J. Robbins................ 20,000 1.67% 13.75 1/19/06 172,946 438,279
20,000(2) 1.67% 13.75 1/19/06 172,946 438,279
20,000(3) 1.67% 6.88 4/19/06 86,535 219,299
20,000(3) 1.67% 6.88 4/19/06 86,535 219,299
</TABLE>
- ------------------------
(1) Generally, options granted under the Nonstatutory Plan and the Software
Artistry Inc. 1996 incentive Stock Option Plan (as amended) (collectively,
the "Option Plans") before December 10, 1996 are exercisable over a
five-year period, 20% each year, and are subject to the employee's continued
employment. Options granted after December 10, 1996 are exercisable over a
two-year period, 25% every six months, and are subject to the employee's
continued employment. Options are issued at fair market value on the date of
grant. The exercisability of the options will be accelerated in the event of
certain occurrences, including the sale of the Company or a significant
merger.
(2) Options granted prior to 1996 which were cancelled and re-issued April 19,
1996, with vesting to re-start as of the new date of issue.
(3) Options either newly granted or cancelled and re-issued on January 19, 1996
were subsequently exchanged for new options on April 19, 1996, with vesting
to re-start as of the new date of issue.
A-7
<PAGE>
OPTION EXERCISES
The following table shows information concerning options exercised by the
Named Executive Officers during the Company's fiscal year ended December 31,
1996, including the aggregate value of any gains realized on such exercise. The
table also shows information regarding the number and value of unexercised
options held by the Named Executive Officers at December 31, 1996.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
SHARES UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT
ACQUIRED VALUE AT FISCAL YEAR-END (#) FISCAL YEAR-END ($)(2)
ON REALIZED -------------------------- ---------------------------
NAME EXERCISE (#) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------- ------------ ---------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
W. Scott Webber................ 0 0 285,820 60,000 $ 1,725,797 $ 15,000
Steven M. Ehrlich.............. 5,000 $ 56,350 32,148 30,000 $ 183,921 $ 7,500
Jeremiah J. Fleming............ 11,000 $ 135,930 9,000 38,750 $ 43,928 $ 9,688
Stephen R. Head................ 28,750 $ 143,550 0 0 0 0
Michael J. Robbins............. 10,000 $ 120,200 197,160 40,000 $ 1,266,377 $ 10,000
</TABLE>
- ------------------------
(1) Calculated based on the fair market value of the underlying securities on
the exercise date minus the exercise price of such options.
(2) The closing price for the Shares as of December 31, 1996, the last day of
trading in 1996, on the Nasdaq National Market was $7 1/8 per share.
REPRICING OF OPTIONS
In January and April, 1996, as a result of broad declines in the fair market
value of the Shares, the Compensation Committee and the Board of Directors
determined that it was in the best interests of the Company to offer certain
current option holders, including executive officers and independent directors
(see "Compensation of Directors") the opportunity to exchange certain
unexercised and unvested options for new options with an exercise price equal to
the then current fair market value of the Shares. Under the approved changes,
optionees who agreed to the cancellation of their outstanding options received
in exchange a new option exercisable for the same number of shares at an
exercise price equal to the fair market value of the Shares on the date of the
exchange. Therefore, in effect, optionees who agreed to the exchange received a
lower exercise price and gave up any vesting accrued through the date of their
canceled options.
On January 19, 1996, the Compensation Committee and the Board of Directors
approved the offer to exchange outstanding unexercised and unvested options that
were previously granted with exercise prices above $20.00 per Share for the same
number of Shares with an exercise price of $13.75 per Share, the fair market
value on January 19, 1996, with vesting to restart as of that date. On April 19,
1996, the Compensation Committee and the Board of Directors approved the offer
to exchange outstanding unexercised and unvested options that were previously
granted with exercise prices above the current market price with new options for
the same number of Shares with an exercise price of $6.88 per Share, the fair
market value on April 19, 1996, with vesting to restart as of that date. See
"Compensation of Directors", "Ten-Year Option/ SAR Repricings" table, and
"Report of the Compensation Committee on Repricing of Options."
A-8
<PAGE>
The following table provides the specified information concerning all
repricings of options Shares held by any executive officer of the Company since
March 2, 1995, the date of the Company's initial public offering. All repriced
options are at the full fair market value of the Shares on the date of
repricing. Repriced options vest ratably over a five-year period beginning on
the date of repricing. Optionees forfeit any accrued vesting on their canceled
options. See "Report of the Compensation Committee on Repricing of Options."
TEN-YEAR OPTION/SAR REPRICINGS
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES EXERCISE LENGTH OF
UNDERLYING MARKET PRICE OF PRICE AT TIME ORIGINAL OPTION
OPTIONS/SARS STOCK AT TIME OF REPRICING NEW TERM REMAINING AT
REPRICED OR OF REPRICING OR OR AMENDMENT EXERCISE DATE OF REPRICING
NAME AND POSITION DATE AMENDED(#) AMENDMENT ($) ($) PRICE ($) OR AMENDMENT
- -------------------------------- --------- --------------- --------------- ------------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C>
W. Scott Webber................. 4/19/96 60,000 $ 6.88 $ 13.75 $ 6.88 117 mos.
President and Chief Executive
Officer
Steven M. Ehrlich............... 1/19/96 10,000 $ 13.75 $ 20.13 $ 13.75 112 mos.
Vice President 4/19/96 30,000 $ 6.88 $ 13.75 $ 6.88 117 mos.
Jeremiah J. Fleming............. 1/19/96 20,000 $ 13.75 $ 20.13 $ 13.75 112 mos.
Former Vice President, Sales 4/19/96 30,000 $ 6.88 $ 13.75 $ 6.88 117 mos.
4/19/96 6,250 $ 6.88 $ 7.40 $ 6.88 104 mos.
4/19/96 2,500 $ 6.88 $ 7.35 $ 6.88 104 mos.
Stephen R. Head................. 1/19/96 10,000 $ 13.75 $ 20.13 $ 13.75 112 mos.
Former Vice President, Chief
Financial Officer, Secretary & 4/19/96 30,000 $ 6.88 $ 13.75 $ 6.88 117 mos.
Treasurer
Gary E. Lemke................... 1/19/96 20,000 $ 13.75 $ 20.13 $ 13.75 112 mos.
Former Vice President,
Marketing 4/19/96 50,000 $ 6.88 $ 13.75 $ 6.88 117 mos.
Scott S. McCorkle............... 4/19/96 1,000 $ 6.88 $ 13.88 $ 6.88 115 mos.
Vice President 4/19/96 1,000 $ 6.88 $ 15.00 $ 6.88 115 mos.
Michael J. Robbins.............. 1/19/96 20,000 $ 13.75 $ 20.13 $ 13.75 112 mos.
Senior Vice President,
Worldwide 4/19/96 40,000 $ 6.88 $ 13.75 $ 6.88 117 mos.
Operations
</TABLE>
EMPLOYMENT AND OTHER EMPLOYEE RELATED CONTRACTS
Certain executive officers have employment agreements with the Company. The
agreements fix each officer's base compensation, provide for salary increases
and bonuses as the Company's Board of Directors may determine from time to time,
provide for participation in such employee benefit plans as the Company may
adopt from time to time for its personnel generally, provide for reimbursement
of travel and other expenses in connection with such officers' employment, and,
in certain circumstances, allow for specified relocation fees and education
reimbursement. The agreements have no specified terms but are terminable by the
Company with or without just cause, as defined in the employment agreements.
Upon termination without just cause, the officer is entitled to severance pay
equal to such officer's base salary at the time of termination and continued
medical insurance coverage for 12 months or until such officer obtains
employment, whichever period is less. If so terminated without just cause, the
Company would be obligated to pay the indicated amounts to the following
executive officers: W. Scott Webber, $240,000; Steven M. Ehrlich $140,000; and
Michael J. Robbins, $190,000. The agreements also contain confidentiality and
non-compete provisions between the Company and such officers for the terms and
guidelines as set forth in each agreement. Certain amendments were made to these
severance arrangements in connection with the execution of the Merger Agreement.
See "Arrangements Made in Connection with the Merger" below.
A-9
<PAGE>
ARRANGEMENTS MADE IN CONNECTION WITH THE MERGER
AMENDMENT TO CERTAIN STOCK OPTION AGREEMENTS. Except as described below,
all options will become fully vested as a result of the Merger unless the holder
of options that would otherwise accelerate elects to waive such acceleration.
In connection with the execution of the Merger Agreement, Stock Option
Agreements between the Company and each of Mr. Webber and Mr. Robbins, (the
"Stock Option Agreements"), were amended to provide that the unvested options
held by them (i) would not be accelerated as a result of the transaction, (ii)
would be assumed by IBM and (iii) would vest in two equal segments, one segment
becoming fully vested on the first anniversary of the effective time of the
Merger (the "Effective Time") and the second segment becoming fully vested on
the second anniversary of the Effective Time; PROVIDED HOWEVER, that all
unvested options held by Mr. Webber and Mr. Robbins would vest immediately upon
any termination of Mr. Webber or Mr. Robbins, as the case may be, without "good
cause" and, in the case of Mr. Robbins, upon a Special Termination Event (as
hereinafter defined).
In connection therewith, IBM agreed to make payments to Mr. Webber equal to
$150,000 and to Mr. Robbins equal to $125,000 upon the vesting of each segment
of options (other than, in the case of Mr. Robbins, a vesting pursuant to the
occurence of a Special Termination Event); PROVIDED that all such payments would
be paid immediately to Mr. Webber or Mr. Robbins, as the case may be, upon any
termination of Mr. Webber or Mr. Robbins, as the case may be, without "good
cause".
WAIVER OF SEVERANCE PAY. In connection with the execution of the Merger
Agreement, (i) Mr. Godfrey, Mr. Ehrlich, Mr. McCorkle and Mr. Webber waived
their rights to receive severance payments as a result of a constructive
termination occurring at any time or as a result of any termination occurring
after the first anniversary of the Effective Time, (ii) Mr. Vanneman waived his
right to receive severance payments in exchange for a lump sum payment of
$170,000 and (iii) Mr. Robbins agreed that, for purposes of determining whether
severance payments would be due to him as a result of a constructive
termination, a constructive termination would be defined as a reduction in his
base compensation or a relocation of his place of employment to a location that
is more than fifty miles from his current place of employment (a "Special
Termination Event") and waived his right to receive severance payments as a
result of any termination occurring after the first anniversary of the Effective
Time.
CERTAIN ARRANGEMENTS In connection with the execution of the Merger
Agreement, IBM agreed to the payment by the Company to Mr. Webber and Mr.
Robbins of special bonuses of $450,000 and $300,000, respectively, and to the
making of certain future option grants in connection with the Company's sales
compensation program.
A-10
<PAGE>
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The following is the Report of the Compensation Committee of the Board of
Directors, describing the compensation policies and rationale applicable to the
Company's executive officers with respect to compensation paid to such executive
officers for the year ended December 31, 1996. This report is not "soliciting
material," is not deemed filed with the Securities and Exchange Commission, and
is not to be incorporated by reference in any filing of the Company under the
Securities Act of 1933 or the Securities Exchange Act of 1934. This Report
speaks as of March 25, 1997 and does not reflect developments related to the
Offer and the Merger.
PURPOSE OF THE COMPENSATION COMMITTEE
The Compensation Committee of the Board of Directors is responsible for
recommending to the Board of Directors compensation levels for the executive
officers for each fiscal year based upon a consistent set of policies and
procedures.
COMPENSATION COMMITTEE STRUCTURE
As of March 25, 1997, the date of this report, the Compensation Committee
consisted of three (3) independent, non-employee members of the Board of
Directors who meet during the fourth quarter of each fiscal year to set
executive officer salaries and other compensation, and at other times as deemed
necessary.
OBJECTIVES OF THE COMPENSATION PROGRAM
The objectives of the compensation program are: (i) to provide a means for
the Company to attract and retain high-quality executives; (ii) to tie executive
compensation directly to the Company's business and performance objectives;
(iii) to align the financial interests of the Company's executive officers with
the financial interest of shareholders; and (iv) to reward outstanding
individual performance that contributes to the long-term success of the Company.
ELEMENTS OF COMPENSATION
Each executive officer's compensation package is comprised of three
elements: (i) base compensation, which reflects individual responsibility and is
designed primarily to be competitive with salary levels of a comparative group;
(ii) annual bonus plan compensation payable in cash and tied generally to the
achievement of financial performance goals as established by the Board of
Directors; and (iii) long-term stock-based incentive compensation which
emphasizes a focus on Company growth and increased shareholder value.
BASE SALARIES. In order to retain executives and other key employees, and
to be able to attract additional well-qualified executives when the need arises,
the Company strives to offer salaries, health care and other employee benefit
programs to its executives and other key employees which are comparable to those
offered to persons with similar skills and responsibilities by competing
businesses. In recommending salaries for executive officers, the Committee: (i)
reviews the historical performance of the officers and (ii) reviews available
information, including information published in secondary sources, regarding
prevailing salaries and compensation programs offered by competing businesses
which it believes are comparable to the Company in terms of size, revenue,
financial performance and industry group. Many, though not all, of these
competing businesses are publicly traded.
REVENUE BONUS. Certain officers of the Company (Vice President, North
American Sales, Vice President, European Operations, and Vice President, Asia
Pacific Operations) are paid a cash bonus, on a quarterly basis, upon the
achievement of their assigned revenue targets on a year-to-date basis. The
annual bonuses for achievement of all targets range from $50,000 to $85,000 for
each officer.
A-11
<PAGE>
ANNUAL BONUS COMPENSATION. The Board of Directors establishes, on an annual
basis, a cash incentive program for each of the Company's executive officers.
The Compensation Committee recommended and the Board of Directors approved an
annual incentive bonus compensation structure for fiscal year 1997 which is
based upon the attainment of annual operating income goals and increased revenue
growth for the year.
LONG-TERM STOCK-BASED INCENTIVE COMPENSATION. Long-term incentives are
provided through stock option grants which are based upon factors that the
Compensation Committee deems appropriate, including aligning the interests of
each executive officer with those of the shareholders and providing each
individual with a significant incentive to manage the Company from the
perspective of an owner with an equity stake in the business. Each grant
generally allows the officer to acquire Shares at a fixed price per Share (the
market price on the grant date) over a specified period of time (up to 10
years). Options granted before December 10, 1996 generally vest in equal
installments over a five year period, contingent upon the executive officer's
continued employment with the Company. Options granted after December 10, 1996
generally vest at six month intervals over a two-year period, contingent upon
the executive officer's continued employment. Accordingly, options will provide
a return to the executive officer only if the executive officer remains employed
by the Company during the vesting period, and then only to the extent the market
price of the Shares appreciates over the option term. The size of the option
grant to each executive officer, based on the aggregate exercise price, is
somewhat subjective and generally is set at a level that the Committee deems
appropriate in order to create a meaningful opportunity for stock ownership
based upon the individual's current position with the Company, but also takes
into account (i) comparable awards to individuals in similar positions in the
industry as reflected in generally available information, (ii) the individual's
potential for future responsibility and promotion over the option term, and
(iii) the individual's personal performance in recent periods. The Committee
also takes into account the number of vested and unvested options held by each
executive officer in order to maintain an appropriate amount of equity incentive
for that individual. However, the Committee does not adhere to any specific
guidelines as to the relative option holdings of the Company's executive
officers. See "Executive Compensation--Repricing of Options".
CHIEF EXECUTIVE OFFICER COMPENSATION
Mr. Webber's base salary and incentive compensation were established in
accordance with the criteria described above. Mr. Webber's base salary for 1996
as President and Chief Executive Officer was $220,000. In setting this amount,
the Board of Directors took into account: (i) its belief that Mr. Webber is the
Chief Executive Officer of a leading software company and has significant and
broad based experience in the software industry; (ii) the scope of Mr. Webber's
responsibilities; and (iii) its confidence in Mr. Webber to lead the Company's
growth in the future. The base salary is set to provide a compensation level
considered by the Compensation Committee to be comparable to a selected group of
other software companies.
TAX DEDUCTIBILITY OF EXECUTIVE COMPENSATION
Section 162 of the Internal Revenue Code of 1986, as amended (the "IRC"),
limits the federal income tax deductibility of compensation paid to the
Company's Chief Executive Officer and to each of the other four most highly
compensated executive officers. The Company may deduct such compensation only to
the extent that during any fiscal year the compensation paid to any such
individual does not exceed $1 million, unless compensation is performance-based
and meets certain specified conditions (including shareholder approval). Based
on the Company's current compensation plans and policies and recently released
regulations interpreting Section 162 of the IRC, the Company and the Committee
do not believe that, for the near future, the aggregate amount of compensation
payable to executives will exceed the $1 million limit.
A-12
<PAGE>
REPORT OF THE COMPENSATION COMMITTEE ON REPRICING OF OPTIONS
In January and April, 1996 the Compensation Committee considered the options
held by the Company's executive officers, independent directors and employees
and the fact that the broad decline in the price of the Shares had resulted in a
substantial number of stock options granted pursuant to the Company's Option
Plans having exercise prices well above the recent trading prices for the
Shares. The Committee took into account information presented by management
showing that employee turnover had significantly increased in each of the most
recent fiscal years. The Committee was advised that management believed that
turnover was increasing in part because the Company's total compensation package
for long-term employees, which included substantial options with exercise prices
well above the current trading price, was less attractive than compensation
offered by other companies in the same geographic location, because options
granted to new hires at other companies would be granted at current trading
prices, providing more opportunity for appreciation than the Company's options.
The Committee believed that (i) the Company's success in the future will
depend in large part on its ability to retain a number of its highly skilled
technical, managerial and marketing personnel, (ii) competition for such
personnel is intense, (iii) the loss of key employees could have a significant
adverse impact on the Company's business, and (iv) it is important and
cost-effective to provide equity incentives to independent directors, employees
and executive officers of the Company to improve the Company's performance and
the value of the Company for its shareholders. The Committee considered granting
new options to existing employees at fair market value, but recognized that the
size of the option grants required to offset the decline in market price would
result in significant additional dilution to shareholders. The Committee also
recognized that an exchange of existing options with exercise prices higher than
fair market value for options at fair market value would provide additional
incentive to employees because of the increased potential for appreciation and
also recognized that the Committee could require restarted vesting in the
exchange options, so that optionees participating in the exchange would have
incentives to remain with the Company. On balance, considering all of these
factors, the Committee determined it to be in the best interests of the Company
and its shareholders to restore the incentive for independent directors,
employees and executive officers to remain with the Company and to exert their
maximum efforts on behalf of the Company by granting replacement stock options
under its Options Plans for those options with exercise prices above recent
trading prices, at the optionee's option, and with restarted vesting.
