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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____.
Commission file number: 0 - 27794
SEGUE SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-4188982
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1320 Centre Street, Newton Centre, Massachusetts 02159
(Address of principal executive offices)
Registrant's telephone number, including area code: (617) 796-1000
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [x] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of this
Form 10-K. [x]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant was approximately $87,948,602 as of March 10, 1998, based upon
the closing sale price of Common Stock reported for that date on the NASDAQ
National Market. Shares of Common Stock held by each officer and director and
by each person who owns 5% or more of the outstanding Common Stock have been
excluded because such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
The number of shares of Registrant's Common Stock outstanding as of March
10, 1998 was 7,903,585.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement to be filed pursuant to
Regulation 14A for Registrant's 1998 Annual Meeting of Stockholders to be held
on June 5, 1998, are incorporated by reference into Part III of this Annual
Report on Form 10-K.
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SEGUE SOFTWARE, INC.
FORM 10-K
TABLE OF CONTENTS
Page
PART I
Item 1. Business 2
Item 2. Properties 11
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 11
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 12
Item 6. Selected Financial Data 13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
Item 8. Financial Statements and Supplementary Data 27
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 27
PART III
Item 10. Directors and Executive Officers of the Registrant 27
Item 11. Executive Compensation 27
Item 12. Security Ownership of Management and Certain Beneficial Owners 27
Item 13. Certain Relationships and Related Transactions 27
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 28
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Statements made or incorporated in this Form 10-K include a number of
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-
looking statements include, without limitation, statements containing the words
"anticipates", "believes", "expects", "intends", "future" and words of similar
import which express management's belief, expectations or intentions regarding
Segue Software, Inc.'s (hereafter "Segue" or the "Company") future performance.
The Company's actual results could differ materially from those set forth in the
forward-looking statements. Certain factors that might cause such a difference
are discussed in the section entitled "Certain Factors Affecting Future
Operating Results" on page 21 of this Form 10-K.
PART I
ITEM 1. BUSINESS
GENERAL
Segue Software, Inc. is a leader in automated testing for software
reliability. The Company's products are used by quality assurance professionals
and software developers to improve software quality, reduce development costs
and shorten the time required to develop and deploy software applications. The
Company's products integrate test planning, creation, execution, management and
analysis to provide automated functionality and load testing of software
applications. The Company's products are used to test software applications
across various components of distributed, multi-platform client/server systems
as well as applications deployed on the World Wide Web.
During 1997, Segue introduced new technology to provide automated software
testing for Web-enabled software applications extending the Company's
distributed testing capabilities beyond distributed client/server applications
with GUI front ends. Segue also began to focus on load testing in 1997, through
an OEM/reseller arrangement with a third party software vendor. On December 30,
1997, the Company acquired both the third party software vendor and the
developer of the product, SQLBench International, Inc. and ARC - Dr. Ambichl &
Dr. Reindl Communication GmbH (formerly named ARC Dr. Ambichl & Dr. Reindl OEG),
hereafter referred to as "SQLBench". See Note B to the Consolidated Financial
Statements. These new product offerings formed the basis for a significant
refocus of the Company's marketing and sales initiatives beginning in the fourth
quarter of 1997.
In the fourth quarter of 1997, the Company began focusing its marketing and
sales efforts on the electronic commerce ("e-commerce") and Internet
applications market with a solution sales approach for its customers. The
Company believes that it can provide its customers with an automated testing
solution which can be of strategic value. This decision to refocus the
Company's marketing and sales efforts was based on the belief that this is a
fast-growing segment of the automated software testing market. The Company
introduced its cross-browser regression testing tool, SilkTest, in May 1997 to
address this market. The Company also believes that its Web load testing
product, SilkPerformer, introduced in September 1997, is positioned to model or
simulate load on Web-based applications for this market.
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In order to offer this testing solution consisting of products and
consulting, the Company reorganized its sales force structure beginning in the
fourth quarter of 1997. The Company formed an enterprise sales group consisting
of teams of one strategic sales representative and one technical support
engineer. This group focuses on e-commerce solution sales. At the same time, the
Company reconfigured its telesales force into a product sales group focused on
selling regression and load testing products primarily to the distributed
client/server market. This reorganization was accomplished under the direction
of a new domestic sales management team put in place in the fourth quarter of
1997.
The new sales focus and structure was launched under the direction of a new
Chief Executive Officer who joined the Company in September 1997 and was fueled
in large part by the evolution of the Company's regression testing products
addressing Web-based applications. This new focus also emphasizes the Company's
load testing product line.
Since these changes were implemented in the fourth quarter of 1997, the
Company does not have significant data to determine whether these initiatives
will be well received by its customers or whether the e-commerce market will
grow significantly.
Segue was incorporated in California in 1988 and reincorporated in Delaware
in March 1996.
INDUSTRY BACKGROUND
As businesses expand the use of technology to manage information and
processes, and as software has become a more important component in the delivery
of their products and services, consistent and effective operation of software
applications has become more critical to their success. These applications are
increasingly deployed in both client/server configurations and on the World Wide
Web. According to Brendan Conway of the Gartner Group, "Software, which
connects people to process, has become the blood supply to today's living
enterprise. If it becomes infected, so does the business process of the
organization." As client/server software is increasingly utilized to support
mission-critical applications, effective software quality management and testing
is required to avoid defects. As Web-based applications are increasingly being
used to support commerce, the up-time reliability and accuracy of those commerce
applications are critical to the success of those companies.
Unlike mainframe environments, where applications, operating systems and
hardware were designed by a single vendor as an integrated solution,
client/server systems and Web-based systems consist of component layers of
applications, middleware, operating systems, databases, browsers, servers,
processors and network technology designed separately by multiple vendors. For
example, in a client/server configuration, a Microsoft Windows95 client might
send requests to a router installed on a Microsoft NT server that distributes
them to an Oracle database located on a Sun Solaris server. There is a higher
probability for application instability or failure when the component layers of
client/server applications and Web-based applications are developed separately
by multiple vendors and integrated to form a business system.
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The transition to client/server environments has occurred in two phases. In
the first phase, client/server application logic exists on either the client or
the server. Typically the business logic is supported by the client and only the
data resides on the database server. In the second phase, referred to as
distributed client/server, application logic and business data are distributed
among multiple client, middleware and server layers. Now Web-based, e-commerce
applications are being added to the client/server environments, adding another
layer of complexity to the environments.
Distributed client/server computing and Web applications present enormous
challenges to quality assurance professionals and software developers.
Moreover, advances in client/server software development tools have enabled
rapid development of client/server applications. The complexity of distributed
client/server environments, and rapid application development, greatly increase
the likelihood that a combination of events will cause an application or system
to fail or produce unintended results ("bugs"). At the same time, competitive
pressures force software developers to compress development schedules in order
to shorten time to deployment.
To date, quality assurance professionals and software developers have
primarily used manual testing techniques to test software application functions
and features. Manual testing is slow, tedious and difficult to replicate in a
systematic manner, and is often performed at the end of the development process
when bugs are difficult and costly to correct. As a result, quality assurance
professionals and software developers have begun to invest in automated software
testing tools.
Traditional automated testing tools, which are designed for a specific
component on a particular platform, do not adequately address the complexities
of distributed client/server computing. First, they are not designed to
validate distributed application logic and data. Second, tests created by these
tools become obsolete when a component is replaced or upgraded. Third,
traditional automated testing tools are unable to recover when a bug is
encountered in the component being tested, meaning that truly unattended testing
in a distributed environment is impossible with such tools. Finally, they do
not deliver the capability to design, create, manage and reuse tests across
multiple platforms and system configurations, resulting in additional costs and
time spent on the software development and quality assurance processes.
In addition to automated testing tools, defect tracking and load testing
are important components of the automated testing solution. With integrated
defect tracking, the quality assurance department and the software development
organization can work more closely in the process of finding, tracking and
fixing software errors. By building load testing into the application testing
process early in the development cycle, the performance of the application in a
"real world" environment can be tested as well.
PRODUCTS
The Company's product family of software testing and quality management
tools can be divided into those that provide an automated testing solution for
Web-based applications (Silk) and those that provide an automated testing
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solution for distributed client/server applications (QualityWorks).
The Silk Product Family
The Silk product family includes SilkTest for end-to-end functional and
regression testing; SilkPerformer for robust load testing; QA Organizer for Web
site test planning and management; and Surf! for automatic link and Web-page
load testing. Available in a variety of Silk Editions, these tools test the
reliability of complex, cross-enterprise Web applications.
SilkTest
SilkTest is an automated functional and regression testing tool for end-to-
end testing of enterprise Web applications. SilkTest includes a recovery system
that supports unattended testing 7 days a week, 24 hours a day. SilkTest can run
across multiple platforms, technologies, browsers and environments.
SilkPerformer
SilkPerformer uses load testing technology to simulate real-world
conditions to help users predict capacity, scalability and performance problems
during their development process. SilkPerformer captures and simulates all
Internet protocols including HTTP, HTTPS, FTP, POP3 and SMTP, and playback at
varying connection speeds, from modem to T1.
Surf!
Surf! is an easy-to-use automatic Web site tester. Using pre-packaged
scripts and tests that Surf! provides, users can test the links in their Web
application, check the load time of each Web page, and drill down and report
back results.
The QualityWorks Product Family
QualityWorks combines testing tools to deliver an end-to-end testing
solution. QualityWorks includes QA Partner for end-to-end functional and
regression testing; QA Performer, for load testing; QA Organizer for test
planning and management; QA Radar for automated defect tracking; QA DBTester for
direct database access and verification; and GO! for automatic test generation.
Available in a variety of QualityWorks Editions, these tools together test the
reliability of complex, cross-enterprise applications.
QA Partner
QA Partner is an automated functional and regression testing tool for end-
to-end testing of cross-enterprise client/server applications. QA Partner
includes a recovery system that supports unattended testing 7 days a week, 24
hours a day. QA Partner runs across multiple platforms, technologies, and
environments.
QA Performer
QA Performer uses load testing technology to simulate real-world conditions
to help users predict capacity, scalability and performance problems during
their development process. QA Performer assists the user in modeling performance
improvements before incurring the cost of application rework. From database
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design through to deployment, QA Performer tests mission-critical client/server
applications under challenging conditions.
QA Organizer
QA Organizer is a fully-automated test planning and management tool. QA
Organizer automatically creates customized test plans for a particular
application and manages the testing process from a central point of control.
QA Radar
QA Radar automates the time-consuming process of tracking defects. Once
the bugs in an application are found, QA Radar automatically captures the bug
and recommends an action to correct the bug.
QA DBTester
QA DBTester directly accesses a database, using SQL calls, to verify
accurate database content. By providing test scripts with direct ODBC standard
access to over 35 databases, QA DBTester helps ensure that client/server
applications function with the associated database reliably before it deploys.
GO!
GO! is an easy-to-use automatic test generator. Using pre-packaged scripts
and tests that GO! provides, users can perform application operability testing,
including tests for tab orders, window detail, mnemonics, and property sets
without scripting.
SERVICES
The Company supplements all of its product offerings with training,
consulting and technical support services. The Company's services are designed
to promote a clear and consistent approach to automated testing and to
facilitate the penetration of the Company's products into a broader market. As
of February 28, 1998, these services were provided by 23 employees.
Training and Consulting. The Company offers training courses and consulting
services in support of its product families. The training courses are held
regionally in selected U.S. cities or at the customer site. The Company has two
principal objectives for its fee-based training courses and consulting services:
to produce the agreed-upon deliverables for the projects and to enhance the
customers' understanding of the Company's methodologies and techniques. The
Company has recently begun to offer e-commerce testing consulting services in
order to assist companies in a more rapid and successful adoption of regression
and load testing for Web-based applications.
Support Services. The Company offers annual maintenance contracts for an
annual fee to customers who have entered into license agreements for the use of
the Company's software products. The Company provides customer service and
support through its internal technical support organization. Support services
include the maintenance of the Company's software products in accordance with
specifications contained in the user's guide for such products and access to
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technical support personnel. This support includes technical support through the
Company's internal customer support group via phone, fax and e-mail
communications. Customers who are under an active software maintenance contract
are entitled to product upgrades and enhancements, when and if released. The
Company's distributors and some of its channel partners provide initial
telephone support to end-users.
SALES AND MARKETING
The Company sells its products through four channels: a direct sales force;
telesales representatives; a channel partner program; and international
distributors and resellers. The Company has made a significant investment in
sales and marketing in each of the last two years. As of February 28, 1998, the
Company's sales and marketing force consisted of 69 employees.
Direct Sales. The Company has historically relied principally on direct
sales of its products. The Company has recently structured its domestic direct
sales force into an enterprise sales group consisting of teams of one strategic
sales representative and one technical support engineer. As of February 28,
1998, the Company's direct sales force consisted of 33 employees. The Company
has nine sales offices throughout the United States and Canada and one sales
office in the United Kingdom. The Company intends to hire additional sales and
support personnel to broaden its direct selling and distribution capabilities.
Telesales. The Company recently separated its telesales representatives
into a product sales group selling principally to the distributed client/server
market. As of February 28, 1998, the Company's telesales force totaled six
employees.
Channel Partner Programs. In 1995, the Company established its Channel
Partner Programs, which aim to generate revenues from alternate channels. These
programs consist of the following: Value Added Resellers (VARs), Business
Integration Partners and Technology Integration Providers. Current partners
include Andersen Consulting, Interim Technology and INTERSOLV.
International Sales. In international markets, the Company utilizes
distributors in ten countries, which are supported by six members of the
Company's international sales organization. The Company derived approximately
11%, 8% and 7% of its total product sales from international customers in 1997,
1996 and 1995, respectively.
In support of its sales efforts, the Company conducts sales training
courses, targeted marketing programs, including direct mail, public relations,
advertising, seminars, trade shows and telemarketing, and ongoing customer and
third party communications programs. The Company also seeks to stimulate
interest in computer and software quality management tools through a public
relations program, speaking engagements, white papers, technical notes and other
publications. The Company has established a home page on the Internet's World
Wide Web, where potential customers can access information about the Company and
its products.
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BACKLOG
The time between order and delivery of the Company's products is generally
quite short. The number of orders, as well as the size of individual orders, can
vary substantially from month to month. Because of the short period between
order receipt and shipment of products, the Company typically does not have a
backlog of unfilled orders.
RESEARCH AND DEVELOPMENT
The Company has made substantial investments in research and product
development. The Company's research and development is conducted by project
teams consisting of development and quality assurance engineers and technical
writers. The Company uses many of its own products and methodologies in its
development process. The Company organizes development and quality assurance
schedules to optimize usage of automated tests by starting script development
very early in the development life cycle. The Company's research and
development staff originates, produces and tests many of the Company's prototype
products. The research and development department consults with the Company's
sales and marketing staff and utilizes the feedback from customer support and
training to ensure the satisfaction of its current customers. The Company also
licenses technology from vendors to be embedded in its product for resale or to
be resold as products by the Company.
The Company's research and development organization for regression testing
products is located at the Company headquarters in Newton Centre, MA. The
Company also has nine developers in Austria who are focused on the development
of load testing products. These employees joined the Company as part of the
acquisition of SQLBench. See Note B to the Consolidated Financial Statements.
Research and development expenses were $4.9 million in 1997, $3.8 million
in 1996 and $2.3 million in 1995. The staff grew to 51 employees as of February
28, 1998 from 35 as of February 28, 1997. The Company intends to continue making
significant investments in research and development to develop new products,
expand the capabilities of its Web application testing products and to
internationalize all of the Company's products.
COMPETITION
The market for software quality management tools is new, intensely
competitive, rapidly evolving and subject to rapid technological change. The
Company's competitors offer a variety of products and services to address this
market. The Company currently encounters direct competition from a number of
public and private companies such as Mercury Interactive Corporation, Rational
Software Corporation and Compuware Corporation. In addition, the possible
entrance of new competitors may intensify competition in the software quality
management market. Many of the Company's current and possible future
competitors have significantly greater financial, technical, marketing and other
resources than the Company, and many have well established relationships
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with current and potential customers of the Company. It is also possible that
alliances among competitors may emerge and rapidly acquire significant market
share. The Company also expects that competition will increase as a result of
software industry consolidations. Increased competition may result in price
reductions, reduced gross margins and loss of market share, any of which would
materially adversely affect the Company's business, operating results and
financial condition. There can be no assurance that the Company will be able to
compete effectively against current and future competitors.
The Company believes that the principal competitive factors affecting its
market include product features and functionalities, such as flexibility,
scalability, ease-of-integration, ease-of-implementation, ease-of-use, quality,
performance, price and total cost of ownership; customer service and support;
company reputation and financial viability; and effectiveness of sales and
marketing efforts. Although the Company believes that it currently competes
effectively with respect to such factors, there can be no assurance that the
Company will be able to maintain its competitive position against current and
potential competitors.
PROPRIETARY TECHNOLOGY
The Company primarily relies upon a combination of trademark, copyright and
trade secret laws and employee and third-party non-disclosure agreements to
protect its proprietary rights in its products. The Company has one patent, but
there can be no assurance that this patent would be upheld if challenged. There
can be no assurance that the Company's competitors will not independently
develop technologies that are substantially equivalent or superior to the
Company's technology. There can also be no assurance that the measures taken by
the Company to protect its proprietary rights will be adequate to prevent
misappropriation of the technology or independent development by others of
similar technology. In addition, the laws of various countries in which the
Company's products may be sold may not protect the Company's products and
intellectual property rights to the same extent as the laws of the United
States. There can be no assurance that third parties will not assert
intellectual property infringement claims against the Company or that any such
claims will not require the Company to enter into royalty arrangements or result
in costly litigation. The Company is not aware of any patent infringement
charge or any violation of other proprietary rights claimed by any third party
relating to the Company or the Company's products. However, the computer
software market is characterized by frequent and substantial intellectual
property litigation. Intellectual property litigation is complex and expensive,
and the outcome of such litigation is difficult to predict. The Company
believes that, due to the rapid pace of technological innovation for software
quality management products, the Company's ability to establish and maintain a
position of technology leadership in the industry is dependent more upon the
skills of its development personnel than upon the legal protections afforded its
existing technology.
EMPLOYEES
As of February 28, 1998, the Company had 167 full-time employees, all but
13 of whom were based in the United States. These employees include 51 in
Research and Development, 69 in Sales and Marketing, 28 in Customer Support,
Training and Distribution, and 19 in Finance and Administration. The Company's
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employees are not represented by any collective bargaining organizations and the
Company has never experienced any work stoppages. The Company considers its
relations with its employees to be good.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, their ages and their positions with
the Company as of March 10, 1998 are as follows:
NAME AGE POSITION
Stephen B. Butler 40 President, Chief Executive Officer and
Director
J. Jeffrey Bingenheimer 54 Vice President, Chief Financial Officer,
Treasurer and Assistant Secretary
Jeannine A. Bartlett 37 Senior Vice President of Research and
Development
Stewart A. Bush 41 Senior Vice President of North American Sales
Anthony G. Kolish 38 Senior Vice President of Services
Alexander M. Levi 40 Senior Vice President of International
Operations
Michael D. Maggio 36 Senior Vice President of Marketing
Betsy R. Rudnick 47 Senior Vice President of Human Resources and
Administration
Mr. Butler joined the Company in September 1997 as Chief Executive Officer
and Director. Mr. Butler was elected to the office of President in January 1998.
Mr. Butler served as President and Chief Executive Officer at TriQuest Design
Automation from October 1995 until July 1997. Prior to that, Mr. Butler held
senior management positions at Quickturn Design Systems where he served as
Senior Vice President of Sales, Marketing and Support from May 1993 until July
1995, and as Vice President of Sales from July 1991 until May 1993.
Mr. Bingenheimer has served as Vice President, Chief Financial Officer and
Assistant Secretary of the Company since September 1995 and as Treasurer since
February 1996. Prior to joining the Company, Mr. Bingenheimer served as Vice
President of Finance and Administration and Treasurer of CenterLine Software,
Inc., a software company, from April 1991 to September 1995.
Ms. Bartlett joined the Company in June 1997. Ms. Bartlett has served as
Senior Vice President of Research and Development since February 1998. Ms.
Bartlett served as Vice President of Product Management from November 1997 until
February 1998 and as Director of Product Management from June 1997 until October
1997. Prior to joining the Company, Ms. Bartlett served as Director of
Marketing, Director of Software Development and Senior Marketing Manager from
November 1994 until June 1997 at Praxis International, Inc. Prior to that, Ms.
Bartlett served as Director of Business Development from September 1993 until
October 1994 at Marketpulse, a division of CCA.
Mr. Bush joined the Company in October 1997 as Senior Vice President of
North American Sales. Prior to that, Mr. Bush served in several roles at
Talarian Corporation from 1991 until he joined the Company; these roles included
Director of North American Sales, National Sales Manager of Messaging and
Director of Eastern Region Sales.
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Mr. Kolish joined the Company in September 1995 and has served in several
positions. Mr. Kolish has served as Senior Vice President of Services since
February 1998. Prior to that, Mr. Kolish served as Vice President of Services,
Director of Marketing Strategy and Director of Product Management. Prior to
joining the Company, Mr. Kolish served as Senior Systems Manager at Fidelity
Investments from January 1994 until August 1995.
Mr. Levi joined the Company in December 1997 as Senior Vice President of
International Operations. Prior to that, Mr. Levi served in a variety of roles
at Quickturn Design Systems, Inc. from February 1991 until he joined the
Company. Mr. Levi's most recent role at Quickturn Design Systems was that of
Vice President of Asia Pacific Operations, which he held from October 1996 until
he joined Segue. Other roles included Director of Asia Sales and Senior Account
Manager, New England Area.
Mr. Maggio joined the Company in October 1991 and has held several senior
management positions. Mr. Maggio has served as Senior Vice President of
Marketing since February 1998. Mr. Maggio served as Vice President of Business
Development from January 1995 until February 1998, as Director, Eastern Region
in the Company's sales organization from June 1993 to December 1994 and as Vice
President of Development from 1991 until 1993.
Ms. Rudnick has served as Senior Vice President, Human Resources and
Administration since January 1995. From August 1987 to January 1995, Ms.
Rudnick worked as an independent consultant to several software companies in the
areas of organizational development, human resource management and facilities
planning and leasing. Effective March 31, 1998, Ms. Rudnick has resigned from
the Company.
ITEM 2. PROPERTIES
The Company's corporate headquarters are located in Newton Centre, MA, where
it leases approximately 22,750 square feet under a lease that expires in
November 1998. The Company's field sales and support operations occupy leased
facilities in eight locations throughout the United States and in two
locations in Canada and Europe. The Company also leases a research and
development facility, approximately 1,000 square feet, in Linz, Austria. The
facility in Newton Centre is being fully utilized. In the second quarter of
1998, the Company expects to enter into a lease agreement for a new headquarters
location and move into those new offices in Lexington, MA in the third quarter
of 1998. The Company will lease 40,500 square feet initially. See Note M to the
Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET PRICE FOR COMMON STOCK
The Company's Common Stock began trading publicly on March 28, 1996 on the
National Market Tier of the NASDAQ Stock Market under the symbol: SEGU. The
following table sets forth, for the periods indicated, the high and low closing
prices of the Common Stock as reported on the NASDAQ National Market System.
These prices do not include retail markups, markdowns, or commissions.
<TABLE>
<CAPTION>
Year ended December 31, 1997: High Low
------- -------
<S> <C> <C>
First Quarter $18.250 $ 7.500
Second Quarter $15.125 $ 8.625
Third Quarter $13.750 $ 7.625
Fourth Quarter $12.500 $ 7.750
Year ended December 31, 1996:
First Quarter (March 28, 1996 - March 31, 1996) $21.500 $21.000
Second Quarter $39.500 $21.250
Third Quarter $24.500 $ 9.875
Fourth Quarter $18.250 $12.000
</TABLE>
On March 10, 1998, the closing price reported on the NASDAQ National Market
System for the Common Stock was $13.875. The market price of the Company's
Common Stock has fluctuated significantly and is subject to significant
fluctuations in the future.
HOLDERS OF RECORD
As of March 10, 1998, there were approximately 94 holders of record of the
Company's Common Stock and 7,903,585 shares of Common Stock outstanding. The
Company estimates that as of March 10, 1998, there were approximately 1,800
beneficial stockholders.
DIVIDEND POLICY
The Company has never paid cash dividends on the Common Stock and does not
anticipate paying such dividends in the foreseeable future. The Company intends
to retain future earnings for use in the Company's business. The payment of any
future dividends will be determined by the Board of Directors in light of
conditions then existing, including the Company's financial condition and
requirements, future prospects, restrictions in financing agreements, business
conditions and other factors deemed relevant by the Board of Directors.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the Consolidated Financial Statements and the Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------------
1997 1996 1995 1994 1993
-------- --------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue:
Software $15,783 $12,592 $ 8,312 $4,770 $2,173
Services 6,011 4,381 2,627 1,253 466
Royalties - - 129 335 770
------- ------- ------- ------ ------
Total revenue 21,794 16,973 11,068 6,358 3,409
Cost of revenue:
Cost of software 1,095 651 315 243 165
Cost of services 2,590 1,709 1,194 601 352
Cost of royalties - - 30 80 169
------- ------- ------- ------ ------
Total cost of revenue 3,685 2,360 1,539 924 686
Gross margin 18,109 14,613 9,529 5,434 2,723
Operating expenses:
Sales and marketing 11,872 8,500 5,378 2,546 925
Research and development 4,931 3,806 2,273 1,574 1,041
General and administrative 3,211 2,437 1,709 1,284 724
Non-recurring charges 9,813/(1)/ - 449 - -
------- ------- ------- ------ ------
Total operating expenses 29,827 14,743 9,809 5,404 2,690
Income (loss) from operations (11,718) (130) (280) 30 33
Litigation settlement - (744) - - -
Other income (expense), net 2,186 1,535 (23) (21) (34)
------- ------- ------- ------ ------
Income (loss) before provision
for income taxes (9,532) 661 (303) 9 (1)
Provision for income taxes 56 20 - - -
------- ------- ------- ------ ------
Net income (loss) $(9,588) $ 641 $ (303) $ 9 $ (1)
======= ======= ======= ====== ======
Net income (loss) per common share -
basic $ (1.31) $ .12 $ (.20) $ .01 $ -
======= ======= ======= ====== ======
Net income (loss) per common share -
diluted $ (1.31) $ .09 $ (.20) $ - $ -
======= ======= ======= ====== ======
Weighted average common shares
outstanding - basic 7,337 5,364 1,552 1,528 1,395
------- ------- ------- ------ ------
Weighted average common shares
outstanding - diluted 7,337 7,689 1,552 4,002 1,395
------- ------- ------- ------ ------
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
Balance Sheet Data:
December 31,
1997 1996 1995 1994 1993
-------- ------- ------------- ------ ------
(in thousands)
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $22,975 $ 7,112 $ 442 $ 711 $ 218
Working capital (deficit) 35,521 40,667 (57) 1,211 504
Total assets 46,037 47,631 4,496 3,810 1,991
Subordinated notes payable 4,415 - 654 654 654
Total stockholders' equity 35,743 42,707 1,305 1,546 613
</TABLE>
/(1)/Non-recurring charges include a charge of $9.1 million for purchased
research and development in process and $718,000 for severance charges.
There were no cash dividends declared per common share for any of the years
shown above.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Segue Software, Inc. is a leader in automated testing for software
reliability. The Company's products are used by quality assurance professionals
and software developers to improve software quality, reduce development costs
and shorten the time required to develop and deploy software applications. The
Company's products integrate test planning, creation, execution, management and
analysis to provide automated functionality and load testing of software
applications. The Company's products are used to test software applications
across various components of distributed, multi-platform client/server systems
as well as applications deployed on the World Wide Web.
During 1997, Segue introduced new technology to provide automated software
testing for Web-enabled software applications extending the Company's
distributed testing capabilities beyond distributed client/server applications
with GUI front ends. Segue also began to focus on load testing in 1997, through
an OEM/reseller arrangement with a third party software vendor. On December 30,
1997, the Company acquired both the third party software vendor and the
developer of the product, SQLBench International, Inc. and ARC - Dr. Ambichl &
Dr. Reindl Communication GmbH (formerly named ARC Dr. Ambichl & Dr. Reindl OEG),
hereafter referred to as "SQLBench". See Note B to the Consolidated Financial
Statements. These new product offerings formed the basis for a significant
refocus of the Company's marketing and sales initiatives beginning in the fourth
quarter of 1997.
The Company began focusing its marketing and sales efforts on the e-
commerce and Internet applications market with a solution sales approach for its
customers. By doing so, the Company believes it can provide its customers with
an automated testing solution which can be of strategic value.
The new sales focus was launched under the direction of a new Chief
Executive Officer who joined the Company in September 1997 and was fueled in
large part by the evolution of the Company's regression testing products to
address Web-based applications. This new focus also emphasizes the Company's
load testing product line.
14
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
of revenue represented by certain items reflected in the Company's consolidated
statements of operations:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1997 1996 1995
------- ------ ------
<S> <C> <C> <C>
Revenue:
Software 72.4% 74.2% 75.1%
Services 27.6 25.8 23.7
Royalties - - 1.2
------ ----- -----
Total revenue 100.0 100.0 100.0
Cost of revenue:
Cost of software 5.0 3.8 2.8
Cost of services 11.9 10.1 10.8
Cost of royalties - - 0.3
------ ----- -----
Total cost of revenue 16.9 13.9 13.9
Gross margin 83.1 86.1 86.1
Operating expenses:
Sales and marketing 54.5 50.1 48.6
Research and development 22.6 22.4 20.5
General and administrative 14.7 14.4 15.4
Non-recurring charges 45.0 - 4.1
------ ----- -----
Total operating expenses 136.8 86.9 88.6
------ ----- -----
Loss from operations (53.7) (0.8) (2.5)
Litigation settlement - (4.4) -
Other income (expense), net 10.0 9.1 (0.2)
------ ----- -----
Income (loss) before provision for income taxes (43.7) 3.9 (2.7)
Provision for income taxes 0.3 0.1 -
------ ----- -----
Net income (loss) (44.0)% 3.8% (2.7)%
====== ===== =====
</TABLE>
REVENUE
TOTAL REVENUE
Total revenue increased 28% to $21.8 million in 1997 and 53% to $17.0
million in 1996 from $11.1 million in 1995.
Total revenue primarily consists of software and services revenue. Software
revenue consists of revenue from the granting of perpetual licenses to use the
Company's products. Services revenue consists of revenue from maintenance,
training and consulting. The Company sells its licenses through its direct sales
force, telesales, international distributors and channel partners.
15
<PAGE>
REVENUE FROM SOFTWARE
Software revenue increased 25% to $15.8 million in 1997 and 51% to $12.6
million in 1996 from $8.3 million in 1995. The increases in software revenue
are primarily the result of increased unit shipments in each of the respective
periods. These increased unit shipments were due to an increase in the demand
for automated testing products; the introduction by the Company of new and
upgraded products; increased market acceptance of the families of products
including its Web application testing products and load testing products
introduced in 1997; and expansion of the Company's sales and marketing
activities.
In 1997, the Company introduced a Web application testing product,
SilkTest, and load testing products, SilkPerformer and QA Performer. Revenues
from these three new products represented 18%, 5% and 3% of total product
revenue, respectively.
The increase in unit shipments came largely through the direct domestic
channel. Revenue from the domestic indirect channel accounted for 8%, 5% and 5%
of total product revenue in 1997, 1996 and 1995, respectively. International
revenue accounted for 11%, 8% and 7% of total product revenue in 1997, 1996 and
1995, respectively.