Accordingly, in January 1996 and April 1996, the Committee and the Board of
Directors approved an offer to all employees of the Company, including executive
officers and independent directors, to exchange certain outstanding options with
exercise prices above the then current trading price for options with an
exercise price equal to the current trading price, with vesting commencing on
the date of the exchange. All exchanged options will terminate no later than ten
(10) years from the date of exchange. Accordingly, optionees who participated in
the exchange received a lower exercise price in exchange for their forfeiting
any accrued vesting on their exchanged options.
The offer to exchange options on January 19, 1996 was applicable only to
previously granted options with exercise prices above $20.00 per share. A total
of 126,500 options with exercise prices from $20.13 to $24.25 per share were
exchanged for an equal number of shares at an exercise price of $13.75, the
closing price of the Shares on January 19, 1996.
The offer to exchange options on April 19, 1996 was applicable to previously
granted unvested and unexercised options with exercise prices above $6.88 per
share. A total of 431,738 options with exercise prices from $7.35 to $17.75 per
share were exchanged for an equal number of Shares at an exercise price of $6.88
per Share, the closing price of the Shares on April 19, 1996.
See "Executive Compensation--Repricing of Options", "Board of
Directors--Compensation of Directors", and "Executive Compensation--Ten-Year
Option/SAR Repricings" table for additional information.
A-13
<PAGE>
CONCLUSION
Through the programs described above, a significant portion of the Company's
executive compensation is linked directly to corporate performance as well as,
with respect to stock options, stock appreciation. In 1996, as in previous
years, a substantial portion of the Company's targeted executive compensation
consisted of performance-based variable elements. The Compensation Committee
intends to continue the policy of linking executive officer compensation to
Company performance and returns to shareholders, recognizing that the ups and
downs of the business cycle from time to time may result in an imbalance for a
particular period.
By the Compensation Committee,
Joseph A. Piscopo, CHAIRMAN
Lawrence W. Olson
Jerry Baker
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the year ended December 31, 1996, the Compensation Committee
consisted of Joseph A. Piscopo, Jerry Baker, and Lawrence W. Olson. Mr. Baker
resigned effective September 10, 1997. The Compensation Committee now consists
of Mr. Piscopo, Mr. Dawson, Mr. Fensterstock and Mr. Olson. The Company is not
aware of any interlocks or insider participation required to be disclosed under
applicable rules of the Securities and Exchange Commission.
SECTION 16(A) OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's directors,
executive officers and holders of more than 10% of the Company's Common Stock
(collectively the "Reporting Persons") to file with the Securities and Exchange
Commission initial reports of ownership and reports of changes in ownership of
Shares. Such Reporting Persons are required by regulations of the Securities and
Exchange Commission to furnish the Company with copies of all such filings.
Based solely on a review of copies of reports filed by the Reporting Persons
pursuant to Section 16(a) of the Exchange Act, or written representations from
certain Reporting Persons that no Form 5 filing was required for such person,
the Company believes that all Reporting Persons complied with all Section 16(a)
requirements in the fiscal year ended December 31, 1996, except that (i) Mr.
Fleming filed one late Form 5, and (ii) Dr. Brown filed one late Form 4
reporting three transactions.
A-14
<PAGE>
COMPARATIVE PERFORMANCE GRAPH
The following graph compares the cumulative total return on the Shares
during the period from the Company's initial public offering through December
31, 1996, with the Prepackaged Software (SIC Code 7372) Index ("SIC Code 7372
Index") and the cumulative total return on the Nasdaq Stock Market (U.S.
Companies) Index ("NASDAQ Market Index"). The comparison assumes $100.00 was
invested on March 3, 1995 in the Shares and in each of the foregoing indices and
assumes any dividends were reinvested.
COMPARISON OF CUMULATIVE TOTAL RETURN (1) (2)
[GRAPH]
ASSUMES $100 INVESTED ON MARCH 3, 1995
ASSUMES DIVIDENDS REINVESTED
FISCAL YEAR ENDING DECEMBER 31, 1996
<TABLE>
<CAPTION>
INDEX DESCRIPTION 3/3/95 3/31/95 6/30/95 9/30/95 12/31/95 3/31/96 6/30/96
- ------------------------------------ ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Software Artistry, Inc.............. $ 100 115.66 107.23 91.57 72.29 56.63 33.13
SIC Code 7372 Index................. $ 100 107.69 128.62 138.89 146.28 152.55 172.06
NASDAQ Market Index................. $ 100 104.74 114.59 127.68 126.65 132.50 142.32
<CAPTION>
INDEX DESCRIPTION 9/30/96
- ------------------------------------ -----------
<S> <C>
Software Artistry, Inc.............. 34.94
SIC Code 7372 Index................. 181.15
NASDAQ Market Index................. 146.24
</TABLE>
- ------------------------
(1) Prior to March 3, 1995, the Shares were not publicly traded. Comparative
data is provided only for the period since that date. This graph is not
"soliciting material," is not deemed filed with the Securities and Exchange
Commission, and is not to be incorporated by reference in any filing of the
Company under the Securities Act of 1933 or the Securities Exchange Act of
1934 whether made before or after the date hereof and irrespective of any
general incorporation language in any such filing.
(2) The Share price performance shown on the graph is not necessarily indicative
of future price performance. Information used for this graph was obtained
from Media General Financial Services, Richmond, Virginia, a source believed
to be reliable, but the Company is not responsible for any error or
omissions in such information.
A-15
<PAGE>
VOTING SECURITIES AND PRINCIPAL HOLDERS
The following table sets forth, as of December 18, 1997, certain information
regarding beneficial ownership of Shares by (i) each person known to the Company
to be the beneficial owner of more than five percent of the outstanding Shares,
(ii) each director of the Company, (iii) the chief executive officer and the
other Named Executive Officers, and (iv) all of the Company's executive officers
and directors as a group. Unless otherwise noted, the named beneficial owner has
sole voting and investment power. The amounts set forth below do not reflect the
acceleration of any presently unvested options, or the exercise of any
accelerated options, which under the terms of the Company's Option Plans would
result from the purchase of Shares pursuant to the Offer.
<TABLE>
<CAPTION>
NUMBER OF SHARES
OF COMMON STOCK
BENEFICIALLY PERCENT OF COMMON
NAME (1) OWNED STOCK OUTSTANDING
- ------------------------------------------------------------------------------ ----------------- -----------------
<S> <C> <C>
Brendan J. Dawson............................................................. 0 0
Blair C. Fensterstock......................................................... 0 0
Lawrence W. Olson (2)......................................................... 6,500 *
Joseph A. Piscopo (3)......................................................... 591,094 7.7
W. Scott Webber (4)........................................................... 516,720 6.7
Steven M. Ehrlich (5)......................................................... 51,148 *
Jeremiah J. Fleming (6)....................................................... 48,148 *
Stephen Head (7).............................................................. 28,650 *
Michael J. Robbins (8)........................................................ 210,160 2.7
Thomas E. Vanneman (9)........................................................ 18,272 *
All Directors and executive officers
as a group (10 persons)...................................................... 1,470,692 19.1
ADDITIONAL 5% SHAREHOLDERS
- ------------------------------------------------------------------------------
Donald E. Brown, M.D. (10).................................................... 827,070 10.5
10022 Fox Trace
Zionsville, IN 46277
Lawrence D. Greenberg......................................................... 411,900 6.0
Greenberg--Summit Partners, L.L.C. (11)
600 Atlantic Avenue
Suite 2800
Boston, MA 02210
</TABLE>
- ------------------------
* Less than 1% of the outstanding Shares.
(1) The business address of all directors and executive officers is care of
Software Artistry, Inc., 9449 Priority Way West Drive, Indianapolis, IN
46240.
(2) Includes 6,500 Shares subject to options exercisable within 60 days of
December 18, 1997.
(3) Includes 15,750 Shares subject to options exercisable within 60 days of
December 18, 1997.
(4) Includes 317,820 Shares subject to options exercisable within 60 days of
December 18, 1997.
(5) Includes 50,648 Shares subject to options exercisable within 60 days of
December 18, 1997.
(6) Mr. Fleming terminated employment with the Company in January 1997. Share
ownership information for him is as of February 26, 1997.
(7) Mr. Head terminated employment with the Company in December 1996. Share
ownership information for him is as of February 26, 1997.
(8) Includes 210,160 Shares subject to options exercisable within 60 days of
December 18, 1997.
(9) Includes 12,500 Shares subject to options exercisable within 60 days of
December 18, 1997.
(10) Based solely on information provided by Dr. Brown in connection with the
execution of the Shareholders' Agreement, Dr. Brown owns 707,000 shares.
Shares beneficially owned also includes 120,070 Shares subject to options
exercisable within 60 days of December 18, 1997.
(11) Based solely on information included in a joint statement on Schedule 13-D
dated July 16, 1997.
A-16
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------- --------------------------------------------------------------------------------------------------------
<C> <S>
1.......... Merger Agreement
2.......... Pages 9-16 of the Proxy Statement
3.......... Shareholder Agreement
4.......... Article VI of the Restated By-laws of the Company
5.......... Opinion of Broadview Associates dated December 18, 1997*
6.......... Press Release of the Company and IBM, issued December 19, 1997
7.......... Letter, dated December 23, 1997, from the Chairman of the Board and President to the shareholders of the
Company
</TABLE>
- ------------------------
* Attached hereto as Annex A.
<PAGE>
==============================================================================
AGREEMENT AND PLAN OF MERGER
among
INTERNATIONAL BUSINESS MACHINES CORPORATION,
HOOSIER ACQUISITION CORP.
and
SOFTWARE ARTISTRY, INC.
Dated as of December 18, 1997
===============================================================================
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I
The Offer
SECTION 1.01. The Offer.................................................... 2
SECTION 1.02 Company Actions.............................................. 4
ARTICLE II
The Merger
SECTION 2.01. The Merger................................................... 5
SECTION 2.02. Closing...................................................... 6
SECTION 2.03. Effective Time............................................... 6
SECTION 2.04. Effects of the Merger........................................ 6
SECTION 2.05. Articles of Incorporation and By-laws........................ 6
SECTION 2.06. Directors.................................................... 7
SECTION 2.07 Officers..................................................... 7
ARTICLE III
Effect of the Merger on the Capital Stock of the
Constituent Corporations; Exchange of Certificates
SECTION 3.01. Effect on Capital Stock................................... 7
(a) Capital Stock of Sub.................................. 7
(b) Cancelation of Parent Owned Stock..................... 7
(c) Conversion of Shares.................................. 7
(d) Shares of Dissenting Shareholders..................... 8
(e) Withholding Tax....................................... 8
SECTION 3.02. Exchange of Certificates.................................. 8
(a) Paying Agent.......................................... 8
(b) Exchange Procedure.................................... 9
(c) No Further Ownership Rights in Shares................. 9
(d) No Liability.......................................... 10
<PAGE>
Contents, p. 2
Page
----
ARTICLE IV
Representations and Warranties of the Company
SECTION 4.01. Organization.............................................. 10
SECTION 4.02. Subsidiaries.............................................. 11
SECTION 4.03. Capitalization............................................ 11
SECTION 4.04. Authority................................................. 12
SECTION 4.05. Consents and Approvals; No Violations..................... 12
SECTION 4.06. SEC Reports and Financial Statements...................... 13
SECTION 4.07. Absence of Certain Changes or Events...................... 14
SECTION 4.08. No Undisclosed Liabilities................................ 15
SECTION 4.09. Information Supplied...................................... 15
SECTION 4.10. Benefit Plans; Employees and Employment Practices......... 15
SECTION 4.11. Contracts................................................. 17
SECTION 4.12. Litigation................................................ 18
SECTION 4.13. Compliance with Applicable Law............................ 18
SECTION 4.14. Tax Matters............................................... 19
SECTION 4.15. State Takeover Statutes................................... 21
SECTION 4.16. Brokers; Schedule of Fees and Expenses.................... 21
SECTION 4.17. Opinion of Financial Advisor.............................. 21
SECTION 4.18. Intellectual Property..................................... 22
ARTICLE V
Representations and Warranties
of Parent and Sub
SECTION 5.01. Organization.............................................. 24
SECTION 5.02. Authority................................................. 24
SECTION 5.03. Consents and Approvals; No Violations..................... 25
SECTION 5.04. Information Supplied...................................... 25
SECTION 5.05. Interim Operations of Sub................................. 26
SECTION 5.06. Brokers................................................... 26
SECTION 5.07. Financing................................................. 26
<PAGE>
Contents, p. 3
Page
----
ARTICLE VI
Covenants
SECTION 6.01. Covenants of the Company.................................. 26
(a) Ordinary Course....................................... 27
(b) Dividends; Changes in Stock........................... 27
(c) Issuance of Securities................................ 27
(d) Governing Documents................................... 27
(e) No Acquisitions....................................... 27
(f) No Dispositions....................................... 28
(g) Indebtedness.......................................... 28
(h) Advice of Changes; Filings............................ 28
(i) Tax Matters........................................... 28
(j) Capital Expenditures.................................. 29
(k) Discharge of Liabilities.............................. 29
(l) Material Contracts.................................... 29
(m) Benefits Changes...................................... 29
(n) General............................................... 29
SECTION 6.02. No Solicitation........................................... 30
SECTION 6.03. Other Actions............................................. 32
ARTICLE VII
Additional Agreements
SECTION 7.01. Shareholder Approval; Preparation of
Proxy Statement.......................................... 32
SECTION 7.02. Access to Information..................................... 33
SECTION 7.03. Reasonable Efforts........................................ 34
SECTION 7.04. Company Stock Options..................................... 34
SECTION 7.05. Directors................................................. 36
SECTION 7.06. Fees and Expenses......................................... 37
SECTION 7.07. Indemnification........................................... 37
SECTION 7.08. Certain Litigation........................................ 38
ARTICLE VIII
Conditions
SECTION 8.01. Conditions to Each Party's Obligation To
Effect the Merger....................................... 39
(a) Company Shareholder Approval.......................... 39
(b) No Injunctions or Restraints.......................... 39
(c) Purchase of Shares.................................... 39
<PAGE>
Contents, p. 4
Page
----
ARTICLE IX
Termination and Amendment
SECTION 9.01. Termination............................................... 39
SECTION 9.02. Effect of Termination..................................... 41
SECTION 9.03. Amendment................................................. 41
SECTION 9.04. Extension; Waiver......................................... 41
ARTICLE X
Miscellaneous
SECTION 10.01. Nonsurvival of Representations, Warranties
and Agreements........................................ 42
SECTION 10.02. Notices.................................................. 42
SECTION 10.03. Interpretation........................................... 43
SECTION 10.04. Counterparts............................................. 44
SECTION 10.05. Entire Agreement; No Third Party Beneficiaries........... 44
SECTION 10.06. Governing Law............................................ 44
SECTION 10.07. Publicity................................................ 44
SECTION 10.08. Assignment............................................... 44
SECTION 10.09. Enforcement.............................................. 45
EXHIBIT A - Conditions of the Offer
<PAGE>
AGREEMENT AND PLAN OF MERGER dated as of December 18, 1997,
among INTERNATIONAL BUSINESS MACHINES CORPORATION, a New York
corporation ("Parent"), HOOSIER ACQUISITION CORP., an Indiana
corporation and a wholly owned subsidiary of Parent ("Sub"), and
SOFTWARE ARTISTRY, INC., an Indiana corporation (the "Company").
WHEREAS, Parent proposes to cause Sub to make a tender offer (as it
may be amended from time to time as permitted under this Agreement, the "Offer")
to purchase all the outstanding shares of Common Stock, no par value, of the
Company (the "Company Common Stock"; the outstanding shares of Company Common
Stock being hereinafter collectively referred to as the "Shares"), at a purchase
price (the "Offer Price") of $24.50 per Share, net to the seller in cash,
without interest thereon, upon the terms and subject to the conditions set forth
in this Agreement; and the Board of Directors of the Company has adopted
resolutions approving the Offer and recommending that holders of Shares accept
the Offer;
WHEREAS, the merger of Sub with the Company (the "Merger") upon the
terms and subject to the conditions set forth in this Agreement, whereby each
issued and outstanding Share, other than Shares owned directly or indirectly by
Parent and, if applicable, Dissenting Shares (as defined in Section 3.01(d)),
will be converted into the right to receive in cash the price per share paid in
the Offer, has been authorized by all necessary corporate action on behalf of
Parent and Sub and has been adopted by the Board of Directors of the Company;
WHEREAS, concurrently with the execution of this Agreement and as an
inducement to Parent to enter into this Agreement, Parent, Sub and certain
shareholders of the Company are entering into a Shareholder Agreement (the
"Shareholder Agreement") pursuant to which such shareholders have, among other
things, agreed to sell all such shareholders' Shares to Sub at the price per
Share paid in the Offer, upon the terms and subject to the conditions set forth
in the Shareholder Agreement; and the Shareholder Agreement has been approved by
the Board of Directors of the Company;
WHEREAS, concurrently with the execution of this Agreement and as an
inducement to Parent to enter into this Agreement, Parent and certain
shareholders of the Company who are employed by the Company are entering into
<PAGE>
Noncompetition Agreements (the "Noncompetition Agreements") pursuant to which
such shareholders have, among other things, agreed to not have any Relationship
(as defined in the Noncompetition Agreements) with certain third parties during
the Noncompetition Period (as defined in the Noncompetition Agreements); and
WHEREAS, Parent, Sub and the Company desire to make certain
representations, warranties, covenants and agreements in connection with the
Offer and the Merger and also to prescribe various conditions to the Offer and
the Merger.
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements herein contained, and intending to be legally bound
hereby, Parent, Sub and the Company hereby agree as follows:
ARTICLE I
The Offer
SECTION 1.01. The Offer. (a) Subject to the provisions of this
Agreement, as promptly as practicable but in no event later than five business
days after the date of the public announcement by Parent and the Company of this
Agreement, Sub shall, and Parent shall cause Sub to, commence the Offer. The
obligation of Sub to, and of Parent to cause Sub to, commence the Offer and
accept for payment, and pay for, any Shares tendered pursuant to the Offer shall
be subject only to the conditions set forth in Exhibit A (the "Offer
Conditions") (any of which may be waived in whole or in part by Sub in its
reasonable discretion, except that Sub shall not waive the Minimum Condition (as
defined in Exhibit A) without the consent of the Company) and to the terms and
conditions of this Agreement. Sub expressly reserves the right to modify the
terms of the Offer, except that, without the consent of the Company, Sub shall
not (i) reduce the number of Shares subject to the Offer, (ii) reduce the Offer
Price, (iii) amend or add to the Offer Conditions, (iv) except as provided in
the next sentence, extend the Offer, (v) change the form of consideration
payable in the Offer or (vi) amend any other term of the Offer in any manner
adverse to the holders of the Shares. Notwithstanding the foregoing, Sub may,
without the consent of the Company, (i) extend the Offer, if at the scheduled or
extended expiration date of the Offer any of the Offer Conditions shall not be
satisfied or waived, until such time as such conditions are satisfied or waived,
(ii) extend the
2
<PAGE>
Offer for any period required by any rule, regulation, interpretation or
position of the Securities and Exchange Commission (the "SEC") or the staff
thereof applicable to the Offer and (iii) extend the Offer for any reason on one
or more occasions for an aggregate period of not more than 10 business days
beyond the latest expiration date that would otherwise be permitted under
clause (i) or (ii) of this sentence. Subject to the terms and conditions of the
Offer and this Agreement, Sub shall, and Parent shall cause Sub to, accept for
payment, and pay for, all Shares validly tendered and not withdrawn pursuant to
the Offer that Sub becomes obligated to accept for payment, and pay for,
pursuant to the Offer as promptly as practicable after the expiration of the
Offer.