In addition, the mix of software license revenue changed in 1997. Prior to
1997, the Company had no revenue from either the e-commerce testing or load
testing markets. Revenues from those markets totaled 23% and 8% of total
product revenue in 1997.
REVENUE FROM SERVICES
Services revenue increased 37% to $6.0 million in 1997 and 67% to $4.4
million in 1996 from $2.6 million in 1995. The increases in revenue from
services are principally the result of the increased volume of maintenance,
training and consulting services, primarily due to the expansion of the
installed base of users of the Company's products. Maintenance revenue increased
46% to $4.1 million in 1997 and 75% to $2.8 million in 1996 from $1.6 million in
1995. Training and consulting revenue increased 19% to $1.9 million in 1997 and
60% to $1.6 million in 1996 from $1.0 million in 1995.
COST OF REVENUE
COST OF SOFTWARE
Cost of software includes documentation reproduction costs, product
packaging, product media, employment costs for processing and distribution,
amortization of intangible assets and royalties due to third parties for their
software included in the Company's products or sold separately by the Company.
These costs increased 68% to $1,095,000 in 1997 and 107% to $651,000 in 1996
from $315,000 in 1995. As a percentage of software revenue, cost of software
16
<PAGE>
was 7% in 1997, 5% in 1996 and 4% in 1995. The increase in the cost of software
revenue in each period primarily reflects the increased volume of units sold.
The increase in the cost of software revenue in 1997 is also attributable to
royalty expense related to the sale of the Company's load testing products which
were licensed from a third party software provider until December 30, 1997 (see
Note J to the Consolidated Financial Statements).
COST OF SERVICES
Cost of services consists principally of employment-related costs for the
Company's customer support staff, which provides services under maintenance
contracts, and the Company's training and consulting staff, as well as the cost
of materials and facilities used in training customers. Cost of services
increased 52% to $2.6 million in 1997 and 43% to $1.7 million in 1996 from $1.2
million in 1995. As a percentage of services revenue, cost of services was 43%,
39% and 45% in 1997, 1996 and 1995, respectively. The increases in the cost of
services are largely the result of the increase in the number of employees in
both the training and consulting and technical support groups, from 18 employees
as of February 28, 1997 to 23 employees as of February 28, 1998. This increase
is also attributable to costs related to the delivery of training and consulting
services, such as travel and equipment rental. The Company expects to expand
its customer support, training and consulting capabilities in 1998.
OPERATING EXPENSES
SALES AND MARKETING
Sales and marketing expenses consist primarily of salaries, commissions and
related costs of Company personnel and promotional marketing programs, including
advertising, brochures, direct mail programs and seminars. Sales and marketing
expenses increased 40% to $11.9 million in 1997 and 58% to $8.5 million in 1996
from $5.4 million in 1995. The principal reasons for the increases in sales and
marketing expenses in all periods were increases in the number of sales and
marketing personnel, increases in commissions as a result of higher revenue
levels and increases in promotional marketing programs. The staff grew to 69
employees as of February 28, 1998 from 52 as of February 28, 1997. Sales and
marketing expenses increased as a percentage of revenue to 55% in 1997 from 50%
in 1996 and 49% in 1995, respectively, as a result of significant increases in
the number of sales staff hired by the Company and in the Company's promotional
marketing programs. The sales organization was restructured in the fourth
quarter of 1997 to focus on the Company's e-commerce market initiative.
Historically, the Company's costs for the sales and marketing organization have
totaled between 40% and 50% of revenue on an annual basis. However, in 1997, as
noted above, the cost of the sales and marketing organization grew to 55% of
revenue. These increases are largely related to the restructuring of the sales
organization to focus on e-commerce solution selling and the hiring of a new
sales management team. The Company intends to continue this increase in
spending for sales and marketing in 1998, both internationally and domestically,
principally related to hiring additional sales personnel and the related travel,
training and commission costs.
17
<PAGE>
There can be no assurance that these increased expenditures or the re-
structuring of the sales organization will result in increased revenue or
improvement in the effectiveness of the sales organization.
RESEARCH AND DEVELOPMENT
Research and development expenses consist primarily of the employment-
related costs for engineering and technical personnel associated with developing
new products or enhancing existing products, for quality assurance personnel and
for product documentation specialists to provide user product documentation and
tutorials. To date, all of the Company's internal costs for research and
development have been charged to operations as incurred since the amount of
software development costs qualifying for capitalization has been insignificant.
Research and development expenses increased 30% to $4.9 million in 1997 and 67%
to $3.8 million in 1996 from $2.3 million in 1995. The increases are mainly
attributable to increases in the number of research and development employees.
The staff grew to 51 employees as of February 28, 1998 from 35 as of February
28, 1997. The Company intends to continue making significant investments in
research and development to develop new products, expand the capabilities of its
Web application testing products and to internationalize all of the Company's
products.
During 1997, the Company introduced several new products including SilkTest
(a regression testing product for Web applications), SilkPerformer (a load
testing product for Web applications) and QA Partner Blue (a Year 2000
regression testing product). Additionally, in January 1998, the Company further
enhanced its SilkTest product by adding support for the JAVA programming
language.
As a result of the acquisition of SQLBench on December 30, 1997, the
Company now has nine developers located in Austria who are focusing on the
development and enhancement of the Company's load testing products.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist principally of employment-
related costs for executive and administrative personnel, professional fees,
consulting fees, system support costs and other general corporate expenses.
General and administrative expenses increased 32% to $3.2 million in 1997 and
43% to $2.4 million in 1996 from $1.7 million in 1995. The increases in all
periods are attributable to increased employment of both executive and
administrative personnel and increases in professional fees, system support
costs and other general corporate expenses. The staff growth has occurred in
executive, finance and human resources and has been necessary to support the
growth of the Company. The Company anticipates that general and administrative
expenses will increase in 1998 due to the growth in management systems and
administrative infrastructure.
18
<PAGE>
NON-RECURRING CHARGES
In the fourth quarter of 1997, the Company recognized a charge of $9.1
million related to the write-off of purchased research and development in
process in conjunction with the SQLBench acquisition and $718,000 consisting of
severance and accelerated vesting of options related to the resignation of the
Company's former President and Chief Executive Officer (see Note K to the
Consolidated Financial Statements).
The non-recurring charge in 1995 totaled $449,000 and consisted of
severance and the purchase of vested options for common stock granted to the
Company's President and Chief Executive Officer who had held that position from
1991 until June 30, 1995.
LITIGATION SETTLEMENT
On September 30, 1996, the Company entered into a definitive agreement with
a plaintiff to settle litigation brought against the Company and certain of its
current and former employees. The Company recorded a charge of $744,000 in the
third quarter of fiscal 1996 to cover the settlement and other expenses incurred
in connection therewith.
OTHER INCOME (EXPENSE), NET
Other income (expense), net is comprised primarily of interest income from
cash, cash equivalents and short-term investments. On April 2, 1996, the
Company completed an initial public offering of common stock and received net
proceeds of $39.5 million. As a result of the Company's receipt and investment
of the offering proceeds, other income has increased substantially over prior
periods. Prior to 1997, interest income was partially offset by interest
expense related to the Company's convertible debt. As of December 31, 1996, all
of the Company's convertible debt was converted into common stock of the
Company.
PROVISION FOR INCOME TAXES
The Company had a provision for income taxes of $56,000 and $20,000 in 1997
and 1996, respectively, principally for state taxes. There was no provision for
income taxes in 1995. As of December 31, 1997, the Company had federal net
operating loss carryforwards of approximately $4.5 million and state net
operating loss carryforwards of $1.8 million as well as $821,000 of federal tax
credit carryforwards available for income tax purposes. These carryforwards
generally expire in the years 1998 through 2012 and may be subject to annual
limitations as a result of changes in the Company's ownership. Management of
the Company has evaluated the positive and negative evidence impacting the
realizability of its deferred tax assets, which are comprised principally of net
operating loss carryforwards and tax credits. Based on the weight of the
available evidence, it is more likely than not that all of the deferred tax
assets will not be realized, and accordingly the deferred tax assets have been
fully reserved. Management re-evaluates the positive and negative evidence on a
quarterly basis.
19
<PAGE>
NET INCOME (LOSS)
For the year ended December 31, 1997, the Company had a net loss of
$9,588,000 compared with net income of $641,000 for the year ended December 31,
1996 and a net loss of $303,000 for the year ended December 31, 1995.
Net income for 1997, excluding the non-recurring charges, would have been
$225,000.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments decreased to $37.4
million as of December 31, 1997 from $41.2 million as of December 31, 1996. In
1996, cash, cash equivalents and short term investments increased from $442,000
as of December 31, 1995, primarily as a result of the funds raised in the
Company's initial public offering of common stock.
The Company generated $1.4 million and $2.1 million from operations in 1997
and 1996, respectively. In 1997, funds provided by operating activities were
primarily affected by the growth in accounts receivable. In 1996, funds provided
by operating activities were primarily the result of net income and growth in
accrued expenses and deferred revenue, partially offset by growth in accounts
receivable and other current assets.
The Company generated $13.6 million and utilized $35.4 million for
investing activities in 1997 and 1996, respectively. Funds generated in 1997
were largely the result of the maturity of short-term investments, partially
offset by $4.4 million related to the SQLBench acquisition and $1.3 million
related to capital expenditures for computer equipment, software and furniture.
The investing activities in 1996 involved the investment of the initial public
offering proceeds in short-term investments, generally in U.S. Government and
government agency securities, and the purchase of computer equipment, software
and furniture.
The Company generated funds from financing activities of $925,000 and $40.0
million in 1997 and 1996, respectively. In 1997, funds generated from financing
activities resulted from the exercise of stock options. In 1996, the Company
generated $39.5 million from its initial public offering of common stock and
$445,000 from the exercise of stock options.
In the second quarter of 1998, the Company expects to enter into a nine
year lease commitment for 40,500 to 67,500 square feet, effective August 1,
1998, at an annual rental rate of approximately $2.2 million. The lease expires
in October, 2007. The Company has the right to terminate the lease on September
30, 2004 for a fee of approximately $2.2 million.
Long-term cash requirements, other than normal operating expenses, are
anticipated for the development of new software products and enhancements of
existing products, the opening of additional international offices, and the
20
<PAGE>
possible acquisition of software products or technologies complementary to the
Company's business.
Assuming there is no significant change in the Company's business, the
Company believes that the existing cash and short-term investments as well as
cash flows from operations will be sufficient to meet its working capital
requirements for at least the next twelve months.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income". This statement requires that changes in comprehensive
income be shown in a financial statement that is displayed with the same
prominence as other financial statements. The statement is effective for annual
periods beginning after December 15, 1997, and the Company will adopt its
provisions in fiscal 1998. Reclassification for earlier periods is required for
comparative purposes. Management does not expect the statement to have a
material impact on the Company's financial disclosures.
In June 1997, the FASB issued SFAS No. 131 ("SFAS 131"), "Disclosure about
Segments of an Enterprise and Related Information", which changes the manner in
which public companies report information about their operating segments. SFAS
131, which is based on the management approach to segment reporting, establishes
requirements to report selected segment information quarterly and to report
entity-wide disclosures about products and services, major customers, and the
geographic locations in which the entity holds assets and reports revenue.
Management is currently evaluating the effects of this change on its reporting
of segment information. The Company will adopt SFAS 131 for its fiscal year
ending December 31, 1998.
In October 1997, Statement of Position 97-2, "Software Revenue Recognition"
("SOP 97-2"), was issued which provides guidance on applying generally accepted
accounting principles in recognizing revenue on software transactions. SOP 97-2
is effective for transactions entered into in fiscal years beginning after
December 15, 1997. The Company will adopt the guidelines of SOP 97-2 as of
January 1, 1998 and does not expect adoption to have a material impact on the
Company's financial results.
CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS
Statements made or incorporated in this Form 10-K include a number of
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-
looking statements include, without limitation, statements containing the words
"anticipates", "believes", "expects", "intends", "future" and words of similar
import which express management's belief, expectations or intentions regarding
the Company's future performance. The Company's actual results could differ
materially from those set forth in the forward-looking statements. Certain
factors that might cause such a difference are discussed below.
21
<PAGE>
Short Operating History; Accumulated Deficit.
The Company was founded in 1988 to provide software porting services to
independent software vendors. In 1992, the Company reorganized its business to
focus on the development and marketing of automated testing software for the
quality assurance market. The Company shipped its first automated testing
product, QA Partner, in the quarter ended March 31, 1993. Accordingly, the
Company has a limited operating history and, although the Company has
experienced growth in recent periods, continued growth at the same rate is not
sustainable and is not necessarily indicative of future operating results.
Losses have resulted in an accumulated deficit of approximately $12.7 million as
of December 31, 1997. The Company had a net loss of $303,000 in 1995, net income
of $641,000 in 1996 and a net loss of $9.6 million in 1997, which includes a
charge of $9.1 million for purchased research and development in process. The
limited operating history of the Company makes the prediction of future results
difficult and, therefore, there can be no assurance that the Company will
sustain revenue growth or achieve profitability on a consistent basis.
Potential Fluctuations in Operating Results.
The Company may experience significant fluctuations in future quarterly
operating results, which may be caused by many factors, including: the timing of
introductions of new products or product enhancements by the Company or its
competitors; personnel changes; the size and timing of individual orders;
software bugs or other product quality problems; competition and pricing;
customer order deferrals in anticipation of new products or product
enhancements; reduction in demand for automated software testing products;
changes in operating expenses; product mix; and general economic conditions. A
substantial portion of the Company's operating expenses are related to
personnel, facilities and marketing programs. The level of spending for such
expenses cannot be adjusted quickly and is based, in significant part, on the
Company's expectations of future revenues. If actual revenue levels are below
management's expectations, results of operations are likely to be adversely
affected. In addition, the Company does not typically experience order backlog.
Furthermore, the Company has often recognized a substantial portion of its
revenues in the last month of a quarter, with these revenues frequently
concentrated in the last weeks or days of a quarter. As a result, product
revenues in any quarter are substantially dependent on orders booked and shipped
in the latter part of that quarter, and revenues for any future quarter are not
predictable with any significant degree of accuracy. For these reasons, the
Company believes that period-to-period comparisons of its results of operations
are not necessarily meaningful and should not be relied upon as indications of
future performance. Moreover, although the Company has not historically
experienced seasonal fluctuations in its revenue or results of operations, such
fluctuations are not uncommon in the software industry and may affect the
Company in the future.
Dependence on Principal Product.
To date, the Company has derived substantially all of its revenues from
licenses of QA Partner and related products and from fees for related services.
As a result, any factors adversely affecting the sales of QA Partner, such as
increased price competition or the introduction of technologically superior
products, could have a material adverse effect on the Company. The Company's
future financial performance will depend in significant part on its ability to
develop and introduce new releases of QA Partner with enhanced features and
functionalities and related products. In 1997, the Company introduced a Web
application testing product, SilkTest, and load testing products, SilkPerformer
and QA Performer. Revenues from these three new products represented 18%, 5% and
22
<PAGE>
3% of total product revenue, respectively. The Company has refocused its sales
and marketing organization on the sale of these new products with an emphasis on
the e-commerce market. There can be no assurance that these products will be
successfully developed or achieve market acceptance.
Emerging Market.
The market for automated software testing products is relatively new and
undeveloped. Marketing and sales techniques in the automated software testing
marketplace, as well as the bases for competition, are not well established.
There can be no assurance as to the extent that a significant market for
automated software testing products will develop or the extent to which the
Company's products will be accepted in that market. Although the Company
believes that the current trend toward increased use of automated software
testing will continue, a majority of software testing is still carried out
manually, and there can be no assurance that the automated software testing
market will enjoy continued growth.
The commercial market for products and services designed for use on the
Internet, Intranet and Extranet has only recently begun to develop. The success
of the Company's products focused on e-commerce and Internet applications will
depend on the growth of the market and on the Company's ability to continue to
enhance its products to work with all of the prevalent technologies driving
Internet applications. There can be no assurance that the Company will be able
to effectively adapt its products to the prevalent technologies being used on e-
commerce applications or to successfully compete in the market for Internet-
related products and services.
Management of Growth.
The Company has recently experienced a period of rapid growth, including
increases in the number of orders, customers and employees. Such growth has
placed, and may continue to place, strains on the Company's management,
operations and systems. The Company's ability to compete effectively will
depend, in part, upon its ability to expand, improve and effectively utilize its
operational, management, marketing, sales and financial systems as necessitated
by changes in the Company's business. Any failure by the Company's management to
effectively anticipate, implement and manage the changes required to sustain the
Company's growth could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, the Company has
significantly changed the executive management team and the sales management
team under the direction of a new Chief Executive Officer. In conjunction with
these management changes, the Company has refocused its sales and marketing
approach to focus on e-commerce applications. There can be no assurance that the
Company will be able to effectively manage such change.
Management of Growth Through Acquisitions.
The Company's product range and customer base have increased in the recent
past due in part to acquisitions. The Company may acquire additional businesses
or product lines in the future. The probability of success of any acquisition
may be dependent upon the Company's ability to integrate the acquired business
or products successfully and to retain key personnel associated with the
acquisition. Failure to do so, or a material increase in the cost of
integration, could cause actual results to differ from those projected in
management's forward-looking statements.
23
<PAGE>
Year 2000 Compliance.
The Year 2000 compliance issue concerns the inability of computerized
information systems to accurately calculate, store or use a date after 1999.
This could result in a system failure or miscalculations causing disruptions of
operations.
The Company is in the process of conducting an assessment of its core
internal and external computer information systems and is taking the necessary
steps to understand the nature and extent of the work required to make its
systems, in those situations in which the Company is required to do so, Year
2000 compliant. These steps may require the Company to modify, upgrade or
replace some of its internal financial and operational systems. The total cost
of bringing all internal systems, equipment and operations into Year 2000
compliance has not been fully quantified. The Company continues to evaluate the
estimated costs associated with these compliance efforts. While these efforts
involve additional costs, the Company believes, based on available information,
that these costs will not have a material adverse effect on its business,
financial condition or results of operations. However, if these efforts are not
completed on time, or if the cost of updating or replacing the Company's
information systems exceeds the Company's current estimates, the Year 2000 issue
could have a material impact on the Company's ability to meets its financial and
reporting requirements and/or on its financial results. Further, no estimates
can be made as to any potential adverse impact resulting from the failure of
third-party service providers and vendors to prepare for the Year 2000. The
Company is attempting to identify those risks as well as to receive compliance
certificates from all third parties that have a material impact on the Company's
operations, but the cost and timing of third party Year 2000 compliance is not
within the Company's control and no assurances can be given with respect to the
cost or timing of such efforts or the potential effects of any failure to
comply.
Rapidly Changing Technology; New Products; Risk of Product Defects.
The market for computer software products is generally characterized by
rapidly changing technology and frequent new product introductions that can
render existing products obsolete or unmarketable. The Company believes that a
major factor in its future success will be its ability to develop and introduce
in a timely manner enhancements to its existing products and new products that
will gain market acceptance. If the Company is unable to introduce new products
and respond to industry changes on a timely basis, its business could be
materially adversely affected. Software products as complex as those offered by
the Company may contain undetected errors or failures when first introduced or
as new versions are released. Although the Company has not experienced material
adverse effects resulting from undetected errors in the past, there can be no
assurance that errors will not be found in new products after commencement of
commercial shipments, resulting in loss of or delay in market acceptance, which
could have a material adverse effect upon the Company's business, financial
condition and results of operations. Further, because the Company is in the
quality assurance business, any errors in its software could harm the Company's
reputation in the quality assurance software market and make it more difficult
for the Company to sell its products.
Competition.
The market for software quality management tools is new, intensely
competitive and subject to rapid technological change. The Company expects
competition to intensify in the future. The Company currently encounters direct
competition from a number of public and private companies including Mercury
Interactive Corporation, Rational Software Corporation and Compuware
24
<PAGE>
Corporation. Due to the expansion of the market for software quality management
tools, the Company may face competition from new entrants in the software
quality management industry, possibly including the Company's resellers or
current customers. There can be no assurance that the Company's current and
potential competitors will not develop software quality management tools that
may be more effective or achieve greater market acceptance than the Company's
current or future products or that the Company's technologies and products would
not be rendered obsolete by such developments. Many of the Company's current and
potential competitors have longer operating histories, greater name recognition,
larger installed customer bases, and significantly greater financial, technical
and marketing resources than the Company. The Company may also face increased
competition from the recent consolidation of several companies in the automated
software quality market. As a result, these competitors may be able to adapt
more quickly to new or emerging technologies and changes in customer
requirements, or to devote greater resources to the promotion and sale of their
products than the Company. An increase in competition could result in price
reductions and loss of market share. Such competition and any resulting
reduction in profitability could have a material adverse effect on the Company's
business, financial condition and results of operations.
Dependence on Key Personnel.
The Company's success depends upon its ability to attract and retain highly
skilled technical, managerial and sales personnel. Competition for such
qualified sales, marketing and software development personnel in the computer
industry in general, and the automated software testing industry in particular,
is intense. Future results will depend on the Company's ability to attract and
retain such personnel, and the failure to do so could have a material adverse
effect on the Company's ability to develop and market competitive products and
its ability to achieve projected operating results.
International Activities.
The Company derived approximately 11% of its total product sales from
international customers in 1997. The international market for software products
is highly competitive and the Company expects to face substantial competition in
this market from established and emerging companies. Risks inherent in the
Company's international business activities also include currency fluctuations,
imposition of government controls, export license requirements, restrictions on
the export of critical technology, political and economic instability, tailoring
of products to local requirements, trade restrictions, changes in tariffs and
taxes, difficulties in staffing and managing international operations, longer
accounts receivable payment cycles and the burdens of complying with a wide
variety of foreign laws and regulations. To the extent that the Company is
unable to expand international sales in a timely and cost-effective manner, the
Company's business could be materially adversely affected.
Development of Indirect Channels; Potential for Channel Conflict.
Although the Company has not historically sold significant amounts of its
products through indirect channels, the Company intends to continue to develop
channel sales as part of its growth strategy. In 1995, the Company established
its Channel Partner Program. The Company licenses its products to its channel
partners at a discount and such partners relicense the products to end-users.
The Company's agreements with its channel partners are non-exclusive and provide
the channel partners with 60-day price protection. Because the Company's channel
partners generally order the Company's products after they have received
purchase orders, there is no requirement that the Company repurchase any
25
<PAGE>
product. The Company selects its channel partners based on the partner's
financial viability, product expertise and market focus. In order for the
Company's strategy to broaden market penetration through its Channel Partner
Program to be successful, the Company must increase its unit sales to offset the
discount it is providing the channel partners. There can be no assurance that
the Company will succeed in the development of these channels. Moreover, selling
through indirect channels may limit the Company's contact with the end users of
its products. As a result, the Company's ability to accurately forecast sales,
evaluate customer satisfaction and recognize emerging customer requirements may
be hindered and its ability to develop and maintain customer goodwill may be
limited. In addition, the Company's strategy of marketing its products directly
to end users and indirectly through its channel program and through distributors
may result in distribution channel conflicts. Although the Company has attempted
to manage its distribution channels in a manner to avoid potential conflicts,
there can be no assurance that channel conflicts will not materially adversely
affect its relationships with existing channel partners or distributors or
adversely affect its ability to attract new channel partners and distributors.
In addition, there can be no assurance that the Company's resellers will be able
to effectively market the Company's products or that they will not commence the
sale of competitive products. In 1996, the Company entered into an OEM
arrangement with INTERSOLV whereby INTERSOLV has the right to resell QA Partner
and related products to its customers. The Company has no assurance that this
will be a successful sales channel for the Company's products or that it will
not result in significant channel conflict.
Product Liability.
In selling its products, the Company relies primarily on "shrink wrap"
licenses that contain, among other things, provisions protecting against the
unauthorized use, copying and transfer of the licensed program and limiting the
Company's exposure to potential product liability claims. However, these
licenses are not signed by the licensees and the provisions of these licenses,
including the provisions limiting the Company's exposure to product liability
claims, may therefore be unenforceable under the laws of certain jurisdictions.
Intellectual Property and Proprietary Rights.
The Company currently relies on a combination of trademark, copyright and
trade secret laws and contractual provisions to protect its proprietary rights
in its products. The Company presently has no registered copyrights. The Company
has a patent but there can be no assurance that the patent would be upheld if
challenged. There can be no assurance that the Company's competitors will not
independently develop technologies that are substantially equivalent or superior
to the Company's technology. There can also be no assurance that the measures
taken by the Company to protect its proprietary rights will be adequate to
prevent misappropriation of the technology or independent development by others
of similar technology. In addition, the laws of various countries in which the
Company's products may be sold may not protect the Company's products and
intellectual property rights to the same extent as the laws of the United
States. There can be no assurance that third parties will not assert
intellectual property infringement claims against the Company or that any such
claims will not require the Company to enter into royalty or cross-license
arrangements or result in costly litigation. In the event of litigation to
determine the validity of any third party claims, such litigation could result
in significant expense to the Company and divert the efforts of the Company's
technical and management personnel, whether or not such litigation is determined
in favor of the Company.
26
<PAGE>
Stock Market Volatility.
Market prices for securities of software companies have generally been
volatile. In particular, the market price of the Company's common stock has been
and may continue to be subject to significant fluctuations as a result of
factors affecting the computer industry or the securities markets in general.
These factors include, but are not limited to, quarterly variations,
announcements of technological innovations by the Company or competitors,
announcements of mergers or acquisitions by the Company or competitors, changes
in prices by the Company or competitors, change in product mix, and change in
revenue or revenue growth rates for geographic areas or products.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements required pursuant to this Item 8 are presented
beginning on page F-1 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 concerning the Company's officers
is incorporated by reference to the section of Part I of this Form 10-K entitled
"Item 1. Business - Executive Officers of the Registrant". The information
concerning the Company's directors required by this Item 10 is incorporated by
reference to the information under the heading, "Election of Directors -
Information Regarding the Nominees and Executive Officers" in the Company's 1998
Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated by reference to
the Company's 1998 Proxy Statement under the heading, "Compensation of Directors
and Executive Officers".
ITEM 12. SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
The information required by this Item 12 is incorporated by reference to
the Company's 1998 Proxy Statement under the heading, "Security Ownership of
Management and Certain Beneficial Owners".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
27
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
1. Financial Statements. The following financial statements of
Segue Software, Inc. are filed as a part of this report:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Table of Contents F-1
Report of Independent Accountants F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996 F-3
Consolidated Statements of Operations for the Years ended
December 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Stockholders' Equity for the Years
ended December 31, 1997, 1996 and 1995 F-5
Consolidated Statements of Cash Flows for the Years ended
December 31, 1997, 1996 and 1995 F-6
Notes to Consolidated Financial Statements F-7
</TABLE>
2. Financial Statement Schedules. All schedules have been omitted
because they are not applicable or the required information is
shown in the financial statements or notes thereto.
3. Exhibits. The following is a complete list of Exhibits filed as
part of this Form 10-K.
<TABLE>
<CAPTION>
NUMBER DESCRIPTION OF EXHIBITS
- ------ ---------------------------------------------------------------
<S> <C>
*(3.1) Restated Certificate of Incorporation (Exhibit 3.2 of Registration Statement on Form S-1
(File No. 333-1488))
*(3.2) By-Laws (Exhibit 3.3 of Registration Statement on Form S-1 (File No. 333-1488))
*(4.1) Specimen Certificate representing the Common Stock (Exhibit 4.2 of Registration
Statement on Form S-1 (File No. 333-1488))
*(10.1) 1996 Amended and Restated Incentive and Non-Qualified Stock Option Plan
*(10.2) 1996 Employee Stock Purchase Plan
*(10.3) Preferred Stock Purchase and Sale Agreement, dated as of February 11, 1994, by and
between the Registrant and John J. Cullinane
</TABLE>
28
<PAGE>
<TABLE>
<S> <C>
*(10.4) Non-Qualified Stock Option Agreement, dated as of February 11, 1994,
by and between the Registrant and John J. Cullinane
*(10.5) Letter Agreement, dated as of April 14, 1994, by and between the
Registrant and John J. Cullinane
*(10.6) Employment Separation Agreement, dated as of June 30, 1995, by and
between the Registrant and Laurence R. Kepple
*(10.7) Form of Shareholder Rights Agreement, dated as of February 8, 1996,
entered into between the Registrant and certain of its stockholders
(Exhibit 10.9 of Registration Statement on Form S-1 (File No. 333-
1488))
*(10.8) Form of Indemnification Agreement between the Registrant and its
directors and officers (Exhibit 10.10 of Registration Statement on
Form S-1 (File No. 333-1488))
*(10.9) Lease, dated as of October 19, 1995, by and between the Registrant and
1330 Centre Street Associates Limited Partnership (Exhibit 10.11 of
Registration Statement on Form S-1 (File No. 333-1488))
(10.10) Agreement and Plan of Merger by and among the Registrant, SGE
Merger Corp. and SQLBench International, Inc. and the Stockholders of
SQLBench International, Inc. dated as of December 30, 1997
(10.11) Asset Purchase Agreement by and among the Registrant, ARC - Dr.
Ambichl & Dr. Reindl Communication GmbH and the Stockholders of ARC -
Dr. Ambichl & Dr. Reindl Communication GmbH dated as of December 30,
1997
(10.12) Segue Software, Inc. Special Termination and Vesting Plan adopted
February 5, 1997
(10.13) Letter Agreement, effective as of December 31, 1997, by and between
the Registrant and Elisabeth Elterman
(21.1) Subsidiaries of the Registrant
(23.1) Consent of Coopers & Lybrand L.L.P.
(27.1) Financial Data Schedule
(27.2) Restated Financial Data Schedule for the three and six months ended
June 30, 1997
(27.3) Restated Financial Data Schedule for the three months ended
March 31, 1997
(27.4) Restated Financial Data Schedule for the year ended December 31, 1996
</TABLE>
* All exhibits with an asterisk are incorporated by reference to identically
numbered exhibits (unless otherwise indicated) filed in response to Item 16(a),
"Exhibits", of the Registrant's Registration Statement on Form S-1, as amended
(File No. 333-1488), which was declared effective on March 28, 1996.
29
<PAGE>
(b) Reports on Form 8-K
On January 14, 1998, the Company filed a Report under Item 5 on Form 8-K.
On March 16, 1998, the Company filed an amendment to the Report.
30
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on this 30th day of March,
1998.
SEGUE SOFTWARE, INC.
By: /s/ STEPHEN B. BUTLER
----------------------
Stephen B. Butler, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Titles Date
- --------- ------ ----
<S> <C> <C>
/s/ STEPHEN B. BUTLER President, Chief Executive Officer March 30, 1998
- --------------------------- and Director (Principal Executive Officer)
Stephen B. Butler
/s/ J. JEFFREY BINGENHEIMER Vice President and Chief Financial Officer March 30, 1998
- --------------------------- (Principal Financial Officer and
J. Jeffrey Bingenheimer Principal Accounting Officer)
/s/ JAMES H. SIMONS Chairman of the Board March 30, 1998
- ---------------------------
James H. Simons
/s/ LEONARD E. BAUM Director March 30, 1998
- ---------------------------
Leonard E. Baum
/s/ JOHN J. CULLINANE Director March 30, 1998
- ---------------------------
John J. Cullinane
/s/ RONALD D. FISHER Director March 30, 1998
- ---------------------------
Ronald D. Fisher
/s/ JOHN R. LEVINE Director March 30, 1998
- ---------------------------
John R. Levine
/s/ Milton E. Mohr Director March 30, 1998
- ---------------------------
Milton E. Mohr
/s/ HOWARD L. MORGAN Director March 30, 1998
- ---------------------------
Howard L. Morgan
</TABLE>
31
<PAGE>
SEGUE SOFTWARE, INC.
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996 F-3
Consolidated Statements of Operations for the Years ended December 31,
1997, 1996 and 1995 F-4
Consolidated Statements of Stockholders' Equity for the Years ended
December 31, 1997, 1996 and 1995 F-5
Consolidated Statements of Cash Flows for the Years ended December 31,
1997, 1996 and 1995 F-6
Notes to Consolidated Financial Statements F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Segue Software, Inc.:
We have audited the accompanying consolidated balance sheets of Segue Software,
Inc. as of December 31, 1997 and 1996, and the related consolidated statements
of operations, stockholders' equity and cash flows for each of the three years
in the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Segue Software,
Inc. as of December 31, 1997 and 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
February 5, 1998
F-2
<PAGE>
SEGUE SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
December 31,
-----------
1997 1996
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 22,975 $ 7,112
Short-term investments 14,385 34,092
Accounts receivable, net of allowances of $345 and $200 4,308 3,023
Other current assets 615 1,365
-------- --------
Total current assets 42,283 45,592
Property and equipment, net 2,252 1,960
Other assets 1,502 79
-------- --------
Total assets $ 46,037 $ 47,631
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 860 $ 474
Accrued compensation and benefits 1,127 885
Accrued expenses 1,268 642
Deferred revenue 2,477 1,876
Accrued royalties 147 1,047
Short-term subordinated notes payable 883 -
-------- --------
Total current liabilities 6,762 4,924
Subordinated notes payable 3,532 -
Commitments and contingencies (Note J)
Stockholders' equity:
Series A Preferred Stock, par value $.01 per share;
noncumulative; 4,000 shares authorized; no shares
issued and outstanding - -
Common Stock, par value $.01 per share; 30,000 shares
authorized; 7,630 and 7,196 shares issued and
outstanding 76 72
Additional paid-in capital 48,479 46,194
Unearned compensation (105) (440)
Accumulated deficit (12,707) (3,119)
-------- --------
Total stockholders' equity 35,743 42,707
-------- --------
Total liabilities and stockholders' equity $ 46,037 $ 47,631
======== ========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-3
<PAGE>
SEGUE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenue:
Software $ 15,783 $ 12,592 $ 8,312
Services 6,011 4,381 2,627
Royalties - - 129
-------- -------- --------
Total revenue 21,794 16,973 11,068
Cost of revenue:
Cost of software 1,095 651 315
Cost of services 2,590 1,709 1,194
Cost of royalties - - 30
-------- -------- --------
Total cost of revenue 3,685 2,360 1,539
Gross margin 18,109 14,613 9,529
Operating expenses:
Sales and marketing 11,872 8,500 5,378
Research and development 4,931 3,806 2,273
General and administrative 3,211 2,437 1,709
Non-recurring charges 9,813 - 449
-------- -------- --------
Total operating expenses 29,827 14,743 9,809
-------- -------- --------
Loss from operations (11,718) (130) (280)
Litigation settlement - (744) -
Interest expense - (44) (57)
Interest income 2,186 1,579 34
-------- -------- --------
Income (loss) before provision for income taxes (9,532) 661 (303)
Provision for income taxes 56 20 -
-------- -------- --------
Net income (loss) $ (9,588) $ 641 $ (303)
======== ======== ========
Net income (loss) per common share - basic $ (1.31) $ .12 $ (.20)
Net income (loss) per common share - diluted $ (1.31) $ .09 $ (.20)
Weighted average common shares outstanding - basic 7,337 5,364 1,552
Weighted average common shares outstanding - diluted 7,337 7,689 1,552
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-4
<PAGE>
SEGUE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
Total
Series A Additional Unearned Accumulated stockholders'
Preferred Stock Common Stock paid-in capital compensation deficit equity
--------------- ------------ --------------- ------------ ------- ------
Shares Par value Shares Par value
------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 2,292 $ 4,338 1,527 $ 666 $ (3,457) $ 1,547
Issuance of common stock
under option plan 59 62 62
Net loss (303) (303)
------ -------- ------ ------- ---------- --------
Balance at December 31, 1995 2,292 4,338 1,586 728 (3,760) 1,306
Change in par value (4,315) (712) $ 5,027 -
Issuance of common stock
under option plan 125 1 127 1 1,017 $ (575) 444
Conversion of Series A
preferred stock to common
stock (2,417) (24) 2,416 24 -
Conversion of convertible
debt to common stock 654 7 647 654
Issuance of common stock,
net of issuance costs 2,413 24 39,503 39,527
Amortization of unearned
compensation 135 135
Net income 641 641
------ -------- ------ ------- --------- -------- ---------- --------
Balance at December 31, 1996 - - 7,196 72 46,194 (440) (3,119) 42,707
Issuance of common stock
under stock plans 290 3 1,446 1,449
Issuance of restricted
common stock 144 1 1,031 1,032
Stock options cancelled
and amortization of
unearned compensation (192) 335 143
Net loss (9,588) (9,588)
------ -------- ------ ------- --------- -------- ---------- --------
Balance at December 31, 1997 - $ - 7,630 $ 76 $ 48,479 $ (105) $ (12,707) $ 35,743
====== ======== ====== ======= ========= ======== ========== ========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-5
<PAGE>
SEGUE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (9,588) $ 641 $ (303)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Charge for purchased research and development in process 9,095 - -
Depreciation and amortization 1,242 655 382
Loss on disposal of property and equipment 4 16 35
Noncash compensation charges 666 135 -
Net changes in operating assets and liabilities, net of effects
from acquisitions:
Accounts receivable (1,346) (428) (548)
Other current assets 575 (369) (34)
Accounts payable 386 13 125
Accrued expenses, compensation and benefits 618 739 272
Accrued royalties (900) (72) 29
Deferred revenue 601 808 500
-------- ------- ------
Net cash provided by operating activities 1,353 2,138 458
-------- ------- ------
Cash flows from investing activities:
Additions to property and equipment (1,271) (1,414) (755)
(Increase) decrease in other assets (352) 66 (34)
Acquisition of businesses (4,499) - -
Sales (purchases) of short-term investments, net 19,707 (34,092) -
-------- ------- ------
Net cash provided by (used in) investing activities 13,585 (35,440) (789)
-------- ------- ------
Cash flows from financing activities:
Net proceeds from initial public offering of common stock - 39,527 -
Proceeds from exercise of stock options 925 445 62
-------- ------- ------
Net cash provided by financing activities 925 39,972 62
-------- ------- ------
Net cash increase (decrease) in cash and cash equivalents 15,863 6,670 (269)
Cash and cash equivalents at beginning of year 7,112 442 711
-------- ------- ------
Cash and cash equivalents at end of year $ 22,975 $ 7,112 $ 442
======== ======= ======
Supplemental disclosure of noncash financing transactions:
Conversion of convertible debt into common stock $ - $ 654 $ -
Issuance of subordinated notes payable $ 4,415 $ - $ -
Issuance of restricted common stock $ 1,032 $ - $ -
Supplemental disclosure:
Cash paid during the year for interest $ - $ 38 $ 57
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-6
<PAGE>
SEGUE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:
Description of Business
The Company develops, markets and supports integrated software solutions
for the automated functionality and load testing and quality management of
client/server software applications. The Company also provides maintenance,
training and consulting services in support of its product offerings. The
Company operates in one industry segment and no customer accounted for 10% or
more of total revenue in 1997, 1996 or 1995.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany transactions and balances
have been eliminated in consolidation.
Revenue Recognition
Revenue from software license fees is recognized upon shipment and receipt
of a signed purchase order or contract. At the time the Company recognizes
revenue from the sale of software products, collection is probable, no
significant vendor obligations remain and the costs of insignificant support
obligations, if any, are accrued. Maintenance revenue associated with initial
product license contracts is recognized ratably over the initial term, which is
generally one year. Maintenance revenue for annual contracts is deferred and
recognized ratably over the term of agreement. Revenue from training and
consulting services is recognized as the related services are performed. Royalty
revenue is recognized based upon the sale of the related products.
The Company typically does not grant to its customers a contractual right
to return software products. When approved by management, however, the Company
has accepted returns of certain software products and has provided an allowance
for those specific products. The Company also provides reserves for customer
receivable balances which are considered potentially uncollectible. The
Company's allowances amounted to $345,000, $200,000 and $150,000 as of December
31, 1997, 1996 and 1995, respectively. The provision charged to general and
administrative expenses was $362,000, $489,000 and $249,000 in 1997, 1996 and
1995, respectively, and write-offs against the allowances were $217,000,
$439,000 and $139,000 in 1997, 1996 and 1995, respectively.
Deferred Revenue
Service revenue (maintenance, training and consulting) which is not yet
earned is included in deferred revenue.
F-7
<PAGE>
SEGUE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Research and Development and Software Development Costs
Research and development expenditures are charged to operations as
incurred. Software development costs subsequent to the establishment of
technological feasibility are capitalized and amortized to cost of software.
Based on the Company's product development process, technological feasibility is
established upon completion of a working model. Costs incurred by the Company
between completion of the working model and the point at which the product is
ready for general release have been insignificant.
Income Taxes
The Company uses the liability method of accounting for income taxes. Under
this method, deferred tax liabilities and assets are determined based on the
differences between the tax and financial reporting basis of assets and
liabilities and are measured using the tax rates and laws that will be in effect
when the differences are expected to reverse. The Company provides a valuation
allowance against net deferred tax assets if, based upon the available evidence,
it is more likely than not that some or all of the deferred tax assets will not
be realized.
Cash Equivalents and Short-Term Investments
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents. Short-term investments
are those with maturities in excess of three months but less than one year. All
cash equivalents and short-term investments have been classified as available-
for-sale and are reported at fair value with unrealized gains and losses
included in stockholders' equity. For the years ended December 31, 1997 and
1996, unrealized gains and losses on available-for-sale securities were
insignificant.
Property and Equipment
Property and equipment are stated at cost. Expenditures for major
improvements which substantially increase the useful lives of assets are
capitalized. Repair and maintenance costs are expensed as incurred. Depreciation
is provided on a straight-line basis over the useful lives of the assets,
generally three to five years. Amortization of leasehold improvements is
computed on a straight-line basis over the remaining term of the lease.
Upon retirement or sale, the cost of the assets disposed and the related
accumulated depreciation and amortization are removed from the accounts and any
resulting gain or loss is included in the determination of net income.
Completed Technology and Other Assets
Completed technology of $1.0 million is included in other assets and is
carried at cost less accumulated amortization, which is being provided on a
straight-line basis over a period of three years, its estimated useful life (see
Note B).
F-8
<PAGE>
SEGUE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Long-lived assets to be held and used are recorded at cost. Management
reviews long-lived assets and the related intangible assets for impairment
whenever events or changes in circumstances indicate the carrying amount of such
assets may not be recoverable. Recoverability of these assets is determined by
comparing the forecasted undiscounted net cash flows of the operation to which
the assets relate, to the carrying amount including associated intangible assets
of such operation. In addition, the Company's evaluation considers non-financial
data such as market trends, product development cycles and changes in
management's market emphasis.
Concentration of Credit Risk
The Company invests its cash, cash equivalents and short-term investments
primarily in U.S. Government and government agency securities, investment-grade
commercial paper and money market accounts. The Company has established
guidelines relative to credit ratings, diversification and maturities that
maintain safety and liquidity. The Company has not experienced any losses on its
cash, cash equivalents and short-term investments to date.
The Company sells its products principally through a direct sales force
domestically and through distributors outside of the United States to customers
in a broad range of industries. The Company performs ongoing credit evaluations
of its customers but does not require collateral or other security to support
customer receivables. The Company maintains reserves for credit losses and such
losses have been within management's expectations.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results may differ from those estimates.
Reclassification
Certain prior year amounts have been reclassified to conform to the current
year presentation.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123 ("SFAS 123"),
"Accounting for Stock-Based Compensation", allows companies to either account
for stock-based compensation under the provisions of SFAS 123 or under the
provisions of Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting
for Stock Issued to Employees", but requires pro forma disclosure in the notes
to the financial statements as if the measurement provisions of SFAS 123 had
been adopted. The Company has continued to account for its stock-based
F-9
<PAGE>
SEGUE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
compensation in accordance with the provisions of APB 25.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income". This statement requires that changes in comprehensive
income be shown in a financial statement that is displayed with the same
prominence as other financial statements. The statement is effective for annual
periods beginning after December 15, 1997, and the Company will adopt its
provisions in fiscal 1998. Reclassification for earlier periods is required for
comparative purposes. Management does not expect the statement to have a
material impact on the Company's financial disclosures.
In June 1997, the FASB issued SFAS No. 131 ("SFAS 131"), "Disclosure about
Segments of an Enterprise and Related Information", which changes the manner in
which public companies report information about their operating segments. SFAS
131, which is based on the management approach to segment reporting, establishes
requirements to report selected segment information quarterly and to report
entity-wide disclosures about products and services, major customers, and the
geographic locations in which the entity holds assets and reports revenue.
Management is currently evaluating the effects of this change on its reporting
of segment information. The Company will adopt SFAS 131 for its fiscal year
ending December 31, 1998.
In October 1997, Statement of Position 97-2, "Software Revenue Recognition"
("SOP 97-2"), was issued which provides guidance on applying generally accepted
accounting principles in recognizing revenue on software transactions. SOP 97-2
is effective for transactions entered into in fiscal years beginning after
December 15, 1997. The Company will adopt the guidelines of SOP 97-2 as of
January 1, 1998 and does not expect adoption to have a material impact on the
Company's financial results.
B. ACQUISITIONS:
On December 30, 1997, the Company acquired both SQLBench International,
Inc. and ARC - Dr. Ambichl & Dr. Reindl Communication GmbH (formerly named ARC
Dr. Ambichl & Dr. Reindl OEG), privately-held developers of Web-based load
testing technology (hereafter referred to as "SQLBench"). Since the acquisition
of each company was contingent upon both companies being acquired, the
transaction was accounted for as a single business combination using the
purchase method. The combined purchase had an aggregate consideration of
approximately $10.1 million, including transaction costs, and consisted of
approximately $4.4 million in cash paid from the Company's existing cash
balances, $4.4 million in subordinated notes payable and the issuance of 144,000
restricted shares of the Company's common stock with a fair value of $1.0
million. The purchase price was allocated to $1.0 million of completed
technology, which is being amortized over three years, and $9.1 million to
purchased research and development in process. The purchased research and
development in process of $9.1 million had not reached technological
feasibility, had no alternative future use and was valued using expected future
F-10
<PAGE>
SEGUE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
cash flows, discounted for risks and uncertainties related to the target markets
and the completion of the products. Consequently, at the date of acquisition,
the $9.1 million allocated to purchased research and development in process was
recorded as a non-recurring charge.
Set forth below are unaudited pro forma combined results of operations of
the Company and SQLBench for the years ended December 31, 1997 and 1996 as if
the SQLBench acquisition had been completed at the beginning of each year
presented. The pro forma combined information set forth below is not necessarily
indicative of future results of operations or results of operations that would
have been reported for the periods indicated had the acquisition of SQLBench
been completed as of January 1, 1997 or 1996 (amounts in thousands, except per
share data).
<TABLE>
<CAPTION>
Year ended
December 31,
1997 1996
---- ----
<S> <C> <C>
Net revenue $ 22,204 $17,317
Net loss $(10,421) $ (240)
Net loss per share - basic $ (1.39) $ (.04)
Net loss per share - diluted $ (1.39) $ (.04)
</TABLE>
C. DEVELOPMENT CONTRACTS AND ROYALTY ARRANGEMENTS:
In 1991, the Company entered into a development agreement with Lotus
Development Corporation to develop and provide support for certain versions of a
product. The Company in turn subcontracted certain work to a third party to
assist in the development. Development was completed in 1992. The Company earns
royalties on sales of the product developed under this agreement. The Company
also must pay a certain percentage of the royalties received to the third party
who assisted with development. For the years ended December 31, 1997 and 1996,
there were no royalties earned pursuant to this agreement. During the year ended
December 31, 1995, the Company earned $101,000 pursuant to this agreement.
In addition, the Company participates in other royalty arrangements with
third parties and expenses such amounts as revenues from the related products
are recognized.
F-11
<PAGE>
SEGUE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
D. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following as of December 31 (in
thousands):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Computer equipment $ 3,483 $ 2,466
Office equipment 63 67
Furniture and fixtures 460 343
Leasehold improvements 74 76
------- -------
4,080 2,952
Accumulated depreciation and amortization (1,828) (992)
------- -------
$ 2,252 $ 1,960
======= =======
</TABLE>
Depreciation and amortization of property and equipment amounted to
$996,000, $591,000, and $258,000 during the years ended December 31, 1997, 1996
and 1995, respectively.
E. SUBORDINATED NOTES PAYABLE:
In conjunction with the SQLBench acquisition, the Company issued $4.4
million of subordinated notes payable that bear interest at prime rate (8.5% at
December 31, 1997).
Subject to certain acceleration terms set forth below, the notes mature on
December 30, 2002. Interest is payable in arrears semi-annually beginning on
June 30, 1998 and on each December 31 and June 30 thereafter. If the holders of
the notes terminate employment with the Company prior to December 30, 2000, no
interest shall accrue with respect to any period following such termination. In
the event that the note holders are either (i) employed by the Company as of the
dates set forth below or (ii) terminated by the Company without cause or by
reason of death or permanent disability, payments under the notes shall be made
according to the following schedule (in thousands):
<TABLE>
<CAPTION>
Date Amount
---- ------
<S> <C>
December 30, 1998 $ 883
December 30, 1999 2,649
December 30, 2000 883
------
Total $4,415
</TABLE>
The Company's Convertible Subordinated Notes were converted into 654,200
shares of common stock during the year ended December 31, 1996 at $1.00 per
share.
F. STOCKHOLDERS' EQUITY:
Common Stock
In February 1996, the Board of Directors of the Company voted for the
following, which were approved by the stockholders on February 16, 1996: (i) the
reincorporation of the Company from a California corporation to a Delaware
corporation; (ii) an amendment of the Company's Certificate of Incorporation
F-12
<PAGE>
SEGUE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
to increase the number of authorized shares of common stock and preferred stock
to 30 million and 9 million shares, respectively; (iii) the designation of 4
million shares of such 9 million shares of preferred stock as Series A preferred
stock; (iv) the changing of the per share par value of the common stock and
preferred stock from no par value to $.01 par value; (v) the amendment and
restatement of the Company's 1989 Incentive and Non-Qualified Stock Option Plan,
pursuant to which, among other things, the number of shares of common stock
reserved for issuance pursuant to options granted pursuant to the plan was
increased to 2,450,000 shares, the name of the plan was changed to the 1996
Amended and Restated Incentive and Non-Qualified Stock Option Plan (the "Option
Plan"), and stock option grants to non-employee directors were authorized; and
(vi) the Employee Stock Purchase Plan, which permits eligible employees to
purchase common stock of the Company up to a maximum of 100,000 shares of common
stock.
In May 1997, the stockholders of the Company approved the increase of
550,000 shares of common stock reserved for issuance pursuant to options granted
pursuant to the Option Plan.
In April 1996, the Company consummated an initial public offering of
3,162,500 shares of the Company's common stock ($.01 par value) at an initial
public offering price of $18.00 per share. The total shares issued pursuant to
the initial public offering consisted of 2 million shares sold by the Company,
750,000 shares sold by selling shareholders, and an additional 412,500 shares
sold by the Company pursuant to the underwriters' over-allotment option.
Proceeds to the Company, net of underwriters' discount and associated costs of
$858,000, were approximately $39.5 million. Concurrent with the closing of the
offering, all outstanding shares of Series A preferred stock were converted into
common stock.
In February 1994, the Company sold 500,000 shares of Series A preferred
stock at a purchase price of $2.00 per share and received aggregate proceeds of
$1.0 million in cash. The Company paid $75,000 in related issuance costs. This
transaction included the sale of 375,000 shares of Series A preferred stock and
the issuance of a non-qualified stock option to purchase 125,000 shares of
Series A preferred stock exercisable at $2.00 per share, to an investor who
became a member of the Board of Directors. The option vested over three years
and provided that vesting of the option may be accelerated by the Board of
Directors or upon occurrence of certain events, including a public offering,
merger or liquidation. This option was exercised immediately prior to the
closing of the initial public offering. The Company had also entered into a
consulting agreement with this member of the Board of Directors. The Company
paid no amounts in 1997 or 1996. In 1995, the Company paid a total of $120,000.
In conjunction with the SQLBench acquisition, the Company issued
approximately 144,000 shares of unregistered restricted stock which by agreement
cannot be sold or otherwise disposed of for two years from the acquisition date.
F-13
<PAGE>
SEGUE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Stock Compensation Plans
As of December 31, 1997, the Company has two stock-based compensation plans
(the "Plans"). The Company applies APB 25 in accounting for the Plans. Had
compensation cost for the Company's Plans been determined based on the fair
value at the grant dates for awards under those Plans consistent with the
methodology of SFAS 123, the Company's net income (loss) and income (loss) per
share would have been adjusted to the pro forma amounts indicated below (in
thousands, except per share data):
<TABLE>
<CAPTION>
1997 1996 1995
--------- ------- -------
<S> <C> <C> <C> <C>
Net income (loss) As reported $ (9,588) $ 641 $(303)
Pro forma $(11,711) $(511) $(387)
Income (loss) per common share -
basic As reported $ (1.31) $ .12 $(.20)
Pro forma $ (1.60) $(.10) $(.25)
Income (loss) per common share -
diluted As reported $ (1.31) $ .09 $(.20)
Pro forma $ (1.60) $(.10) $(.25)
</TABLE>
For the years ended December 31, 1997, 1996 and 1995, total compensation
cost recognized in pro forma loss for stock-based employee compensation awards
was $2,123,000, $1,152,000 and $84,000, respectively.
Since the SFAS 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting compensation cost may not be
representative of that to be expected in future years.
Stock Option Plan
The Option Plan provides for the grant of common stock options, for which
there were 3 million shares of common stock reserved.
Incentive stock options (ISOs) may be granted to any officer or employee of
the Company. Nonqualified stock options may be granted to any officer, employee,
consultant, director or other agent of the Company. In the case of ISOs, the
exercise price shall be at least 100% (110% in certain cases) of the fair market
value of the common stock on the date of grant. Options become exercisable at
varying rates, generally over three or four years, as determined by the Board of
Directors.
F-14
<PAGE>
SEGUE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table summarizes option activity:
<TABLE>
<CAPTION>
Weighted average
Shares Exercise prices exercise prices
------ --------------- ---------------
<S> <C> <C> <C>
(in thousands)
Outstanding at December 31, 1994 1,016 $ 1.00 - $ 2.00 $ 1.44
Granted 826 2.00 - 3.50 2.39
Exercised (59) 1.00 - 2.00 1.06
Canceled (457) 1.00 - 3.50 1.79
-----
Outstanding at December 31, 1995 1,326 1.00 - 3.50 1.93
Granted 834 9.00 - 35.25 15.01
Exercised (127) 1.00 - 9.00 1.54
Canceled (183) 1.00 - 35.25 16.54
-----
Outstanding at December 31, 1996 1,850 1.00 - 22.25 6.43
Granted 1,177 8.50 - 18.00 10.64
Exercised (249) 1.00 - 11.25 2.33
Canceled (377) 1.00 - 16.63 10.25
-----
Outstanding at December 31, 1997 2,401 $ 1.00 - $22.25 $ 8.32
=====
</TABLE>
Subject to certain exceptions defined under the Option Plan, options expire
10 years from the date of grant. As of December 31, 1997, 1996 and 1995, options
to purchase 877,000, 628,000 and 415,000 shares, respectively, were exercisable
with a weighted average exercise price of $4.88, $2.51 and $1.43 per share,
respectively.
The weighted average fair value of the stock options granted during 1997,
1996 and 1995 was $5.78, $7.30 and $.68 per share, respectively. For the
computation in accordance with SFAS 123, the fair value of each stock option
grant is estimated on the date of grant using the Black-Scholes option pricing
model with the following weighted average assumptions used for grants in 1997,
1996 and 1995, respectively: risk-free interest rate of 6.1%, 5.9% and 7.1%;
dividend yield of 0%; expected life of five years; and expected volatility of
60%, 47% and 0%.
For various price ranges, weighted average information for options
outstanding at December 31, 1997 were as follows:
<TABLE>
<CAPTION>
Outstanding Options Exercisable Options
------------------------------------------- -----------------------------
Weighted
Range of per average Weighted Weighted
share exercise remaining life average average exercise
prices Shares (in years) exercise price Shares price
------ ------ -------- -------------- ------ -----
<S> <C> <C> <C> <C> <C>
$ 1.00 - $ 3.50 826,775 6.34 $ 1.98 647,675 $ 1.81
8.50 - 9.00 546,924 9.27 8.96 80,784 9.00
9.25 - 10.63 370,500 8.60 9.84 12,000 9.50
10.75 - 14.00 438,438 9.19 12.69 76,938 13.44
14.75 - 22.25 218,000 8.67 19.37 59,375 20.72
--------- -------
$ 1.00 - $22.25 2,400,637 8.09 $ 8.32 876,772 $ 4.88
</TABLE>
F-15
<PAGE>
SEGUE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Employee Stock Purchase Plan
On February 12, 1996, the Company established the Segue Software, Inc. 1996
Employee Stock Purchase Plan, under which eligible employees may purchase shares
of the Company's common stock through payroll deductions. The shares can be
purchased for 85% of the lower of the beginning or ending fair market value of
each six-month segment within the offering period. Purchases are limited to 10%
of an employee's annual compensation. A total of 100,000 shares of the
Company's common stock are reserved for issuance under the stock purchase plan,
of which approximately 37,000 shares have been issued as of December 31, 1997.
No shares had been issued as of December 31, 1996.
For the computation in accordance with SFAS 123, the fair value of the
employees' purchase rights is estimated using the Black-Scholes model with the
following assumptions for 1997 and 1996: risk-free interest rate of 5.3% and
5.4%; dividend yield of 0%; expected life of six months; and expected volatility
of 60%.
G. NET INCOME (LOSS) PER SHARE:
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128 ("SFAS 128"), "Earnings Per Share". Under the new
standard, primary and fully diluted earnings per share were replaced with basic
and diluted earnings per share. All net income (loss) per common share amounts
have been restated to conform to the requirements of SFAS 128.
F-16
<PAGE>
SEGUE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table sets forth the computation of basic and diluted
earnings (loss) per share (in thousands, except per share data):
<TABLE>
<CAPTION>
1997 1996 1995
--------- ------ -------
<S> <C> <C> <C>
Net income (loss) $(9,588) $ 641 $ (303)
Plus income impact of assumed conversions
Interest on convertible debt to shareholders, net of tax - 27 -
------- ------ ------
Net income (loss) plus assumed conversions (9,588) 668 (303)
Weighted average shares used in net income (loss) per share -
basic 7,337 5,364 1,552
Effect of dilutive securities:
Employee and director stock options - 1,164 -
Preferred stock - 614 -
Convertible debt to stockholders - 547 -
------- ------ ------
Dilutive potential common shares - 2,325 -
------- ------ ------
Weighted average shares used in net income (loss) per
common share - diluted 7,337 7,689 1,552
======= ====== ======
Net income (loss) per common share - basic $ (1.31) $ .12 $ (.20)
======= ====== ======
Net income (loss) per common share - diluted $ (1.31) $ .09 $ (.20)
======= ====== ======
</TABLE>
Options to purchase 584,000 weighted average shares of common stock at an
average exercise price of $8.32 per share were outstanding for the year ended
December 31, 1997, but were not included in the calculation of diluted net loss
per common share because their inclusion would have been antidilutive. Options
to purchase 24,000 weighted average shares of common stock at an average
exercise price of $21.44 were outstanding for the year ended December 31, 1996,
but were not included in the calculation of diluted net income per common share
because the options' exercise prices were greater than the average market price
of the common shares for the period. Options to purchase 1.2 million weighted
average shares of common stock at an average exercise price of $1.72 per share
were outstanding for the year ended December 31, 1995, but were not included in
the calculation of diluted net loss per common share because their inclusion
would have been antidilutive.
H. EMPLOYEE SAVINGS PLAN:
On November 1, 1990, the Company established the Segue Software, Inc.
401(k) Plan, under which all employees may make contributions to their
respective participant accounts. The Company may, at its discretion, make
matching contributions on behalf of its employees. Employees must have completed
two years of service to be eligible for the Company's contributions. No matching
contributions were made during the years ended December 31, 1997, 1996 and 1995.
I. INCOME TAXES:
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. As of December 31, the
F-17
<PAGE>
SEGUE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
components of the net deferred tax asset are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Gross deferred tax assets
- -------------------------
Federal and state net operating
loss carryforwards $ 1,619 $ 1,004
Acquired intangible assets 2,575 0
Accrued and deferred compensation 160 43
Research and development credits 1,047 764
Other 368 183
------- -------
Total assets $ 5,769 $ 1,994
------- -------
Gross deferred tax liability
- ----------------------------
Fixed assets $ (47) $ (83)
------- -------
Total liability (47) (83)
------- -------
Valuation allowance (5,722) (1,911)
------- -------
Net deferred tax asset $ 0 $ 0
======= =======
</TABLE>
The Company had a provision for income taxes of $56,000 and $20,000 in 1997
and 1996, respectively, principally for state taxes. There was no provision for
income taxes in 1995. As of December 31, 1997, the Company had federal net
operating loss carryforwards of approximately $4.5 million and state net
operating loss carryforwards of $1.8 million, of which $3,119,000 relates to
deductions attributable to the exercise of non-qualified stock options and
employees' disposition of stock acquired through incentive stock options, as
well as $821,000 of federal tax credit carryforwards available for income tax
purposes. These carryforwards generally expire in the years 1998 through 2012
and may be subject to annual limitations as a result of changes in the Company's
ownership. Management of the Company has evaluated the positive and negative
evidence impacting the realizability of its deferred tax assets, which are
comprised principally of net operating loss carryforwards and tax credits. Based
on the weight of the available evidence, it is more likely than not that all of
the deferred tax assets will not be realized, and accordingly the deferred tax
assets have been fully reserved. Management re-evaluates the positive and
negative evidence on a quarterly basis.
F-18
<PAGE>
SEGUE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
J. COMMITMENTS AND CONTINGENCIES:
Lease Commitments
The Company leases facilities for its headquarters in Massachusetts under
non-cancelable operating leases that expire in 1998. The Company also leases
certain U.S. and foreign sales offices and certain equipment under various
leases with lease terms ranging from month-to-month up to three years. Certain
of these leases contain renewal options. The agreements generally require the
payment of utilities, real estate taxes, insurance and repairs. Future minimum
payments under the facilities and equipment leases with non-cancelable terms are
as follows as of December 31, 1997 (in thousands):
<TABLE>
<S> <C>
1998 $558
1999 95
2000 19
----
$672
====
</TABLE>
Rent expense for the years ended December 31, 1997, 1996 and 1995 amounted
to $680,000, $585,000 and $263,000, respectively.
Royalty Commitments
In November 1996, the Company entered into an agreement with a vendor who
licensed specific software to the Company for purposes of marketing and
distribution. Under the terms of the agreement, the Company was required to pay
$1.0 million in royalties by December 31, 1997. As of December 31, 1996, the
Company had paid $100,000 and recorded a minimum royalty commitment of $900,000.