(b) On the date of commencement of the Offer, Parent and Sub shall
file with the SEC a Tender Offer Statement on Schedule 14D-1 (the
"Schedule 14D-1") with respect to the Offer, which shall contain an offer to
purchase and a related letter of transmittal and summary advertisement (such
Schedule 14D-1 and the documents included therein pursuant to which the Offer
will be made, together with any supplements or amendments thereto, the "Offer
Documents"). Parent and Sub agree that the Offer Documents shall comply as to
form in all material respects with the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and the rules and regulations promulgated
thereunder and the Offer Documents, on the date first published, sent or given
to the Company's shareholders, shall not contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, except that no
covenant is made by Parent or Sub with respect to information supplied by the
Company or any of its shareholders specifically for inclusion or incorporation
by reference in the Offer Documents. Each of Parent, Sub and the Company agree
promptly to correct any information provided by it for use in the Offer
Documents if and to the extent that such information shall have become false or
misleading in any material respect, and Parent and Sub further agree to take all
steps necessary to cause the Schedule 14D-1 as so corrected to be filed with the
SEC and the other Offer Documents as so corrected to be disseminated to the
Company's shareholders, in each case as and to the extent required by applicable
federal securities laws. The Company and its counsel shall be given reasonable
opportunity to review and comment upon the Offer Documents prior to their filing
with the SEC or dissemination to the shareholders of the Company. Parent and
Sub agree to provide the Company
3
<PAGE>
and its counsel any comments Parent, Sub or their counsel may receive from the
SEC or its staff with respect to the Offer Documents promptly after the receipt
of such comments.
(c) Parent shall provide or cause to be provided to Sub on a timely
basis the funds necessary to accept for payment, and pay for, any Shares that
Sub becomes obligated to accept for payment, and pay for, pursuant to the Offer.
SECTION 1.02. Company Actions. (a) The Company hereby approves of
and consents to the Offer and represents that the Board of Directors of the
Company, at a meeting duly called and held, duly and unanimously adopted
resolutions adopting this Agreement and authorizing the Company to execute and
deliver the Shareholder Agreement, approving the Offer and the Merger (and
effecting the other actions referred to in Section 4.15), determining that the
terms of the Offer and the Merger are fair to, and in the best interests of, the
Company's shareholders, recommending that the Company's shareholders accept the
Offer, tender their shares pursuant to the Offer and approve this Agreement (if
required) and approving the acquisition of Shares by Sub pursuant to the Offer
and the Shareholder Agreement and the other transactions contemplated by this
Agreement and the Shareholder Agreement. The Company has been advised by each
of its directors and executive officers that each such person intends to tender
all Shares owned by such person pursuant to the Offer.
(b) On the date the Offer Documents are filed with the SEC, the
Company shall file with the SEC a Solicitation/Recommendation Statement on
Schedule 14D-9 with respect to the Offer (such Schedule 14D-9, as amended from
time to time, the "Schedule 14D-9") containing the recommendation described in
paragraph (a) and shall mail the Schedule 14D-9 to the shareholders of the
Company. The Company agrees that the Schedule 14D-9 shall comply as to form in
all material respects with the requirements of the Exchange Act and the rules
and regulations promulgated thereunder and, on the date filed with the SEC and
on the date first published, sent or given to the Company's shareholders, shall
not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading, except that no covenant is made by the Company with respect to
information supplied by Parent or Sub specifically for inclusion in the
Schedule 14D-9. Each of the Company, Parent and Sub agrees promptly to correct
any information provided by it for use in the Schedule 14D-9 if and to the
extent that such
4
<PAGE>
information shall have become false or misleading in any material respect, and
the Company further agrees to take all steps necessary to amend or supplement
the Schedule 14D-9 and to cause the Schedule 14D-9 as so amended or supplemented
to be filed with the SEC and disseminated to the Company's shareholders, in each
case as and to the extent required by applicable federal securities laws.
Parent and its counsel shall be given reasonable opportunity to review and
comment upon the Schedule 14D-9 prior to its filing with the SEC or
dissemination to shareholders of the Company. The Company agrees to provide
Parent and its counsel any comments the Company or its counsel may receive from
the SEC or its staff with respect to the Schedule 14D-9 promptly after the
receipt of such comments.
(c) In connection with the Offer and the Merger, the Company shall
cause its transfer agent to furnish Sub promptly with mailing labels containing
the names and addresses of the record holders of Shares as of a recent date and
of those persons becoming record holders subsequent to such date, together with
copies of all lists of shareholders, security position listings and computer
files and all other information in the Company's possession or control regarding
the beneficial owners of Shares, and shall furnish to Sub such information and
assistance (including updated lists of shareholders, security position listings
and computer files) as Parent may reasonably request in communicating the Offer
to the Company's shareholders. Subject to the requirements of applicable law,
and except for such steps as are necessary to disseminate the Offer Documents
and any other documents necessary to consummate the Merger, Parent and Sub and
their agents shall hold in confidence the information contained in any such
labels, listings and files, will use such information only in connection with
the Offer and the Merger and, if this Agreement shall be terminated, will, upon
request, deliver, and will use their reasonable efforts to cause their agents to
deliver, to the Company all copies and any extracts or summaries from such
information then in their possession or control.
ARTICLE II
The Merger
SECTION 2.01. The Merger. Subject to the last two sentences of this
Section 2.01, upon the terms and subject to the conditions set forth in this
Agreement, and in accordance with the Indiana Business Corporation Law (the
"IBCL"), Sub shall be merged with and into the Company at
5
<PAGE>
the Effective Time (as defined in Section 2.03). Following the Effective Time,
the separate corporate existence of Sub shall cease and the Company shall
continue as the surviving corporation (the "Surviving Corporation") and shall
succeed to and assume all the rights and obligations of Sub in accordance with
the IBCL. At the election of Parent, any direct or indirect wholly owned
subsidiary (as defined in Section 10.03) of Parent may be substituted for and
assume all of the rights and obligations of Sub as a constituent corporation in
the Merger. In such event, the parties agree to execute an appropriate
amendment to this Agreement in order to reflect the foregoing.
SECTION 2.02. Closing. The closing of the Merger will take place at
10:00 a.m. (New York City time) on a date to be specified by Parent or Sub,
which shall be no later than the second business day after satisfaction or
waiver of the conditions set forth in Article VIII (the "Closing Date"), at the
offices of Cravath, Swaine & Moore, Worldwide Plaza, 825 Eighth Avenue,
New York, New York 10019, unless another date, time or place is agreed to in
writing by the parties hereto.
SECTION 2.03. Effective Time. Subject to the provisions of this
Agreement, as soon as practicable on or after the Closing Date, the parties
shall file articles of merger or other appropriate documents (in any such
case, the "Articles of Merger") executed in accordance with the relevant
provisions of the IBCL and shall make all other filings or recordings
required under the IBCL. The Merger shall become effective at such time as
the Articles of Merger are duly filed with the Indiana Secretary of State, or
at such other time as Sub and the Company shall agree and shall be specified
in the Articles of Merger (the time the Merger becomes effective being
hereinafter referred to as the "Effective Time").
SECTION 2.04. Effects of the Merger. The Merger shall have the
effects set forth in Section 23-1-40-6 of the IBCL.
SECTION 2.05. Articles of Incorporation and By-laws. (a) The Third
Amended and Restated Articles of Incorporation of the Company as in effect
immediately prior to the Effective Time shall be the articles of incorporation
of the Surviving Corporation,
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until thereafter changed or amended as provided therein or by applicable law.
(b) The By-laws of the Company, as amended and restated and as in
effect immediately prior to the Effective Time, shall be the By-laws of the
Surviving Corporation, until thereafter changed or amended as provided therein
or by applicable law.
SECTION 2.06. Directors. The directors of Sub immediately prior to
the Effective Time shall be the directors of the Surviving Corporation, until
the earlier of their resignation or removal or until their respective successors
are duly elected and qualified, as the case may be.
SECTION 2.07. Officers. The officers of the Company immediately
prior to the Effective Time shall be the officers of the Surviving Corporation,
until the earlier of their resignation or removal or until their respective
successors are duly elected and qualified, as the case may be.
ARTICLE III
Effect of the Merger on the Capital Stock of the
Constituent Corporations; Exchange of Certificates
SECTION 3.01. Effect on Capital Stock. As of the Effective Time, by
virtue of the Merger and without any action on the part of the holder of any
Shares or any shares of capital stock of Sub:
(a) Capital Stock of Sub. Each issued and outstanding share of
capital stock of Sub shall be converted into and become one fully paid and
nonassessable share of Common Stock, no par value, of the Surviving
Corporation.
(b) Cancelation of Treasury Stock and Parent Owned Stock. Each Share
that is owned by the Company and each Share that is owned by Parent or Sub
shall automatically be canceled and retired and shall cease to exist, and
no consideration shall be delivered in exchange therefor.
(c) Conversion of Shares. Subject to Section 3.01(d), each issued
and outstanding Share (other than Shares to be canceled in accordance with
Section 3.01(b) and Shares owned by any subsidiary of the Company, Parent
(other than Sub) or Sub) shall be converted into the right to receive from
the Surviving Corporation in cash, without interest, the price per share
paid in the Offer (the "Merger Consideration"). As of the Effective Time,
all such Shares shall no longer be outstanding and shall automatically be
canceled and retired and shall cease to exist, and each
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holder of a certificate representing any such Shares shall cease to have
any rights with respect thereto, except the right to receive the Merger
Consideration, without interest.
(d) Shares of Dissenting Shareholders. Notwithstanding anything in
this Agreement to the contrary, if the Merger is not effected pursuant to
Section 23-1-40-4 of the IBCL, any issued and outstanding Shares held by a
person (a "Dissenting Shareholder") who does not vote to approve the Merger
and complies with all the provisions of the IBCL concerning the right of
holders of Shares to dissent from the Merger and require payment of fair
value (as defined in the IBCL) for their Shares ("Dissenting Shares") shall
not be converted as described in Section 3.01(c), but shall be converted
into the right to receive such consideration as may be determined to be due
to such Dissenting Shareholder pursuant to the IBCL. If, after the
Effective Time, such Dissenting Shareholder withdraws his demand or fails
to perfect or otherwise loses his rights as a Dissenting Shareholder to
payment of fair value, in any case pursuant to the IBCL, his Shares shall
be deemed to be converted as of the Effective Time into the right to
receive the Merger Consideration. The Company shall give Parent (i) prompt
notice of any demands for fair value for Shares received by the Company and
(ii) the opportunity to participate in and direct all negotiations and
proceedings with respect to any such demands. The Company shall not,
without the prior written consent of Parent, make any payment with respect
to, or settle, offer to settle or otherwise negotiate, any such demands.
(e) Withholding Tax. The right of any shareholder to receive the
Merger Consideration shall be subject to and reduced by the amount of any
required tax withholding obligation.
SECTION 3.02. Exchange of Certificates. (a) Paying Agent. Prior to
the Effective Time, Parent shall designate a bank or trust company to act as
paying agent in the Merger (the "Paying Agent"), and, from time to time on,
prior to or after the Effective Time, Parent shall make available, or cause the
Surviving Corporation to make available, to the Paying Agent cash in amounts and
at the times necessary for the prompt payment of the Merger Consideration upon
surrender of certificates formerly representing Shares as part of the Merger
pursuant to Section 3.01 (it being understood that any and all interest
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earned on funds made available to the Paying Agent pursuant to this Agreement
shall be turned over to Parent).
(b) Exchange Procedure. As soon as reasonably practicable after the
Effective Time, the Paying Agent shall mail to each holder of record of a
certificate or certificates that immediately prior to the Effective Time
represented Shares (the "Certificates"), (i) a letter of transmittal (which
shall specify that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon delivery of the Certificates to the Paying
Agent and shall be in a form and have such other provisions as Parent may
reasonably specify) and (ii) instructions for use in effecting the surrender of
the Certificates in exchange for the Merger Consideration. Upon surrender of a
Certificate to the Paying Agent or to such other agent or agents as may be
appointed by Parent, together with such letter of transmittal, duly executed,
and such other documents as may reasonably be required by the Paying Agent, the
holder of such Certificate shall be entitled to receive in exchange therefor the
amount of cash into which the Shares theretofore represented by such Certificate
shall have been converted pursuant to Section 3.01, and the Certificate so
surrendered shall forthwith be canceled. In the event of a transfer of
ownership of Shares that is not registered in the transfer records of the
Company, payment may be made to a person other than the person in whose name the
Certificate so surrendered is registered, if such Certificate shall be properly
endorsed or otherwise be in proper form for transfer and the person requesting
such payment shall pay any transfer or other taxes required by reason of the
payment to a person other than the registered holder of such Certificate or
establish to the satisfaction of the Surviving Corporation that such tax has
been paid or is not applicable. Until surrendered as contemplated by this
Section 3.02, each Certificate shall be deemed at any time after the Effective
Time to represent only the right to receive upon such surrender the amount of
cash, without interest, into which the Shares theretofore represented by such
Certificate shall have been converted pursuant to Section 3.01. No interest
will be paid or will accrue on the cash payable upon the surrender of any
Certificate.
(c) No Further Ownership Rights in Shares. All cash paid upon the
surrender of Certificates in accordance with the terms of this Article III shall
be deemed to have been paid in full satisfaction of all rights pertaining to the
Shares theretofore represented by such Certificates. At the Effective Time, the
stock transfer books of the Company shall be closed, and there shall be no
further registration
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of transfers on the stock transfer books of the Surviving Corporation of the
Shares that were outstanding immediately prior to the Effective Time. If, after
the Effective Time, Certificates are presented to the Surviving Corporation or
the Paying Agent for any reason, they shall be canceled and exchanged as
provided in this Article III.
(d) No Liability. None of Parent, Sub, the Company or the Paying
Agent shall be liable to any person in respect of any cash delivered to a public
official pursuant to any applicable abandoned property, escheat or similar law.
If any Certificates shall not have been surrendered prior to seven years after
the Effective Time (or immediately prior to such earlier date on which any
payment pursuant to this Article III would otherwise escheat to or become the
property of any Governmental Entity (as defined in Section 4.05)), the cash
payment in respect of such Certificate shall, to the extent permitted by
applicable law, become the property of the Surviving Corporation, free and clear
of all claims or interests of any person previously entitled thereto.
ARTICLE IV
Representations and Warranties of the Company
Except as set forth in the disclosure schedule delivered by the
Company to Parent prior to the execution of this Agreement (the "Company
Disclosure Schedule"), the Company represents and warrants to Parent and Sub as
follows:
SECTION 4.01. Organization. The Company and each of its Significant
Subsidiaries (as defined in Section 10.03) is a corporation duly organized,
validly existing and in good standing (to the extent the jurisdiction recognizes
such concept) under the laws of the jurisdiction of its organization and has all
requisite corporate power and authority to carry on its business as now being
conducted. The Company and each of its Significant Subsidiaries is duly
qualified or licensed to do business and in good standing in each jurisdiction
in which the property owned, leased or operated by it or the nature of the
business conducted by it makes such qualification or licensing necessary, except
in such jurisdictions where the failure to be so duly qualified or licensed and
in good standing would not have a material adverse effect (as defined in
Section 10.03) on the Company or prevent or materially delay the consummation of
the Offer and/or the Merger. The Company has delivered to Parent complete and
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correct copies of its Third Amended and Restated Articles of Incorporation and
By-laws, as amended and restated and the articles of incorporation and by-laws
(or similar organizational documents) of its Significant Subsidiaries.
SECTION 4.02. Subsidiaries. Schedule 4.02 lists each subsidiary of
the Company. All the outstanding shares of capital stock of each such
subsidiary are owned by the Company, by another wholly owned subsidiary of the
Company or by the Company and another wholly owned subsidiary of the Company,
free and clear of all pledges, claims, liens, charges, encumbrances and security
interests of any kind or nature whatsoever (collectively, "Liens"), and are duly
authorized, validly issued, fully paid and nonassessable. Except for the
capital stock of its subsidiaries, the Company does not own, directly or
indirectly, any capital stock or other ownership interest in any corporation,
partnership, joint venture or other entity.
SECTION 4.03. Capitalization. The authorized capital stock of the
Company consists of 10,000,000 Shares. At the close of business on December 17,
1997, (i) 7,085,433 Shares were issued and outstanding and (ii) 1,726,205 Shares
were reserved for issuance upon exercise of options to purchase Shares ("Company
Stock Options"). Except as set forth above, as of the close of business on
December 17, 1997, no shares of capital stock or other voting securities of the
Company were issued, reserved for issuance or outstanding. All outstanding
shares of capital stock of the Company are, and all shares which may be issued
will be, when issued, duly authorized, validly issued, fully paid and
nonassessable and not subject to preemptive rights. There are no bonds,
debentures, notes or other indebtedness of the Company having the right to vote
(or convertible into, or exchangeable for, securities having the right to vote)
on any matters on which shareholders of the Company may vote. Except as set
forth above, as of the date of this Agreement, there are no securities, options,
warrants, calls, rights, commitments, agreements, arrangements or undertakings
of any kind to which the Company or any of its subsidiaries is a party or by
which the Company or any of its subsidiaries is bound obligating the Company or
any of its subsidiaries to issue, deliver or sell, or cause to be issued,
delivered or sold, additional shares of capital stock or other voting securities
of the Company or any of its subsidiaries. As of the date of this Agreement,
there are no outstanding contractual obligations of the Company or any of its
subsidiaries to repurchase, redeem or otherwise acquire any shares of capital
stock of the Company or to vote or to dispose of any shares of the capital stock
of any of the Company's subsidiaries.