Royalty expense was recognized based upon the sale of the related product. As
of December 31, 1997, the Company had paid $800,000 in total and recognized
royalty expense of $170,000 related to the royalty agreement. In December 1997,
the Company acquired the vendor (see Note B) with the existing royalty agreement
being terminated. The remaining prepaid royalty of $630,000 was refunded to the
Company in conjunction with the acquisition.
K. NON-RECURRING CHARGES:
In the fourth quarter of 1997, the Company recognized a charge of $9.1
million related to the write-off of purchased research and development in
process in conjunction with the SQLBench acquisition and $718,000 consisting of
severance and accelerated vesting of options related to the resignation of the
Company's former President and Chief Executive Officer. The charge of $718,000
consisted of $195,000 in severance and $523,000 in accelerated vesting of
options for common stock.
For the year ended December 31, 1995, severance charges reflect costs
incurred pursuant to an employment separation agreement dated as of June 30,
1995 between the Company and its former Chief Executive Officer.
F-19
<PAGE>
SEGUE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
L. LITIGATION SETTLEMENT:
On September 30, 1996, the Company entered into a definitive agreement with
a plaintiff, a software company located in Cambridge, MA, to settle litigation
brought against the Company and certain of its current and former employees. The
Company recorded a charge of $744,000 during the third quarter of 1996 to cover
the settlement and other expenses incurred in connection therewith.
M. SUBSEQUENT EVENT:
In the second quarter of 1998, the Company expects to enter into a nine
year lease commitment for 40,500 to 67,500 square feet, effective August 1,
1998, at an annual rental rate of approximately $2.2 million. The lease expires
in October, 2007. The Company has the right to terminate the lease on September
30, 2004 for a fee of approximately $2.2 million.
F-20
<PAGE>
EXHIBIT 10.10
================================================================================
AGREEMENT AND PLAN OF MERGER
by and among
SEGUE SOFTWARE, INC.,
SGE MERGER CORP.
and
SQLBENCH INTERNATIONAL, INC. AND
THE STOCKHOLDERS OF SQLBENCH INTERNATIONAL, INC.
Dated as of December 30, 1997
================================================================================
<PAGE>
AGREEMENT AND PLAN OF MERGER
TABLE OF CONTENTS
Page
SECTION 1. THE MERGER.................................................. 1
1.1 The Merger....................................................... 1
1.1.1 The Merger................................................ 1
1.1.2 Effect of the Merger...................................... 1
1.1.3 Consummation of the Merger................................ 2
1.1.4 Certificate of Incorporation.............................. 2
1.1.5 By-Laws................................................... 2
1.1.6 Directors and Officers.................................... 2
1.1.7 Conversion of Shares...................................... 2
1.1.8 Manner of Payment......................................... 3
1.2 Promissory Note.................................................. 3
1.3 Lock-up Agreement................................................ 3
1.4 Stockholders' Representative..................................... 3
1.5 Closing.......................................................... 4
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS.......... 5
2.1 Making of Representations and Warranties......................... 5
2.2 Organization and Qualifications of SQLBench...................... 5
2.3 Subsidiaries..................................................... 5
2.4 Capital Stock; Beneficial Ownership.............................. 5
2.5 Authority of SQLBench............................................ 5
2.6 Real and Personal Property....................................... 6
2.7 Financial Statements............................................. 7
2.8 Taxes............................................................ 8
2.9 Accounts Receivable.............................................. 10
2.10 Absence of Certain Changes....................................... 10
2.11 Ordinary Course.................................................. 11
2.12 Banking Relations................................................ 11
2.13 Intellectual Property............................................ 11
2.14 Contracts........................................................ 14
2.15 Litigation....................................................... 15
2.16 Competition...................................................... 15
2.17 Compliance with Laws............................................. 15
2.18 Insurance........................................................ 15
2.19 Warranty or Other Claims......................................... 15
2.20 Powers of Attorney............................................... 15
2.21 Finder's Fee..................................................... 16
2.22 Corporate Records; Copies of Documents........................... 16
2.23 Employee Benefit Programs; Employees; Labor Relations............ 16
(i)
<PAGE>
2.24 Hazardous Waste, Etc............................................. 16
2.25 Disclosure....................................................... 16
SECTION 3. REPRESENTATIONS AND WARRANTIES OF STOCKHOLDERS.............. 17
3.1 SQLBench Shares.................................................. 17
3.2 Authority........................................................ 17
3.3 Finder's Fee..................................................... 18
3.4 Agreements....................................................... 18
3.5 Investment Representation........................................ 18
SECTION 4. COVENANTS OF THE SELLERS.................................... 19
4.1 Making of Covenants and Agreements............................... 19
4.2 Conduct of Business.............................................. 19
4.3 Due Diligence; Production of Documents........................... 19
4.4 Authorization from Others........................................ 19
4.5 Notice of Default................................................ 19
4.6 Cooperation; Consummation of Agreement; Books and Records........ 20
4.7 Tax Returns...................................................... 20
4.8 Satisfaction of Indebtedness..................................... 20
SECTION 5. REPRESENTATIONS AND WARRANTIES OF BUYER..................... 20
5.1 Making of Representations and Warranties......................... 20
5.2 Organization..................................................... 20
5.3 Authority........................................................ 20
5.4 Litigation....................................................... 21
5.5 Finder's Fee..................................................... 21
5.6 Buyer's Public Information....................................... 21
5.7 Buyer Common Stock............................................... 22
5.8 Buyer Indebtedness............................................... 22
SECTION 6. COVENANTS OF BUYER AND MERGER SUB........................... 22
6.1 Authorization from Others........................................ 22
6.2 Cooperation; Consummation of Agreement; Books and Records........ 22
6.3 Notice of Default................................................ 22
SECTION 7. CONDITIONS.................................................. 22
7.1 Conditions to the Obligations of Buyer and Merger Sub............ 22
7.2 Conditions to Obligations of the Stockholders.................... 24
SECTION 8. TERMINATION OF AGREEMENT; RIGHTS TO PROCEED................. 25
8.1 Termination...................................................... 25
(ii)
<PAGE>
8.2 Effect of Termination............................................ 25
SECTION 9. RIGHTS AND OBLIGATIONS SUBSEQUENT TO CLOSING................ 26
9.1 Survival of Warranties; Setoff................................... 26
SECTION 10. MISCELLANEOUS............................................... 27
10.1 Fees and Expenses................................................ 27
10.2 Governing Law.................................................... 27
10.3 Notices.......................................................... 28
10.4 Entire Agreement................................................. 28
10.5 Assignability; Binding Effect.................................... 29
10.7 Captions and Gender.............................................. 29
10.8 Execution in Counterparts........................................ 29
10.9 Amendments....................................................... 29
10.10 Publicity and Disclosures........................................ 30
(iii)
<PAGE>
INDEX OF DEFINED TERMS
Term Section
---- -------
Agreement.................................. Preamble
Base Balance Sheet......................... 2.7(a)(ii)
SQLBench................................... Preamble
SQLBench Shares............................ 1.1.7(a)
Buyer...................................... Preamble
Buyer Shares............................... 1.1.7(a)(ii)
Closing.................................... 1.5
Closing Date............................... 1.5
Code....................................... 2.8(c)
Delaware Law............................... 1.1.1
Effective Time............................. 1.1.3
Employment Agreement....................... 7.1(i)
Intellectual Property...................... 2.13(a)
Leased Real Property....................... 2.6(b)
Lease...................................... 2.6(b)(iii)
Merger..................................... 1.1.1
Merger Consideration....................... 1.1.7(a)
Notes...................................... 1.2
Sellers.................................... Preamble
Stockholders............................... Preamble
Stockholders' Representative............... 1.4
Surviving Corporation...................... 1.1.1
(iv)
<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") is entered into as of
December 30, 1997 by and among Segue Software, Inc., a Delaware corporation
("Buyer"), SGE Merger Corp., a Delaware corporation and a wholly owned
subsidiary of Buyer ("Merger Sub"), SQLBench International, Inc., a Georgia
corporation ("SQLBench"), and each holder of the capital stock of SQLBench,
which include Klaus K. Obermeier and Susan P. Obermeier, (the "Stockholders"
and, together with SQLBench, the "Sellers").
W I T N E S S E T H
- - - - - - - - - -
WHEREAS, the SQLBench Stockholders own of record and beneficially all of
the issued and outstanding capital stock of SQLBench, consisting of 10,000
shares of SQLBench's Common Stock, $.10 par value per share (said shares being
referred to herein as the "SQLBench Shares"); and
WHEREAS, the SQLBench Stockholders desire to sell all of the SQLBench
Shares to Buyer, and Buyer desires to acquire all of the SQLBench Shares
pursuant to a forward triangular merger.
NOW, THEREFORE, in order to consummate said purchase and sale and in
consideration of the mutual agreements set forth herein, the parties hereto
agree as follows:
SECTION 1. THE MERGER.
---------------------
1.1 The Merger.
----------
1.1.1 The Merger. On the terms and subject to the conditions set
----------
forth in this Agreement, at the Effective Time (as defined in Section 1.1.3
hereof), in accordance with this Agreement, the Delaware General Corporation Law
(the "Delaware Law") and the Georgia Business Corporation Code (the "Georgia
Code"), SQLBench shall merge with and into Merger Sub (the "Merger"), the
separate existence of SQLBench shall cease and Merger Sub shall continue, as a
wholly-owned subsidiary of Buyer, as the surviving corporation under the
corporate name SGE Merger Corp. Merger Sub, in its capacity as the corporation
surviving the Merger, is sometimes referred to herein as the "Surviving
Corporation," and Merger Sub and SQLBench are sometimes referred to collectively
herein as the "Constituent Corporations."
1.1.2 Effect of the Merger. At and after the Effective Time, the
--------------------
Merger shall have the effects set forth in Sections 259 and 261 of the Delaware
Law and Section 14-2-1106 of the Georgia Code.
<PAGE>
1.1.3 Consummation of the Merger. On the Closing Date, the parties
--------------------------
hereto shall cause the Certificate of Merger to be filed with the Secretary of
State of the State of Delaware, in such form as required by, and executed in
accordance with, Section 251 of the Delaware Law. On the Closing Date, the
parties hereto shall cause (a) Articles of Merger to be filed with the Secretary
of State of Georgia, in such form as required by, and executed in accordance
with, Section 14-2-1105 of the Georgia Code and (b) publication of notice of
merger to be made as required by Section 14-2-1105.1 of the Georgia Code. The
Merger shall be effective as of the date of filing of the Certificate of Merger
(the "Effective Time").
1.1.4 Certificate of Incorporation. From and after the Effective
----------------------------
Time, the Certificate of Incorporation of Merger Sub, as in effect immediately
prior to the Effective Time, shall be and become the Certificate of
Incorporation of the Surviving Corporation, and shall thereafter continue in
effect until amended as provided therein and in accordance with the Delaware
Law.
1.1.5 By-Laws. The By-Laws of Merger Sub, as in effect immediately
-------
prior to the Effective Time, shall be the By-Laws of the Surviving Corporation,
and shall thereafter continue in effect until amended as provided therein and in
accordance with the Delaware Law.
1.1.6 Directors and Officers. The directors and officers of Merger
----------------------
Sub holding office immediately prior to the Effective Time shall, from and after
the Effective Time, be the directors and officers of the Surviving Corporation,
until their respective successors shall have been duly elected or appointed and
qualified or until their earlier death, resignation or removal in accordance
with the Surviving Corporation's Certificate of Incorporation and By-Laws.
1.1.7 Conversion of Shares. At the Effective Time, by virtue of the
--------------------
Merger, the manner and the basis of converting the shares of capital stock of
SQLBench and Merger Sub shall be as follows:
(a) each share of SQLBench Common Stock (without regard to
class) issued and outstanding at the Effective Time (the "SQLBench Shares" or
the "Shares") shall, by virtue of the Merger and without any action on the part
of the Stockholders or SQLBench, be converted into the right to receive the
following consideration (the "Merger Consideration"):
(i) $1,392,400 (the "Aggregate Cash Consideration
Amount") divided by 10,000 (the "Per Share Cash Consideration Amount"); and
(ii) that fraction of Buyer Common Stock, the numerator of
which equals 143,885 and the denominator of which equals 10,000. The aggregate
number of shares of Buyer's Common Stock deliverable pursuant to this Section
1.1.7(a)(ii) shall be hereinafter referred to as the "Buyer Shares;" and
2
<PAGE>
(b) all of the certificates representing the SQLBench Shares,
by virtue of the Merger and without any action on the part of the Stockholders
or SQLBench, shall be deemed to be no longer outstanding, shall not be
transferable on the books of the Surviving Corporation, and shall represent
solely the right to receive the amount determined pursuant to Section 1.1.7(a)
hereof.
1.1.8 Manner of Payment. At the Effective Time, Buyer shall (i) pay
-----------------
by wire transfer to an account designated by the Stockholders' Representative
(as defined below) for the account of the Stockholders an amount, in immediately
available funds, equal to one-half ( 1/2) of the Aggregate Cash Consideration
Amount, (ii) deliver to the Stockholders' Representative for the account of the
Stockholders, the Note (as defined below) and (iii) deliver to the Stockholders'
Representative for the account of the Stockholders, the Buyer Shares.
1.2 Promissory Note. At the Effective Time, Buyer shall execute and
---------------
deliver to the Stockholders' Representative on behalf of the Stockholders a
subordinated promissory note of Buyer (the "Note") in a principal amount equal
to $696,200, such Note to be dated the date of the Closing and to be in
substantially the form of Exhibit 1.2 attached hereto. At such time or times as
-----------
any amounts become due and payable under the Note in accordance with the terms
thereof, Buyer shall pay or cause to be paid to the Stockholders'
Representative, as paying agent, in immediately available funds, the amounts
then due and payable under the Note, such amounts so deposited with
Stockholders' Representative to be distributed by the Stockholders'
Representative in the manner provided in, and otherwise to be subject to the
terms of, this Agreement. At such time as all obligations under the Note are
satisfied in full, the Stockholders' Representative shall deliver to Buyer the
Note marked "CANCELED."
1.3 Lock-up Agreement. Each Stockholder agrees not to sell, pledge,
-----------------
encumber or otherwise transfer or dispose of all or any portion of the Buyer
Shares issued to such Stockholder hereunder during the two (2) year period
following the Closing Date. Buyer may impose stop-transfer instructions with
respect to the Buyer Shares subject to the foregoing restriction until the end
of such two (2) year period.
1.4 Stockholders' Representative.
----------------------------
(a) In order to administer efficiently (i) the implementation
of the Agreement by the Stockholders, (ii) the waiver of any condition to the
obligations of the Stockholders to consummate the transactions contemplated
hereby and (iii) the settlement of any dispute with respect to the Agreement,
the Stockholders hereby designate Mr. Klaus Obermeier as their representative
(the "Stockholders' Representative").
(b) The Stockholders hereby authorize the Stockholders'
Representative (i) to take all action necessary in connection with the
implementation of the Agreement on behalf of the Stockholders, the waiver of any
condition to the obligations of the Stockholders to consummate the transactions
contemplated hereby or the settlement of any dispute, (ii) to give and receive
all notices required to be given under the Agreement and (iii)
3
<PAGE>
to take any and all additional action as is contemplated to be taken by or on
behalf of the Stockholders by the terms of this Agreement.
(c) In the event that the Stockholders' Representative dies,
becomes legally incapacitated or resigns from such position, Susan P. Obermeier
shall fill such vacancy and shall be deemed to be the Stockholders'
Representative for all purposes of this Agreement; however, no change in the
Stockholders' Representative shall be effective until Buyer is given notice of
it by the Stockholders.
(d) All decisions and actions by the Stockholders'
Representative shall be binding upon all of the Stockholders, and no Stockholder
shall have the right to object, dissent, protest or otherwise contest the same.
(e) By their execution of this Agreement, the Stockholders
agree that:
(i) Buyer shall be able to rely conclusively on the
instructions and decisions of the Stockholders' Representative as to any actions
required or permitted to be taken by the Stockholders or the Stockholders'
Representative hereunder, and no party hereunder shall have any cause of action
against Buyer for any action taken by Buyer in reliance upon the instructions or
decisions of the Stockholders' Representative;
(ii) all actions, decisions and instructions of the
Stockholders' Representative shall be conclusive and binding upon all of the
Stockholders and no Stockholder shall have any cause of action against the
Stockholders' Representative for any action taken, decision made or instruction
given by the Stockholders' Representative under this Agreement, except for fraud
or willful breach of this Agreement by the Stockholders' Representative;
(iii) remedies available at law for any breach of the
provisions of this Section 1.4 are inadequate; therefore, Buyer shall be
entitled to temporary and permanent injunctive relief without the necessity of
proving damages if Buyer brings an action to enforce the provisions of this
Section 1.4; and
(iv) the provisions of this Section 1.4 are independent
and severable, shall constitute an irrevocable power of attorney, coupled with
an interest and surviving death, granted by the Stockholders to the
Stockholders' Representative and shall be binding upon the executors, heirs,
legal representatives and successors of each Stockholder.
(f) All fees and expenses incurred by the Stockholders'
Representative shall be paid by the Stockholders.
1.5 Closing. The transactions contemplated by this Agreement shall be
-------
consummated at the closing (the "Closing") which will take place at the offices
of Goodwin, Procter & Hoar LLP, Exchange Place, Boston, Massachusetts on
December 30, 1997, or at
4
<PAGE>
such other place or earlier or later date or time as may be fixed by mutual
agreement of Buyer and the Sellers (the "Closing Date").
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS.
--------- --------------------------------------------------
2.1 Making of Representations and Warranties. As a material inducement to
----------------------------------------
Buyer to enter into this Agreement and consummate the transactions contemplated
hereby, each of the Stockholders jointly and severally hereby makes to Buyer the
representations and warranties contained in this Section 2.
2.2 Organization and Qualifications of SQLBench. SQLBench is a
-------------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the state of Georgia with full corporate power and authority to own or lease
its properties and to conduct its business in the manner and in the places where
such properties are owned or leased or such business is currently conducted or
proposed to be conducted. The copies of SQLBench's Certificate of Incorporation
as amended to date, certified by the appropriate governmental officer, and By-
laws, as amended to date, certified by SQLBench's Clerk or Secretary, and
heretofore delivered to Buyer's counsel, are complete and correct, and no
amendments thereto are pending. SQLBench is not in violation of any provision
of its Certificate of Incorporation or By-laws. SQLBench is not qualified to do
business as a foreign corporation in any state or jurisdiction.
2.3 Subsidiaries. SQLBench has no subsidiaries and does not own any
------------
securities issued by any other business organization or governmental authority.
SQLBench does not own and does not have any direct or indirect interest in or
control over any corporation, partnership, joint venture or entity of any kind.
2.4 Capital Stock; Beneficial Ownership. The authorized capital stock of
-----------------------------------
SQLBench consists of 1,000,000 shares of common stock, $.10 par value per share,
of which 10,000 shares are duly and validly issued, outstanding, fully paid and
non-assessable and of which 990,000 shares are authorized but unissued. There
are no outstanding options, warrants, rights, commitments, preemptive rights or
agreements of any kind for the issuance or sale of, or outstanding securities
convertible into, any additional shares of capital stock of any class of
SQLBench. None of the capital stock of SQLBench has been issued in violation of
any federal or state law. There are no voting agreements, trusts, proxies or
other agreements, instruments or undertakings with respect to the voting of the
capital stock of SQLBench to which SQLBench or any Stockholder is a party. The
Stockholders own beneficially and of record all of the outstanding shares of
capital stock of SQLBench which consists solely of the SQLBench Shares set forth
on Schedule 2.4 hereto.
------------
2.5 Authority of SQLBench. SQLBench has full right, authority and power
---------------------
to enter into this Agreement and each agreement, document and instrument to be
executed and delivered by SQLBench pursuant to this Agreement and to carry out
the transactions
5
<PAGE>
contemplated hereby. The execution, delivery and performance by SQLBench of this
Agreement and each such other agreement, document and instrument have been duly
authorized by all necessary action of SQLBench and its stockholders and no other
action on the part of SQLBench or its stockholders or otherwise is required in
connection therewith. This Agreement and each agreement, document and instrument
executed and delivered by SQLBench pursuant to this Agreement constitutes, or
when executed and delivered will constitute, valid and binding obligations of
SQLBench enforceable in accordance with their terms. The execution, delivery and
performance by SQLBench of this Agreement and each such agreement, document and
instrument:
(i) do not and will not violate any provision of the
Certificate of Incorporation (or similar organizational document) or By-laws of
SQLBench;
(ii) do not and will not violate any laws of the United
States, or any state or other jurisdiction (domestic or foreign) applicable to
SQLBench or require SQLBench to obtain any approval, consent or waiver of, or
make any filing with, any person or entity (governmental or otherwise) that has
not been obtained or made, except where the failure of which will, individually
or in the aggregate, not result in a material adverse affect on the business or
prospects of SQLBench; and
(iii) do not and will not result in a breach of,
constitute a default under, accelerate any obligation under, or give rise to a
right of termination of any indenture or loan or credit agreement or any other
agreement, contract, instrument, mortgage, lien, lease, permit, authorization,
order, writ, judgment, injunction, decree, determination or arbitration award to
which SQLBench is a party or by which the property of SQLBench is bound or
affected, or result in the creation or imposition of any mortgage, pledge, lien,
security interest or other charge or encumbrance on any of SQLBench's assets or
property or on the SQLBench Shares.
2.6 Real and Personal Property.
--------------------------
(a) Owned Real Property. SQLBench does not own any real
-------------------
property.
(b) Leased Real Property. All of the real property leased by
--------------------
SQLBench, as tenant or lessee, is identified on Schedule 2.6(b) hereto
---------------
(collectively referred to herein as the "Leased Real Property"). The
Stockholders hereby make the following representations and warranties with
respect to the Leased Real Property:
(i) SQLBench holds a good, clear, marketable, valid and
enforceable leasehold interest in the Leased Real Property;
(ii) None of the Sellers is aware of any material
defects in the physical condition of any improvements constituting a part of the
Leased Real Property,
6
<PAGE>
including, without limitation, structural elements, mechanical systems, roofs or
parking and loading areas, and, to the knowledge of the Sellers, all of such
improvements are in reasonable operating condition and repair, have been
maintained in accordance with past practice and are free from material
infestation by rodents or insects;
(iii) The copies of the lease (the "Lease") for the Lease
Real Property delivered by SQLBench to Buyer is complete, accurate, true and
correct;
(iv) The Lease is in full force and effect and has not
been modified, amended, or altered, in writing or otherwise;
(v) All obligations of the landlord or lessor under the
Lease which have accrued have been performed, and to the best of the knowledge
of the Stockholders, no landlord or lessor is in default under the Lease;
(vi) All obligations of SQLBench under the Lease which
have accrued have been performed, and SQLBench is not in default under the
Lease, and no circumstance presently exists which, with notice or the passage of
time, or both, would give rise to a default by SQLBench; and
(vii) SQLBench has obtained or will obtain prior to the
Closing the consent of the landlord or lessor under the Lease whose consent is
required to the transfer of the Leased Real Property to Buyer, and such transfer
will not give the landlord or lessor under the Lease any remedy, including,
without limitation, any right to declare a default under the Lease.
(c) Personal Property. A complete description of SQLBench's
-----------------
fixtures, machinery, equipment and other tangible personal property is contained
in Schedule 2.6(c) hereto. SQLBench has good and marketable title to all of its
---------------
personal property. None of such personal property or assets is subject to any
mortgage, pledge, lien, conditional sale agreement, security agreement,
encumbrance or other charge. All leasehold improvements, furnishings, machinery,
equipment and other tangible personal property of SQLBench have been maintained
consistent with past practice, are suitable for the purposes for which they are
intended and are in good repair.
(d) No Third Party Rights. Neither TEK Channels
---------------------
International Inc. nor any other person or entity has any right, title or
interest in any assets or property used in the operation of the business of
SQLBench.
2.7 Financial Statements.
--------------------
(a) Sellers have delivered to Buyer the following financial
statements, copies of which are attached hereto as Schedule 2.7:
------------
7
<PAGE>
(i) Unaudited Balance sheet of SQLBench for the fiscal
year ending on December 31, 1996 and statements of income and retained earnings
for the year then ended, with appropriate footnotes, certified by SQLBench's
chief financial officer.
(ii) A balance sheet of SQLBench as of December 19, 1997
(the "Base Balance Sheet") and statements of income and retained earnings for
the period then ended, with appropriate footnotes, certified by SQLBench's chief
financial officer.
Except as set forth on Schedule 2.7 hereto, said financial statements have been
------------
prepared in accordance with generally accepted accounting principles applied
consistently during the periods covered thereby, are complete and correct in all
material respects, and present fairly in all material respects the financial
condition of SQLBench at the dates of said statements and the results of its
operations and its cash flows for the periods covered thereby.
(b) Except as reflected on the Base Balance Sheet or
Schedule 2.7 hereto, as of the date of the Base Balance Sheet, SQLBench had no
- ------------
liabilities of any nature, whether accrued, absolute, contingent or otherwise,
asserted or unasserted, known or unknown (including without limitation
liabilities as guarantor or otherwise with respect to obligations of others, or
liabilities for taxes due or then accrued or to become due or contingent or
potential liabilities relating to activities of SQLBench or the conduct of its
business prior to the date of the Base Balance Sheet regardless of whether
claims in respect thereof had been asserted as of such date).
(c) Except as reflected on the Base Balance Sheet or
Schedule 2.7 hereto, as of the date hereof and as of the Closing, SQLBench does
- ------------
not and will not have liabilities of any nature, whether accrued, absolute,
contingent or otherwise, asserted or unasserted, known or unknown (including
without limitation liabilities as guarantor or otherwise with respect to
obligations or others, or liabilities for taxes due or then accrued or to become
due or contingent or potential liabilities relating to activities of SQLBench or
the conduct of its business prior to the date hereof or the Closing, regardless
of whether claims in respect thereof had been asserted as of such date).
2.8 Taxes.
-----
(a) Except as set forth on Schedule 2.8 hereto, SQLBench has
------------
paid or caused to be paid all federal, state, local, foreign and other taxes,
including, without limitation, income taxes, estimated taxes, alternative
minimum taxes, excise taxes, sales taxes, use taxes, value-added taxes, gross
receipts taxes, franchise taxes, capital stock taxes, employment and payroll-
related taxes, withholding taxes, stamp taxes, transfer taxes, windfall profit
taxes, environmental taxes and property taxes, whether or not measured in whole
or in part by net income, and all deficiencies, or other additions to tax,
interest, fines and penalties owed by it (collectively, "Taxes"), required to be
paid by SQLBench through the date hereof whether disputed or not.
8
<PAGE>
(b) Except as set forth on Schedule 2.8 hereto, SQLBench has
------------
in accordance with applicable law filed all federal, state, local and foreign
tax returns required to be filed by it through the date hereof, and all such
returns correctly and accurately set forth the amount of any Taxes relating to
the applicable period. A list of all federal, state, local and foreign income
tax returns filed with respect to SQLBench for taxable periods ended on or after
October 22, 1996, are set forth in Schedule 2.8 hereto, and said Schedule
------------
indicates those returns that have been audited or currently are the subject of
an audit. SQLBench has delivered to Buyer correct and complete copies of all
federal, state, local and foreign income tax returns listed on said Schedule,
and of all examination reports and statements of deficiencies assessed against
or agreed to by SQLBench with respect to said returns. SQLBench is not required
to file a foreign tax return, or to pay any Stockholders' foreign taxes, in
connection with the business conducted by SQLBench.
(c) Neither the Internal Revenue Service nor any other
governmental authority is now asserting or, to the knowledge of the
Stockholders, threatening to assert against SQLBench any deficiency or claim for
additional Taxes. No claim has ever been made by an authority in a jurisdiction
where SQLBench does not file reports and returns that SQLBench is or may be
subject to taxation by that jurisdiction. There are no security interests on any
of the assets of SQLBench that arose in connection with any failure (or alleged
failure) to pay any Taxes. None of the Sellers has entered into a closing
agreement pursuant to Section 7121 of the Internal Revenue Code of 1986, as
amended, (the "Code").
(d) There has not been any audit of any tax return filed by
SQLBench for any tax period, no audit of any tax return of SQLBench is in
progress, and SQLBench has not been notified by any tax authority that any such
audit is contemplated or pending. No extension of time with respect to any date
on which a tax return was or is to be filed by SQLBench is in force, and no
waiver or agreement by SQLBench is in force for the extension of time for the
assessment or payment of any Taxes.
(e) None of the Sellers has been (and has no liability for
unpaid Taxes because it once was) a member of an "affiliated group" (as defined
in Section 1504(a) of the Code). SQLBench has never filed, nor has it been
required to file, a consolidated, combined or unitary tax return with any other
entity. SQLBench does not own, nor has it ever owned, a direct or indirect
interest in any trust, partnership, corporation or other entity, nor is any such
interest necessary to conduct the business of SQLBench, and Buyer is not
acquiring from any Seller an interest in any such entity (except for the capital
stock of SQLBench). No such entity is a party to any tax sharing agreement.
(f) None of the Sellers is a "foreign person" within the
meaning of Section 1445 of the Code and Treasury Regulations Section 1.1445-2.
(g) For purposes of this Agreement, all references to Sections
of the Code shall include any predecessor provisions to such Sections.
9
<PAGE>
2.9 Accounts Receivable. All of the accounts receivable of SQLBench (less
-------------------
the reserve for bad debts set forth on the Base Balance Sheet) are or will be at
the Closing valid and enforceable claims, fully collectible and subject to no
setoff or counterclaim. SQLBench does not have any accounts or loans receivable
from any person, firm or corporation which is affiliated with SQLBench or from
any director, officer or employee of SQLBench, and all accounts and loans
receivable from any such person, firm or corporation shall be paid in cash prior
to the Closing.
2.10 Absence of Certain Changes. Since the date of the Base Balance Sheet,
--------------------------
there has not been:
(i) any change in the financial condition, properties,
assets, liabilities, business or operations of SQLBench which change by itself
or in conjunction with all other such changes, has been materially adverse with
respect to SQLBench;
(ii) any contingent liability incurred by SQLBench as
guarantor or otherwise with respect to the obligations of others or any
cancellation of any debt or claim owing to, or waiver of any material right of,
SQLBench;
(iii) any mortgage, encumbrance or lien placed on any of the
assets or properties of SQLBench which remain in existence on the date hereof or
will remain on the Closing Date;
(iv) any obligation or liability of any nature incurred by
SQLBench whether accrued, absolute, contingent or otherwise, asserted or
unasserted (including without limitation liabilities for Taxes due or to become
due or contingent or potential liabilities relating to products or services
provided by SQLBench or the conduct of SQLBench's business since the date of the
Base Balance Sheet regardless of whether claims in respect thereof have been
asserted), other than obligations and liabilities incurred in the ordinary
course of business consistent with the terms of this Agreement (it being
understood that product or service liability claims shall not be deemed to be
incurred in the ordinary course of business);
(v) any purchase, sale or other disposition, or any agreement
or other arrangement for the purchase, sale or other disposition, of any of the
properties or assets of SQLBench other than in the ordinary course of business;
(vi) any damage, destruction or loss, whether or not covered
by insurance, materially and adversely affecting the properties, assets or
business of SQLBench;
(vii) any other transaction entered into by SQLBench other
than transactions in the ordinary course of business; or
10
<PAGE>
(viii) any agreement or understanding whether in writing or
otherwise, for SQLBench to take any of the actions specified in paragraphs (i)
through (vii) above.
2.11 Ordinary Course. Since the date of the Base Balance Sheet, SQLBench
---------------
has conducted its business and operations only in the ordinary course and
consistently with its prior practices. Seller has transferred and disposed of
the assets identified on Schedule 2.11 hereto outside of the ordinary course of
-------------
business prior to the date of the Base Balance Sheet, which transfer is
reflected in the Base Balance Sheet. Buyer and Merger Sub consent to such
transfer.
2.12 Banking Relations. All of the arrangements which SQLBench has with
-----------------
any banking institution are completely and accurately described in Schedule 2.12
-------------
hereto, indicating with respect to each of such arrangements the type of
arrangement maintained (such as checking account, borrowing arrangements, safe
deposit box, etc.) and the person or persons authorized in respect thereof.
2.13 Intellectual Property.
---------------------
(a) Except as set forth in the License and Distribution
Agreement between SQLBench and ARC - Dr. Ambichl & Dr. Reindl Communication GmbH
dated November 1, 1996, SQLBench owns no right, title or interest in or to any
patents, copyrights, technology, software, software tools, know-how, processes,
trade secrets, trademarks, service marks, trade names and other technology or
proprietary rights developed or discovered in connection with or contained in
the SQLBench and SQLBench.web products (the "SQLBench Products"). Except as set
forth in Schedule 2.13, SQLBench owns all right, title and interest in and to
all patents, copyrights, technology, software, software tools, know-how,
processes, trade secrets, trademarks, service marks, trade names and other
proprietary rights used in or necessary for the conduct of SQLBench's business
as conducted to the date hereof or contemplated, free and clear of all liens,
claims and encumbrances (including without limitation distribution rights) (all
of which are referred to as "Proprietary Rights"). The foregoing representation
as it relates to Third Party Technology (as hereinafter defined) is limited to
SQLBench's interest pursuant to the Third Party Licenses (as hereinafter
defined), all of which are valid and enforceable and in full force and effect
and which grant SQLBench such right to Third Party Technology as are employed in
or necessary to the business of SQLBench as conducted or proposed to be
conducted prior to the Closing Date.
(b) Schedule 2.13 hereto contains an accurate and complete description
-------------
of (i) all patents, trademarks (with separate listings of registered and
unregistered trademarks), trade names, and registered and unregistered
copyrights in or related to the SQLBench Products owned by SQLBench, all
applications and registration statements therefor, and a list of all licenses
and other agreements relating thereto, and (ii) a list of all licenses and other
agreements with third parties (the "Third Party Licenses") relating to any
software, technology, know-how, or processes that SQLBench is licensed or
otherwise authorized by
11
<PAGE>
such third parties to use, market, distribute or incorporate into products
distributed by SQLBench (such software, technology, know-how and processes are
collectively referred to as the "Third Party Technology"). All of SQLBench's
trademark or trade name registrations related to the SQLBench Products and all
of SQLBench's copyrights in any of the SQLBench Products are valid and in full
force and effect; and consummation of the transactions contemplate hereby will
not alter or impair any such rights. There is no material default by any party
to any Third Party License and all of SQLBench's rights thereunder are freely
assignable. To the knowledge of the Sellers, the licensors under such Third
Party Licenses have and had all requisite power and authority to grant the
rights purported to be conferred thereby. True and complete copies of such Third
Party Licenses, and any amendments thereto, have been provided to Buyer.
(c) No claims have been asserted against SQLBench or any of
the Stockholders (and neither SQLBench nor any of the Stockholders is aware of
any claims which are likely to be asserted against SQLBench or any of the
Stockholders or which have been asserted against others) by any person
challenging SQLBench's use or distribution of any patents, trademarks, trade
names, copyrights, trade secrets, software, technology, know-how or processes
utilized by SQLBench (including, without limitation, the Third Party Technology)
or challenging or questioning the validity or effectiveness of any license or
agreement relating thereto (including, without limitation, the Third Party
Licenses). To the Sellers' knowledge, there is no valid basis for any claim of
the type specified in the immediately preceding sentence which could in any way
relate to or interfere with the continued enhancement and exploitation by
SQLBench of any of the SQLBench Products. None of the SQLBench Products nor the
use of any patents, trademarks, trade names, copyrights, software, technology,
know-how or processes by SQLBench in its current business infringes on the
rights of, constitutes misappropriation of, or in any way involves unfair
competition with respect to, any proprietary information or intangible property
right of any third person or entity, including without limitation any trade
secret, copyright, trademark or trade name, or, to the knowledge of the Sellers,
any patent.
(d) All licenses or other agreements pursuant to which the
Sellers have granted rights to others in Proprietary Rights owned or licensed by
the Sellers are listed on Schedule 2.13. All of such licenses or agreements are
in full force and effect, there is no default by any party thereto and all of
Sellers' rights thereunder are freely assignable. True and complete copies of
all such licenses or other agreements, and any amendments thereto, have been
provided to Buyer. Except as set forth in Schedule 2.13, the Sellers have not
granted any third party any right to manufacture, reproduce, distribute, market
or exploit any of the SQLBench Products or any adaptations, translations, or
derivative works based on the SQLBench Products or any portion thereof,
including, without limitation, as a value added reseller. Except with respect to
the rights of third parties to the Third Party Technology, no third party has
any right to manufacture, reproduce, distribute, market or exploit any
underlying works or materials of which any of the SQLBench Products are a
"derivative work" as that term is defined in the United States Copyright Act,
Title 17, U.S.C. Section 101.
12
<PAGE>
(e) Except as set forth on Schedule 2.13, no designs,
-------------
drawings, specifications, source code, object code, documentation, flow charts
or diagrams incorporating, embodying or reflecting any of the SQLBench Products
at any stage of their development (the "SQLBench Components") were written,
developed and created in whole or in part by any employee of SQLBench with or
without the assistance of any third party or entity or were created by third
parties (including, without limitation, each of the Stockholders), who assigned
ownership of their rights to SQLBench in any manner. The Sellers have at all
times used commercially reasonable efforts to treat the SQLBench Products and
the SQLBench Components as containing trade secrets and have not disclosed or
otherwise dealt with such items in such a manner as to cause the loss of such
trade secrets by release into the public domain.
(f) To the Sellers' knowledge, no employee of SQLBench is in
violation of any term of any employment contract, patent disclosure agreement or
any other contract or agreement relating to the relationship of any such
employee with SQLBench or, to the best of the Sellers' knowledge, any other
party, including, without limitation, any previous employer, because of the
nature of the business conducted by SQLBench or proposed to be conducted by
SQLBench.
(g) Each person presently or previously employed by SQLBench
(including independent contractors, if any) employed in a research and
development or other technical position has executed a confidentiality and non-
disclosure agreement previously provided to Purchaser or its representatives.
Such confidentiality and non-disclosure agreements constitute valid and binding
obligations of SQLBench and such person, enforceable in accordance with their
respective terms. To the best of SQLBench's and each of the Stockholder's
knowledge, neither the execution or delivery of such agreements, nor the
carrying on of SQLBench's business as employees by such persons, nor the conduct
of SQLBench's business as currently anticipated, will conflict with or result in
a breach of the terms, conditions or provisions of or constitute a default under
any contract, covenant or instrument under which any of such persons is
obligated. SQLBench is not making unauthorized use of any confidential
information or trade secrets of any person, including, without limitation, any
former employer or any past or present employee of SQLBench. Neither SQLBench
nor, to the knowledge of the Sellers, any of SQLBench's employees have any
agreements or arrangements with any persons other than SQLBench related to
confidential information or trade secrets of such persons or restricting any
such employee's ability to engage in business activities of any nature.
(h) No product liability or warranty claims which individually
or in the aggregate could exceed Five Thousand Dollars ($5,000) have been
communicated to or threatened against SQLBench nor, to the best of the Sellers'
knowledge, is there any specific situation, set of facts or occurrence that
provides a basis for such claim. SQLBench has provided to Buyer an accurate list
of all errors or "bugs" in the SQLBench Products which are contained in the
computer databases which SQLBench maintains for the purpose of tracking errors
and "bugs" in its software. Such list is set forth as Schedule 2.13(h).
----------------
13
<PAGE>
2.1 Contracts. Except for contracts, commitments, plans, agreements and
---------
licenses (true and complete copies of which have been delivered to Buyer)
described in Schedule 2.14 hereto, SQLBench is not a party to or subject to:
-------------
(i) any plan or contract providing for bonuses, pensions,
options, stock purchases, deferred compensation, retirement payments, profit
sharing, collective bargaining or the like, or any contract or agreement with
any labor union;
(ii) any employment contract or contract for personal
services;
(iii) any contract or agreement relating to capital
expenditures in excess of $5,000 per annum;
(iv) any contract or agreement which by its terms does not
terminate or is not terminable without penalty by such entity or any successor
or assignee on not more than one month's notice;
(v) any contract or agreement providing for the purchase of
all or substantially all of its requirements of a particular product from a
supplier;
(vi) any contract or agreement which by its terms does not
terminate or is not terminable without penalty by such entity or any successor
or assignee on or at any time after the Closing Date;
(vii) any contract not made in the ordinary course of
business;
(vii) any contract or agreement for the purchase of any fixed
asset for a price in excess of $5,000 whether or not such purchase is in the
ordinary course of business;
(ix) any contract containing covenants limiting the freedom
of such entity to compete in any line of business or with any person or entity;
(x) any license agreement (as licensor or licensee);
(xi) any indenture, mortgage, promissory note, loan
agreement, guaranty or other agreement or commitment for the borrowing of money;
or
(xii) any contract or agreement with any officer, employee,
director or stockholder of SQLBench or with any persons or organizations
controlled by or affiliated with any of them.
14
<PAGE>
SQLBench is not in default under any such contracts, commitments, plans,
agreements or licenses described in said Schedule, and none of the Stockholders
have any knowledge of conditions or facts which with notice or passage of time,
or both, would constitute a default.
2.15 Litigation. There is no litigation or governmental or administrative
----------
proceeding or investigation pending or, to the knowledge of the Stockholders,
threatened against SQLBench or any affiliate of SQLBench which may have an
adverse effect on SQLBench's properties, assets, prospects, financial condition
or business or which would prevent or hinder the consummation of the
transactions contemplated by this Agreement.
2.16 Competition. TEK Channels International Inc. does not, directly or
-----------
indirectly, engage in any business which may be competitive with the business of
SQLBench or Buyer as presently conducted. TEK Channels International Inc. has
entered into a Noncompetition Agreement with the Buyer in the form attached
hereto as Exhibit 7.1(k).
--------------
2.17 Compliance with Laws. SQLBench is in compliance with all applicable
--------------------
statutes, ordinances, orders, judgments, decrees and rules and regulations
promulgated by any federal, state, municipal or other governmental authority
which apply to SQLBench or to the conduct of its business, and SQLBench has not
received notice of a violation or alleged violation of any such statue,
ordinance, order, rule or regulation.
2.18 Insurance. The only insurance policy maintained by the Company is
---------
disclosed on Schedule 2.18 hereto, and such insurance policy is in full force
-------------
and effect, all premiums with respect thereto are currently paid, and SQLBench
is in compliance in all material respects with the terms thereof. Said
insurance is adequate and customary for the business engaged in by SQLBench and
is sufficient for compliance by SQLBench with all requirements of law and all
agreements and leases to which SQLBench is a party.
2.19 Warranty or Other Claims. There are no existing or threatened product
------------------------
liability, warranty or other similar claims, or any facts upon which a material
claim of such nature could be based, against SQLBench for products or services
which are defective or fail to meet any product or service warranties. No claim
has been asserted against SQLBench for renegotiation or price redetermination of
any business transaction, and there are no facts upon which any such claim could
be based.
2.20 Powers of Attorney. SQLBench has not granted powers of attorney which
------------------
are presently outstanding.
2.21 Finder's Fee. None of the Sellers has incurred or become liable for
------------
any broker's commission or finder's fee relating to or in connection with the
transactions contemplated by this Agreement.
2.22 Corporate Records; Copies of Documents. The corporate record books of
--------------------------------------
SQLBench accurately record all corporate action taken by its stockholders and
board of
15
<PAGE>
directors and committees thereof. The copies of the corporate records of
SQLBench, as delivered to Buyer pursuant to this Agreement, are true and
complete copies of the originals of such documents. SQLBench has made available
for inspection and copying by Buyer and its counsel complete and correct copies
of all documents referred to in this Section or in the Schedules delivered to
Buyer pursuant to this Agreement.
2.23 Employee Benefit Programs; Employees; Labor Relations.
-----------------------------------------------------
(a) SQLBench does not have any employment contract, collective
bargaining or other labor agreement, any agreement containing severance or
termination pay arrangements, deferred compensation agreement, pension or
retirement plan, bonus or profit-sharing plan, stock option or purchase plan or
other non-terminable (with or without penalty) arrangement, group insurance,
group hospitalization or other employee benefit plan, in each case relating to
its employees.
(b) SQLBench is responsible for and has paid, or will have
paid, in accordance with all applicable laws and current policies of SQLBench
all amounts due to its employees for any salary, bonus, wages, severance,
vacation, sick leave, benefits or other accrued obligations due to its employees
for service through the Closing Date. Buyer shall not have any responsibility or
liability of any kind whatsoever which relate in any way to any services
rendered to SQLBench on or prior to the Closing Date or to any person's status
as an employee of SQLBench on or prior to the Closing Date.
(c) Upon termination of the employment of any of SQLBench's
employees, Buyer will not by reason of the transactions contemplated by this
Agreement, or anything done prior to or on the Closing Date, be liable to any of
said employees for so-called "severance pay" or any other payments.
2.24 Hazardous Waste, Etc. No hazardous wastes, substances or materials or
--------------------
oil or petroleum products have been generated, transported, used, disposed,
stored or treated by SQLBench and no hazardous wastes, substances or materials,
or oil or petroleum products have been released, discharged, disposed,
transported, placed or otherwise caused to enter the soil or water in, under or
upon any real property owned, leased or operated by SQLBench.
2.25 Disclosure. The representations, warranties and statements contained
----------
in this Agreement and in the certificates, exhibits and schedules delivered to
Buyer do not contain any untrue statement of a material fact, and, do not omit
to state a material fact required to be stated therein or necessary in order to
make such representations, warranties or statements not misleading in light of
the circumstances under which they were made. To the knowledge of the Sellers,
there are no facts which presently or may in the future have a material adverse
affect on the business, properties, prospects, operations or condition of
SQLBench which have not been specifically disclosed herein or in a Schedule
furnished herewith, other than general economic conditions affecting SQLBench's
industry.
16
<PAGE>
SECTION 3. REPRESENTATIONS AND WARRANTIES OF STOCKHOLDERS.
--------- ----------------------------------------------
As a material inducement to Buyer to enter into this Agreement and
consummate the transactions contemplated hereby, each Stockholder hereby
severally makes to Buyer each of the representations and warranties set forth in
this Section 3 with respect to such Stockholder. No Stockholder shall have any
right of indemnity or contribution from SQLBench with respect to the breach of
any representation or warranty hereunder.
3.1 SQLBench Shares. Such Stockholder owns of record and beneficially the
---------------
number of the SQLBench Shares set forth opposite such Stockholder's name in
Schedule 3.1 hereto. Such SQLBench Shares are duly authorized, validly issued,
- ------------
fully paid, non-assessable and free and clear of any and all liens,
encumbrances, charges or claims.
3.2 Authority. Such Stockholder has full right, authority, power and
---------
capacity to enter into this Agreement and each agreement, document and
instrument to be executed and delivered by or on behalf of such Stockholder
pursuant to this Agreement and to carry out the transactions contemplated hereby
and thereby. This Agreement and each agreement, document and instrument
executed and delivered by such Stockholder pursuant to this Agreement
constitutes a valid and binding obligation of such Stockholder, enforceable in
accordance with their respective terms. The execution, delivery and performance
of this Agreement and each such agreement, document and instrument:
(i) does not and will not violate any laws of the United
States or any state or other jurisdiction applicable to such Stockholder, or
require such Stockholder to obtain any approval, consent or waiver from, or make
any filing with, any person or entity (governmental or otherwise) that has not
been obtained or made; and
(ii) does not and will not result in a breach of, constitute
a default under, accelerate any obligation under, or give rise to a right of
termination of, any indenture or loan or credit agreement or any other
agreement, contract, instrument, mortgage, lien, lease, permit, authorization,
order, writ, judgment, injunction, decree, determination or arbitration award to
which such Stockholder is a party or by which the property of such Stockholder
is bound or affected, or result in the creation or imposition of any mortgage,
pledge, lien, security interest or other charge or encumbrance on any assets of
SQLBench or on the SQLBench Shares owned by such Stockholder.
3.3 Finder's Fee. Such Stockholder has not incurred or become liable for
------------
any broker's commission or finder's fee relating to or in connection with the
transactions contemplated by this Agreement.
3.4 Agreements. Each such Stockholder who is employed by SQLBench is not
----------
a party to any non-competition, trade secret or confidentiality agreement with
any party other than SQLBench. There are no agreements or arrangements not
contained herein or disclosed in a Schedule hereto, to which such Stockholder is
a party relating to the business of
17
<PAGE>
SQLBench or to such Stockholder's rights and obligations as a stockholder,
director or officer of SQLBench. Such Stockholder does not own, directly or
indirectly, on an individual or joint basis, any material interest in, or serve
as an officer or director of, any customer, competitor or supplier of SQLBench,
or any organization which has a contract or arrangement with SQLBench. Such
Stockholder has not at any time transferred any of the stock of SQLBench held by
or for such holder to any employee of SQLBench, which transfer constituted or
could be viewed as compensation for services rendered to SQLBench by said
employee. The execution, delivery and performance of this Agreement will not
violate or result in a default or acceleration of any obligation under any
contract, agreement, indenture or other instrument involving SQLBench to which
such Stockholder is a party.
3.5 Investment Representation.
-------------------------
(a) Each Stockholder is an "accredited investor" as defined in
Regulation D under the Securities Act of 1933, as amended, (the "Securities
Act").
(b) Each Stockholder has read or reviewed and is familiar with
the Buyer SEC Documents.
(c) Each Stockholder has had an opportunity to ask questions
of and receive answers from Buyer, or a person or persons acting on Buyer's
behalf, concerning the terms and conditions of the Buyer Shares and the Note.
(d) Each Stockholder understands that the Buyer Shares and the
Note have not been registered under the Securities Act or under the securities
laws of any state or other jurisdiction in reliance upon exemptions for private
offerings, and that, while Buyer may in the future register the Buyer Shares and
the Note, it is under no obligation to do so, and each Stockholder further
understands that such Stockholder is acquiring the Buyer Shares and the Note
without being furnished any offering literature or prospectus other than the
Buyer SEC Documents.
(e) Each Stockholder represents that the Buyer Shares and the
Note are being acquired solely for such Stockholder's own account, for
investment and not with a view to or for the resale, distribution, subdivision,
or fractionalization thereof; none of the Stockholders has any present plans to
enter into any contract, undertaking, agreement, or arrangement relating
thereto.
(f) Each Stockholder acknowledges and is aware that there are
substantial restrictions on the transferability of the Buyer Shares and the
Note; the Buyer Shares and the Note cannot be resold unless the Buyer Shares and
the Note are registered under the Securities Act and any applicable securities
law of any state or other jurisdiction, or an exemption from registration is
available; the Stockholders have no rights to require that the Buyer Shares and
the Note be registered under the Securities Act except to the extent expressly
provided herein; and there will be no public market for the Buyer Shares and the
Note.
18
<PAGE>
(g) The Stockholders have such knowledge and experience in
financial and business matters that they are capable of evaluating the relative
risks and merits of the Buyer Shares and the Note.
(h) Each of the Stockholders is a resident of the State of
Georgia.
SECTION 4. COVENANTS OF THE SELLERS.
--------- ------------------------
4.1 Making of Covenants and Agreements. Sellers hereby make their
----------------------------------
respective covenants and agreements set forth in this Section 4.
4.2 Conduct of Business. Between the date of this Agreement and the
-------------------
Closing Date, SQLBench will, and the Stockholders will cause SQLBench to,
conduct its business only in the ordinary course and refrain from changing or
introducing any method of management or operations except in the ordinary course
of business and consistent with prior practices.
4.3 Due Diligence; Production of Documents. SQLBench shall provide, and
--------------------------------------
the Stockholders shall cause SQLBench to provide, Buyer with full access to its
books, properties, management and employees so as to enable Buyer to conduct
such review of the business, assets and property of SQLBench as Buyer shall deem
necessary or appropriate in connection with the consummation of the transactions
contemplated by this Agreement.
4.4 Authorization from Others. Prior to the Closing Date, SQLBench shall
-------------------------
obtain, and the Stockholders shall use their reasonable best efforts to cause
SQLBench to obtain, all authorizations, consents and permits of others required
to permit the consummation by SQLBench of the transactions contemplated by this
Agreement.
4.5 Notice of Default. Promptly upon the occurrence of, or promptly upon
-----------------
any Seller becoming aware of the impending or threatened occurrence of, any
event which would cause or constitute a breach or default, or would have caused
or constituted a breach or default had such event occurred or been known to such
Seller prior to the date hereof, of any of the representations, warranties or
covenants of any Seller contained in or referred to in this Agreement or in any
Schedule or Exhibit referred to in this Agreement, such Seller shall give
detailed written notice thereof to Buyer and shall use its best efforts to
prevent or promptly remedy the same.
4.6 Cooperation; Consummation of Agreement; Books and Records. Each
---------------------------------------------------------
Seller shall cooperate with all reasonable requests of Buyer and Buyer's counsel
in connection with the consummation of the transactions contemplated hereby, and
each Seller shall use its best efforts to perform and fulfill all conditions and
obligations on its part to be performed and fulfilled under this Agreement, to
the end that the transactions contemplated by this Agreement shall be fully
carried out. SQLBench shall maintain its books and records in accordance with
good business practices, on a basis consistent with past practices, and SQLBench
shall
19
<PAGE>
promptly make available to Buyer such books and records, any other material or
information regarding SQLBench as Buyer or its counsel, accountants or other
advisors may from time to time reasonably request.
4.7 Tax Returns. SQLBench, with the approval of Buyer and in accordance
-----------
with applicable law, shall (i) promptly prepare and file on or before the due
date or any extension thereof all federal, state, local and foreign tax returns
required to be filed by each SQLBench with respect to taxable periods of
SQLBench that include any period ending on or before the Closing Date and (ii)
pay all Taxes of SQLBench attributable to periods ending on or before the
Closing Date.
4.8 Satisfaction of Indebtedness. At or prior to the Closing, SQLBench
----------------------------
shall, and the Stockholders shall cause SQLBench to, cause all mortgages,
security interests, pledges and other arrangements securing indebtedness or
other encumbrances upon the SQLBench Shares or any of SQLBench's properties or
assets to be extinguished.
4.9 Cooperation with Respect to 1996 Audited Financial Statements. Each
-------------------------------------------------------------
Stockholder shall cooperate with Buyer and shall promptly provide to Buyer all
necessary information and documentation requested by Buyer in connection with
the preparation of audited financial statements for the period from inception of
SQLBench to December 31, 1996.
SECTION 5. REPRESENTATIONS AND WARRANTIES OF BUYER.
--------- ---------------------------------------
5.1 Making of Representations and Warranties. As a material inducement to
----------------------------------------
the Sellers to enter into this Agreement and consummate the transactions
contemplated hereby, Buyer hereby makes the representations and warranties to
the Sellers contained in this Section 5.
5.2 Organization. Each of Buyer and Merger Sub is a corporation duly
------------
organized, validly existing and in good standing under the laws of the State of
Delaware with full corporate power to own or lease its properties and to conduct
its business in the manner and in the places where such properties are owned or
leased or such business is conducted by it.
5.3 Authority. Each of Buyer and Merger Sub has full right, authority and
---------
power to enter into this Agreement and each agreement, document and instrument
to be executed and delivered by Buyer or Merger Sub pursuant to this Agreement
and to carry out the transactions contemplated hereby. The execution, delivery
and performance by Buyer and Merger Sub of this Agreement and each such other
agreement, document and instrument have been duly authorized by all necessary
corporate action of Buyer and Merger Sub and no other action on the part of
Buyer or Merger Sub is required in connection therewith. This Agreement and
each other agreement, document and instrument executed and delivered by Buyer or
Merger Sub pursuant to this Agreement constitute, or when executed and delivered
will constitute, valid and binding obligations of Buyer and Merger Sub (as the
case may be) enforceable in
20
<PAGE>
accordance with their terms. The execution, delivery and performance by Buyer
and Merger Sub of this Agreement and each such agreement, document and
instrument:
(i) does not and will not violate any provision of the
Certificate of Incorporation or by-laws of Buyer or Merger Sub;
(ii) does not and will not violate any laws of the
United States or of any state or any other jurisdiction applicable to Buyer or
Merger Sub or, assuming no breach in the representations set forth in Sections
2.5 and 2.24 hereof, require Buyer or Merger Sub to obtain any approval, consent
or waiver of, or make any filing with, any person or entity (governmental or
otherwise) which has not been obtained or made; and
(iii) does not and will not result in a breach of,
constitute a default under, accelerate any obligation under, or give rise to a
right of termination of any indenture, loan or credit agreement, or any other
agreement, mortgage, lease, permit, order, judgment or decree to which Buyer or
Merger Sub is a party and which is material to the business and financial
condition of Buyer, Merger Sub and affiliated organizations on a consolidated
basis.
5.4 Litigation. There is no litigation or governmental or administrative
----------
proceeding or investigation pending or, to its knowledge, threatened against
Buyer or Merger Sub which would prevent or hinder the consummation of the
transactions contemplated by this Agreement.
5.5 Finder's Fee. Neither Buyer nor Merger Sub has incurred or become
------------
liable for any broker's commission or finder's fee relating to or in connection
with the transactions contemplated by this Agreement.
5.6 Buyer's Public Information. Buyer has heretofore furnished the
--------------------------
Stockholders with information regarding Buyer, including its Annual Report on
Form 10-K for the fiscal year ended December 31, 1996 and its Quarterly Report
on Form 10-Q for the quarter ended September 30, 1997, each as filed with the
Securities and Exchange Commission ("SEC"), and will provide to the Stockholders
any Current, Annual or Quarterly Report filed by Buyer with the SEC at or prior
to the Closing Date (as any such documents have been amended since their
original filing, the "Buyer SEC Documents"). As of their respective filing
dates, the Buyer SEC Documents did not or will not contain any untrue statements
of materiel facts or omit to state material facts required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. As of their respective filing dates, the
Buyer SEC Documents complied or will comply in all material respects with the
applicable requirements of the Securities Act of 1933, as amended, and the
Securities Exchange Act of 1934, as amended, and the rules and regulations
promulgated under such statutes.
21
<PAGE>
5.7 Buyer Common Stock. On the Closing Date, Buyer will have a sufficient
------------------
number of authorized but unissued shares of its Common Stock available for
issuance to the Stockholders in accordance with the provisions of this
Agreement. The Common Stock to be issued pursuant to this Agreement will, when
so delivered, be duly and validly issued, fully paid and nonassessable.
5.8 Buyer Indebtedness. The Buyer has no material indebtedness or other
------------------
obligations not reflected on the face of the Buyer SEC Documents.
SECTION 6. COVENANTS OF BUYER AND MERGER SUB.
---------------------------------------------
6.1 Authorization from Others. Prior to the Closing Date, Buyer and
-------------------------
Merger Sub shall obtain all authorizations, consents and permits of others
required to permit the consummation by it of the transactions contemplated by
this Agreement.
6.2 Cooperation; Consummation of Agreement; Books and Records. Buyer and
---------------------------------------------------------
Merger Sub shall cooperate with all reasonable requests of Sellers and Sellers'
counsel in connection with the consummation of the transactions contemplated
hereby, and each of Buyer and Merger Sub shall use their respective best efforts
to perform and fulfill all conditions and obligations on its part to be
performed and fulfilled under this Agreement, to the end that the transactions
contemplated by this Agreement shall be fully carried out.
6.3 Notice of Default. Promptly upon the occurrence of, or promptly upon
-----------------
the Buyer becoming aware of the impending or threatened occurrence of, any event
which would cause or constitute a breach or default, or would have caused or
constituted a breach or default had such event occurred or been known to the
Buyer prior to the date hereof, of any of the representations, warranties or
covenants of the Buyer contained in or referred to in this Agreement or in any
Schedule or Exhibit referred to in this Agreement, the Buyer shall give detailed
written notice thereof to the Sellers and shall use its best efforts to prevent
or promptly remedy the same.
SECTION 7. CONDITIONS.
----------------------
7.1 Conditions to the Obligations of Buyer and Merger Sub. The obligation
-----------------------------------------------------
of Buyer and Merger Sub to consummate this Agreement and the transactions
contemplated hereby are subject to the fulfillment, prior to or at the Closing,
of the following conditions precedent:
(a) Representations; Warranties; Covenants. Each of the
--------------------------------------
representations and warranties of the Stockholders contained in Section 2 and
Section 3 shall be true and correct as though made on and as of the Closing
Date; and the Sellers shall, on or
22
<PAGE>
before the Closing, have performed all of their obligations hereunder which by
the terms hereof are to be performed on or before the Closing.
(b) No Material Change. There shall have been no material
------------------
adverse change in the financial condition, prospects, properties, assets,
liabilities, business or operations of SQLBench since the date hereof.
(c) Certificate from Officers. SQLBench shall have delivered
-------------------------
to Buyer a certificate of the President and Chief Financial Officer of SQLBench
and each Stockholder shall have delivered a certificate dated as of the Closing
Date to the effect that the statements set forth in paragraphs (a) and (b) above
in this Section 7.1 are true and correct.
(d) Opinion of Counsel. At the Closing, Buyer shall have
------------------
received from Perrie, Buker, Jones & Morton, P.C., counsel for SQLBench and the
Stockholders, an opinion as of said date, in the form attached hereto as Exhibit
-------
7.1(d).
- ------
(e) No Litigation. There shall have been no determination by
-------------
Buyer, acting in good faith, that the consummation of the transactions
contemplated by this Agreement has become inadvisable or impracticable by reason
of the institution or threat by any person or any federal, state, foreign or
other governmental authority of litigation, proceedings or other action against
Buyer or any Seller.
(f) Consents. SQLBench shall have made, and the Stockholders
--------
shall have caused SQLBench to make, all filings with and notifications of
governmental authorities, regulatory agencies and other entities required to be
made by such entity in connection with the execution and delivery of this
Agreement, the performance of the transactions contemplated hereby and the
continued operation of the business of SQLBench to be acquired by Buyer
subsequent to the Closing; and the Sellers shall have received all
authorizations, waivers, consents and permits, in form and substance reasonably
satisfactory to Buyer, from all third parties, including, without limitation,
applicable governmental authorities, regulatory agencies, lessors, lenders and
contract parties required to permit the continuation of the business of SQLBench
by Buyer and the consummation of the transactions contemplated by this
Agreement.
(g) FIRPTA Withholding. At or prior to the Closing, Buyer
------------------
shall have received from each Stockholder, a "transferor's certificate of non-
foreign status" as provided in the Treasury Regulations under Section 1445 of
the Code substantially in the form attached hereto as Exhibit 7.1(g).
--------------
(h) Employment Agreement. Klaus Obermeier shall have
--------------------
executed and delivered to Buyer an Employment Agreement in substantially the
form of Exhibit 7.1(h) attached hereto.