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SECTION 4.04. Authority. The Company has the requisite corporate
power and authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby (subject to, with respect to the Merger, if the
Merger is not effected pursuant to Section 23-1-40-4 of the IBCL, the approval
of this Agreement by the holders of a majority of the Shares (the "Company
Shareholder Approval")). The execution, delivery and performance of this
Agreement and the consummation by the Company of the Merger and of the other
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of the Company and no other corporate proceedings
on the part of the Company are necessary to authorize this Agreement or to
consummate the transactions so contemplated (in each case, other than, with
respect to the Merger, the Company Shareholder Approval (if required)). This
Agreement has been duly executed and delivered by the Company and, assuming this
Agreement constitutes a valid and binding obligation of Parent and Sub,
constitutes a valid and binding obligation of the Company enforceable against
the Company in accordance with its terms.
SECTION 4.05. Consents and Approvals; No Violations. Except for
filings, permits, authorizations, consents and approvals as may be required
under, and other applicable requirements of, the Exchange Act (including the
filing with the SEC of the Schedule 14D-9 and a proxy statement relating to the
Company Shareholder Approval, if required (the "Proxy Statement")), the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), the IBCL, Section 23-2-3.1 et seq. of the Indiana Code or the laws of
other states in which the Company is qualified to do or is doing business,
neither the execution, delivery or performance of this Agreement by the Company
nor the consummation by the Company of the transactions contemplated hereby will
(i) conflict with or result in any breach of any provision of the Third Amended
and Restated Articles of Incorporation or By-laws, as amended and restated, of
the Company or any of the similar organizational documents of any of its
Significant Subsidiaries, (ii) require any filing with, or permit,
authorization, consent or approval of, any federal, state or local government or
any court, tribunal, administrative agency or commission or other governmental
or regulatory authority or agency, domestic, foreign or supranational (a
"Governmental Entity") (except where the failure to make such filings or to
obtain such permits, authorizations, consents or approvals would not have a
material adverse effect on the Company or prevent or materially delay the
consummation of the Offer and/or the Merger), (iii) result in a violation or
breach of, or constitute (with or without
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due notice or lapse of time or both) a default under, or give rise to any right
of termination, amendment, cancelation or acceleration under, or result in the
creation of any Lien upon any of the properties or assets of the Company or any
of its subsidiaries under, any of the terms, conditions or provisions of any
note, bond, mortgage, indenture, lease, license, permit, concession, franchise,
contract, agreement or other instrument or obligation (a "Contract") to which
the Company or any of its subsidiaries is a party or by which any of its
properties or assets may be bound or (iv) violate any judgment, order, writ,
preliminary or permanent injunction or decree (an "Order") or any statute, law,
ordinance, rule or regulation of any Governmental Entity (a "Law") applicable to
the Company, any of its subsidiaries or any of their properties or assets,
except in the case of clauses (iii) or (iv) for violations, breaches or defaults
that could not reasonably be expected to have a material adverse effect on the
Company or prevent or materially delay the consummation of the Offer and/or the
Merger.
SECTION 4.06. SEC Reports and Financial Statements. The Company
and each of its subsidiaries has filed with the SEC, and has heretofore made
available to Parent, true and complete copies of, all forms, reports,
schedules, statements and other documents required to be filed by it since
January 1, 1996 under the Exchange Act or the Securities Act of 1933 (the
"Securities Act") (such forms, reports, schedules, statements and other
documents, including any financial statements or schedules included therein,
are referred to as the "Company SEC Documents"). The Company SEC Documents,
at the time filed, (a) did not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading and (b) complied in
all material respects with the applicable requirements of the Exchange Act
and the Securities Act, as the case may be, and the applicable rules and
regulations of the SEC thereunder. Except to the extent that information
contained in any Company SEC Document has been revised or superseded by a
subsequently filed Company Filed SEC Document (as defined in Section 4.07) (a
copy of which has been made available to Parent prior to the date hereof),
none of the Company SEC Documents contains an untrue statement of a material
fact or omits to state a material fact required to be stated or incorporated
by reference therein or necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading. The
financial statements of the Company included in the Company SEC
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Documents comply as to form in all material respects with applicable accounting
requirements and with the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto or, in the case of the
unaudited statements, as permitted by Form 10-Q of the SEC) and fairly present
(subject, in the case of the unaudited statements, to normal, recurring audit
adjustments) the consolidated financial position of the Company and its
consolidated subsidiaries as at the dates thereof and the consolidated results
of their operations and cash flows for the periods then ended.
SECTION 4.07. Absence of Certain Changes or Events. Except as
disclosed in the Company SEC Documents filed and publicly available prior to the
date of this Agreement (the "Company Filed SEC Documents"), since December 31,
1996, the Company and its subsidiaries have conducted their respective business
only in the ordinary course, and there has not been (i) any material adverse
change (as defined in Section 10.03) with respect to the Company, (ii) any
declaration, setting aside or payment of any dividend or other distribution with
respect to its capital stock or any redemption, repurchase or other acquisition
of any of its capital stock, (iii) any split, combination or reclassification of
any of its capital stock or any issuance or the authorization of any issuance of
any other securities in respect of, in lieu of or in substitution for shares of
its capital stock, (iv) (x) any granting by the Company or any of its
subsidiaries to any officer of the Company or any of its subsidiaries of
any increase in compensation (including in connection with promotions), except
in the ordinary course of business consistent with past practice or as was
required under employment agreements in effect as of December 31, 1996, (y) any
granting by the Company or any of its subsidiaries to any such officer of any
increase in severance or termination pay, except as required under employment,
severance or termination agreements in effect as of December 31, 1996, or
(z) except employment or consulting agreements in the ordinary course of
business consistent with past practice with employees other than any executive
officer of the Company, any entry by the Company or any of its subsidiaries into
any employment or consulting agreement, with any such employee or executive
officer, (v) any damage, destruction or loss, whether or not covered by
insurance, that has or reasonably could be expected to have a material adverse
effect on the Company, (vi) any revaluation by the Company of any of its
material assets,
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(vii) any material change in accounting methods, principles or practices by the
Company or (viii) (A) any licensing or other agreement with regard to the
acquisition or disposition of any material Intellectual Property (as defined in
Section 4.18) or rights thereto other than sales or licenses of its products to
customers in the ordinary course of business consistent with past practice or
(B) any amendment or consent with respect to any licensing or other agreement
described in clause (A) above.
SECTION 4.08. No Undisclosed Liabilities. Except as and to the
extent set forth in the Company Filed SEC Documents, neither the Company nor any
of its subsidiaries has any liabilities of any nature, whether or not accrued,
contingent or otherwise, that would be reasonably expected to have a material
adverse effect on the Company.
SECTION 4.09. Information Supplied. None of the information supplied
or to be supplied by the Company specifically for inclusion or incorporation by
reference in (i) the Offer Documents, (ii) the Schedule 14D-9, (iii) the
information to be filed by the Company in connection with the Offer pursuant to
Rule 14f-1 promulgated under the Exchange Act (the "Information Statement") or
(iv) the Proxy Statement, will, in the case of the Offer Documents, the
Schedule 14D-9 and the Information Statement, at the respective times the Offer
Documents, the Schedule 14D-9 and the Information Statement are filed with the
SEC or first published, sent or given to the Company's shareholders, or, in the
case of the Proxy Statement, at the time the Proxy Statement is first mailed to
the Company's shareholders or at the time of the Shareholders Meeting (as
defined in Section 7.01), contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they are made, not misleading. The Schedule 14D-9, the Information Statement
and the Proxy Statement will comply as to form in all material respects with the
requirements of the Exchange Act and the rules and regulations thereunder,
except that no representation or warranty is made by the Company with respect to
statements made or incorporated by reference therein based on information
supplied by Parent or Sub specifically for inclusion or incorporation by
reference therein.
SECTION 4.10. Benefit Plans; Employees and Employment Practices.
(a) Except as disclosed in the Company Filed SEC Documents, since December 31,
1996, there has not been any adoption or amendment in any material respect
(including any increase or improvements in benefits
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or coverage) by the Company or any of its subsidiaries of any Benefit Plan (as
defined in Section 4.10(b)). Except as disclosed in the Company Filed SEC
Documents, there exist no employment or consulting agreements, or any other
similar arrangements or understandings (whether or not in writing), between the
Company or any of its subsidiaries and any current or former employee, officer
or director of the Company or any of its subsidiaries.
(b) Schedule 4.10(b) lists each "employee pension benefit plan" (as
defined in Section 3(2) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA") (sometimes referred to herein as "Pension Plans"),
"employee welfare benefit plan" (as defined in Section 3(1) of ERISA), bonus,
deferred compensation, incentive compensation, stock ownership, stock purchase,
stock option, phantom stock, retirement, vacation, severance, change of control,
disability, death benefit, hospitalization, medical, fringe benefit, excess
benefit, supplemental executive compensation, stock appreciation, restricted
stock, indemnification, collective bargaining agreement or other material
employee benefit plan, policy, agreement, arrangement or understanding (whether
or not in writing) providing benefits to any current or former employee,
officer, director or independent contractor of the Company or any of its
subsidiaries or any entity that is or required under Section 414 of the Code to
be treated with the Company as a single employer (an "ERISA Affiliate") or with
respect to which the Company or any ERISA Affiliate could have any liability
(collectively, the "Benefit Plans"). The Company has made available to Parent
true, complete and correct copies of (i) each Benefit Plan (or, in the case of
any unwritten Benefit Plans, descriptions thereof) and each employment and
consulting agreement, arrangement or understanding between the Company or any of
its subsidiaries and any current or former employee, officer or director of the
Company or any of its subsidiaries, (ii) the most recent annual report on
Form 5500 (and related schedules and financial statements or opinions required
in connection therewith) filed with the Internal Revenue Service with respect to
each Benefit Plan (if any such report was required), (iii) the most recent
actuarial report with respect to each Benefit Plan, as applicable, (iv) the most
recent summary plan description (and a summary of material modifications, if
applicable) for each Benefit Plan, (v) each trust agreement and group annuity
contract relating to any Benefit Plan, and (vi) the most recent determination
letter, if any, issued with respect to such Benefit Plan.
(c) Each Benefit Plan has been administered in all material respects
in accordance with its terms and the
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applicable requirements of ERISA, the Internal Revenue Code of 1986, as amended
(the "Code") and all other applicable laws. No event has occurred and to the
knowledge of the Company there exists no condition or set of conditions in
connection with the Benefit Plans that, individually or in the aggregate, could
have a material adverse effect on, or give rise to material liability to, the
Company or any ERISA Affiliate under ERISA, the Code or any other applicable
law.
(d) Each Pension Plan intended to be qualified under Section 401(a)
of the Code has been the subject of a determination letter from the Internal
Revenue Service to the effect that such Pension Plan is so qualified under all
currently applicable provisions of Section 401(a) of the Code and, to the
knowledge of the Company, no circumstances exist that would adversely affect the
qualification of any such Pension Plan.
(e) No Benefit Plan is subject to Title IV of ERISA.
(f) Each Benefit Plan may be amended or terminated without material
liability to the Company or any ERISA Affiliate.
(g) The Company has previously delivered to Parent a list which sets
forth the names of all current officers, directors and employees of the Company
and each of its subsidiaries, together with each employee's current salary and
date of employment.
(h) (i) There are no material controversies, strikes, work stoppages
or disputes pending or threatened between the Company or any of its subsidiaries
and any current or former employees, (ii) no labor union or other collective
bargaining unit represents or has ever represented any employee of the Company
or any of its subsidiaries with respect to employment by the Company or such
subsidiary and (iii) no organizational effort by any labor union or other
collective bargaining unit currently is under way or threatened with respect to
any employee.
SECTION 4.11. Contracts. Except as disclosed in the Company Filed
SEC Documents and except for Contracts that have previously been delivered to
Parent, there are no Contracts that are material to the business, properties,
financial condition or results of operations of the Company and its subsidiaries
taken as a whole. Neither the Company nor any of its subsidiaries is in
violation or breach of or in default under (nor does there exist any condition
which upon the passage of time or the giving of notice would cause
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such a violation or breach of or default under) any Contract to which it is a
party or by which it or any of its properties or assets is bound, except for
violations, breaches or defaults that could not reasonably be expected to have a
material adverse effect on the Company.
SECTION 4.12. Litigation. Except as disclosed in the Company Filed
SEC Documents, there is no suit, claim, action, proceeding or investigation
pending before any Governmental Entity or, to the best knowledge of the Company,
threatened against the Company or any of its subsidiaries that could reasonably
be expected to have a material adverse effect on the Company or prevent or
materially delay the consummation of the Offer and/or the Merger. Except as
disclosed in the Company Filed SEC Documents, neither the Company nor any of its
subsidiaries is subject to any outstanding Order that could reasonably be
expected to have a material adverse effect on the Company or prevent or
materially delay the consummation of the Offer and/or the Merger.
SECTION 4.13. Compliance with Applicable Law. The Company and its
subsidiaries hold all permits, licenses, variances, exemptions, orders and
approvals of all Governmental Entities necessary for the lawful conduct of their
respective businesses (the "Company Permits"), except for failures to hold such
Company Permits that would not have a material adverse effect on the Company or
prevent or materially delay the consummation of the Offer and/or the Merger.
The Company and its subsidiaries are in compliance with the terms of the Company
Permits, except where the failure so to comply would not have a material adverse
effect on the Company or prevent or materially delay the consummation of the
Offer and/or the Merger. Except as disclosed in the Company Filed SEC
Documents, to the best knowledge of the Company, the businesses of the Company
and its subsidiaries are not being conducted in violation of any Law, except for
possible violations that would not have a material adverse effect on the Company
or prevent or materially delay the consummation of the Offer and/or the Merger.
As of the date of this Agreement, no investigation or review by any Governmental
Entity with respect to the Company or any of its subsidiaries is pending or, to
the best knowledge of the Company, threatened, nor has any Governmental Entity
indicated an intention to conduct any such investigation or review, other than,
in each case, those the outcome of which would not be reasonably expected to
have a material adverse effect on the Company or prevent or materially delay the
consummation of the Offer and/or the Merger.
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SECTION 4.14. Tax Matters.
(a) The Company and each of its subsidiaries has timely filed all
federal, state and local, domestic and foreign, income and franchise tax returns
and reports and all other material tax returns and reports required to be filed
by it. All such returns and reports are complete and correct in all material
respects. The Company and each of its subsidiaries has timely paid (or the
Company has paid on its subsidiaries' behalf) all taxes due with respect to the
taxable periods covered by such returns and reports and all other material taxes
(as defined below), and the most recent financial statements contained in the
Company Filed SEC Documents reflect an adequate reserve for all taxes payable by
the Company and its subsidiaries for all taxable periods and portions thereof
through the date of such financial statements.
(b) No federal, state or local, domestic or foreign, income or
franchise tax return or report or any other material tax return or report of the
Company or any of its subsidiaries is under audit or examination by any taxing
authority, and no written or unwritten notice of such an audit or examination
has been received by the Company. Each material deficiency resulting from any
audit or examination relating to taxes by any taxing authority has been timely
paid. No material issues relating to taxes were raised by the relevant taxing
authority during any presently pending audit or examination, and no material
issues relating to taxes were raised by the relevant taxing authority in any
completed audit or examination that can reasonably be expected to recur in a
later taxable period. No federal, state or local, domestic or foreign, tax
return or report of the Company or any of its subsidiaries has ever been under
audit or examination by the Internal Revenue Service or other relevant taxing
authority, except for federal income tax examinations for 1994 and 1995 and
Indiana tax examinations for 1993, 1994 and 1995. The relevant statute of
limitations is closed with respect to the U.S. federal tax returns of the
Company and its subsidiaries for all years through 1993.
(c) There is no agreement or other document extending, or having the
effect of extending, the period of assessment or collection of any taxes and no
power of attorney with respect to any taxes has been executed or filed with any
taxing authority.
(d) No material liens for taxes exist with respect to any assets or
properties of the Company or any of
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its subsidiaries, except for statutory liens for taxes not yet due.
(e) Neither the Company nor any of its subsidiaries is a party to or
bound by any tax sharing agreement, tax indemnity obligation or similar
agreement, arrangement or practice with respect to taxes (including any advance
pricing agreement, closing agreement or other agreement relating to taxes with
any taxing authority).
(f) Neither the Company nor any of its subsidiaries will be required
to include in a taxable period ending after the Effective Time taxable income
attributable to income that accrued in a prior taxable period but was not
recognized in any prior taxable period as a result of the installment method of
accounting, the completed contract method of accounting, the long-term contract
method of accounting, the cash method of accounting or Section 481 of the Code
or comparable provisions of state or local tax law, domestic or foreign, or for
any other reason.
(g) The disallowance of a deduction under Section 162(m) of the Code
for employee remuneration will not apply to any amount paid or payable by the
Company or any of its subsidiaries under any Benefit Plan or other compensation
arrangement currently in effect.
(h) Any amount or other entitlement that could be received (whether
in cash or property or the vesting of property) as a result of any of the
transactions contemplated by this Agreement by any employee, officer or director
of the Company or any of its affiliates who is a "disqualified individual" (as
such term is defined in proposed Treasury Regulation Section 1.280G-1) under any
Benefit Plan or other compensation arrangement currently in effect would not be
characterized as an "excess parachute payment" or a "parachute payment" (as such
terms are defined in Section 280G(b)(1) of the Code).
(i) The Company has complied in all respects with all applicable
laws, rules and regulations relating to the payment and withholding of taxes
(including, without limitation, withholding of taxes pursuant to Sections 1441,
1442, 3121 and 3402 of the Code or similar provisions under any foreign federal
laws or any state or local laws, domestic and foreign) and has, within the time
and the manner prescribed by law, withheld from and paid over to the proper
governmental authorities all amounts required to be so withheld and paid over
under applicable laws.
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(j) As used in this Agreement, "taxes" shall include all federal,
state and local, domestic and foreign, income, franchise, property, sales,
excise, employment, payroll, social security, value-added, ad valorem,
transfer, withholding and other taxes, including taxes based on or measured
by gross receipts, profits, sales, use or occupation, tariffs, levies,
impositions, assessments or governmental charges of any nature whatsoever,
including any interest penalties or additions with respect thereto.
SECTION 4.15. State Takeover Statutes. The Board of Directors of the
Company has (i) adopted a by-law providing that Chapter 42 of the IBCL does not
apply to control share acquisitions of Shares and (ii) adopted this Agreement
and approved the Offer, the Shareholder Agreement, the acquisition of Shares by
Sub pursuant to the Offer and the Shareholder Agreement and the other
transactions contemplated by this Agreement and the Shareholder Agreement, and
such adoptions and approvals are sufficient to render inapplicable to the Offer,
the Merger, this Agreement, the Shareholder Agreement, the acquisition of Shares
by Sub pursuant to the Offer and the Shareholder Agreement and the other
transactions contemplated by this Agreement and the Shareholder Agreement the
provisions of Chapters 42 and 43 of the IBCL. To the best knowledge of the
Company, no other state takeover statute (other than Section 23-2-3.1 et seq. of
the IBCL) or similar Law applies or purports to apply to the Offer, the Merger,
this Agreement, the Shareholder Agreement, the acquisition of Shares by Sub
pursuant to the Offer and the Shareholder Agreement or any of the transactions
contemplated by this Agreement or the Shareholder Agreement.
SECTION 4.16. Brokers; Schedule of Fees and Expenses. No broker,
investment banker, financial advisor or other person, other than Broadview
Associates, the fees and expenses of which will be paid by the Company (as
reflected in an agreement between such firm and the Company, a copy of which has
been delivered to Parent), is entitled to any broker's, finder's, financial
advisor's or other similar fee or commission in connection with the transactions
contemplated by this Agreement based upon arrangements made by or on behalf of
the Company.
SECTION 4.17. Opinion of Financial Advisor. The Company has received
the opinion of Broadview Associates, dated the date of this Agreement, to the
effect that, as of the date of this Agreement, the consideration to be received
in the Offer and the Merger by the Company's shareholders is fair to the
Company's shareholders from a financial point of view, and a complete and
correct signed copy of such opinion
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has been, or promptly upon receipt thereof will be, delivered to Parent.
SECTION 4.18. Intellectual Property. (a) The Company has provided
Parent with true and correct copies of all Contracts relating to Intellectual
Property to which the Company or any of its subsidiaries is a party except that,
with respect to employee confidentiality agreements, the Company has provided
Parent with a specimen of the form of agreement signed by all former and current
employees, agents, consultants and contractors who have contributed to or
participated in the conception and development of computer software or other
Intellectual Property of the Company or any of its subsidiaries.
(b) Except to the extent that the inaccuracy of any of the following
(or the circumstances giving rise to such inaccuracy) would not have a material
adverse effect on the Company:
(1) the Company and each of its subsidiaries owns, or is licensed or
otherwise has the right to use (in each case, clear of any Liens), all
Intellectual Property used in or necessary for the conduct of its business
as currently conducted;
(2) there is no suit, claim, action, investigation or proceeding
pending or, to the best knowledge of the Company, threatened that the
Company or any of its subsidiaries is infringing on or otherwise violating
the rights of any person with regard to any Intellectual Property owned by,
licensed to and/or otherwise used by the Company or any of its
subsidiaries;
(3) to the best knowledge of the Company, no person is infringing on
or otherwise violating any right of the Company or any of its subsidiaries
with respect to any Intellectual Property owned by, licensed to and/or
otherwise used by the Company or any of its subsidiaries;
(4) none of the former or current members of management or key
personnel of the Company or any of its subsidiaries, including all former
and current employees, agents, consultants and contractors who have
contributed to or participated in the conception and development of
computer software or other Intellectual Property of the Company or any of
its subsidiaries, has asserted or threatened in writing any claim against
the Company or any of its subsidiaries in connection with
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the involvement of such persons in the conception and development of any
computer software or other Intellectual Property of the Company or any of
its subsidiaries and to the best knowledge of the Company no basis exists
for any such claim;
(5) the execution and delivery of this Agreement, compliance with its
terms and the consummation of the transactions contemplated hereby do not
and will not conflict with or result in any violation, breach or default
(with or without notice or lapse of time or both) under, or give rise to
any right, license or Lien relating to, Intellectual Property owned by the
Company or any of its subsidiaries or with respect to which the Company or
any of its subsidiaries now has or has had any Contract with any third
party, or any right of termination, cancelation or acceleration of any
material Intellectual Property right or obligation set forth in any
agreement to which the Company or any of its subsidiaries is a party, or
the loss or encumbrance of any Intellectual Property or material benefit
related thereto, or result in or require the creation, imposition or
extension of any Lien upon any Intellectual Property or right;
(6) no licenses or rights have been granted to distribute the source
code of, or to use the source code to create Derivative Works (as
hereinafter defined) of, any product currently marketed by, commercially
available from or under development by the Company or any of its
subsidiaries other than applications source code written in SA-Script
(formerly known as KML); and
(7) the Company and each of its subsidiaries has taken reasonable and
necessary steps to protect its Intellectual Property and their rights
thereunder, and to the best knowledge of the Company, no such rights to
Intellectual Property have been lost or are in jeopardy of being lost
through failure to act by the Company or any of its subsidiaries.
As used herein, "Derivative Work" shall mean a work that is based upon
one or more preexisting works, such as a revision, enhancement, modification,
abridgement, condensation, expansion or any other form in which such preexisting
works may be recast, transformed or adapted, and which, if prepared without
authorization of the owner of the copyright in such preexisting work, would
constitute a copyright infringement. For purposes hereof, a Derivative Work
shall also include any compilation that incorporates
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such a preexisting work as well as translations from one human language to
another and from one type of code to another.
(c) For purposes of this Agreement, "Intellectual Property" shall
mean trademarks (registered or unregistered), service marks, brand names,
certification marks, trade dress, assumed names, trade names and other
indications of origin, the goodwill associated with the foregoing and
registrations in any jurisdiction of, and applications in any jurisdiction to
register, the foregoing, including any extension, modification or renewal of any
such registration or application; inventions, discoveries and ideas, whether
patented, patentable or not in any jurisdiction; nonpublic information, trade
secrets and confidential information and rights in any jurisdiction to limit the
use or disclosure thereof by any person; writings and other works, whether
copyrighted, copyrightable or not in any jurisdiction; registration or
applications for registration of copyrights in any jurisdiction, and any
renewals or extensions thereof; any similar intellectual property or proprietary
rights and computer programs and software (including source code, object code
and data); licenses, immunities, covenants not to sue and the like relating to
the foregoing; and any claims or causes of action arising out of or related to
any infringement or misappropriation of any of the foregoing.
ARTICLE V
Representations and Warranties
of Parent and Sub
Parent and Sub jointly and severally represent and warrant to the
Company as follows:
SECTION 5.01. Organization. Each of Parent and Sub is a corporation
duly organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation and has all requisite corporate power and
authority to carry on its business as now being conducted, except where the
failure to be so organized, existing and in good standing or to have such power
and authority would not be reasonably expected to prevent or materially delay
the consummation of the Offer and/or the Merger.
SECTION 5.02. Authority. Parent and Sub have the requisite corporate
power and authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. The execution, delivery and
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performance of this Agreement and the consummation of the transactions
contemplated hereby have been duly authorized by all necessary corporate action
on the part of Parent and Sub and no other corporate proceedings on the part of
Parent and Sub are necessary to authorize this Agreement or to consummate such
transactions. No vote of Parent shareholders is required to approve this
Agreement or the transactions contemplated hereby. This Agreement has been duly
executed and delivered by Parent and Sub, as the case may be, and, assuming this
Agreement constitutes a valid and binding obligation of the Company, constitutes
a valid and binding obligation of each of Parent and Sub enforceable against
them in accordance with its terms.
SECTION 5.03. Consents and Approvals; No Violations. Except for
filings, permits, authorizations, consents and approvals as may be required
under, and other applicable requirements of, the Exchange Act (including the
filing with the SEC of the Offer Documents), the HSR Act, the IBCL or the laws
of other states in which Parent is qualified to do or is doing business, neither
the execution, delivery or performance of this Agreement by Parent and Sub nor
the consummation by Parent and Sub of the transactions contemplated hereby will
(i) conflict with or result in any breach of any provision of the respective
certificate or articles of incorporation or By-laws of Parent and Sub,
(ii) require any filing with, or permit, authorization, consent or approval of,
any Governmental Entity (except where the failure to make such filings or to
obtain such permits, authorizations, consents or approvals would not be
reasonably expected to prevent or materially delay the consummation of the Offer
and/or the Merger), (iii) result in a violation or breach of, or constitute
(with or without due notice or lapse of time or both) a default (or give rise to
any right of termination, amendment, cancelation or acceleration) under, any of
the terms, conditions or provisions of any Contract to which Parent or any of
its subsidiaries is a party or by which any of them or any of their properties
or assets may be bound or (iv) violate any Order or Law applicable to Parent,
any of its subsidiaries or any of their properties or assets, except in the case
of clauses (iii) and (iv) for violations, breaches or defaults that could not,
individually or in the aggregate, reasonably be expected to prevent or
materially delay the consummation of the Offer and/or the Merger.
SECTION 5.04. Information Supplied. None of the information supplied
or to be supplied by Parent or Sub specifically for inclusion or incorporation
by reference in (i) the Offer Documents, (ii) the Schedule 14D-9, (iii) the
Information Statement or (iv) the Proxy Statement will, in
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the case of the Offer Documents, the Schedule 14D-9 and the Information
Statement, at the respective times the Offer Documents, the Schedule 14D-9 and
the Information Statement are filed with the SEC or first published, sent or
given to the Company's shareholders, or, in the case of the Proxy Statement, at
the time the Proxy Statement is first mailed to the Company's shareholders or at
the time of the Shareholders Meeting, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they are made, not misleading. The Offer Documents will comply as
to form in all material respects with the requirements of the Exchange Act and
the rules and regulations thereunder, except that no representation or warranty
is made by Parent or Sub with respect to statements made or incorporated by
reference therein based on information supplied by the Company specifically for
inclusion or incorporation by reference therein.
SECTION 5.05. Interim Operations of Sub. Sub was formed solely for
the purpose of engaging in the transactions contemplated hereby, has engaged in
no other business activities and has conducted its operations only as
contemplated hereby.
SECTION 5.06. Brokers. No broker, investment banker, financial
advisor or other person is entitled to any broker's, finder's, financial
advisor's or other similar fee or commission in connection with the transactions
contemplated by this Agreement based upon arrangements made by or on behalf of
Parent or Sub.
SECTION 5.07. Financing. Parent has sufficient funds available to
purchase, or to cause Sub to purchase, all the Shares pursuant to the Offer and
the Merger and to pay all fees and expenses related to the transactions
contemplated by this Agreement.
ARTICLE VI
Covenants
SECTION 6.01. Covenants of the Company. Until such time as Parent's
designees shall constitute a majority of the members of the Board of Directors
of the Company, the Company agrees as to itself and its subsidiaries that
(except as expressly contemplated or permitted by this Agreement or except to
the extent that Parent shall otherwise consent in writing):
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(a) Ordinary Course. The Company shall, and shall cause its
subsidiaries to, carry on their respective businesses in the usual, regular and
ordinary course in substantially the same manner as heretofore conducted and in
compliance in all material respects with all applicable laws and regulations and
shall use all reasonable efforts to preserve intact their present business
organizations, keep available the services of their present officers and
employees and preserve their relationships with customers, suppliers and others
having business dealings with the Company and its subsidiaries.
(b) Dividends; Changes in Stock. The Company shall not, and shall
not permit any of its subsidiaries to, (i) declare or pay any dividends on or
make other distributions in respect of any of its capital stock (except for
dividends by a direct or indirect wholly owned subsidiary of the Company to its
parent), (ii) split, combine or reclassify any of its capital stock or issue or
authorize or propose the issuance of any other securities in respect of, in lieu
of or in substitution for shares of its capital stock or (iii) repurchase,
redeem or otherwise acquire any shares of capital stock of the Company or any of
its subsidiaries or any other securities thereof or any rights, warrants or
options to acquire any such shares or other securities.
(c) Issuance of Securities. The Company shall not, and shall not
permit any of its subsidiaries to, issue, deliver, sell, pledge or encumber, or
authorize or propose the issuance, delivery, sale, pledge or encumbrance of, any
shares of its capital stock of any class or any securities convertible into, or
any rights, warrants, calls, subscriptions or options to acquire, any such
shares or convertible securities, or any other ownership interest (including
stock appreciation rights or phantom stock) other than the issuance of Shares
(i) upon the exercise of Company Stock Options outstanding on the date of this
Agreement and in accordance with the terms of such Company Stock Options and
(ii) in accordance with the terms of the Software Artistry, Inc. 1996 Employee
Stock Purchase Plan as in effect on the date of this Agreement.
(d) Governing Documents. The Company shall not, and shall not permit
any of its subsidiaries to, amend or propose to amend its articles of
incorporation or by-laws (or similar organizational documents).
(e) No Acquisitions. The Company shall not, and shall not permit any
of its subsidiaries to, acquire or agree to acquire (i) by merging or
consolidating with, or by
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purchasing a substantial equity interest in or substantial portion of the assets
of, or by any other manner, any business or any corporation, partnership, joint
venture, association or other business organization or division thereof or
(ii) any assets that are material, individually or in the aggregate, to the
Company and its subsidiaries taken as a whole, except purchases of inventory in
the ordinary course of business consistent with past practice.
(f) No Dispositions. Other than sales or licenses of its products in
the ordinary course of business consistent with past practice, the Company shall
not, and shall not permit any of its subsidiaries to, sell, lease, license,
encumber or otherwise dispose of, or agree to sell, lease, license, encumber or
otherwise dispose of, any of its assets.
(g) Indebtedness. The Company shall not, and shall not permit any of
its subsidiaries to, (i) incur or suffer to exist any indebtedness for borrowed
money or guarantee any such indebtedness or issue or sell any debt securities or
warrants or rights to acquire any debt securities of the Company or any of its
subsidiaries, guarantee any debt securities of others, enter into any
"keep-well" or other agreement to maintain any financial statement condition of
another person or enter into any arrangement having the economic effect of any
of the foregoing, except for working capital borrowings incurred in the ordinary
course of business consistent with past practice, or (ii) make any loans,
advances or capital contributions to, or investments in, any other person, other
than to the Company or any direct or indirect wholly owned subsidiary of the
Company.
(h) Advice of Changes; Filings. The Company shall confer on a
regular and frequent basis with Parent, as reasonably requested by Parent,
report on operational matters and promptly advise Parent orally and in writing
of any material adverse change with respect to the Company. The Company shall
promptly provide to Parent (or its counsel) copies of all filings made by the
Company with any Governmental Entity in connection with this Agreement and the
transactions contemplated hereby.
(i) Tax Matters. The Company shall not make any tax election that
would have a material adverse effect on the tax liability or tax attributes of
the Company or any of its subsidiaries or settle or compromise any tax liability
of the Company or any of its subsidiaries. The Company shall, before filing or
causing to be filed any tax return of the Company or any of its subsidiaries or
settling any
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tax liability not described in the preceding sentence, consult with Parent and
its advisors as to the positions and elections that may be taken or made with
respect to such return, and shall take such positions or make such elections as
the Company and Parent shall jointly agree.
(j) Capital Expenditures. Except as set forth on Schedule 6.01(j),
neither the Company nor any of its subsidiaries shall make or agree to make any
new capital expenditure or expenditures which capital expenditures would exceed
$100,000 in the aggregate.
(k) Discharge of Liabilities. The Company shall not, and shall not
permit any of its subsidiaries to, pay, discharge, settle or satisfy any claims,
liabilities or obligations (absolute, accrued, asserted or unasserted,
contingent or otherwise), other than the payment, discharge, settlement or
satisfaction, in the ordinary course of business consistent with past practice
or in accordance with their terms, of claims, liabilities or obligations
recognized or disclosed in the most recent financial statements (or the notes
thereto) of the Company included in the Company Filed SEC Documents or incurred
since the date of such financial statements in the ordinary course of business
consistent with past practice.
(l) Material Contracts. Except in the ordinary course of business,
neither the Company nor any of its subsidiaries shall (i) modify, amend or
terminate any material Contract to which the Company or such subsidiary is a
party, (ii) waive, release or assign any material rights or claims or
(iii) waive the benefits of, or agree to modify in any manner, any
confidentiality, standstill or similar agreement to which the Company or such
subsidiary is a party.
(m) Benefits Changes. The Company shall not, and shall not permit
any of its subsidiaries to, (i) increase the compensation or benefits of any
director, officer or employee, except for increases in the ordinary course that
are consistent with past practice, (ii) adopt any amendment to a Benefit Plan
that materially increases the cost thereof, (iii) enter into any employment or
consulting agreement with any director, officer or employee or (iv) accelerate
the payment of compensation or benefits to any director, officer or employee.
(n) General. The Company shall not, and shall not permit any of its
subsidiaries to, authorize any of, or commit or agree to take any of, the
foregoing actions otherwise prohibited by this Section 6.01.
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EMPLOYMENT AND OTHER EMPLOYEE RELATED CONTRACTS
Certain executive officers have employment agreements with the Company.
The Agreements fix each officer's base compensation, provide for salary
increases and bonuses as the Company's Board of Directors may determine from
time to time, provide for participation in such employee benefit plans as the
Company may adopt from time to time for its personnel generally, provide for
reimbursement of travel and other expenses in connection with such officers'
employment, and, in certain circumstances, allow for specified relocation
fees and education reimbursement. The agreements have no specified terms but
are terminable by the Company with or without just cause, as defined in the
employment agreements. Upon termination without just cause, the officer is
entitled to severance pay equal to such officer's base salary at the time of
termination and continued medical insurance coverage for 12 months or until
such officer obtains employment, whichever period is less. If so terminated
without just cause, the Company would be obligated to pay the indicated
amounts to the following executive officers: W. Scott Webber, $240,000;
Steven M. Ehrlich $140,000; and Michael J. Robbins, $190,000. The agreements
also contain confidentiality and non-compete provisions between the Company
and such officers for the terms and guidelines as set forth in each agreement.
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COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The following is the report of the Compensation Committee of the Board
of Directors, describing the compensation policies and rationale applicable
to the Company's executive officers with respect to compensation paid to such
executive officers for the year ended December 31, 1996. This report is not
"soliciting material," is not deemed filed with the Securities and Exchange
Commission, and is not to be incorporated by reference in any filing of the
Company under the Securities Act of 1993 or the Securities Exchange Act of
1934.
PURPOSE OF THE COMPENSATION COMMITTEE
The Compensation Committee of the Board of Directors is responsible for
recommending to the Board of Directors compensation levels for the executive
officers for each fiscal year based upon a consistent set of policies and
procedures.
COMPENSATION COMMITTEE STRUCTURE
The Compensation Committee is currently made up of three (3) independent,
non-employee members of the Board of Directors who meet during the fourth
quarter of each fiscal year to set executive officer salaries and other
compensation, and at other times and deemed necessary.
OBJECTIVES OF THE COMPENSATION PROGRAM
The objectives of the compensation program are: (i) to provide a means
for the Company to attract and retain high-quality executives; (ii) to tie
executive compensation directly to the Company's business and performance
objectives; (iii) to align the financial interests of the Company's executive
officers with the financial interest of shareholders; and (iv) to reward
outstanding individual performance that contributes to the long-term success
of the Company.