-------------
23
<PAGE>
(i) Cancellation of OEM Agreement. All parties to that
-----------------------------
certain Software OEM Agreement, dated as of November 11, 1996, among, inter
-----
alia, Buyer and SQLBench (as amended or modified to date, the "OEM Agreement")
- ----
shall have been terminated effective October 1, 1997 and SQLBench shall have
made a payment in cash to Buyer immediately prior to the Closing in an amount
equal to $630,000 in respect of refunded prepaid royalties under the OEM
Agreement.
(j) Closing of Alpha Transaction. All conditions to the
----------------------------
closing of the transactions contemplated by that certain Asset Purchase
Agreement, dated as of the date hereof, among the Buyer, Alpha and the
stockholders of Alpha (the "Asset Purchase Agreement") shall have been satisfied
or waived and the transactions contemplated by the Asset Purchase Agreement
shall have been consummated.
(k) Noncompete. TEK Channels International Inc. shall have
----------
entered into a Noncompetition Agreement with the Buyer in the form attached
hereto as Exhibit 7.1(k).
--------------
7.2 Conditions to Obligations of the Stockholders. The Stockholders'
---------------------------------------------
obligations to consummate this Agreement and the transactions contemplated
hereby is subject to the fulfillment, prior to or at the Closing, of the
following conditions precedent:
(a) Representations; Warranties; Covenants. Each of the
--------------------------------------
representations and warranties of Buyer contained in Section 5 shall be true and
correct as though made on and as of the Closing Date; Buyer shall, on or before
the Closing, have performed all of its obligations hereunder which by the terms
hereof are to be performed on or before the Closing; and Buyer shall have
delivered to the Sellers a certificate of the Chief Executive Officer, President
or Treasurer of Buyer dated as of the Closing Date to such effect.
(b) No Material Change. There shall have been no material
------------------
adverse change in the financial condition, prospects, properties, assets,
liabilities, business or operations of the Buyer since the date hereof.
(c) Opinion of Counsel. At the Closing, the Stockholders
------------------
shall have received from Goodwin, Procter & Hoar LLP, counsel for Buyer, an
opinion as of said date, in the form attached hereto as Exhibit 7.2(b).
--------------
(d) No Litigation. There shall have been no determination
-------------
by the Sellers, acting in good faith, that the consummation of the transactions
contemplated by this Agreement has become inadvisable or impracticable by reason
of the institution or threat by any person or any federal, state, foreign or
other governmental authority of litigation, proceedings or other action against
Buyer or any Seller.
(e) Consents. The Buyer shall have made all filings with and
--------
notifications of governmental authorities, regulatory agencies and other
entities required to be made by such entity in connection with the execution and
delivery of this Agreement, the
24
<PAGE>
performance of the transactions contemplated hereby and the continued operation
of the business of SQLBench to be acquired by Buyer subsequent to the Closing;
and the Buyer shall have received all authorizations, waivers, consents and
permits, in form and substance reasonably satisfactory to the Sellers, from all
third parties, including, without limitation, applicable governmental
authorities, regulatory agencies, lessors, lenders and contract parties required
to permit the continuation of the business of SQLBench by Buyer and the
consummation of the transactions contemplated by this Agreement.
(f) Employment Agreement. The Buyer shall have executed and
--------------------
delivered to Klaus Obermeier an Employment Agreement in substantially the form
of Exhibit 7.1(h) attached hereto.
--------------
(g) Closing of Alpha Transaction. All conditions to the
----------------------------
closing of the transactions contemplated by that certain Asset Purchase
Agreement, dated as of the date hereof, among the Buyer, Alpha and the
stockholders of Alpha (the "Asset Purchase Agreement") shall have been satisfied
or waived and the transactions contemplated by the Asset Purchase Agreement
shall have been consummated.
SECTION 8. TERMINATION OF AGREEMENT; RIGHTS TO PROCEED.
-------------------------------------------------------
8.1 Termination. At any time prior to the Closing, this Agreement may be
-----------
terminated as follows:
(i) by mutual written consent of all of the parties to
this Agreement;
(ii) by Buyer, pursuant to written notice by Buyer to
the Sellers, if any of the conditions set forth in Section 7.1 of this Agreement
have not been satisfied at or prior to the Closing Date and Buyer is not then in
default hereunder; and
(iii) by the Sellers, pursuant to written notice by
Sellers to Buyer, if any of the conditions set forth in Section 7.2 of this
Agreement have not been satisfied at or prior to the Closing and the Sellers are
not then in default hereunder.
8.2 Effect of Termination. All obligations of the parties hereunder shall
---------------------
cease upon any termination pursuant to Section 8.1; provided, however, that the
-------- -------
provisions of this Section 8, Section 10.1 and Section 10.9 hereof shall survive
any termination of this Agreement.
SECTION 9. RIGHTS AND OBLIGATIONS SUBSEQUENT TO CLOSING.
--------------------------------------------------------
9.1 Survival of Warranties; Setoff.
------------------------------
25
<PAGE>
(a) Each of the representations, warranties, agreements,
covenants and obligations herein or in any schedule, exhibit, certificate or
financial statement delivered by any party to the other party incident to the
transactions contemplated hereby are material, shall be deemed to have been
relied upon by the other party and shall survive the Closing regardless of any
investigation and shall not merge in the performance of any obligation by either
party hereto. Subject to Section 9.1(c) below, each party shall be liable to any
other party for all damages, liabilities, losses, taxes, fines, penalties,
expenses or costs (including reasonable attorneys fees and expenses) of any kind
or nature whatsoever (collectively "Losses") which may be sustained, suffered or
incurred by or against such party as a result of any breach of this Agreement or
any document or instrument related hereto or in any Schedule, exhibit or
certificate delivered pursuant hereto.
(b) Subject to Section 9.1(c) below, any breach by the
Stockholders of a representation, covenant or obligation contained in this
Agreement, in any agreement or document related hereto (other than the
employment agreement of Klaus K. Obermeier) or in any Schedule, exhibit or
certificate delivered pursuant hereto shall entitle Buyer first to set off from
any future payment that Buyer is to make pursuant to the Note, amounts equal to
the Losses sustained, suffered or incurred by or made against the Buyer as a
result of such breach and then to collect the balance, if any, directly from the
Stockholders.
(c) Notwithstanding the foregoing, the Stockholders shall not
have any liability to Buyer or Merger Sub for any breach of or noncompliance
with this Agreement (and with any other document executed by any of the Sellers
in connection herewith), including by way of set off from any future payments
that Buyer is required to make to Stockholders pursuant to the Note, unless (a)
the aggregate amount of all Losses shall exceed $25,000, and thereafter,
Stockholders shall only be liable for Losses in excess of said $25,000; and (b)
such claim, except claims with respect to Section 2.8 or Section 2.13 which may
be asserted until the expiration of the applicable statue of limitations, is
asserted against the Stockholders (whether or not such Losses have actually been
incurred) on or before the third anniversary of the Closing Date. Buyer and
Merger Sub agree to reasonably cooperate to minimize Losses.
(d) Notwithstanding the foregoing, neither Buyer nor Merger
Sub shall have any liability to any Stockholder for breach of or noncompliance
with this Agreement or with any other document executed by Buyer or Merger Sub
in connection herewith except the Note or the Employment Agreement of Klaus K.
Obermeier, unless and until (a) the aggregate amount of all Losses shall exceed
$25,000, in which case, Buyer and Merger Sub shall thereafter only be liable for
Losses in excess of said $25,000; and (b) such claim is asserted against Buyer
and/or Merger Sub (whether or not such Losses have been actually incurred) on or
before the third anniversary of the Closing Date. The Stockholders agree to
reasonably cooperate to minimize Losses.
26
<PAGE>
SECTION 10. MISCELLANEOUS.
-------------------------
10.1 Fees and Expenses.
-----------------
(a) Except as set forth herein, each of the parties will bear
its own expenses in connection with the negotiation and the consummation of the
transactions contemplated by this Agreement, and no expenses of the Sellers or
the Stockholders relating in any way to the Merger and the transactions
contemplated hereby, including without limitation, legal, accounting or other
professional expenses of SQLBench or the Stockholders, shall be charged to or
paid by Buyer; except that the Buyer expressly agrees to pay all expenses for
and relating to the audit of the financial records of SQLBench that are to be
prepared in accordance with Section 4.9 of this Agreement.
(b) The Stockholders will pay all costs incurred, whether at
or subsequent to the Closing, in connection with the transfer of the SQLBench
Shares to Buyer as contemplated by this Agreement, including without limitation,
all sales, use, excise, real property and other transfer taxes and charges
applicable to such transfer; all recording charges and fees applicable to the
recordation of deeds and mortgages and other instruments of transfer; and all
costs of obtaining or transferring permits, registrations, applications and
other tangible and intangible properties. Notwithstanding the foregoing, the
Stockholders shall not be liable for any costs of obtaining or transferring
permits, registrations, applications and other tangible or intangible
properties, that would not have been necessary for the conduct of business of
SQLBench in the jurisdictions and in the manner in which SQLBench did business
on the date hereof.
10.2 Governing Law. This Agreement shall be construed under and governed
-------------
by the internal laws of the Commonwealth of Massachusetts, U.S.A. without regard
to its conflict of laws provisions. For any action, suit or proceeding arising
out of or relating to this Agreement and the transaction contemplated hereby,
the parties hereto hereby irrevocably and unconditionally consent to the
exclusive jurisdiction of the courts of (i) The Commonwealth of Massachusetts
and the United States District Court for the District of Massachusetts and (ii)
the local, state and federal courts of general jurisdiction in the jurisdiction
of the Stockholders' domicile at the time such action is initiated provided that
the Stockholders are domiciled in the United States, and the parties further
agree not to commence any such action, suit or proceeding except in such courts.
The parties hereto further hereby irrevocably and unconditionally waive any
objection to the laying of venue of any action, suit or proceeding arising out
of or relating to this Agreement and the transaction contemplated hereby in
courts referenced in this Section 10.2 under the applicable circumstances, and
hereby further irrevocably and unconditionally waive and agree not to plead or
claim in any such court that any such action, suit or proceeding brought in any
such court has been brought in an inconvenient forum. Each of the parties
hereto further agrees that service of any process, summons, notice or document
by U.S. registered mail to its address set forth herein shall be effective
service of process for any action, suit or proceeding brought against it in any
such court.
27
<PAGE>
10.3 Notices. Any notice, request, demand or other communication required
-------
or permitted hereunder shall be in writing and shall be deemed to have been
given if delivered or sent by facsimile transmission, upon receipt, or if sent
by registered or certified mail, upon the sooner of the date on which receipt is
acknowledged or the expiration of three days after deposit in United States Post
Office facilities properly addressed with postage prepaid. All notices to a
party will be sent to the addresses set forth below or to such other address or
person as such party may designate by notice to each other party hereunder:
TO BUYER OR MERGER SUB: Segue Software, Inc.
- ---------------------- 1320 Centre Street
Newton Centre, MA 02159
Attn: J. Jeffrey Bingenheimer
Chief Financial Officer
Facsimile: 617-795-1621
With a copy to: Goodwin, Procter & Hoar LLP
Exchange Place
Boston, MA 02109
Attn: Jeffrey C. Hadden, Esq.
Facsimile: 617-523-1231
TO SQLBENCH OR
- --------------
THE STOCKHOLDERS: Klaus K. Obermeier
- ---------------- 430 Tenth Street, N.W.
Suite S-103
Atlanta, Georgia 30318
Facsimile: 770-399-9533
With a copy to: Perrie, Buker, Jones & Morton, P.C.
115 Perimeter Center Place, Suite 170
Atlanta, GA 30346
Attn: Charles E. Buker, III, Esq.
Facsimile: 770-804-0509
Any notice given hereunder may be given on behalf of any party by his counsel or
other authorized representatives.
10.4 Entire Agreement. This Agreement, including the Schedules and
----------------
Exhibits referred to herein and the other writings specifically identified
herein or contemplated hereby, is complete, reflects the entire agreement of the
parties with respect to its subject matter, and supersedes all previous written
or oral negotiations, commitments and writings. No promises, representations,
understandings, warranties and agreements have been made by any of the parties
hereto except as referred to herein or in such Schedules and Exhibits or in such
other
28
<PAGE>
writings; and all inducements to the making of this Agreement relied upon by
either party hereto have been expressed herein or in such Schedules or Exhibits
or in such other writings.
10.5 Assignability; Binding Effect. Prior to the Closing, this Agreement
-----------------------------
shall only be assignable by Buyer and Merger Sub to a corporation, partnership
or limited liability company controlling, controlled by or under common control
with Buyer upon written notice to the Sellers. After the Closing, Buyer's and
Merger Sub's rights and obligations hereunder shall be freely assignable. This
Agreement may not be assigned by the Sellers without the prior written consent
of Buyer. This Agreement shall be binding upon and enforceable by, and shall
inure to the benefit of, the parties hereto and their respective successors and
permitted assigns.
10.6 Access to Records. After the Closing, upon the reasonable request of
-----------------
the Stockholders, the Buyer and Merger Sub shall afford to the Stockholders and
their accountants and attorneys, for the purpose of preparing tax returns,
access to the books and records of SQLBench for time periods prior to the
Closing Date which books and records are in the possession of the Buyer or
Merger Sub following the consummation of the transactions contemplated hereby.
Should Buyer or Merger Sub elect to dispose of any such books or records in any
manner prior to the seventh anniversary of the Closing Date, then the disposing
party shall notify the Stockholders of the intent to do so and shall offer the
Stockholders the opportunity to receive such books and records, or at the
Stockholders' expense, full and complete copies thereof; provided that if the
Buyer or Merger Sub, as the case may be, shall so request, the Stockholders
shall first enter into appropriate confidentiality and nondisclosure agreements
with the Buyer or Merger Sub, in a form acceptable to Buyer or Merger Sub, as
the case may be, with regard to such books and records.
10.7 Captions and Gender. The captions in this Agreement are for
-------------------
convenience only and shall not affect the construction or interpretation of any
term or provision hereof. The use in this Agreement of the masculine pronoun in
reference to a party hereto shall be deemed to include the feminine or neuter,
as the context may require.
10.8 Execution in Counterparts. For the convenience of the parties and to
-------------------------
facilitate execution, this Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which shall
constitute one and the same document.
10.9 Amendments. This Agreement may not be amended or modified, nor may
----------
compliance with any condition or covenant set forth herein be waived, except by
a writing duly and validly executed by each party hereto, or in the case of a
waiver, the party waiving compliance.
10.10 Publicity and Disclosures. No press releases or public disclosure,
-------------------------
either written or oral, of the transactions contemplated by this Agreement,
shall be made by a party to this Agreement without the prior knowledge and
written consent of Buyer, SQLBench and the Stockholders.
29
<PAGE>
[SIGNATURE PAGE FOLLOWS]
30
<PAGE>
IN WITNESS WHEREOF the parties hereto have caused this Agreement to be
executed as of the date set forth above by their duly authorized
representatives.
BUYER: SEGUE SOFTWARE, INC.
- -----
By: /s/ J. Jeffrey Bingenheimer
---------------------------
Name:
Title:
MERGER SUB: SGE MERGER CORP.
- ----------
By: /s/ J. Jeffrey Bingenheimer
---------------------------
Name:
Title:
SELLERS: SQLBENCH INTERNATIONAL, INC.
- -------
By: /s/ Klaus K. Obermeier
---------------------------
Name:
Title:
/s/ Klaus K. Obermeier
---------------------------
Klaus K. Obermeier
/s/ Susan P. Obermeier
---------------------------
Susan P. Obermeier
<PAGE>
List of Exhibits and Schedules
Schedule 2.4 Capitalization
Schedule 2.6(b) Leased Real Property
Schedule 2.6(c) Personal Property
Schedule 2.7 Financial Statements
Schedule 2.8 Tax Returns
Schedule 2.11 Asset Transfers
Schedule 2.12 Banking Relations
Schedule 2.13 Intellectual Property
Schedule 2.14 Contracts
Schedule 2.18 Insurance
Schedule 3.1 SQLBench Shares
Exhibit 1.2 Form of Note
Exhibit 7.1(d) Form of Opinion of Perrie, Buker, Jones & Morton, P.C.
Exhibit 7.1(h) Form of Employment Agreement
Exhibit 7.1(g) Form of Transferor's Certificate of Non-Foreign Status
Exhibit 7.1(k) TEK Noncompetition Agreement
Exhibit 7.2(b) Form of Opinion of Goodwin, Procter & Hoar LLP
<PAGE>
EXHIBIT 10.11
================================================================================
ASSET PURCHASE AGREEMENT
by and among
SEGUE SOFTWARE, INC.,
ARC - DR. AMBICHL & DR. REINDL COMMUNICATION GMBH
and
THE STOCKHOLDERS OF ARC - DR. AMBICHL &
DR. REINDL COMMUNICATION GMBH
Dated as of December 30, 1997
================================================================================
<PAGE>
ASSET PURCHASE AGREEMENT
TABLE OF CONTENTS
Page
SECTION 1. PURCHASE AND SALE........................................... 1
1.1 Sale of ARC Assets and Purchase Price............................ 1
1.1.1 Sale of Intellectual Property............................. 1
1.1.2 Sale of Non-Intellectual Property Assets.................. 3
1.1.3 Excluded Assets........................................... 4
1.2 Assumption of Liabilities ....................................... 4
1.3 Retained Liabilities............................................. 4
1.4 Purchase Price and Payment....................................... 6
1.4.1 Intellectual Property Assets.............................. 6
1.4.2 Non-Intellectual Property Assets.......................... 6
1.5 Transfer of Subject Assets....................................... 6
1.6 Delivery of Records and Contracts................................ 6
1.7 Allocation of Purchase Price..................................... 7
1.8 Closing.......................................................... 7
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE SELLERS............... 7
2.1 Making of Representations and Warranties......................... 7
2.2 Organization and Qualifications of ARC........................... 7
2.3 Subsidiaries..................................................... 8
2.4 Capital Stock; Beneficial Ownership.............................. 8
2.5 Authority of ARC................................................. 8
2.6 Real and Personal Property....................................... 9
2.7 Financial Statements............................................. 10
2.8 Taxes............................................................ 11
2.9 Accounts Receivable.............................................. 12
2.10 Absence of Certain Changes....................................... 12
2.11 Ordinary Course.................................................. 13
2.12 Banking Relations................................................ 13
2.13 Proprietary Rights............................................... 13
2.14 Contracts........................................................ 16
2.15 Litigation....................................................... 17
2.16 Compliance with Laws............................................. 17
2.17 Insurance........................................................ 17
2.18 Warranty or Other Claims......................................... 17
2.19 Powers of Attorney............................................... 18
2.20 Finder's Fee..................................................... 18
2.21 Corporate Records; Copies of Documents........................... 18
2.22 Employee Benefit Programs; Employees; Labor Relations............ 18
2.23 Disclosure....................................................... 18
(i)
<PAGE>
Page
----
SECTION 3. REPRESENTATIONS AND WARRANTIES OF STOCKHOLDERS.............. 19
3.3 Agreements....................................................... 19
SECTION 4. COVENANTS OF THE SELLERS.................................... 20
4.1 Making of Covenants and Agreements............................... 20
4.2 Conduct of Business.............................................. 20
4.3 Due Diligence; Production of Documents........................... 20
4.4 Authorization from Others........................................ 20
4.5 Notice of Default................................................ 20
4.6 Cooperation; Consummation of Agreement; Books and Records........ 21
4.7 Tax Returns...................................................... 21
4.8 Satisfaction of Indebtedness..................................... 21
SECTION 5. REPRESENTATIONS AND WARRANTIES OF BUYER..................... 21
5.1 Making of Representations and Warranties......................... 21
5.2 Organization of Buyer............................................ 21
5.3 Authority of Buyer............................................... 22
5.4 Litigation....................................................... 22
5.5 Finder's Fee..................................................... 22
5.6 Buyer USA Public Information..................................... 22
5.7 Buyer USA Indebtedness........................................... 23
SECTION 6. COVENANTS OF BUYER.......................................... 23
6.1 Authorization from Others........................................ 23
6.2 Cooperation; Consummation of Agreement; Books and Records........ 23
6.3 Notice of Default................................................ 23
SECTION 7. CONDITIONS.................................................. 23
7.1 Conditions to the Obligations of Buyer........................... 23
7.2 Conditions to Obligations of the Sellers......................... 25
SECTION 8. TERMINATION OF AGREEMENT; RIGHTS TO PROCEED................. 27
8.1 Termination...................................................... 27
8.2 Effect of Termination............................................ 27
SECTION 9. RIGHTS AND OBLIGATIONS SUBSEQUENT TO CLOSING................ 27
9.1 Survival of Warranties; Setoff................................... 27
SECTION 10. MISCELLANEOUS............................................... 28
10.1 Bulk Sales Law................................................... 28
(ii)
<PAGE>
Page
----
10.2 Fees and Expenses................................................ 28
10.3 Governing Law.................................................... 29
10.4 Notices.......................................................... 29
10.5 Entire Agreement................................................. 30
10.6 Assignability; Binding Effect.................................... 30
10.7 Captions and Gender.............................................. 31
10.8 Execution in Counterparts........................................ 31
10.9 Amendments....................................................... 31
10.10 Publicity and Disclosures........................................ 31
(iii)
<PAGE>
INDEX OF DEFINED TERMS
Term Section
---- -------
Agreement..................................... Preamble
ARC........................................... Preamble
ARC Note...................................... 1.4
Assigned Contracts............................ 1.1.1(iii)
Assigned Permits.............................. 1.1.1(iv)
Base Balance Sheet............................ 2.7(a)(ii)
Buyer......................................... Preamble
Closing....................................... 1.9
Closing Date.................................. 1.9
Code.......................................... 1.7
Corporate Records............................. 1.1.2
Employment Agreement.......................... 7.1(d)
Excluded Assets............................... 1.1.2
Intellectual Property......................... 2.13(a)
Intellectual Property Assets.................. 1.1.1
Leased Real Property.......................... 2.6(b)
Non-Intellectual Property Assets.............. 1.1.2
Retained Liabilities.......................... 1.3
Sellers....................................... Preamble
Subject Assets................................ .1.1.1
(iv)
<PAGE>
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (this "Agreement") is entered into as of
December 30, 1997 by and among Segue Software, Inc., a Delaware corporation
("Buyer USA"), Segue Software Entwicklung GmbH, an Austrian corporation, ("Buyer
Austria") (Buyer USA and Buyer Austria are sometimes collectively referred to
hereinafter as the "Buyer" or the "Buyers") and ARC - Dr. Ambichl & Dr. Reindl
Communication GmbH, an Austrian corporation ("ARC"), and each holder of the
share capital of ARC, which include Ernst Ambichl, Manfred Reindl and Bernd
Greifeneder (the "Stockholders" and, together with ARC, the "Sellers").
W I T N E S S E T H
- - - - - - - - - -
WHEREAS, subject to the terms and conditions hereof, ARC desires to sell to
Buyer USA all of its intellectual property and related assets as set forth
herein; and
WHEREAS, subject to the terms and conditions hereof, Buyer USA desires to
purchase from ARC all of ARC's intellectual property and related assets for the
consideration applicable thereto as specified herein; and
WHEREAS, subject to the terms and conditions hereof, ARC desires to sell to
Buyer Austria certain of its assets as set forth herein; and
WHEREAS, subject to the terms and conditions hereof, Buyer Austria desires
to purchase certain of the assets of ARC for the consideration applicable
thereto as specified herein;
NOW, THEREFORE, in order to consummate said purchases and sales and in
consideration of the mutual agreements set forth herein, the parties hereto
agree as follows:
SECTION 1. PURCHASE AND SALE.
-----------------------------
1.1 Sale of ARC Assets and Purchase Price.
-------------------------------------
1.1 Sale of Intellectual Property. Subject to the provisions of this
-----------------------------
Agreement, Buyer USA agrees to purchase from ARC and the Stockholders, and ARC
and the Stockholders agree to sell, convey, transfer, assign and deliver to
Buyer USA, on the Closing Date (as defined in Section 1.8 hereof) the
Intellectual Property Assets owned or used by ARC as of the close of business on
the Closing Date which are used in the conduct of ARC's business and operations,
other than the Excluded Assets (as defined in Section 1.1.3). The Intellectual
Property Assets shall include, without limitation, the following:
<PAGE>
(i) the business of ARC, as a going concern, including all
of ARC's goodwill therein, as well as ARC's website (including the domain name
"______________" and any similar domain name related to, or contemplated for use
by, ARC or any of the products or services offered by ARC);
(ii) all claims, rights (and benefits arising therefrom),
causes of action, rights of recovery, set-offs or defenses of any kind
pertaining to, or arising out of, ARC's business and operations, and all rights
of ARC against suppliers under warranties covering the Intellectual Property
Assets and all non-compete agreements with any current or former employees of
ARC, copies of which non-compete agreements have been delivered to Buyer by ARC
prior to the date hereof;
(iii) all computer programs, databases, software and software
licenses owned or licensed by ARC used by ARC in the operation of ARC's
business, all of which are listed on Schedule 1.1.1(iii) hereto;
-------------------
(iv) all of ARC's right, title and interest in all
copyrights (registered and unregistered) and applications, if any, therefor,
patents, patent applications, patent rights, trade secrets, trade secret rights,
trademarks (registered and unregistered), service marks (registered and
unregistered), technology, know-how, techniques, processes, all documents of ARC
embodying proprietary information and copyright protected material, all evidence
of ownership of any of the foregoing, and all other intellectual property
developed by or on behalf of ARC or to which ARC have rights, including, without
limitation, the copyrights, patents, trademarks, service marks, software, and
technology listed on Schedule 1.1.1(iv) hereto;
------------------
(v) all of the Stockholders' right, title and interest in
the Intellectual Property Assets owned or used by ARC as of the close of
business on the Closing Date which are used in the conduct of ARC's business and
operations, other than the Excluded Assets, including without limitation, the
following rights embodied in such Intellectual Property Assets: all copyrights
(registered and unregistered) and applications, if any, therefor, patents,
patent applications, patent rights, trade secrets, trade secret rights,
trademarks (registered and unregistered), service marks (registered and
unregistered), trade names, trade name rights, trade style, logos, technology,
know-how, techniques, processes, all documents embodying proprietary information
and copyright protected material, all evidence of ownership of any of the
foregoing, and all other intellectual property;
(vi) the trade names, trade name rights, trade style, or
other similar rights owned or licensed by ARC, including, specifically, the
names, any similar name, any logo or mark used in connection with ARC's
business, including, without limitation, the trade names listed on Schedule
--------
1.1.1(v) hereto, and any goodwill associated therewith;
- --------
(vii) all mailing lists, subscriber lists, advertiser lists,
and subscriptions or processes of ARC; and
2
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(vi) all advertising and promotional material, a customer
list which shall consist of an electronic and a hard copy list of all of ARC's
customers as of the Closing Date, customer information, a supplier list which
shall consist of an electronic and hard copy list of all of ARC's suppliers as
of the Closing Date, supplier information owned or licenses by ARC or the
Stockholders, market surveys, marketing know-how, and information pertaining to
planned products or services (if any).
1.1.2 Sale of Non-Intellectual Property Assets. Subject to the
----------------------------------------
provisions of this Agreement, Buyer Austria agrees to purchase from ARC, and ARC
agrees to sell, convey, transfer, assign and deliver to Buyer Austria, on the
Closing Date (as defined in Section 1.8 hereof) the Non-Intellectual Property
Assets. The term "Non-Intellectual Property Assets" shall mean the assets,
properties and business (other than the Intellectual Property Assets) that are
owned or used by ARC as of the close of business on the Closing Date which are
used in the conduct of ARC's business and operations, other than the Excluded
Assets (as defined in Section 1.1.3). The Intellectual Property Assets and the
Non-Intellectual Property Assets are referred to herein together to as the
"Subject Assets." The Non-Intellectual Property Assets shall include, without
limitation, the following:
(i) all inventories, office supplies, maintenance supplies,
spare parts and similar items used by ARC in the conduct of its business;
(ii) all machinery, equipment (including office equipment,
computers and computer hardware and peripherals), furniture, furnishings and
other fixed assets (including leasehold interests therein) of ARC listed on
Schedule 1.1.2(ii) hereto;
- ------------------
(iii) all leases and contracts of ARC used in or related to
its business, including, without limitation, all leases of real or personal
property, all contracts for services and supplies, all contracts to sell
products or services, all purchase orders, and all other agreements, commitments
and personal property leases (whether written or oral) to which ARC is a party
or under which ARC receives benefit arising out of or related to its business
(collectively, the "Assigned Contracts"), which Assigned Contracts shall
include, without limitation, all existing and pending sales contracts and sales
commission agreements or arrangements, including orders, offers and proposals,
all of which Assigned Contracts are listed on Schedule 1.1.2(iii) hereto;
-------------------
(iv) all Federal, state, local, foreign or other
governmental and other third party permits (including occupancy permits),
certificates, licenses, consents and authorizations held by ARC that are used in
or related to its business to the extent assignable (the "Assigned Permits"),
including, without limitation, all permits, certificates, licenses and
authorizations listed on Schedule 1.1.2(iv) hereto;
------------------
(v) all files, documents, records (other than ARC's
Corporate Records (as defined in Section 1.1.3), employee files, data and books
of account maintained in connection with ARC's business;
3
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(vi) all memberships in trade associations of ARC to the
extent assignable;
(vii) all raw materials and inventories, including
inventories of works-in-process and supplies, owned by ARC; and
(viii) all intangible rights relating to any of the foregoing.
1.1.3 Excluded Assets. Notwithstanding the foregoing, the Subject
---------------
Assets shall not include the following items owned, leased or used by ARC (the
"Excluded Assets"):
(i) Assets and property disposed of since the date of the
Base Balance Sheet in the ordinary course of business and such other assets as
have been or are disposed of pursuant to this Agreement;
(ii) ARC's corporate franchise, stock record books,
corporate record books containing minutes of meetings of directors and
stockholders and such other records as have to do exclusively with ARC's
organization or stock capitalization (collectively, the "Corporate Records");
provided, however, that ARC shall provide Buyer prior to the Closing with copies
of each of the foregoing, certified by ARC to be true and correct copies;
(iii) ARC's rights under this Agreement and the agreements
and instruments delivered to Buyer pursuant hereto; and
(iv) ARC's rights, title and interest in and to assets of,
and obligations under, any pension funds, profit sharing, 401(k) or similar
plans maintained by or on behalf of ARC for the benefit of its employees.
1.2 Assumption of Liabilities. Except for the Assumed Liabilities (as
-------------------------
defined below), Buyer shall not assume or be bound by any obligations or
liabilities of any Seller, accrued, absolute, contingent or otherwise, whether
or not existing or hereafter arising whatsoever. Upon the sale and purchase of
the Subject Assets, Buyer agrees to perform in accordance with their respective
terms the obligations of ARC (other than obligations described in Section
1.3(vi)) under all Assigned Contracts and Assigned Permits and other grants of
rights assigned to Buyer pursuant to Section 1.1.1 arising or to be performed
after the Closing Date (the "Assumed Liabilities"). The assumption of said
liabilities by Buyer hereunder shall not enlarge any rights of third parties
under contracts or arrangements with Buyer or ARC and nothing herein shall
prevent any party from contesting in good faith with any third party any of said
liabilities.