ELEMENTS OF COMPENSATION
Each executive officer's compensation package is comprised of three
elements: (i) base compensation, which reflects individual responsibility and
is designed primarily to be competitive with salary levels of a comparative
group; (ii) annual bonus plan compensation payable in cash and tied generally
to the achievement of financial performance goals as established by the Board
of Directors; and (iii) long-term stock-based incentive compensation which
emphasizes a focus on Company growth and increased shareholder value.
BASE SALARIES. In order to retain executives and other key employees,
and to be able to attract additional well-qualified executives when the need
arises, the Company strives to offer salaries, health care and other employee
benefit programs to its executives and other key employees which are
comparable to those offered to persons with similar skills and
responsibilities by competing businesses. In recommending salaries for
executive officers, the Committee: (i) reviews the historical performance of
the officers and (ii) reviews available information, including information
published in secondary sources, regarding prevailing salaries and
compensation programs offered by competing businesses which it believes are
comparable to the Company in terms of size, revenue, financial performance
and industry group. Many, though not all, of these competing businesses are
publicly traded.
REVENUE BONUS. Certain officers of the Company (V.P. North American
Sales, V.P. European Operations, and V.P. Asia Pacific Operations) are paid a
cash bonus, on a quarterly basis, upon the achievement of their assigned
revenue targets on a year-to-date basis. The annual bonuses for achievement
of all targets range from $50,000 to 85,000 for each officer.
ANNUAL BONUS COMPENSATION. The Board of Directors establishes, on an
annual basis, a cash incentive program for each of the Company's executive
officers. The Compensation Committee recommended and
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the Board of Directors approved an annual incentive bonus compensation
structure for fiscal year 1997 which is based upon the attainment of annual
operating income goals and increased revenue growth for the year.
LONG-TERM STOCK-BASED INCENTIVE COMPENSATION. Long-term incentives are
provided through stock option grants which are based upon factors that the
Compensation Committee deems appropriate, including aligning the interests of
each executive officer with those of the shareholders and providing each
individual with a significant incentive to manage the Company for the
perspective of an owner with an equity stake in the business. Each grant
generally allows the officer to acquire shares of the Company's Common Stock
at a fixed price per share (the market price on the grant date) over a
specified period of time (up to 10 years). Options granted before December
10, 1996 generally vest in equal installments over a five year period,
contingent upon the executive officer's continued employment with the
Company. Options granted after December 10, 1996 are generally vested at six
month intervals over a two-year period, contingent upon the executive
officer's continued employment. Accordingly, options will provide a return to
the executive officer only if the executive officer remains employed by the
Company during the vesting period, and then only to the extent the market
price of the shares appreciates over the option term. The size of the option
grant to each executive officer, based on the aggregate exercise price, is
somewhat subjective and generally is set at a level that the Committee deems
appropriate in order to create a meaningful opportunity for stock ownership
based upon the individual's current position with the Company, but also takes
into account (i) comparable awards to individuals in similar positions in the
industry as reflected in generally available information, (ii) the
individual's potential for future responsibility and promotion over the
option term, and (iii) the individual's personal performance in recent
periods. The Committee also takes into account the number of vested and
unvested options held by each executive officer in order to maintain an
appropriate amount of equity incentive for that individual. However, the
Committee does not adhere to any specific guidelines as to the relative option
holdings of the Company's executive officers. See "Executive
Compensation--Repricing of Options".
CHIEF EXECUTIVE OFFICER COMPENSATION
Mr. Webber's base salary and incentive compensation were established in
accordance with the criteria described above. Mr. Webber's base salary for
1996 as President and Chief Executive Officer was $220,000. In setting this
amount, the Board of Directors took into account: (i) its belief that Mr.
Webber is the Chief Executive Officer of a leading software company and has
significant and broad-based experience in the software industry; (ii) the
scope of Mr. Webber's responsibilities, and (iii) its confidence in Mr.
Webber to lead the Company's growth in the future. The base salary is set to
provide a compensation level considered by the Compensation Committee to be
comparable to a selected group of other software companies.
TAX DEDUCTIBILITY OF EXECUTIVE COMPENSATION
Section 162 of the Internal Revenue Code of 1986, as amended (the
"IRC"), limits the federal income tax deductibility of compensation paid to
the Company's Chief Executive Officer and to each of the other four most
highly compensated executive officers. The Company may deduct such
compensation only to the extent that during any fiscal year the compensation
paid to any such individual does not exceed $1 million, unless compensation
is performance-based and meets certain specified conditions (including
shareholder approval). Based on the Company's current compensation plans and
policies and recently released regulations interpreting Section 162 of the
IRC, the Company and the Committee do not believe that, for the near future,
the aggregate amount of compensation payable to executives will exceed the $1
million limit.
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REPORT OF THE COMPENSATION COMMITTEE ON REPRICING OF OPTIONS
In January and April, 1996 the Compensation Committee considered the
options held by the Company's executive officers, independent directors and
employees and the fact that the broad decline in the price of the Common
Stock of the Company had resulted in a substantial number of stock options
granted pursuant to the Company's Option Plans having exercise prices well
above the recent trading prices for the Common Stock. The Committee took into
account information presented by management showing that employee turnover
had significantly increased in each of the most recent fiscal years. The
Committee was advised that management believed that turnover was increasing
in part because the Company's total compensation package for long-term
employees, which included substantial options with exercise prices well above
the current trading price, was less attractive than compensation offered by
other companies in the same geographic location, because options granted to
new hires at other companies would be granted current trading prices,
providing more opportunity for appreciation that the Company's options.
The Committee believed that (i) the Company's success in the future will
depend in large part on its ability to retain a number of its highly skilled
technical, managerial and marketing personnel, (ii) compensation for such
personnel is intense, (iii) the loss of key employees could have a
significant cost-effective to provide equity incentives to independent
directors, employees and executive officers of the Company to improve the
Company's performance and new options to existing employees at fair market
value, but recognized that the size of the option grants required to offset
the decline in market price would result in significant additional dilution
to shareholder. The Committee also recognized that an exchange of existing
options with exercise prices higher than fair market value for options at
fair market value would provide additional incentive to employees because of
the increased potential for appreciation and also recognized that the
Committee could require restarted vesting in the exchange options, so that
optionees participating in the exchange would have incentives to remain with
the Company. On balance, considering all of these factors, the Committee
determined it to be in the best interests of the Company and its shareholders
to restore the incentive for independent directors, employees and executive
officers to remain with the Company and to exert their maximum efforts on
behalf of the Company by granting replacement stock options under its Stock
Options Plans for those options with exercise prices above recent trading
prices, at the optionee's option, and with restarted vesting.
Accordingly, in January, 1996 and April 1996 the Committee and the Board
of Directors approved an offer to all employees of the Company, including
executive officers and independent directors to exchange certain outstanding
options with exercise prices above the then current trading price for options
with an exercise price equal to the current trading price, with vesting
commencing on the date of the exchange. All exchanged options will terminate
no later than ten (10) years from the date of exchange. Accordingly,
optionees who participated in the exchange received a lower exercise price in
exchange for their forfeiting any accrued vesting on their exchanged options.
The offer to exchange options on January 19, 1996 was applicable only to
previously granted options with exercise prices above $20.00 per share. A
total of 126,000 options with exercise prices from $20.13 to $24.25 per share
were exchange for an equal number of shares at an exercise price of $13.75,
the closing price of the Company's stock on January 19, 1996.
The offer to exchange options on April 19, 1996 was applicable to
previously granted unvested and unexercised options with exercise prices
above $6.88 per share. A total of 431,738 options with exercise prices from
$7.35 to $17.75 per share were exchanged for an equal number of shares at an
exercise price of $6.88 per share, the closing price of the Company's stock
on April 19, 1996.
See "Executive Compensation--Repricing of Options", "Board of
Directors--Compensation of Directors", and the "Executive
Compensation--Ten-Year Option/SAR Repricings" table for additional
information.
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Through the programs described above, a significant portion of the
Company's executive compensation is linked directly to corporate performance
as well as, with respect to stock options, stock appreciation. In 1996, as in
previous years, a substantial portion of the Company's targeted executive
compensation consisted of performance-based variable elements. The
Compensation Committee intends to continue the policy of linking executive
officer compensation to Company performance and returns to shareholders,
recognizing that the ups and downs of the business cycle form time to time
may result in an imbalance for a particular period.
By the Compensation Committee,
Joseph A. Piscopo, CHAIRMAN
Lawrence W. Olson
Jerry Baker
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<PAGE>
The Board of Directors has amended the Incentive Plan to provide for
the issuance of options to acquire an additional 200,000 shares of Common
Stock (for an aggregate of 2,075,000 shares of Common Stock) and directed
that this amendment be submitted to the shareholders of the Corporation for
their approval. As of December 31, 1996, options to purchase 1,795,067
shares of Common Stock have been granted under the Incentive Plan. The
approval of the increase in the number of shares of Common Stock available
for grant under the Incentive Plan will require the affirmative vote of a
majority of the shares of Common Stock and entitled to vote at the Annual
Meeting. If not approved by shareholders at the Annual Meeting, certain
grants made under the Incentive Plan during and after the last fiscal year
may be null and void. Under the Incentive Plan, stock options may be granted
only to full-time employees of the Company and its subsidiaries, including
officers.
SUMMARY OF MATERIAL PROVISIONS OF THE INCENTIVE PLAN
GENERAL. The Incentive Plan is intended to provide continuing long-term
incentives to selected eligible key employees, including officers, to provide
a means of rewarding outstanding performance by such individuals, and to
enable the Company to attract and retain key personnel. See also "Executive
Compensation."
ADMINISTRATION. The Incentive Plan is administered by the Board of
Directors or a committee appointed thereby, a majority of the members of
which must be members of the Board and none of whom are eligible to
participate in the Incentive Plan. The Board or committee may interpret the
Incentive Plan and, subject to its provisions, may prescribe, amend and
rescind rules and make all other determinations necessary or desirable for
the administration of the Incentive Plan. Subject to certain limits set
forth in the Incentive Plan, the Board or committee has complete discretion
to select participants, establish the manner in which options are granted and
exercised, and otherwise prescribe all of the terms and provisions of options
granted under the Incentive Plan.
ELIGIBILITY. Only full-time employees, including officers, of the
Company and its subsidiaries are eligible to participate in the Incentive
Plan. As of December 31, 1996, the Company and its subsidiaries had
approximately 237 full-time employees.
STOCK SUBJECT TO INCENTIVE PLAN. The Incentive Plan covers an
aggregate of 1,875,000 shares of Common Stock (as adjusted for a 5 for 4
stock split in January 1995). As of December 31, 1996, options for 1,795,067
shares of Common Stock had been granted under the Incentive Plan. The Board
of Directors shall
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<PAGE>
make appropriate adjustments in the number of shares subject to the Incentive
Plan and outstanding options in the event of a recapitalization,
reclassification, stock split, combination of shares (reverse stock split) or
dividend or other distribution payable in Common Stock after the Incentive
Plan becomes effective.
VESTING AND TERM. Before December 10, 1996, options granted under the
Incentive Plan generally vest and become exercisable at the rate of 20% of
the option shares on the first, second, third, fourth and fifth anniversary
date of the grant conditioned upon continued employment with the Company.
Options granted after December 10, 1996 are exercisable over a two year
period, 25% every six months. Vesting is accelerated and options become
exercisable in the event of a "change of control" of the Company as defined
in the Incentive Plan. The options generally have a term of ten years (five
years for employees owning more than 10% of the Company's Common Stock) from
the date of grant.
AMENDMENT. The Incentive Plan may be amended by the Board of Directors
except that, without shareholder approval, no amendment shall increase the
number of shares available under the Incentive Plan except for certain
specified adjustments, change the designation of the class of persons
eligible to be granted options under the Incentive Plan, or materially
increase the benefits accruing to participants under the Incentive Plan.
FEDERAL TAX CONSEQUENCES. Options under the Incentive Plan are
intended to qualify as "incentive stock options" within the meaning of
section 422 of the Internal Revenue Code. In accordance with section 422 of
the Code, the term of any option granted under the Incentive Plan may not
exceed ten (10) years. With respect to any employee who owns stock
possessing more than ten percent (10%) of the voting power of the outstanding
stock of the Company, the term of any option may be no longer than five (5)
years. The aggregate fair market value of the Common Stock (determined at
the date of the option grant) with respect to which incentive stock options
are exercisable for the first time by any individual during any calendar year
may not exceed $100,000. The exercise price of all options granted under the
Incentive Plan must not be less than the fair market value per share on the
date of grant (unless the Optionee owns ten percent (10%) or more of the
voting power of the outstanding stock of the Company in which case the
exercise price must not be less than one hundred ten percent (110%) of the
fair market value per share on the date of grant).
The grant and exercise of an option under the Incentive Plan does not
result in taxable income to the Optionee provided that the Optionee observes
the following holding periods and restrictions. In order for the option to
be a qualified incentive option, the Optionee must hold the stock acquired
pursuant to the option for a period of two (2) years from the date of the
option grant and (1) year from the date of the option exercise. Any failure
to satisfy the holding periods and restrictions results in the loss of the
qualified status of the option and such option would be treated as a
nonqualified option. Provided that the Optionee observes the aforementioned
holding periods, the sale of the option stock by the Optionee results in
taxable long-term capital gain income to the Optionee in an amount equal to
the difference between the option sales and the option exercise price.
The Incentive Plan is not a stock bonus, pension or profit-sharing plan
and is not subject to or qualified under section 401(a) of the Internal
Revenue Code or any or the provisions of the Employment Retirement Income
Security Act of 1974 ("ERISA").
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SHAREHOLDER AGREEMENT, dated as of December 18, 1997, among
INTERNATIONAL BUSINESS MACHINES CORPORATION, a New York
corporation ("Parent"), HOOSIER ACQUISITION CORP., an Indiana
corporation and a wholly owned subsidiary of Parent ("Sub"), and
the persons listed on Schedule A hereto (each a "Shareholder",
and, collectively, the "Shareholders").
WHEREAS, Parent, Sub and Software Artistry, Inc., an Indiana
corporation (the "Company"), propose to enter into an Agreement and Plan of
Merger of even date herewith (as the same may be amended or supplemented, the
"Merger Agreement") providing for (i) the making of a cash tender offer (as such
offer may be amended from time to time as permitted under the Merger Agreement,
the "Offer") by Sub for all the outstanding shares of Common Stock, no par
value, of the Company (the "Company Common Stock") and (ii) the merger of Sub
with the Company (the "Merger");
WHEREAS, each Shareholder is the record and beneficial owner of the
number of shares of Company Common Stock set forth opposite such Shareholder's
name on Schedule A hereto; such shares of Company Common Stock, as such shares
may be adjusted by stock dividend, stock split, recapitalization, combination or
exchange of shares, merger, consolidation, reorganization or other change or
transaction of or by the Company, together with shares of Company Common Stock
that may be acquired after the date hereof by such Shareholder, including shares
of Company Common Stock issuable upon the exercise of options to purchase
Company Common Stock (as the same may be adjusted as aforesaid), being
collectively referred to herein as the "Shares"; and
WHEREAS, as a condition to their willingness to enter into the Merger
Agreement, Parent and Sub have requested that the Shareholders enter into this
Agreement;
NOW, THEREFORE, to induce Parent and Sub to enter into, and in
consideration of their entering into, the Merger Agreement, and in consideration
of the premises and the
<PAGE>
representations, warranties and agreements contained herein, the parties agree
as follows:
1. Purchase and Sale of Shares.
(a) Each Shareholder hereby severally and not jointly agrees that it
shall tender its Shares into the Offer and that it shall not withdraw any
Shares so
tendered (it being understood that the obligation contained in this
sentence is unconditional, subject to Section 8). In addition, each
Shareholder hereby severally and not jointly agrees to sell to Sub, and Sub
hereby agrees to purchase, all such Shareholder's Shares at a price per
Share equal to the Offer Price (as defined in the Merger Agreement,
provided that (i) such obligation of Sub to purchase is subject to Sub
having accepted Shares for payment under the Offer and the Minimum
Condition (as defined in Exhibit A to the Merger Agreement) having been
satisfied, which conditions may be waived by Sub in its sole discretion,
and (ii) such obligation of such Shareholder to sell is subject to the
Minimum Condition having been satisfied or a Takeover Proposal (as defined
in the Merger Agreement) having been made.
(b) Subject to the satisfaction or waiver of the requirements of the
second sentence in paragraph (a) above, (i) if a Takeover Proposal shall
have been made and the Minimum Condition shall not have been satisfied,
such Shareholder's Shares shall be purchased within three business days of
the delivery by Sub to the Shareholder of notice of Sub's intention to so
purchase such Shareholder's Shares, which notice may be given by Sub at any
time following the time such Takeover Proposal shall have been made and
shall specify the place, time and date for the closing of the purchase by
Sub pursuant to this paragraph (b), or (ii) if Sub shall have accepted
Shares for payment in the Offer and the Minimum Condition shall have been
satisfied, such Shareholder's Shares shall be purchased under the Offer.
(c) (i) In the event that the Merger Agreement shall have been
terminated and Sub would be entitled to purchase each Shareholder's Shares
pursuant to Section 1(b)(i), Sub may elect, by notice given in the manner
set forth in Section 1(b)(i), in lieu of purchasing such Shareholder's
Shares, to receive from such Shareholder, and each Shareholder hereby
agrees to pay to Sub on demand, an amount equal to all profit
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<PAGE>
(determined in accordance with Section 1(c)(ii)) of such Shareholder from
the consummation of any Takeover Proposal that is consummated within one
year of such termination.
(ii) For purposes of this Section 1(c), the profit of any Shareholder
from any Takeover Proposal shall equal (A) the aggregate consideration
received by such Shareholder pursuant to such Takeover Proposal, valuing
any non-cash consideration (including any residual interest in the Company)
at its fair market value on the date of such consummation plus (B) the
value of all Shares of such Shareholder disposed of after the termination
of the Merger Agreement and prior to the date of such consummation (which
shall be the greater of (i) the aggregate consideration received by such
Shareholder in connection with the disposition of such Shares (valuing any
non-cash consideration at its fair market value on the date of disposition)
or (ii) the fair market value, on the date of disposition, of such Shares),
less (C) the product of (x) the number of Shares held by such Shareholder
on the date of termination of the Merger Agreement and (y) the original
Offer Price.
(iii) For purposes of this Section 1(c), the fair market value of any
non-cash consideration consisting of:
(A) securities listed on a national securities exchange or traded on
the Nasdaq National Market shall be equal to the average closing
price per share of such security as reported on such exchange or
Nasdaq National Market for the five trading days after the date
of determination; and
(B) consideration which is other than securities of the form
specified in clause (A) of this Section 1(c)(iii) shall be
determined by a nationally recognized independent investment
banking firm mutually agreed upon by the parties within
10 business days of the event requiring selection of such banking
firm; provided, however, that if the parties are unable to agree
within two business days after the date of such event as to the
investment banking firm, then the parties shall each select one
firm, and those firms shall select a third investment banking
firm,
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<PAGE>
which third firm shall make such determination; provided further,
that the fees and expenses of such investment banking firm shall
be borne equally by Parent, on the one hand, and the
Shareholders, on the other hand. The determination of the
investment banking firm shall be binding upon the parties.
(iv) Any payment of profit under this Section 1(c) shall be paid by
wire transfer of same day funds to an account designated by Parent. If all
or a portion of the consideration received for the Shares by the
Shareholder is in the form of non-cash consideration, the Shareholder shall
pay to Parent the profit on such portion by either, at Parent's election,
(i) transferring to Parent Parent's pro rata share of such non-cash
consideration (which transfer shall be made immediately following the
determination of the value of such non-cash consideration) or (ii) selling
such non-cash consideration (which sale shall be effected as soon as
practicable and the allocable portion of the proceeds of which shall be
paid to Parent immediately following the settlement of such sale).
2. Representations and Warranties of the Shareholders. Each
Shareholder hereby, severally and not jointly, represents and warrants to Parent
and Sub as follows:
(a) Authority. The Shareholder has all requisite power and authority
to execute and deliver this Agreement and to consummate the transactions
contemplated hereby. The execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated hereby have
been duly authorized by the Shareholder. This Agreement has been duly
executed and delivered by the Shareholder and, assuming this Agreement
constitutes a valid and binding obligation of Parent and Sub, constitutes a
valid and binding obligation of the Shareholder enforceable against the
Shareholder in accordance with its terms. Except for the expiration or
termination of the waiting periods under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act") and informational
filings with the Securities and Exchange Commission, neither the execution,
delivery or performance of this Agreement by the Shareholder nor
4
<PAGE>
the consummation by the Shareholder of the transactions contemplated hereby
will (i) require any filing with, or permit, authorization, consent or
approval of, any federal, state or local government or any court, tribunal,
administrative agency or commission or other governmental or regulatory
authority or agency, domestic, foreign or supranational (a "Governmental
Entity"), (ii) result in a violation or breach of, or constitute (with or
without due notice or lapse of time or both) a default under, or give rise
to any right of termination, amendment, cancelation or acceleration under,
or result in the creation of any pledge, claim, lien, charge, encumbrance
or security interest of any kind or nature whatsoever (a "Lien") upon any
of the properties or assets of the Shareholder under, any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, lease,
license, permit, concession, franchise, contract, agreement or other
instrument or obligation (a "Contract") to which the Shareholder is a party
or by which the Shareholder or any of the Shareholder's properties or
assets, including the Shareholder's Shares, may be bound or (iii) violate
any judgment, order, writ, preliminary or permanent injunction or decree
(an "Order") or any statute, law, ordinance, rule or regulation of any
Governmental Entity (a "Law") applicable to the Shareholder or any of the
Shareholder's properties or assets, including the Shareholder's Shares.
(b) The Shares. The Shareholder's Shares and the certificates
representing such Shares are now, and at all times during the term hereof
will be, held by such Shareholder, or by a nominee or custodian for the
benefit of such Shareholder, and the Shareholder has good and marketable
title to such Shares, free and clear of any Liens, proxies, voting trusts
or agreements, understandings or arrangements, except for any such Liens or
proxies arising hereunder. The Shareholder owns of record or beneficially
no shares of Company Common Stock other than such Shareholder's Shares and
shares of Company Common Stock issuable upon the exercise of Company Stock
Options.
(c) Brokers. No broker, investment banker, financial advisor or
other person is entitled to any broker's, finder's, financial advisor's or
other similar fee or commission in connection with the transactions
contemplated by this Agreement based upon arrangements made by or on behalf
of such Shareholder.
5
<PAGE>
(d) Merger Agreement. The Shareholder understands and acknowledges
that Parent is entering into, and causing Sub to enter into, the Merger
Agreement in reliance upon the Shareholder's execution and delivery of this
Agreement.
3. Representations and Warranties of Parent and Sub. Parent and Sub
hereby jointly and severally represent and warrant to the Shareholders as
follows:
(a) Authority. Parent and Sub have the requisite corporate power and
authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. The execution, delivery and performance
of this Agreement by Parent and Sub and the consummation of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of Parent and Sub. This Agreement has been
duly executed and delivered by Parent and Sub and, assuming this Agreement
constitutes a valid and binding obligation of the Shareholders, constitutes
a valid and binding obligation of Parent and Sub enforceable in accordance
with its terms.
(b) Securities Act. The Shares will be acquired in compliance with,
and Sub will not offer to sell or otherwise dispose of any Shares so
acquired by it in violation of any of, the Securities Exchange Act of 1934,
as amended, or the registration requirements of the Securities Act of 1933,
as amended.
(c) Financing. Sub has, or will have at the time that any payment is
required to be made to any Shareholder hereunder, the funds necessary to
make such payment to such Shareholder.
4. Covenants of the Shareholders. Each Shareholder, severally and
not jointly, agrees as follows:
(a) The Shareholder shall not, except as contemplated by the terms of
this Agreement, (i) sell, transfer, pledge, assign or otherwise dispose of,
or enter into any Contract, option or other arrangement (including any
profit sharing arrangement) or understanding with respect to the sale,
transfer, pledge, assignment or other disposition of, the Shares to any
person other than Sub or Sub's designee, (ii) enter into any voting
arrangement, whether by proxy, voting agreement, voting trust,
power-of-attorney or otherwise, with respect to the Shares or
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<PAGE>
(iii) take any other action that would in any way restrict, limit or
interfere with the performance of its obligations hereunder or the
transactions contemplated hereby.
(b) Until the Merger is consummated or the Merger Agreement is
terminated, the Shareholder shall not, nor shall the Shareholder permit any
investment banker, financial adviser, attorney, accountant or other
representative or agent of the Shareholder to, directly or indirectly
(i) solicit, initiate or encourage (including by way of furnishing
information), or take any other action designed or reasonably likely to
facilitate, any inquiries or the making of any proposal which constitutes,
or may reasonably be expected to lead to, any Takeover Proposal or
(ii) participate in any discussions or negotiations regarding any Takeover
Proposal. Without limiting the foregoing, it is understood that any
violation of the restrictions set forth in the preceding sentence by an
investment banker, financial advisor, attorney, accountant or other
representative or agent of the Shareholder shall be deemed to be a
violation of this Section 4(b) by the Shareholder.
(c) At any meeting of shareholders of the Company called to vote upon
the Merger and the Merger Agreement or at any adjournment thereof or in any
other circumstances upon which a vote, consent or other approval (including
by written consent) with respect to the Merger and the Merger Agreement is
sought, each Shareholder shall, including by initiating a written consent
solicitation if requested by Parent, vote (or cause to be voted) such
Shareholder's Shares in favor of the Merger, the adoption by the Company of
the Merger Agreement and the approval of the other transactions
contemplated by the Merger Agreement. At any meeting of shareholders of
the Company or at any adjournment thereof or in any other circumstances
upon which the Shareholder's vote, consent or other approval is sought,
such Shareholder shall vote (or cause to be voted) such Shareholder's
Shares against (i) any merger agreement or merger (other than the Merger
Agreement and the Merger), consolidation, combination, sale of substantial
assets, reorganization, recapitalization, dissolution, liquidation or
winding up of or by the Company or any other Takeover Proposal
(collectively, "Alternative Transactions") or (ii) any amendment of the
Company's Third Amended and Restated Articles of Incorporation or By-laws
or other proposal or
7
<PAGE>
transaction involving the Company or any of its subsidiaries, which
amendment or other proposal or transaction would in any manner impede,
frustrate, prevent or nullify the Offer, the Merger, the Merger Agreement
or any of the other transactions contemplated by the Merger Agreement
(collectively, "Frustrating Transactions").
5. Grant of Irrevocable Proxy; Appointment of Proxy. (a) Each
Shareholder hereby irrevocably grants to, and appoints, Lee A. Dayton, Donald
D. Westfall and Archie W. Colburn, and any other individual who shall hereafter
be designated by Parent, and each of them, such Shareholder's proxy and
attorney-in-fact (with full power of substitution), for and in the name, place
and stead of such Shareholder, to vote such Shareholder's Shares, or grant a
consent or approval in respect of such Shares, at any meeting of shareholders of
the Company or at any adjournment thereof or in any other circumstances upon
which their vote, consent or other approval is sought, (i) in favor of the
Merger, the adoption by the Company of the Merger Agreement and the approval of
the other transactions contemplated by the Merger Agreement and against (i) any
merger agreement or merger (other than the Merger Agreement and the Merger),
consolidation, combination, sale of substantial assets, reorganization,
recapitalization, dissolution, liquidation or winding up of or by the Company
and (ii) any Alternative Transaction or Frustrating Transaction.
(b) Each Shareholder represents that any proxies heretofore given in
respect of such Shareholder's Shares are not irrevocable, and that any such
proxies are hereby revoked.
(c) Each Shareholder hereby affirms that the irrevocable proxy set
forth in this Section 5 is given in connection with the execution of the Merger
Agreement, and that such irrevocable proxy is given to secure the performance of
the duties of such Shareholder under this Agreement. Such Shareholder hereby
further affirms that the irrevocable proxy is coupled with an interest and may
under no circumstances be revoked, subject to Section 8. Such Shareholder
hereby ratifies and confirms all that such irrevocable proxy may lawfully do or
cause to be done by virtue hereof. Such irrevocable proxy is executed and
intended to be irrevocable in accordance with the provisions of Section
23-1-30-3 of the Indiana Business Corporation Law. Such irrevocable proxy shall
be valid until the later to occur of (i) eleven months from the date hereof or
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<PAGE>
(ii) the termination of this Agreement pursuant to Section 8.
6. Further Assurances. Each Shareholder will, from time to time,
execute and deliver, or cause to be executed and delivered, such additional or
further transfers, assignments, endorsements, consents and other instruments as
Parent or Sub may reasonably request for the purpose of effectively carrying out
the transactions contemplated by this Agreement and to vest the power to vote
such Shareholder's Shares as contemplated by Section 5. Parent and Sub jointly
and severally agree to use reasonable efforts to take, or cause to be taken, all
actions necessary to comply promptly with all legal requirements that may be
imposed with respect to the transactions contemplated by this Agreement
(including legal requirements of the HSR Act).
7. Assignment. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of the parties
without the prior written consent of the other parties, except that Sub may
assign, in its sole discretion, any or all of its rights, interests and
obligations hereunder to Parent or to any direct or indirect wholly owned
subsidiary of Parent. Subject to the preceding sentence, this Agreement will be
binding upon, inure to the benefit of and be enforceable by the parties and
their respective successors and assigns. Each Shareholder agrees that this
Agreement and the obligations of such Shareholder hereunder shall attach to such
Shareholder's Shares and shall be binding upon any person or entity to which
legal or beneficial ownership of such Shares shall pass, whether by operation of
law or otherwise, including without limitation such Shareholder's heirs,
guardians, administrators or successors.
8. Termination. This Agreement, and all rights and obligations of
the parties hereunder, shall terminate upon the earliest of (a) the date upon
which the Merger Agreement is terminated pursuant to Section 9.01(a) thereof,
(b) 18 months from the date of this Agreement; provided, however, that
Sections 1, 6, 8, 10 and 13 hereof shall survive until the date that is 10
business days after the later of (i) the first anniversary of the date of any
termination of the Merger Agreement (other than any termination pursuant to
Section 9.01(a) thereof) and (ii) the date on which all waiting periods under
the HSR Act applicable to the purchase of Shares pursuant to Section 1 shall
have expired or been terminated and (c) the date that Parent or Sub shall have
purchased and paid for the Shareholders' Shares pursuant to Section 1.
9
<PAGE>
9. Stop Transfer. The Company agrees with, and covenants to, Parent
and Sub that the Company shall not register the transfer of any certificate
representing any Shareholder's Shares unless such transfer is made in accordance
with the terms of this Agreement.
10. General Provisions.
(a) Payments. All payments required to be made to any party to this
Agreement shall be made by wire transfer of immediately available funds to
an account designated by such party at least one trading day prior to such
payment.
(b) Expenses. All costs and expenses incurred in connection with
this Agreement and the transactions contemplated hereby shall be paid by
the party incurring such expense.
(c) Amendments. This Agreement may not be amended except by an
instrument in writing signed by each of the parties hereto.
(d) Notice. All notices and other communications hereunder shall be
in writing and shall be deemed given if delivered personally, telecopied
(which is confirmed), sent by overnight courier (providing proof of
delivery) or mailed by registered or certified mail (return receipt
requested) to the parties at the following addresses (or at such other
address for a party as shall be specified by like notice):
(i) if to Parent, to
International Business Machines Corporation
New Orchard Road
Armonk, NY 10504
Attention: Mr. Lee Dayton
Telecopy No: (914) 499-7803
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<PAGE>
with a copy to:
Cravath, Swaine & Moore
Worldwide Plaza
825 Eighth Avenue
New York, NY 10019-7475
Attention: Allen Finkelson, Esq.
Telecopy No: (212) 474-3700
and
(ii) if to a Shareholder, to the address set forth under the name of
such Shareholder on Schedule A hereto
with a copy to:
Hinckley, Allen & Snyder
28 State Street
Boston, Massachusetts 02109-1775
Attention: Paul Bork, Esq.
Telecopy No: (617) 345-9020
(e) Interpretation. When a reference is made in this Agreement to a
Section, such reference shall be to a Section of this Agreement unless
otherwise indicated. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Wherever the words "include", "includes"
or "including" are used in this Agreement, they shall be deemed to be
followed by the words "without limitation".
(f) Counterparts. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement
and shall become effective when two or more counterparts have been signed
by each of the parties and delivered to the other parties, it being
understood that all parties need not sign the same counterpart.
(g) Entire Agreement; No Third-Party Beneficiaries. This Agreement
(including the documents and instruments referred to herein)
(i) constitutes the entire agreement and supersedes all prior agreements
and understandings, both written and oral, among the
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parties with respect to the subject matter hereof and (ii) is not intended
to confer upon any person other than the parties hereto any rights or
remedies hereunder.
(h) Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of New York without regard to any
applicable conflicts of law.
(i) Publicity. Except as otherwise required by law, court process or
the rules of a national securities exchange or the Nasdaq National Market
or as contemplated or provided in the Merger Agreement, for so long as this
Agreement is in effect, neither any Shareholder nor Parent shall issue or
cause the publication of any press release or other public announcement
with respect to the transactions contemplated by this Agreement or the
Merger Agreement without the consent of the other parties, which consent
shall not be unreasonably withheld.
11. Shareholder Capacity. No person executing this Agreement who is
or becomes during the term hereof a director or officer of the Company makes any
agreement or understanding herein in his or her capacity as such director or
officer. Each Shareholder signs solely in his or her capacity as the record
holder and beneficial owner of, or the trustee of a trust whose beneficiaries
are the beneficial owners of, such Shareholder's Shares and nothing herein shall
limit or affect any actions taken by a Shareholder in its capacity as an officer
or director of the Company to the extent specifically permitted by the Merger
Agreement.
12. Performance by Sub. Parent covenants and agrees for the benefit
of the Shareholders that it shall cause Sub to perform in full each obligation
of Sub set forth in this Agreement.
13. Enforcement. The parties agree that irreparable damage would
occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached.
It is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement in court of the United States located
in the State of New York or any New York State court, this being in addition to
any other remedy
12
<PAGE>
to which they are entitled at law or in equity. In addition, each of the
parties hereto waives any right to trial by jury with respect to any claim or
proceeding related to or arising out of this Agreement or any of the
transactions contemplated hereby.
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IN WITNESS WHEREOF, each of Parent and Sub has caused this Agreement
to be signed by its officer thereunto duly authorized and each Shareholder has
signed this Agreement, all as of the date first written above.
INTERNATIONAL BUSINESS
MACHINES CORPORATION,
By /s/ Lee A. Dayton
----------------------------
Name: Lee A. Dayton
Title: Vice President,
Corporate Development
and Real Estate
HOOSIER ACQUISITION CORP.
By /s/ Lee A. Dayton
----------------------------
Name: Lee A. Dayton
Title: President
SHAREHOLDERS
/s/ Joseph A. Piscopo
----------------------------
Name: Joseph A. Piscopo
/s/ W. Scott Webber
----------------------------
Name: W. Scott Webber
/s/ Donald E. Brown, M.D.
----------------------------
Name: Donald E. Brown, M.D.
/s/ Thomas E. Vanneman
----------------------------
Name: Thomas E. Vanneman
14
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/s/ Michael J. Robbins
----------------------------
Name: Michael J. Robbins
/s/ William M. Godfrey
----------------------------
Name: William M. Godfrey
/s/ Steven M. Ehrlich
----------------------------
Name: Steven M. Ehrlich
/s/ Scott S. McCorkle
----------------------------
Name: Scott S. McCorkle
15
<PAGE>
ACKNOWLEDGED AND AGREED
TO AS TO SECTION 9:
SOFTWARE ARTISTRY, INC.
By /s/ W. Scott Webber
-----------------------
Name: W. Scott Webber
16
<PAGE>
SCHEDULE A
NAME AND ADDRESS OF NUMBER OF NUMBER OF SHARES
SHAREHOLDER RECORD AND UNDERLYING OPTIONS
BENEFICIAL
SHARES
Joseph A. Piscopo 575,344 31,500
18 Natoma Drive
Oak Brook, IL 60523
W. Scott Webber 198,900 385,820
4914 Deer Ridge Dr.
Carmel, IN 46033-6033
Donald E. Brown, M.D. 707,000 120,000
832 Deer Ridge Dr.
Indianapolis, IN 46260
Thomas E. Vanneman 5,772 25,000
5236 Woodfield Dr.
Carmel, IN 46033-6033
Michael J. Robbins 0 257,160
11342 St. Andrews
Carmel, IN 46032
William M. Godfrey 0 100,875
14520 Quail Pointe Drive
Carmel, IN 46032-9783
Steven M. Ehrlich 500 87,148
5116 Hummingbird
Carmel, IN 46033
Scott S. McCorkle 0 57,000
10078 Bent Tree
Fishors, IN 46038-6038
17
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ARTICLE VI
Indemnification
Section 1. Indemnification Against Underlying Liability. The Corporation
shall indemnify any person who was or is a party, or is threatened to be made
a party, to any threatened, pending, or completed action, suit or proceeding,
whether civil, criminal, administrative, or investigative, by reason of the
fact that he is or was a director or officer of the Corporation, or is or was
serving at the request of the Corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise (collectively, "Agent") against expenses (including attorneys'
fees), judgments, fines, penalties, court costs and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit, or proceeding by judgment, order, settlement (whether with or
without court approval), conviction or upon a plea of nolo contendere or its
equivalent, shall not, of itself, create a presumption that the Agent did not
act in good faith and in a manner which he reasonably believed to be in or
not opposed to the best interests of the Corporation, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe that
his conduct was unlawful. If several claims, issues or matters are involved,
an Agent may be entitled to indemnification as to some matters even though he
is not entitled as to other matters. Any director or officer of the
Corporation serving in any capacity of another corporation, of which a
majority of the shares entitled to vote in the election of its directors is
held, directly or indirectly, by the Corporation, shall be deemed to be doing
so at the request of the Corporation.