1.3 Retained Liabilities. Buyer and ARC agree that, except for the
--------------------
Assumed Liabilities, Buyer is not assuming, and ARC shall remain fully liable
for, all of its liabilities and obligations relating to the property, assets,
business and operations of ARC (collectively, the "Retained Liabilities"),
including, without limitation, the following:
4
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(i) all liabilities for any income, gain, profit or similar
tax arising out of or resulting from the sale, conveyance, transfer, assignment
and delivery of the Subject Assets provided for in this Agreement;
(ii) all Taxes (as defined in Section 2.8(a)) imposed on, or
with respect to, the business of ARC;
(iii) all liabilities and obligations of ARC in respect of
accounts payable, accrued expenses, accrued employee obligations and other
current liabilities arising out of the operation of ARC's business;
(iv) all liabilities and obligations of ARC for indebtedness
for borrowed money;
(v) all liabilities and obligations of ARC in connection
with or relating to any of ARC's existing or former employees, employee benefit
plans, employee insurance policies, severance or other termination obligations,
accrued vacations, accrued and unpaid wages, salaries, bonuses, commissions and
sick pay or other employment related matters, including, without limitation, all
liabilities and obligations (whether fixed or contingent) with respect to any
employment benefit program or plan as a result of the consummation of the
transactions contemplated by this Agreement, as required by Austrian law or
otherwise, and all liabilities of ARC under sales representative or similar
agreements or arrangements pursuant to which any person or entity may be
entitled to a commission on account of revenues booked or earned prior to the
Closing Date; provided, however, that in no event is Buyer assuming any
-------- -------
liabilities with respect to any employees terminated prior to the Closing Date
or any severance or other termination obligations or any liability under any
pension, profit sharing, 401(k) or similar employee benefit plan;
(vi) all liabilities and obligations of ARC to third parties
arising out of any breach by ARC prior to the Closing Date of any
representation, warranty, covenant or indemnification obligation of ARC under
any Assigned Contract or Assigned Permitted or other right assigned hereunder;
(vii) all liabilities and obligations arising in respect of
the Excluded Assets;
(viii) all liabilities for retrospective or similar insurance
premium adjustments and all claims for injury or sickness compensable under
ARC's insurance plans arising prior to the Closing Date; and
(ix) all other liabilities of ARC that are attributable to
or arise from facts, events or conditions that occurred or came into existence
prior to the Closing Date, including without limitation, any intellectual
property indemnification obligations.
5
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1.4 Purchase Price and Payment.
--------------------------
1.4.1 Intellectual Property Assets. In consideration of the sale by
----------------------------
ARC to Buyer USA of the Intellectual Property Assets and upon the assumption by
Buyer of the Assumed Liabilities, Buyer USA agrees that at the First Closing (as
hereinafter defined) it will deliver to ARC (a) Three Million Seven Hundred
Seven Thousand Eight Hundred Dollars ($3,707,800) by bank cashiers check in
Boston Clearing House Funds or by wire transfer of immediately available funds
and (b) a junior subordinated promissory note in the principal amount of Three
Million Seven Hundred Eighteen Thousand Eight Hundred Dollars ($3,718,800) (the
"ARC Note") substantially in the form attached hereto as Exhibit 1.4.
-----------
1.4.2 Non-Intellectual Property Assets. In consideration of the sale
--------------------------------
by ARC to Buyer Austria of the Non-Intellectual Property Assets, and upon the
assumption by Buyer of the Assumed Liabilities, Buyer Austria agrees that at the
Second Closing (as hereinafter defined) it will deliver to ARC Eleven Thousand
Dollars ($11,000) by bank cashiers check in Boston Clearing House Funds or by
wire transfer of immediately available funds.
1.5 Transfer of Subject Assets. At the First Closing, ARC shall deliver
--------------------------
or cause to be delivered to Buyer USA good and sufficient instruments of
transfer transferring to Buyer USA title to all of the Intellectual Property
Assets as provided herein and at the Second Closing, ARC shall deliver or cause
to be delivered to Buyer Austria good and sufficient instruments of transfer
transferring to Buyer Austria title to all of the Non-Intellectual Property
Assets as provided herein. Such instruments of transfer (a) shall be in the
form and will contain the warranties, covenants and other provisions (not
inconsistent with the provisions hereof) which are usual and customary for
transferring the type of property involved under the laws of the jurisdictions
applicable to such transfers, (b) shall be in form and substance satisfactory to
Buyer and its counsel, (c) shall effectively vest in Buyer good and marketable
title to all the Subject Assets free and clear of all liens, restrictions and
encumbrances except the Assumed Liabilities, and (d) shall include, without
limitation, (i) the Bill of Sale in the form of Exhibit 1.5(a) hereto, (ii) the
--------------
Assignment and Assumption of Contracts Agreement in the form of Exhibit 1.5(b)
--------------
hereto, (iii) the Assignment and Assumption of Leases Agreement in the form of
Exhibit 1.5(c) hereto, and (iv) the Assignment and Assumption of Intellectual
- --------------
Property in the form of Exhibit 1.5(d) hereto.
--------------
1.6 Delivery of Records and Contracts. At or prior to the First Closing,
---------------------------------
ARC shall deliver or cause to be delivered to Buyer all of ARC's leases,
contracts, commitments, agreements (including without limitation non-competition
agreements) and rights that are included in the Subject Assets, with such
assignments thereof and consents to assignments as are necessary to assure Buyer
the full benefit of the same. ARC shall also deliver to Buyer at the First
Closing all business records, tax returns, books and other data relating to ARC
and the Subject Assets, and ARC shall take all requisite steps to put Buyer in
actual possession and operating control of the Subject Assets. After the First
Closing, Buyer shall afford to ARC and its accountants and attorneys, for the
purpose of preparing such tax returns of ARC as may be required after the First
Closing, reasonable access to the books and records of ARC
6
<PAGE>
delivered to Buyer under this Section and shall permit ARC, at ARC's expense, to
make extracts and copies therefrom. After the First Closing, ARC shall afford to
Buyer and its accountants and attorneys, for the purpose of preparing and
supporting such tax returns of Buyer as may be required after the First Closing,
reasonable access to the relevant books and records of ARC retained by ARC and
shall permit Buyer, at Buyer's expense, to make extracts and copies therefrom.
ARC and Buyer each agree to retain any such books and records for a period of
seven years or, in the event either party elects to dispose of such books and
records in any manner, such party shall notify the other party of its intent to
do so and shall offer the other party the opportunity to receive such books and
records or, at the other party's expense, full and complete copies thereof.
1.7 Allocation of Purchase Price. ARC and Buyer agree to allocate the
----------------------------
Asset Purchase Price and the Assumed Liabilities (and all other capitalized
costs) among the Subject Assets in accordance with the provisions of Section
1060 of the Internal Revenue Code of 1986, as amended (the "Code"), and such
allocation shall be binding upon Buyer and ARC for all purposes (including
financial accounting purposes, financial and regulatory reporting purposes and
tax purposes).
1.8 Closing.
-------
(a) The transactions contemplated by this Agreement shall be
consummated at the closing (the "First Closing") which will take place at the
offices of Goodwin, Procter & Hoar LLP, Exchange Place, Boston, Massachusetts
on December 30, 1997, or at such other place or earlier or later date or time as
may be fixed by mutual agreement of Buyer and the Sellers (the "First Closing
Date").
(b) Notwithstanding the foregoing, the closing in respect of
and the physical transfer of the Non-Intellectual Property Assets (the "Second
Closing") shall occur on January 9, 1998 or on such earlier or later date as may
be fixed by mutual agreement of Buyer and the Sellers (the "Second Closing
Date").
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE SELLERS.
---------------------------------------------------------
2.1 Making of Representations and Warranties. As a material inducement to
----------------------------------------
Buyer to enter into this Agreement and consummate the transactions contemplated
hereby, ARC and the Stockholders hereby jointly and severally make to Buyer the
representations and warranties contained in this Section 2.
2.2 Organization and Qualifications of ARC. ARC is a corporation duly
--------------------------------------
organized, validly existing and in good standing under the laws of Austria with
full corporate power and authority to own or lease its properties and to conduct
its business in the manner and in the places where such properties are owned or
leased or such business is currently conducted or proposed to be conducted. The
copies of ARC's Certificate of Incorporation (or similar organizational
document) as amended to date, certified by a notary public or the appropriate
7
<PAGE>
governmental officer, and By-laws (or similar document), as amended to date,
certified by ARC's General Manager, and heretofore delivered to Buyer's counsel,
are complete and correct, and no amendments thereto are pending. ARC is not in
violation of any provision of its Certificate of Incorporation (or similar
organizational document) or By-laws (or similar document). ARC is not qualified
to do business as a foreign corporation in any state or jurisdiction.
2.3 Subsidiaries. ARC has no subsidiaries, and does not own any
------------
securities issued by any other business organization or governmental authority.
ARC does not own and does not have any direct or indirect interest in or control
over any corporation, partnership, joint venture or entity of any kind.
2.4 Capital Stock; Beneficial Ownership. The authorized share capital of
-----------------------------------
ARC consists of ATS 500,000 of which ATS 250,000 has been contributed. The
equity of ARC is owned 39% by Ernst Ambichl, 39% by Manfred Reindl and 22% by
Bernd Greifeneder. There are no outstanding options, warrants, rights,
commitments, preemptive rights or agreements of any kind for the issuance or
sale of, or outstanding securities convertible into, any additional share
capital of ARC. None of the share capital of ARC has been issued in violation
of any federal or state law. There are no voting agreements, trusts, proxies or
other agreements, instruments or undertakings with respect to the voting of the
share capital of ARC to which ARC or any Stockholder is a party.
2.5 Authority of ARC. ARC has full right, authority and power to enter
----------------
into this Agreement and each agreement, document and instrument to be executed
and delivered by ARC pursuant to this Agreement and to carry out the
transactions contemplated hereby. The execution, delivery and performance by
ARC of this Agreement and each such other agreement, document and instrument
have been duly authorized by all necessary action of ARC and its stockholders
(as the case may be) and no other action on the part of ARC or its stockholders
or otherwise is required in connection therewith. This Agreement and each
agreement, document and instrument executed and delivered by ARC pursuant to
this Agreement constitutes, or when executed and delivered will constitute,
valid and binding obligations of ARC enforceable in accordance with their terms.
The execution, delivery and performance by ARC of this Agreement and each such
agreement, document and instrument:
(i) do not and will not violate any provision of the
Certificate of Incorporation (or similar organizational document) or By-laws of
ARC;
(ii) do not and will not violate any laws of the United
States, or any state or other jurisdiction (domestic or foreign) applicable to
ARC or require such Seller to obtain any approval, consent or waiver of, or make
any filing with, any person or entity (governmental or otherwise) that has not
been obtained or made, except where the failure of which will, individually or
in the aggregate, not result in a material adverse affect on the business or
prospects of ARC; and
8
<PAGE>
(iii) except as described in Section 2.6(b)(vii) hereof,
do not and will not result in a breach of, constitute a default under,
accelerate any obligation under, or give rise to a right of termination of any
indenture or loan or credit agreement or any other agreement, contract,
instrument, mortgage, lien, lease, permit, authorization, order, writ, judgment,
injunction, decree, determination or arbitration award to which ARC is a party
or by which the property of ARC is bound or affected, or result in the creation
or imposition of any mortgage, pledge, lien, security interest or other charge
or encumbrance on any of ARC's assets or property.
2.6 Real and Personal Property.
--------------------------
(a) Owned Real Property. ARC does not own any real property.
-------------------
(b) Leased Real Property. All of the real property leased by
--------------------
ARC, as tenant or lessee, is identified on Schedule 2.6(b) hereto (collectively
---------------
referred to herein as the "Leased Real Property"). The Sellers hereby make the
following representations and warranties with respect to the Leased Real
Property:
(i) ARC holds a good, clear, marketable, valid and
enforceable leasehold interest in the Leased Real Property;
(ii) None of the Sellers is aware of any material
defects in the physical condition of any improvements constituting a part of the
Leased Real Property, including, without limitation, structural elements,
mechanical systems, roofs or parking and loading areas, and to the knowledge of
the Sellers, all of such improvements are in reasonable operating condition and
repair, have been maintained in accordance with past practice and are free from
material infestation by rodents or insects;
(iii) The copies of the lease for the Leased Real
Property (the "Lease") delivered by ARC to Buyer pursuant to this Agreement is
complete, accurate, true and correct;
(iv) The Lease is in full force and effect and has not
been modified, amended, or altered, in writing or otherwise;
(v) All obligations of the landlord or lessor under
the Lease which have accrued have been performed, and to the best of the
knowledge of the Sellers, no landlord or lessor is in default under the Lease;
(vi) All obligations of the ARC under the Lease which
have accrued have been performed, and ARC is not in default under the Lease, and
no circumstance presently exists which, with notice or the passage of time, or
both, would give rise to a default by ARC; and
9
<PAGE>
(vii) ARC will not have obtained prior to the Closing
the consent of the landlord or lessor under the Lease, and the failure to obtain
such consent shall not constitute a default hereunder. On or before the Closing
Date, ARC will have notified in writing the landlord under the Lease that the
Lease is being assigned to Buyer hereunder.
(c) Personal Property. A complete description of ARC's
-----------------
fixtures, machinery, equipment and other tangible personal property is contained
in Schedule 2.6(c) hereto. ARC has good and marketable title to all of its
---------------
personal property. None of such personal property or assets is subject to any
mortgage, pledge, lien, conditional sale agreement, security agreement,
encumbrance or other charge. All leasehold improvements, furnishings, machinery,
equipment and other tangible personal property of ARC have been maintained
consistent with past practice, are suitable for the purposes for which they are
intended and are in good repair.
2.7 Financial Statements.
--------------------
(a) Sellers have delivered to Buyer the following financial
statements, copies of which are attached hereto as Schedule 2.7:
------------
(i) A balance sheet of ARC (including for purposes of
this Section 2.7 any predecessor entity of ARC) for its fiscal year ending on
December 31, 1996 and a statement of income for the year then ended, with
appropriate footnotes, certified by ARC's chief financial officer.
(ii) A balance sheet of ARC (including for purposes of
this Section 2.7 any predecessor entity of ARC) as of October 31, 1997 (the
"Base Balance Sheet") and a statement of income for the period then ended, with
appropriate footnotes, certified by ARC's chief financial officer.
Said financial statements have been prepared in accordance with generally
accepted accounting principles in force in Austria applied consistently during
the periods covered thereby, are complete and correct in all material respects,
and present fairly in all material respects the financial condition of ARC at
the dates of said statements and the results of its operations and its cash
flows for the periods covered thereby.
(b) Except as reflected on the Base Balance Sheet, as of the
date of the Base Balance Sheet, ARC had no liabilities of any nature, whether
accrued, absolute, contingent or otherwise, asserted or unasserted, known or
unknown (including without limitation liabilities as guarantor or otherwise with
respect to obligations of others, or liabilities for taxes due or then accrued
or to become due or contingent or potential liabilities relating to activities
of ARC or the conduct of its business prior to the date of the Base Balance
Sheet regardless of whether claims in respect thereof had been asserted as of
such date).
10
<PAGE>
(c) As of the date hereof and as of the Closing, ARC does
not and will not have liabilities of any nature, whether accrued, absolute,
contingent or otherwise, asserted or unasserted, known or unknown (including
without limitation liabilities as guarantor or otherwise with respect to
obligations or others, or liabilities for taxes due or then accrued or to become
due or contingent or potential liabilities relating to activities of ARC or the
conduct of its business prior to the date hereof or the Closing, as the case may
be, regardless of whether claims in respect thereof had been asserted as of such
date), which Buyer Austria or Buyer USA will be legally obligated to pay under
any theory of successor liability or otherwise.
2.8 Taxes.
-----
(a) ARC has paid or caused to be paid all federal, state,
local, foreign and other taxes, including, without limitation, income taxes,
estimated taxes, alternative minimum taxes, excise taxes, sales taxes, use
taxes, value-added taxes, gross receipts taxes, franchise taxes, capital stock
taxes, employment and payroll-related taxes, withholding taxes, stamp taxes,
transfer taxes, windfall profit taxes, environmental taxes and property taxes,
whether or not measured in whole or in part by net income, and all deficiencies,
or other additions to tax, interest, fines and penalties owed by it
(collectively, "Taxes"), required to be paid by ARC through the date hereof
whether disputed or not.
(b) ARC has in accordance with applicable law filed all
federal, state, local and foreign tax returns required to be filed by it through
the date hereof, and all such returns correctly and accurately set forth the
amount of any Taxes relating to the applicable period. A list of all federal,
state, local and foreign income tax returns filed with respect to ARC for
taxable periods ended on or after December 31, 1992, are set forth in Schedule
--------
2.8 hereto, and said Schedule indicates those returns that have been audited or
- ---
currently are the subject of an audit. ARC has delivered to Buyer correct and
complete copies of all federal, state, local and foreign income tax returns
listed on said Schedule, and of all examination reports and statements of
deficiencies assessed against or agreed to by ARC with respect to said returns.
(c) Neither the Internal Revenue Service nor any other
governmental authority is now asserting or, to the knowledge of the Sellers,
threatening to assert against ARC any deficiency or claim for additional Taxes.
No claim has ever been made by an authority in a jurisdiction where ARC does not
file reports and returns that ARC is or may be subject to taxation by that
jurisdiction. There are no security interests on any of the assets of ARC that
arose in connection with any failure (or alleged failure) to pay any Taxes.
(d) No extension of time with respect to any date on which a
tax return was or is to be filed by ARC is in force, and no waiver or agreement
by ARC is in force for the extension of time for the assessment or payment of
any Taxes.
11
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(e) None of the Sellers has been (and has no liability for
unpaid Taxes because it once was) a member of an "affiliated group." ARC has
never filed, nor has it been required to file, a consolidated, combined or
unitary tax return with any other entity. ARC does not own, nor has it ever
owned, a direct or indirect interest in any trust, partnership, corporation or
other entity, nor is any such interest necessary to conduct the business of ARC,
and Buyer is not acquiring from any Seller an interest in any such entity. No
such entity is a party to any tax sharing agreement.
(f) ARC has made all necessary and required contributions
under applicable social security systems with respect to employees of ARC and
non-employee contractors of ARC.
2.9 Accounts Receivable. All of the accounts receivable of ARC (less the
-------------------
reserve for bad debts set forth on the Base Balance Sheet) are or will be at the
Closing valid and enforceable claims, fully collectible and subject to no setoff
or counterclaim. ARC does not have any accounts or loans receivable from any
person, firm or corporation which is affiliated with either ARC or from any
director, officer or employee of ARC, and all accounts and loans receivable from
any such person, firm or corporation shall be paid in cash prior to the Closing.
2.10 Absence of Certain Changes. Other than the conversion of ARC from an
--------------------------
OEG to a GmbH, since the date of the Base Balance Sheet, there has not been:
(i) any change in the financial condition, properties,
assets, liabilities, business or operations of ARC which change by itself or in
conjunction with all other such changes, has been materially adverse with
respect to ARC;
(ii) any contingent liability incurred by ARC as
guarantor or otherwise with respect to the obligations of others or any
cancellation of any debt or claim owing to, or waiver of any material right of,
ARC;
(iii) any mortgage, encumbrance or lien placed on any of
the assets or properties of ARC which remain in existence on the date hereof or
will remain on the Closing Date;
(iv) any obligation or liability of any nature incurred
by ARC whether accrued, absolute, contingent or otherwise, asserted or
unasserted (including without limitation liabilities for Taxes due or to become
due or contingent or potential liabilities relating to products or services
provided by ARC or the conduct of ARC's business since the date of the Base
Balance Sheet regardless of whether claims in respect thereof have been
asserted), other than obligations and liabilities incurred in the ordinary
course of business consistent with the terms of this Agreement (it being
understood that product or service liability claims shall not be deemed to be
incurred in the ordinary course of business);
12
<PAGE>
(v) any purchase, sale or other disposition, or any
agreement or other arrangement for the purchase, sale or other disposition, of
any of the properties or assets of ARC other than in the ordinary course of
business;
(vi) any damage, destruction or loss, whether or not
covered by insurance, materially and adversely affecting the properties, assets
or business of ARC;
(vii) any other transaction entered into by ARC other
than transactions in the ordinary course of business; or
(viii) any agreement or understanding whether in writing
or otherwise, for ARC to take any of the actions specified in paragraphs (i)
through (viii) above.
2.11 Ordinary Course. Other than the conversion of ARC from an OEG to a
---------------
GmbH, since the date of the Base Balance Sheet, ARC has conducted its business
and operations only in the ordinary course and consistently with its prior
practices.
2.12 Banking Relations. All of the arrangements which ARC has with any
-----------------
banking institution are completely and accurately described in Schedule 2.12
-------------
hereto, indicating with respect to each of such arrangements the type of
arrangement maintained (such as checking account, borrowing arrangements, safe
deposit box, etc.) and the person or persons authorized in respect thereof.
2.13 Proprietary Rights.
------------------
(a) Except as set forth in Schedule 2.13, ARC owns all
right, title and interest in and to all patents, copyrights, technology,
software, software tools, know-how, processes, trade secrets, trademarks,
service marks, trade names and other proprietary rights used in or necessary for
the conduct of ARC's business as conducted to the date hereof or contemplated,
including, without limitation, the technology and all proprietary rights
developed or discovered in connection with or contained in ARC's products (the
"ARC Products"), free and clear of all liens, claims and encumbrances (including
without limitation distribution rights) (all of which are referred to as
"Proprietary Rights"). The foregoing representation as it relates to Third Party
Technology (as hereinafter defined) is limited to ARC's interest pursuant to the
Third Party Licenses (as hereinafter defined), all of which are valid and
enforceable and in full force and effect and which grant ARC such right to Third
Party Technology as are employed in or necessary to the business of ARC as
conducted or proposed to be conducted prior to the Closing Date.
(b) Schedule 2.13 hereto contains an accurate and complete
-------------
description of (i) all patents, trademarks (with separate listings of registered
and unregistered trademarks), trade names, and registered and unregistered
copyrights in or related to the ARC Products, all applications and registration
statements therefor, and a list of all licenses and other agreements relating
thereto, and (ii) a list of all licenses and other agreements with third
13
<PAGE>
parties (the "Third Party Licenses") relating to any software, technology, know-
how, or processes that ARC is licensed or otherwise authorized by such third
parties to use, market, distribute or incorporate into products distributed by
ARC (such software, technology, know-how and processes are collectively referred
to as the "Third Party Technology"). All of ARC's trademark or trade name
registrations related to the ARC Products and all of ARC's copyrights in any of
the ARC Products are valid and in full force and effect; and consummation of the
transactions contemplate hereby will not alter or impair any such rights. There
is no material default by any party to any Third Party License and all of ARC's
rights thereunder are freely assignable. To the knowledge of the Sellers, the
licensors under such Third Party Licenses have and had all requisite power and
authority to grant the rights purported to be conferred thereby. True and
complete copies of such Third Party Licenses, and any amendments thereto, have
been provided to Buyer.
(c) No claims have been asserted against ARC or any of the
Stockholders (and neither ARC nor any of the Stockholders is aware of any claims
which are likely to be asserted against ARC or any of the Stockholders or which
have been asserted against others) by any person challenging ARC's use or
distribution of any patents, trademarks, trade names, copyrights, trade secrets,
software, technology, know-how or processes utilized by ARC (including, without
limitation, the Third Party Technology) or challenging or questioning the
validity or effectiveness of any license or agreement relating thereto
(including, without limitation, the Third Party Licenses). To the Sellers'
knowledge, there is no valid basis for any claim of the type specified in the
immediately preceding sentence which could in any way relate to or interfere
with the continued enhancement and exploitation by ARC of any of the ARC
Products. None of the ARC Products nor the use of any patents, trademarks, trade
names, copyrights, software, technology, know-how or processes by ARC in its
current business infringes on the rights of, constitutes misappropriation of, or
in any way involves unfair competition with respect to, any proprietary
information or intangible property right of any third person or entity,
including without limitation any trade secret, copyright, trademark or trade
name, or, to the knowledge of the Sellers, any patent.
(d) All licenses or other agreements pursuant to which the
Sellers have granted rights to others in Proprietary Rights owned or licensed by
the Sellers are listed on Schedule 2.13. All of such licenses or agreements are
in full force and effect, there is no default by any party thereto and all of
Sellers' rights thereunder are freely assignable. True and complete copies of
all such licenses or other agreements, and any amendments thereto, have been
provided to Buyer. Except as set forth in Schedule 2.13, the Sellers have not
-------------
granted any third party any right to manufacture, reproduce, distribute, market
or exploit any of the ARC Products or any adaptations, translations, or
derivative works based on the ARC Products or any portion thereof, including,
without limitation, as a value added reseller. Except with respect to the rights
of third parties to the Third Party Technology, no third party has any right to
manufacture, reproduce, distribute, market or exploit any underlying works or
materials of which any of the ARC Products are a "derivative work" as that term
is defined in the United States Copyright Act, Title 17, U.S.C. Section 101.
14
<PAGE>
(e) Except as set forth on Schedule 2.13, all designs,
-------------
drawings, specifications, source code, object code, documentation, flow charts
and diagrams incorporating, embodying or reflecting any of the ARC Products at
any stage of their development (the "ARC Components") were written, developed
and created solely and exclusively by employees of ARC without the assistance of
any third party or entity or were created by third parties (including, without
limitation, each of the Stockholders), who assigned ownership of their rights to
ARC in valid and enforceable consultant confidentiality and invention assignment
agreements. All such employees and third parties have executed waivers of any
right, title or interest in the ARC Products and ARC Components pursuant to
documents prepared by Buyer's counsel. The Sellers have at all times used
commercially reasonable efforts to treat the ARC Products and the ARC Components
as containing trade secrets and has not disclosed or otherwise dealt with such
items in such a manner as to cause the loss of such trade secrets by release
into the public domain.
(f) To the Sellers' knowledge, no employee of ARC is in
violation of any term of any employment contract, patent disclosure agreement or
any other contract or agreement relating to the relationship of any such
employee with ARC or, to the best of the Sellers' knowledge, any other party,
including, without limitation, any previous employer, because of the nature of
the business conducted by ARC or proposed to be conducted by ARC.
(g) Each person presently or previously employed by ARC
(including independent contractors, if any) employed in a research and
development or other technical position has executed a confidentiality and non-
disclosure agreement previously provided to Purchaser or its representatives.
Such confidentiality and non-disclosure agreements constitute valid and binding
obligations of ARC and such person, enforceable in accordance with their
respective terms. To the best of ARC's and each of the Stockholder's knowledge,
neither the execution or delivery of such agreements, nor the carrying on of
ARC's business as employees by such persons, nor the conduct of ARC's business
as currently anticipated, will conflict with or result in a breach of the terms,
conditions or provisions of or constitute a default under any contract, covenant
or instrument under which any of such persons is obligated. ARC is not making
unauthorized use of any confidential information or trade secrets of any person,
including, without limitation, any former employer or any past or present
employee of ARC. Neither ARC nor, to the knowledge of the Sellers, any of ARC's
employees have any agreements or arrangements with any persons other than ARC
related to confidential information or trade secrets of such persons or
restricting any such employee's ability to engage in business activities of any
nature.
(h) No product liability or warranty claims which
individually or in the aggregate could exceed Five Thousand Dollars ($5,000)
have been communicated to or threatened against ARC nor, to the best of the
Sellers' knowledge, is there any specific situation, set of facts or occurrence
that provides a basis for such claim. ARC has provided to Buyer an accurate list
of all errors or "bugs" in the ARC Products which are contained in the computer
databases which ARC maintains for the purpose of tracking errors and "bugs" in
its software. Such list is set forth as Schedule 2.13 (h).
-----------------
15
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(i) Prior to the date hereof, the Stockholders transferred
all rights, title and interest of the Stockholders in the ARC Products to ARC,
and the Stockholders have no rights, title or interest in the ARC Products.
2.14 Contracts. Except for contracts, commitments, plans, agreements and
---------
licenses (true and complete copies of which have been delivered to Buyer)
described in Schedule 2.14 hereto, ARC is not a party to or subject to:
-------------
(i) any plan or contract providing for bonuses,
pensions, options, stock purchases, deferred compensation, retirement payments,
profit sharing, collective bargaining or the like, or any contract or agreement
with any labor union;
(ii) any employment contract or contract for personal
services;
(iii) any contract or agreement relating to capital
expenditures in excess of $5,000 per annum;
(iv) any other contracts or agreements creating any
obligations of ARC of $5,000 or more per annum with respect to any such contract
or agreement not specifically disclosed elsewhere in this Agreement;
(v) any contract or agreement providing for the
purchase of all or substantially all of its requirements of a particular product
from a supplier;
(vi) any contract or agreement which by its terms does
not terminate or is not terminable without penalty by such entity or any
successor or assignee on not more than one month's notice.
(vii) any contract not made in the ordinary course of
business;
(viii) any contract or agreement for the purchase of any
fixed asset for a price in excess of $5,000 whether or not such purchase is in
the ordinary course of business;
(ix) no agreements, contracts or commitments that
provide for the sale, licensing or distribution by ARC of any of its products,
technology, know-how, trademarks or trade names. Section 2.14 hereof sets forth
------------
all of the maintenance obligations of ARC without regard to the dollar amount of
such obligation;
(x) any contract containing covenants limiting the
freedom of such entity to compete in any line of business or with any person or
entity;
(xi) any license agreement (as licensor or licensee);
16
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(xii) any indenture, mortgage, promissory note, loan
agreement, guaranty or other agreement or commitment for the borrowing of money;
or
(xiii) any contract or agreement with any officer,
employee, director or stockholder of ARC or with any persons or organizations
controlled by or affiliated with any of them.
ARC is not in default under any such contracts, commitments, plans, agreements
or licenses described in said Schedule, and none of the Sellers have any
knowledge of conditions or facts which with notice or passage of time, or both,
would constitute a default.
Without limiting the provisions of Section 2.13, except for the License and
Distribution Agreement between ARC and SQLBench International, Inc., ARC has not
granted to any third party (including, without limitation, OEMs and site license
customers) any rights to reproduce or manufacture any of the ARC Products, nor
has ARC granted to any third party any exclusive rights of any kind with respect
to any of the ARC Products, including, without limitation, territorial
exclusivity or exclusivity with respect to particular versions, implementations
or translations of any of the ARC Products, nor has ARC granted any third party
any right to market any of the ARC Products under any "private label"
arrangements pursuant to which ARC is not identified as the source of such
goods.
2.15 Litigation. There is no litigation or governmental or administrative
----------
proceeding or investigation pending or, to the Sellers' knowledge, threatened
against ARC or any affiliate of ARC which may have an adverse effect on ARC's
properties, assets, prospects, financial condition or business or which would
prevent or hinder the consummation of the transactions contemplated by this
Agreement.
2.16 Compliance with Laws. ARC is in compliance with all applicable
--------------------
statutes, ordinances, orders, judgments, decrees and rules and regulations
promulgated by any federal, state, municipal or other governmental authority
which apply to ARC or to the conduct of its business, and ARC has not received
notice of a violation or alleged violation of any such statue, ordinance, order,
rule or regulation.
2.17 Insurance. The only insurance maintained by the Company is disclosed
---------
on Schedule 2.17 hereto, and if any insurance is disclosed on said Schedule,
-------------
then any such insurance policy is in full force and effect, all premiums with
respect thereto are currently paid, and ARC is in compliance in all material
respects with the terms thereof. Said insurance is adequate and customary for
the business engaged in by ARC and is sufficient for compliance by ARC with all
requirements of law and all agreements and leases to which ARC is a party.