Section 2. Successful Defense. To the extent that an Agent of the
Corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in Section 1 of this Article, or in
defense of any claim, issue or matter therein, he shall be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred
by him in connection therewith.
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Section 3. Determination of Conduct. Subject to any rights under any
contract between the Corporation and any Agent, any indemnification against
underlying liability provided for in Section 1 of this Article (unless
ordered by a court) shall be made by the Corporation only as authorized in
the specific case upon a determination that indemnification of the Agent is
proper in the circumstances because he has met the applicable standard of
conduct set forth in said Section. Such determination shall be made (a) by
the Board of Directors by a majority vote of a quorum consisting of directors
not at the time parties to the proceeding; (b) if such independent quorum is
not obtainable, by majority vote of a committee duly designated by the full
Board of Directors (in which designation directors who are parties may
participate), consisting solely of one or more directors not at the time
parties to the proceeding; (c) by special legal counsel (1) selected by the
independent quorum of the Board of Directors (or the independent committee
thereof if no such quorum can be obtained), or (2) if no such independent
quorum or committee thereof can be obtained, selected by majority vote of the
full Board of directors (in which selection directors who are parties may
participate); or (d) by the shareholders, but shares owned by or voted under
the control of directors who are at the time parties to the proceeding may
not be voted on the determination. Notwithstanding the foregoing, an Agent
shall be able to contest any determination that the Agent has not met the
applicable standard of conduct by petitioning a court of appropriate
jurisdiction.
Section 4. Payment of Expenses in Advance. Expenses incurred in
defending or settling a civil, criminal, administrative or investigative
action, suit or proceeding by an Agent who may be entitled to indemnification
pursuant to Section 1 of this Article shall be paid by the Corporation in
advance of the final disposition of such action, suit or proceeding upon
receipt of a written affirmation by the Agent of his good faith belief that
he has met the applicable standard of conduct set forth in Section 1 of this
Article and a written undertaking by or on behalf of the Agent to repay such
amount if it is ultimately determined that he is not entitled to be
indemnified by the Corporation as authorized in this Article. Notwithstanding
the foregoing, such expenses shall not be advanced if the Corporation
conducts the determination of conduct procedure referred to in Section 3 of
this Article and it is determined from the facts then known that the Agent
will be precluded from indemnification against underlying liability because
he has failed to meet the applicable standard of conduct set forth in Section
1 of this Article. The full Board of Directors (including directors who are
parties) may authorize the Corporation to implement the determination of
conduct procedure, but such procedure is not required for the advancement of
expenses. The full Board of Directors (including directors who are parties)
may authorize the Corporation to assume the Agent's defense where
appropriate, rather than to advance expenses for such defense.
Section 5. Indemnity Not Exclusive. The indemnification against
underlying liability, and advancement of expenses provided by, or granted
pursuant to, this Article shall not be deemed exclusive of, and shall be
subject to, any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any By-law, agreement, vote of
shareholders or disinterested directors or otherwise, both as to action in
his official
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<PAGE>
capacity and as to action in another capacity while holding such office.
Section 6. Insurance Indemnification. The Corporation shall have the
power to purchase and maintain insurance on behalf of any person who is or
was an Agent of the Corporation, or is or was serving at the request of the
Corporation as an Agent against any liability asserted against him and
incurred by him in any such capacity, or arising out of his status as such,
whether or not the Corporation would have the power to indemnify him against
such liability under the provisions of this Article.
Section 7. Employee Benefit Plans. For purposes of this Article,
references to "other enterprises" shall include employee benefit plans;
references to "fines" shall include any excise taxes assessed on a person
with respect to any employee benefit plan; and references to "serving at the
request of the Corporation" shall include any service as a director, officer,
employee or agent of the Corporation which imposes duties on, or involves
services by, such director, officer, employee or agent with respect to an
employee benefit plan, its participants or beneficiaries. A person who acted
in good faith and in a manner he reasonable believed to be in the interest of
the participants and beneficiaries of an employee benefit plan shall be
deemed to have acted in a manner "not opposed to the best interests of the
Corporation" as referred to in this Article.
Section 8. Application of Indemnification and Advancement of Expenses.
The indemnification and advancement of expenses provided by, or granted
pursuant to, this Article shall, unless otherwise provided when authorized or
ratified, be applicable to claims, actions, suits or proceedings made or
commenced after the adoption thereof, whether arising from acts or omissions
to act during, before or after the adoption hereof, and shall continue as to
a person who has ceased to be a director, officer, employee or agent and
shall inure to the benefit of the heirs, executors and administrators of such
a person. The right of any person to indemnification and advancement of
expenses shall vest at the time of occurrence or performance of any event,
act or omission giving rise to any action, suit or proceeding of the nature
referred to in Section 1 of this Article and, once vested, shall not later be
impaired as a result of any amendment, repeal, alteration or other
modification of any or all of these provisions.
Section 9. Indemnification Payments. Any payments made to any
indemnified party under this Article or under any other right to
indemnification shall be deemed to be an ordinary and necessary business
expense of the Corporation, and payment thereof shall not subject any person
responsible for the payment, or the Board of Directors, to any action for
corporate waste or to any similar action. Such payments shall be reported to
the shareholders of the Corporation before or with the notice of the next
shareholders' meeting.
Section 10. Full Indemnity. Notwithstanding the foregoing, the
directors of the Corporation shall be entitled to the fullest indemnification
by the Corporation permitted under applicable law.
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[LOGO]
[Letterhead of Broadview Associates LLC]
One Bridge Plaza
Fort Lee, New Jersey 07024
201/346-9000
Fax 201/346-9191
http://www.broadview.com
December 18, 1997
CONFIDENTIAL
Board of Directors
Software Artistry, Inc.
9449 Priority Way West Drive
Indianapolis, IN 46240
Dear Members of the Board:
We understand that Software Artistry, Inc. ("Software Artistry" or the
"Company"), IBM Corporation ("IBM") and Hoosier Acquisition Corp., a wholly
owned subsidiary of IBM (the "Sub"), propose to enter into an Agreement and Plan
of Merger (the "Agreement") pursuant to which the Sub will offer to purchase
(the "Offer") all of the outstanding shares of Software Artistry common stock,
no par value ("Software Artistry Common Stock"), for $24.50 cash per share (the
"Consideration") and subsequently merge with and into Software Artistry (the
"Merger"). Pursuant to the Merger, each issued and outstanding share of Software
Artistry not acquired in the Offer will be converted into the right to receive
an amount of cash equal to the Consideration. The terms and conditions of the
above described Offer and Merger (together the "Transaction") are more fully
detailed in the Agreement.
You have requested our opinion as to whether the Consideration to be
received by Software Artistry shareholders in the Transaction is fair, from a
financial point of view, to Software Artistry shareholders.
Broadview Associates focuses on providing merger and acquisition advisory
services to information technology ("IT") companies. In this capacity, we are
continually engaged in valuing such businesses, and we maintain an extensive
database of IT mergers and acquisitions for comparative purposes. We are
currently acting as financial advisor to Software Artistry's Board of Directors
and will receive a fee from Software Artistry upon the successful conclusion of
the Transaction.
In rendering our opinion, we have, among other things:
1.) reviewed the terms of the Agreement dated December 18, 1997 furnished to us
by Cravath, Swaine & Moore on December 18, 1997;
2.) reviewed Software Artistry's annual reports and Forms 10-K for the fiscal
years ended December 31, 1995 and 1996, including the audited financial
statements included therein, and Software Artistry's Form 10-Q for the nine
months ended September 30, 1997, including the unaudited financial
statements included therein;
[LOGO]
<PAGE>
[LOGO]
3.) reviewed certain internal financial and operating information, including
certain projections, relating to Software Artistry prepared by Software
Artistry management;
4.) participated in discussions with Software Artistry management concerning the
operations, business strategy, financial performance and prospects for
Software Artistry;
5.) reviewed the recent reported closing prices and trading activity for
Software Artistry Common Stock;
6.) compared certain aspects of the financial performance of Software Artistry
with public companies we deemed comparable;
7.) analyzed available information, both public and private, concerning other
mergers and acquisitions we believe to be comparable in whole or in part to
the Transaction;
8.) reviewed IBM's annual reports and Forms 10-K for the fiscal years ended
December 31, 1995 and 1996, including the audited financial statements
included therein, and IBM's Form 10-Q for the nine months ended September
30, 1997, including the unaudited financial statements included therein;
9.) reviewed the recent reported closing prices and trading activity for IBM
common stock;
10.) discussed with IBM management its view of the strategic rationale for the
Transaction;
11.) reviewed recent equity research analyst reports covering Software Artistry
and IBM;
12.) assisted in negotiations and discussions related to the Transaction among
Software Artistry, IBM and their respective legal advisors; and
13.) conducted other financial studies, analyses and investigations as we deemed
appropriate for purposes of this opinion.
In rendering our opinion, we have relied, without independent verification,
on the accuracy and completeness of all the financial and other information
(including without limitation the representations and warranties contained in
the Agreement) that was publicly available or furnished to us by Software
Artistry. With respect to the financial projections examined by us, we have
assumed that they were reasonably prepared and reflected the best available
estimates and good faith judgments of the management of Software Artistry as to
the future performance of Software Artistry. We have neither made nor obtained
an independent appraisal or valuation of any of Software Artistry's assets.
Based upon and subject to the foregoing, we are of the opinion that the
Consideration to be received by Software Artistry shareholders in the
Transaction is fair, from a financial point of view, to Software Artistry
shareholders.
For purposes of this opinion, we have assumed that Software Artistry is not
currently involved in any material transaction other than the Transaction and
those activities undertaken in the ordinary course of conducting its business.
Our opinion is necessarily based upon market, economic, financial and other
conditions as they exist and can be evaluated as of the date of this opinion,
and any change in such conditions may impact this opinion. We express no opinion
as to the price at which IBM common stock will trade subsequent to the Effective
Time (as defined in the Agreement).
This opinion speaks only as of the date hereof. It is understood that this
opinion is for the information of the Board of Directors of Software Artistry in
connection with its consideration of the Transaction and does not constitute a
recommendation to any Software Artistry shareholder as to whether such
shareholder should tender its shares in the Offer or as to how such shareholder
should vote on the Merger. Broadview Associates does not believe that any other
person other than the Board of Directors of Software Artistry has the legal
right under state law to rely on this opinion, and, in the absence of any
governing precedents, we would resist any assertion otherwise by any such
person. This opinion may not be published or referred to, in whole or part,
without our prior written permission, which shall not be unreasonably withheld.
Broadview Associates hereby consents to references to and the inclusion of this
opinion in its entirety in the Schedule 14D-9 to be distributed to Software
Artistry shareholders in connection with the Transaction.
<PAGE>
[LOGO]
Sincerely,
/s/ Broadview Associates LLC
Broadview Associates LLC
<PAGE>
EXHIBIT 99.9
FOR RELEASE:
IMMEDIATE [IBM LOGO]
- --------------------------------------------------------------------------------
International Business Machines Corporation
Armonk, NY 10504
Contacts: Yvonne Donaldson Jeff Cross
Tivoli Systems, Inc. IBM
512-436-8311 914-766-1265
[email protected] [email protected]
Joanie Hasch
Software Artistry
317-843-1663
[email protected]
IBM'S TIVOLI SYSTEMS AND SOFTWARE ARTISTRY, INC.
REACH MERGER AGREEMENT
ARMONK, N.Y. and INDIANAPOLIS, December 19, 1997 . . .
Tivoli Systems, a subsidiary of IBM, and Software Artistry, Inc.,
(NASDAQ: SWRT) today announced the two companies have reached an agreement
under which IBM will shortly commence a cash tender offer for all outstanding
Software Artistry shares at $24.50 per share. Software Artistry is a leading
provider of both consolidated service desk and customer relationship
management solutions for distributed enterprise environments.
The chairman of the board, CEO, the largest shareholder of Software
Artistry and certain other executive officers of Software Artistry have
agreed to tender their shares, representing approximately 20% of the
outstanding shares, into the offer. The net cost of the transaction to IBM is
expected to be approximately $200 million. Under the terms of the agreement,
Software Artistry will become a Tivoli business unit.
The acquisition will expand Tivoli's Managmenet Software solutions to
include Software Artistry's suite of robust consolidated help desk products,
expressly designed for network computing environments.
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- 2 -
"IBM is a leader in helping customers manage their complex IT
environments," said John M. Thompson, IBM senior vice president and Software
Group executive. "Combining the technology and resources of these two
companies will enable businesses to use management solutions to make customer
interaction in areas as e-business a reality."
"In today's competitive market place, CIOs are building the heart of
their IT operation around consolidated service desk solutions," said Tivoli
President and Chief Executive Officer Jan Lindelow. "This merger offers our
customers both near- and long-term benefits. Shortly, we will offer customers
a consolidated service desk solution, integrated across network, systems and
applications management disciplines to automate the processes of change,
request and configuration management. Longer term, our vision is to provide
customers with an automated, service level management offering that will not
only solve problems quickly, but actually prevent them before they surface."
"Tivoli is widely recognized as the industry's premier systems management
vendor," said C. Scott Webber, Software Artistry's President and CEO. "This
agreement offers a good return for our stockholders and will provide our
customers with Tivoli's breadth of expertise and IBM's sweeping global reach.
Additionally, our employees gain the tremendous opportunities for growth with
a recognized worldwide leader."
Software Artistry provides two suites of enterprise applications,
SA-EXPERTISE for Enterprise Support Management (ESM)* and SA-EXPERTISE for
Customer Relationship Management (CRM). The ESM suite fulfills an
organization's service level management requirements through the seamless
intergration of decision support, problem management, asset and change
management, network and system management integration, and end-user
empowerment.
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- 3 -
Software Artistry's CRM suite of products empowers organizations to become
truly customer driven by managing every customer interaction. Specifically,
the suite combines the components of sales and marketing management; customer
support, customer self-service and decision support in managing all aspects
of the customer relationship cycle, from attracting and acquiring customers,
to supporting and retaining them.
About Tivoli Systems and Software Artistry
Tivoli Systems provides TME 10, the industry's leading solution for
end-to-end management of distributed computing environments, from mobile
computers to mainframes. Thousands of companies around the globe use TME 10
and compatible third-party products to reduce the cost and complexity of
managing networks, systems, databases and applications.
Headquartered in Austin, Texas, Tivoli is an IBM company. Tivoli
distributes its products worldwide, through a network of domestic and
international sales offices, system integrators, resellers and IBM sales
channels. For more information, visit Tivoli's World Wide Web site at
http://www.tivoli.com.
Software Artistry, Inc., is the leading provider of strategic Enterprise
Management solutions. The company's suite of applications, SA-EXPERTISE,
uniquely enable organizations to proactively manage and improve their
processes for help desk, network management integration, asset and change
management, and end-user empowerment. Software Artistry is also a leading
contender in the emerging Customer Relationship Management marketplace with a
leading suite of products to address the complete customer lifecycle,
including marketing, sales, and customer service and support. Software
Artistry's customer base spans multiple industries, including one-third of
the Fortune 100 companies. Founded in 1988, Software Artistry sells its
products and services through its direct sales force located in regional
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- 4 -
offices throughout North America, international offices in the United
Kingdom, France, Australia, and Singapore, and through a network of domestic
and international partners.
# # #
IBM is a registered trademark of International Business Machines Corporation.
Tivoli Management Environment and TME 10 are trademarks of Tivoli Systems,
Inc., and IBM company. All other company and product names may be trademarks
of the respective companies with which they are associated.
<PAGE>
[LOGO]
December 23, 1997
Dear Shareholder:
By now you are probably aware that on December 18, 1997, Software Artistry,
Inc. ("Software Artistry" or the "Company") entered into a merger agreement with
International Business Machines Corporation ("IBM") and one of its subsidiaries
that provides for the acquisition of Software Artistry by IBM at a price of
$24.50 per share. Under the terms of the proposed transaction, an IBM subsidiary
has commenced a tender offer for all outstanding shares of Software Artistry
common stock at $24.50 per share.
YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE IBM OFFER AND
DETERMINED THAT THE TERMS OF THE OFFER AND THE MERGER ARE FAIR TO AND IN THE
BEST INTERESTS OF SOFTWARE ARTISTRY SHAREHOLDERS. ACCORDINGLY, THE BOARD OF
DIRECTORS UNANIMOUSLY RECOMMENDS THAT ALL HOLDERS ACCEPT THE IBM OFFER AND
TENDER THEIR SHARES PURSUANT TO THE IBM OFFER.
Following the successful completion of the tender offer, upon approval by
shareholder vote, if required, the IBM subsidiary will be merged with Software
Artistry, and all shares not purchased in the tender offer will be converted
into the right to received $24.50 per share in cash in the merger without
interest.
In arriving at its recommendations, the Board of Directors gave careful
consideration to a number of factors. These factors included the opinion of
Broadview Associates LLC, financial advisor to Software Artistry, that the
consideration to be received by Software Artistry shareholders in the
transaction is fair, from a financial point of view, to Software Artistry
shareholders.
Accompanying this letter is a copy of the Company's
Solicitation/Recommendation Statement on Schedule 14D-9. Also enclosed is IBM's
Offer to Purchase and related materials, including a Letter of Transmittal for
use in tendering shares. We urge you to read the enclosed materials carefully.
Each of us, as well as the largest shareholder of Software Artistry and
certain other executive officers of the Company, has agreed to tender our
shares, representing approximately twenty percent (20%) of Software Artistry's
outstanding shares, into the offer. Along with the Board of Directors,
management and employees, we thank you sincerely for your loyal support. We
believe that the offer and the merger are in the best interests of our
shareholders, and we strongly recommend that you accept IBM's offer.
Sincerely,
/s/ Joseph A. Piscopo
CHAIRMAN OF THE BOARD OF DIRECTORS
/s/ W. Scott Webber
PRESIDENT, CHIEF EXECUTIVE OFFICER AND
DIRECTOR