2.18 Warranty or Other Claims. There are no existing or threatened product
------------------------
liability, warranty or other similar claims, or any facts upon which a material
claim of such nature could be based, against ARC for products or services which
are defective or fail to meet any product or service warranties. No claim has
been asserted against ARC for renegotiation
17
<PAGE>
or price redetermination of any business transaction, and there are no facts
upon which any such claim could be based.
2.19 Powers of Attorney. Except for the power of attorney granted to
------------------
Meyndt, Ransmayr, Schweiger & Partner with respect to the transactions
contemplated by this Agreement, ARC has not granted powers of attorney which are
presently outstanding.
2.20 Finder's Fee. None of the Sellers has incurred or become liable for
------------
any broker's commission or finder's fee relating to or in connection with the
transactions contemplated by this Agreement.
2.21 Corporate Records; Copies of Documents. The corporate record books of
--------------------------------------
ARC accurately record all corporate action taken by its stockholders and board
of directors and committees thereof. The copies of the corporate records of
ARC, as delivered to Buyer pursuant to this Agreement, are true and complete
copies of the originals of such documents. ARC has made available for inspection
and copying by Buyer and its counsel complete and correct copies of all
documents referred to in this Section or in the Schedules delivered to Buyer
pursuant to this Agreement.
2.22 Employee Benefit Programs; Employees; Labor Relations.
-----------------------------------------------------
(a) Except as set forth on Schedule 2.22(a) or as provided
under the laws of Austria, ARC does not have any employment contract, collective
bargaining or other labor agreement, any agreement containing severance or
termination pay arrangements, deferred compensation agreement, pension or
retirement plan, bonus or profit-sharing plan, stock option or purchase plan or
other non-terminable (with or without penalty) arrangement, group insurance,
group hospitalization or other employee benefit plan, in each case relating to
its employees.
(b) Upon termination of the employment of any of ARC's
employees, Buyer will not by reason of the transactions contemplated by this
Agreement, or anything done prior to or on the Closing Date be liable to any of
said employees for so-called "severance pay" or any other payments other than as
provided by mandatory provisions of Austrian law.
2.23 Disclosure. The representations, warranties and statements contained
----------
in this Agreement and in the certificates, exhibits and schedules delivered to
Buyer do not contain any untrue statement of a material fact, and, do not omit
to state a material fact required to be stated therein or necessary in order to
make such representations, warranties or statements not misleading in light of
the circumstances under which they were made. To the knowledge of the Sellers,
there are no facts which presently or may in the future have a material adverse
affect on the business, properties, prospects, operations or condition of ARC
which have not been specifically disclosed herein or in a Schedule furnished
herewith, other than general economic conditions affecting ARC's industry.
18
<PAGE>
SECTION 3. REPRESENTATIONS AND WARRANTIES OF STOCKHOLDERS.
- -----------------------------------------------------------
As a material inducement to Buyer to enter into this Agreement and
consummate the transactions contemplated hereby, each Stockholder hereby
severally makes to Buyer each of the representations and warranties set forth in
this Section 3 with respect to such Stockholder. No Stockholder shall have any
right of indemnity or contribution from ARC with respect to the breach of any
representation or warranty hereunder.
3.1 Authority. Such Stockholder has full right, authority, power and
---------
capacity to enter into this Agreement and such agreement, document and
instrument to be executed and delivered by or on behalf of him or her pursuant
to this Agreement and to carry out the transactions contemplated hereby and
thereby. This Agreement and each agreement, document and instrument executed
and delivered by such Stockholder pursuant to this Agreement constitutes, or
when executed and delivered will constitute, valid and binding obligations of
such Stockholder enforceable in accordance with their respective terms. The
execution, delivery and performance by such Stockholder of this Agreement and
each such agreement, document and instrument:
(i) does not and will not violate any laws of the United
States, or any state or other jurisdiction (domestic or foreign) applicable to
such Stockholder or require such Stockholder to obtain any approval, consent or
waiver of, or make any filing with, any person or entity (governmental or
otherwise) that has not been obtained or made; and
(ii) does not and will not result in a breach of, constitute
a default under, accelerate any obligation under, or give rise to a right of
termination of, any indenture or loan or credit agreement or any other
agreement, contract, instrument, mortgage, lien, lease, permit, authorization,
order, writ, judgment, injunction, decree, determination or arbitration award to
which such Stockholder is a party or by which the property of such Stockholder
is bound or affected, or result in the creation or imposition of any mortgage,
pledge, lien, security interest or other charge or encumbrance on any of the
Subject Assets.
3.2 Finder's Fee. Such Stockholder has not incurred or become liable for
------------
any broker's commission or finder's fee relating to or in connection with the
transactions contemplated by this Agreement.
3.3 Agreements. Each such Stockholder who is employed by ARC is not a
----------
party to any non-competition, trade secret or confidentiality agreement with any
party other than ARC. There are no agreements or arrangements not contained
herein or disclosed in a Schedule hereto, to which such Stockholder is a party
relating to the business of ARC or to such Stockholder's rights and obligations
as a stockholder, director or officer of ARC. Such Stockholder does not own,
directly or indirectly, on an individual or joint basis, any material interest
in, or serve as an officer or director of, any customer, competitor or supplier
of ARC, or any organization which has a contract or arrangement with ARC. Such
Stockholder has not at any time transferred any of the stock of ARC held by or
for such holder to any employee of
19
<PAGE>
ARC, which transfer constituted or could be viewed as compensation for services
rendered to ARC by said employee. The execution, delivery and performance of
this Agreement will not violate or result in a default or acceleration of any
obligation under any contract, agreement, indenture or other instrument
involving ARC to which such Stockholder is a party. Notwithstanding the
foregoing, the continued ownership of interests in ARC by the Stockholders will
not constitute a violation of this Section 3.3, provided that ARC, on and after
the Closing, (i) does not, directly or indirectly, whether as owner, partner,
shareholder, consultant, agent, employee, co-venturer or otherwise, engage,
participate, assist or invest in any Competing Business (as hereinafter
defined), (ii) refrains from directly or indirectly employing, attempting to
employ, recruiting or otherwise soliciting, inducing or influencing any person
to leave employment with the Buyer or Merger Sub, and (iii) refrains from
soliciting or encouraging any customer or supplier to terminate or otherwise
modify adversely its business relationship with the Buyer or Merger Sub. For
purposes of this Agreement, the term "Competing Business" shall mean a business
conducted anywhere in the United States, Europe or any other place in the world
which is engaged in the business of designing, developing, marketing, selling,
distributing and/or consulting with respect to software testing products.
SECTION 4. COVENANTS OF THE SELLERS.
- -------------------------------------
4.1 Making of Covenants and Agreements. Sellers hereby make their
----------------------------------
respective covenants and agreements set forth in this Section 4.
4.2 Conduct of Business. Between the date of this Agreement and the
-------------------
Second Closing Date, ARC will, and the Stockholders will cause ARC to, conduct
its business only in the ordinary course and refrain from changing or
introducing any method of management or operations except in the ordinary course
of business and consistent with prior practices.
4.3 Due Diligence; Production of Documents. ARC shall provide and the
--------------------------------------
Stockholders shall cause ARC to provide Buyer with full access to its books,
properties, management and employees so as to enable Buyer to conduct such
review of the business, assets and property of ARC as Buyer shall deem necessary
or appropriate in connection with the consummation of the transactions
contemplated by this Agreement.
4.4 Authorization from Others. Prior to the First Closing Date, ARC shall
-------------------------
obtain and the Stockholders shall use their reasonable best efforts to cause ARC
to obtain all authorizations, consents and permits of others required to permit
the consummation by it of the transactions contemplated by this Agreement.
4.5 Notice of Default. Promptly upon the occurrence of, or promptly upon
-----------------
any Seller becoming aware of the impending or threatened occurrence of, any
event which would cause or constitute a breach or default, or would have caused
or constituted a breach or default had such event occurred or been known to such
Seller prior to the date hereof, of any of the
20
<PAGE>
representations, warranties or covenants of any Seller contained in or referred
to in this Agreement or in any Schedule or Exhibit referred to in this
Agreement, such Seller shall give detailed written notice thereof to Buyer and
shall use its best efforts to prevent or promptly remedy the same.
4.6 Cooperation; Consummation of Agreement; Books and Records. Each
---------------------------------------------------------
Seller shall cooperate with all reasonable requests of Buyer and Buyer's counsel
in connection with the consummation of the transactions contemplated hereby, and
each Seller shall use its best efforts to perform and fulfill all conditions and
obligations on its part to be performed and fulfilled under this Agreement, to
the end that the transactions contemplated by this Agreement shall be fully
carried out. ARC shall maintain its books and records in accordance with good
business practices, on a basis consistent with past practices, and such entity
shall promptly make available to Buyer such books and records, any other
material or information regarding ARC as Buyer or its counsel, accountants or
other advisors may from time to time reasonably request.
4.7 Tax Returns. ARC, with the approval of Buyer and in accordance with
-----------
applicable law, shall (i) promptly prepare and file on or before the due date or
any extension thereof all federal, state, local and foreign tax returns required
to be filed by ARC with respect to taxable periods of ARC that include any
period ending on or before the Second Closing Date and (ii) pay all Taxes of ARC
attributable to periods ending on or before the Second Closing Date.
4.8 Satisfaction of Indebtedness. At or prior to the First Closing, ARC
----------------------------
shall, and the Stockholders shall cause ARC to, cause all mortgages, security
interests, pledges and other arrangements securing indebtedness or other
encumbrances upon the Subject Assets to be extinguished.
4.9 1997 Financial Statements. Each Seller shall cooperate with Buyer and
-------------------------
shall promptly provide to Buyer all necessary information and documentation
requested by Buyer in connection with the preparation of any audited financial
statements required to be prepared under applicable U.S. securities laws.
SECTION 5. REPRESENTATIONS AND WARRANTIES OF BUYER.
- ----------------------------------------------------
5.1 Making of Representations and Warranties. As a material inducement to
----------------------------------------
the Sellers to enter into this Agreement and consummate the transactions
contemplated hereby, Buyer hereby makes the representations and warranties to
the Sellers contained in this Section 5.
5.2 Organization of Buyer. Buyer is a corporation duly organized, validly
---------------------
existing and in good standing under the laws of the State of Delaware with full
corporate power to own
21
<PAGE>
or lease its properties and to conduct its business in the manner and in the
places where such properties are owned or leased or such business is conducted
by it.
5.3 Authority of Buyer. Buyer has full right, authority and power to
------------------
enter into this Agreement and each agreement, document and instrument to be
executed and delivered by Buyer pursuant to this Agreement and to carry out the
transactions contemplated hereby. The execution, delivery and performance by
Buyer of this Agreement and each such other agreement, document and instrument
have been duly authorized by all necessary corporate action of Buyer and no
other action on the part of Buyer is required in connection therewith. This
Agreement and each other agreement, document and instrument executed and
delivered by Buyer pursuant to this Agreement constitute, or when executed and
delivered will constitute, valid and binding obligations of Buyer enforceable in
accordance with their terms. The execution, delivery and performance by Buyer of
this Agreement and each such agreement, document and instrument:
(i) does not and will not violate any provision of
the Certificate of Incorporation or by-laws of Buyer;
(ii) does not and will not violate any laws of the
United States or of any state or any other jurisdiction applicable to Buyer or,
assuming no breach in the representations set forth in Sections 2.5 and 2.24
hereof, require Buyer to obtain any approval, consent or waiver of, or make any
filing with, any person or entity (governmental or otherwise) which has not been
obtained or made; and
(iii) does not and will not result in a breach of,
constitute a default under, accelerate any obligation under, or give rise to a
right of termination of any indenture, loan or credit agreement, or any other
agreement, mortgage, lease, permit, order, judgment or decree to which Buyer is
a party and which is material to the business and financial condition of Buyer
and its parent and affiliated organizations on a consolidated basis.
5.4 Litigation. There is no litigation or governmental or administrative
----------
proceeding or investigation pending or, to its knowledge, threatened against
Buyer which would prevent or hinder the consummation of the transactions
contemplated by this Agreement.
5.5 Finder's Fee. Buyer has not incurred or become liable for any
------------
broker's commission or finder's fee relating to or in connection with the
transactions contemplated by this Agreement.
5.6 Buyer USA Public Information. Buyer USA has heretofore furnished the
----------------------------
Stockholders with information regarding Buyer USA, including its Annual Report
on Form 10-K for the fiscal year ended December 31, 1996 and its Quarterly
Report on Form 10-Q for the quarter ended September 30, 1997, each as filed with
the Securities and Exchange Commission ("SEC"), and will provide to the
Stockholders any Current, Annual or Quarterly Report filed by Buyer USA with the
SEC at or prior to the Closing Date (as any such
22
<PAGE>
documents have been amended since their original filing, the "Buyer USA SEC
Documents"). As of their respective filing dates, the Buyer USA SEC Documents
did not or will not contain any untrue statements of material fact or omit to
state material facts required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. As of their respective filing dates, the Buyer USA SEC Documents
complied or will comply in all material respects with the applicable
requirements of the Securities Act of 1933, as amended, and the Securities
Exchange Act of 1934, as amended, and the rules and regulations promulgated
under such statutes.
5.7 Buyer USA Indebtedness. Buyer USA has no material indebtedness or
----------------------
other obligations not reflected on the face of the Buyer USA SEC Documents.
SECTION 6. COVENANTS OF BUYER.
------------------------------
6.1 Authorization from Others. Prior to the First Closing Date, Buyer
-------------------------
shall obtain all authorizations, consents and permits of others required to
permit the consummation by it of the transactions contemplated by this
Agreement.
6.2 Cooperation; Consummation of Agreement; Books and Records. Buyer
---------------------------------------------------------
shall cooperate with all reasonable requests of Sellers' counsel in connection
with the consummation of the transactions contemplated hereby, and Buyer shall
use its best efforts to perform and fulfill all conditions and obligations on
its part to be performed and fulfilled under this Agreement, to the end that the
transactions contemplated by this Agreement shall be fully carried out.
6.3 Notice of Default. Promptly upon the occurrence of, or promptly upon
-----------------
the Buyer becoming aware of the impending or threatened occurrence of, any event
which would cause or constitute a breach or default, or would have caused or
constituted a breach or default had such event occurred or been known to the
Buyer prior to the date hereof, of any of the representations, warranties or
covenants of the Buyer contained in or referred to in this Agreement or in any
Schedule or Exhibit referred to in this Agreement, the Buyer shall give detailed
written notice thereof to the Sellers and shall use its best efforts to prevent
or promptly remedy the same.
SECTION 7. CONDITIONS.
- -----------------------
7.1 Conditions to the Obligations of Buyer.
--------------------------------------
7.1 Conditions to Obligations of Buyer at First Closing. The
---------------------------------------------------
obligation of Buyer to consummate this Agreement and the transactions
contemplated hereby to be consummated at the First Closing are subject to the
fulfillment, prior to or at the First Closing, of the following conditions
precedent:
23
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(a) Representations; Warranties; Covenants. Each of the
--------------------------------------
representations and warranties of the Sellers contained in Section 2 and of the
Stockholders in Section 3 shall be true and correct in all material respects as
though made on and as of the First Closing Date; and the Sellers shall, on or
before the First Closing, have performed all of their obligations hereunder
which by the terms hereof are to be performed on or before the First Closing.
(b) No Material Change. There shall have been no material
------------------
adverse change in the financial condition, prospects, properties, assets,
liabilities, business or operations of ARC since the date hereof.
(c) Certificate from Officers. ARC shall have delivered
-------------------------
to Buyer a certificate of the General Manager of ARC and each Stockholder shall
have delivered a certificate dated as of the First Closing Date to the effect
that the statements set forth in paragraphs (a) and (b) above in this Section
7.1 are true and correct.
(d) Opinion of Counsel. At the First Closing, Buyer shall
------------------
have received from Meyndt, Ransmayr, Schweiger & Partner, counsel for ARC and
the Stockholders, an opinion as of said date, in the form attached hereto as
Exhibit 7.1(d).
- --------------
(e) No Litigation. There shall have been no determination
-------------
by Buyer, acting in good faith, that the consummation of the transactions
contemplated by this Agreement has become inadvisable or impracticable by reason
of the institution or threat by any person or any federal, state, foreign or
other governmental authority of litigation, proceedings or other action against
Buyer or any Seller.
(f) Consents. ARC shall have made, and the Stockholders
--------
shall have caused ARC to make, all filings with and notifications of
governmental authorities, regulatory agencies and other entities required to be
made by such entity in connection with the execution and delivery of this
Agreement, the performance of the transactions contemplated hereby and the
continued operation of the businesses of such entity to be acquired by Buyer
subsequent to the First Closing; and the Sellers shall have received all
authorizations, waivers, consents and permits, in form and substance reasonably
satisfactory to Buyer, from all third parties, including, without limitation,
applicable governmental authorities, regulatory agencies, lessors, lenders and
contract parties required to permit the continuation of the business of such
entity by Buyer and the consummation of the transactions contemplated by this
Agreement, and in connection with the transfer of the Subject Assets.
(g) Employment Agreements. Each of Ernst Ambichl, Manfred
---------------------
Reindl and Bernd Greifeneder shall have executed and delivered to Buyer an
Employment Agreement in substantially the forms of Exhibit 7.1(g).
--------------
(h) Cancellation of OEM Agreement. All parties to that
-----------------------------
Reindl and Software OEM Agreement, dated as of November 11, 1996, among, inter
-----
alia, Buyer and
- ----
24
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ARC (as amended or modified to date, the "OEM Agreement") shall have been
terminated effective October 1, 1997.
(i) Closing of Beta Transaction. All conditions to the
---------------------------
closing of the transactions contemplated by that certain Agreement and Plan of
Merger, dated as of the date hereof, among the Buyer USA, Beta and the
stockholders of Beta (the "Merger") shall have been satisfied or waived and the
Merger (as defined therein) shall have been consummated.
7.1.2 Conditions to the Obligations of Buyer at the Second Closing.
------------------------------------------------------------
The obligations of Buyer to consummate this Agreement and the transactions
contemplated hereby to be consummated at the Second Closing are subject to the
fulfillment , prior to the Second closing, of the following conditions
precedent:
(a) Representations; Warranties; Covenants. Each of the
--------------------------------------
representations and warranties of the Sellers contained in Section 2 and of the
Stockholders in Section 3 shall be true and correct in all material respects as
though made on and as of the Second Closing Date; and the Sellers shall, on or
before the Second Closing, have performed all of their obligations hereunder
which by the terms hereof are to be performed on or before the Closing.
(b) No Material Change. There shall have been no material
------------------
adverse changes in the financial condition, prospects, propertis, assets,
liabilities, business or operations of ARC since the date hereof.
(c) Certificate from Officers. ARC shall have delivered
-------------------------
to Buyer a certificate of the President and Chief Financial Officer of ARC and
each Stockholder shall have delivered a certificate dated as of the Second
Closing Date to the effect that the statements set forth in paragraphs (a) and
(b) above in this Section 7.1.2 are true and correct.
7.2 Conditions to Obligations of the Sellers.
----------------------------------------
7.2.1 The Sellers' obligations to consummate this Agreement and the
transactions contemplated hereby is subject to the fulfillment, prior to or at
the First Closing, of the following conditions precedent:
(a) Representations; Warranties; Covenants. Each of the
--------------------------------------
representations and warranties of Buyer contained in Section 5 shall be true and
correct as though made on and as of the First Closing Date; Buyer shall, on or
before the Closing, have performed all of its obligations hereunder which by the
terms hereof are to be performed on or before the First Closing; and Buyer shall
have delivered to the Sellers a certificate of the Chief Executive Officer,
President or Treasurer of Buyer dated as of the First Closing Date to such
effect.
25
<PAGE>
(b) No Material Change. There shall have been no material
------------------
adverse change in the financial condition, prospects, properties, assets,
liabilities, business or operations of the Buyer since the date hereof.
(c) Opinion of Counsel. At the First Closing, the Sellers
------------------
shall have received from Goodwin, Procter & Hoar LLP, counsel for Buyer, an
opinion as of said date, in the form attached hereto as Exhibit 7.2(b).
--------------
(d) No Litigation. There shall have been no
-------------
determination by the Sellers, acting in good faith, that the consummation of the
transactions contemplated by this Agreement has become inadvisable or
impracticable by reason of the institution or threat by any person or any
federal, state, foreign or other governmental authority of litigation,
proceedings or other action against Buyer or any Seller.
(e) Consents. The Buyer shall have made all filings
----------
with and notifications of governmental authorities, regulatory agencies and
other entities required to be made by such entity in connection with the
execution and delivery of this Agreement, the performance of the transactions
contemplated hereby and the continued operation of the business of Beta to be
acquired by Buyer subsequent to the First Closing; and the Buyer shall have
received all authorizations, waivers, consents and permits, in form and
substance reasonably satisfactory to the Sellers, from all third parties,
including, without limitation, applicable governmental authorities, regulatory
agencies, lessors, lenders and contract parties required to permit the
continuation of the business of ARC by Buyer and the consummation of the
transactions contemplated by this Agreement.
(f) Employment Agreements. The Buyer shall have executed
---------------------
and delivered to each of Ernst Ambichl, Manfred Reindl and Bernd Greifeneder an
Employment Agreement in substantially the form of Exhibit 7.1(g) attached
--------------
hereto.
(g) Closing of Beta Transaction. All conditions to the
---------------------------
closing of the transactions contemplated by that certain Agreement and Plan of
Merger, dated as of the date hereof, among Buyer USA, Beta and the stockholders
of Beta (the "Merger Agreement") shall have been satisfied or waived and the
transactions contemplated by the Merger Agreement shall have been consummated.
7.2.2 Conditions to the Obligations of Sellers at the Second Closing.
--------------------------------------------------------------
The obligations of the Sellers to consummate this Agreement and the transactions
contemplated hereby to be consummated at the Second Closing are subject to the
fulfillment, prior to or at the Second closing, of the following conditions
precedent:
(a) Representations; Warranties; Covenants. Each of the
--------------------------------------
representations and warranties of Buyer contained in Section 5 shall be true and
correct as though made on and as of the Second Closing Date; Buyer shall, on or
before the Second Closing, have performed all of its obligations hereunder which
by the terms hereof are to be
26
<PAGE>
performed on or before the Second Closing; and Buyer shall have delivered to the
Sellers a certificate of the Chief Executive Officer, President or Treasurer of
Buyer dated as of the Second Closing Date to such effect.
(b) No Material Change. There shall have been no material
------------------
adverse change in the financial condition, prospects, properties, assets,
liabilities, business or operations of the Buyer since the date hereof.
SECTION 8. TERMINATION OF AGREEMENT; RIGHTS TO PROCEED.
-------------------------------------------------------
8.1 Termination. At any time prior to the Closing, this Agreement may be
-----------
terminated as follows:
(i) by mutual written consent of all of the parties
to this Agreement;
(ii) by Buyer, pursuant to written notice by Buyer to
the Sellers, if any of the conditions set forth in Section 7.1 of this Agreement
have not been satisfied at or prior to the First Closing Date and Buyer is not
then in default hereunder; and
(iii) by the Sellers, pursuant to written notice by
Sellers to Buyer, if any of the conditions set forth in Section 7.2 of this
Agreement have not been satisfied at or prior to the First Closing Date and the
Sellers are not then in default hereunder.
8.2 Effect of Termination. All obligations of the parties hereunder shall
---------------------
cease upon any termination pursuant to Section 8.1; provided, however, that the
-------- -------
provisions of this Section 8, Section 10.2 and Section 10.10 hereof shall
survive any termination of this Agreement.
SECTION 9. RIGHTS AND OBLIGATIONS SUBSEQUENT TO CLOSING.
--------------------------------------------------------
9.1 Survival of Warranties; Setoff.
------------------------------
(a) Each of the representations, warranties, agreements,
covenants and obligations herein or in any schedule, exhibit, certificate or
financial statement delivered by any party to the other party incident to the
transactions contemplated hereby are material, shall be deemed to have been
relied upon by the other party and shall survive the Closing regardless of any
investigation and shall not merge in the performance of any obligation by either
party hereto. Subject to Section 9.1(c) below, each party shall be liable to any
other party for all damages, liabilities, losses, taxes, fines, penalties,
expenses or costs (including reasonable attorneys fees and expenses) of any kind
or nature whatsoever (collectively "Losses") which may be sustained, suffered or
incurred by or against such party as a result of
27
<PAGE>
any breach of this Agreement or any document or instrument related hereto or in
any Schedule, exhibit or certificate delivered pursuant hereto.
(b) Subject to Section 9.1(c) below, any breach by the
Sellers of a representation, covenant or obligation contained in this Agreement,
in any agreement or document related hereto (other than any Employment
Agreement) or in any Schedule, exhibit or certificate delivered pursuant hereto
shall entitle Buyer first to set off from any future payment that Buyer is to
make pursuant to the Note, amounts equal to the Losses sustained, suffered or
incurred by or made against the Buyer as a result of such breach and then to
collect the balance, if any, directly from the Sellers.
(c) Notwithstanding the foregoing, the Sellers shall not
have any liability to Buyer for any breach of or noncompliance with this
Agreement (and with any other document executed by any of the Sellers in
connection herewith), including by way of set off from any future payments that
Buyer is required to make pursuant to the Note, unless (a) the aggregate amount
of all Losses shall exceed $25,000, and thereafter, Sellers shall only be liable
for Losses in excess of said $25,000; and (b) such claim, except claims with
respect to Section 2.8 or Section 2.13 which may be asserted until the
expiration of the applicable statue of limitations, is asserted against the
Sellers (whether or not such Losses have actually been incurred) on or before
the third anniversary of the Closing Date. Buyer agrees to reasonably cooperate
to minimize Losses.
(d) Notwithstanding the foregoing, Buyer shall not have any
liability to any Seller for breach of or noncompliance with this Agreement or
with any other document executed by Buyer in connection herewith except the Note
or the Employment Agreements, unless and until (a) the aggregate amount of all
Losses shall exceed $25,000, in which case, Buyer shall thereafter only be
liable for Losses in excess of said $25,000; and (b) such claim is asserted
against Buyer (whether or not such Losses have been actually incurred) on or
before the third anniversary of the Closing Date. The Sellers agree to
reasonably cooperate to minimize Losses.
SECTION 10. MISCELLANEOUS.
-------------------------
10.1 Bulk Sales Law. Buyer waives compliance by the Sellers with the
--------------
provisions of any applicable bulk sales, fraudulent conveyance or other law for
the protection of creditors in connection with the transfer of the Subject
Assets under this Agreement.
10.2 Fees and Expenses.
-----------------
(a) Except as set forth herein, each of the parties will
bear its own expenses in connection with the negotiation and the consummation of
the transactions contemplated by this Agreement, and no expenses of the Sellers
or the Stockholders relating in any way to the purchase and sale of the Subject
Assets hereunder and the transactions contemplated hereby, including without
limitation, legal, accounting or other professional
28
<PAGE>
expenses of the Sellers or the Stockholders, shall be charged to or paid by
Buyer or included in any of the Assumed Liabilities.
(b) ARC will pay all costs incurred, whether at or
subsequent to the Closing, in connection with the transfer of the Subject Assets
to Buyer as contemplated by this Agreement, including without limitation, all
sales, use, excise, real property and other transfer taxes and charges
applicable to such transfer; all recording charges and fees applicable to the
recordation of deeds and mortgages and other instruments of transfer; and all
costs of obtaining or transferring permits, registrations, applications and
other tangible and intangible properties. Notwithstanding the foregoing, the
Sellers shall not be liable for any costs of obtaining or transferring permits,
registrations, applications and other tangible or intangible properties, that
would not have been necessary for the conduct of the business of ARC in the
jurisdictions and in the manner in which ARC did business on the date hereof.
10.3 Governing Law. This Agreement shall be construed under and governed by
-------------
the internal laws of the Commonwealth of Massachusetts, U.S.A. without regard to
its conflict of laws provisions. Except with respect to matters as to which
injunctive relief is being sought, any dispute arising out of this Agreement or
related to its violation, termination or nullity shall be finally settled under
the Rules of Arbitration and Conciliation of the International Arbitral Centre
of the Austrian Federal Economic Chamber in Vienna (Vienna Rules) by three
arbitrators appointed in accordance with such rules. The substantive law of the
Commonwealth of Massachusetts shall be applicable, whereby the parties hereto
waive the application of the Austrian Conflict of Law Rules (IPRG) and the
application of the Convention of International Sales of Goods (CISG). The
language to be used in the arbitral proceeding shall be English. The
International Arbitral Centre in Vienna shall have exclusive jurisdiction, no
other forum shall have jurisdiction either for a request of arbitration or any
other means of conducting the arbitral proceedings. The venue and seat of
arbitration shall be in Linz, Austria. Each of the parties hereto further
agrees that service of any process, summons, notice or document by U.S.
registered mail to its address set forth herein shall be effective service of
process for any action, suit or proceeding brought against it in any such court.
10.4 Notices. Any notice, request, demand or other communication required
-------
or permitted hereunder shall be in writing and shall be deemed to have been
given if delivered or sent by facsimile transmission, upon receipt, or if sent
by registered or certified mail, upon the sooner of the date on which receipt is
acknowledged or the expiration of three days after deposit in United States Post
Office facilities properly addressed with postage prepaid. All notices to a
party will be sent to the addresses set forth below or to such other address or
person as such party may designate by notice to each other party hereunder:
TO BUYER: Segue Software, Inc.
- -------- 1320 Centre Street
Newton Centre, MA 02159
Facsimile: 617-796-1621
29
<PAGE>
With a copy to: Goodwin, Procter & Hoar LLP
Exchange Place
Boston, MA 02109
Attn: Jeffrey C. Hadden, Esq.
Facsimile: 617-523-1231
TO ARC OR THE
STOCKHOLDERS: ARC - Dr. Ambichl & Dr. Reindl
- ------------- Communication GmbH
Wiener Strasse 131
4020 Linz
With a copy to: Perrie, Buker, Jones & Morton, P.C.
115 Perimeter Center Place, Suite 170
Atlanta, GA 30346
Attn: Charles Buker, Esq.
Facsimile: 770-804-0509
and: Meyndt, Ransmayr, Schweiger &
Partner Rechtsanwalte
A-4020 Linz
Landstrasse 42/Rudigierstrasse
Attn: Thomas Schweiger
Facsimile: 0732/796906
Any notice given hereunder may be given on behalf of any party by his counsel or
other authorized representatives.
10.5 Entire Agreement. This Agreement, including the Schedules and
----------------
Exhibits referred to herein and the other writings specifically identified
herein or contemplated hereby, is complete, reflects the entire agreement of the
parties with respect to its subject matter, and supersedes all previous written
or oral negotiations, commitments and writings. No promises, representations,
understandings, warranties and agreements have been made by any of the parties
hereto except as referred to herein or in such Schedules and Exhibits or in such
other writings; and all inducements to the making of this Agreement relied upon
by either party hereto have been expressed herein or in such Schedules or
Exhibits or in such other writings.
10.6 Assignability; Binding Effect. Prior to the Second Closing, this
-----------------------------
Agreement shall only be assignable by Buyer to a corporation, partnership or
limited liability company controlling, controlled by or under common control
with Buyer upon written notice to the Sellers. After the Second Closing,
Buyer's rights and obligations hereunder shall be freely assignable. This
Agreement may not be assigned by the Sellers without the prior written consent
of Buyer. This Agreement shall be binding upon and enforceable by, and shall
inure to the benefit of, the parties hereto and their respective successors and
permitted assigns.
30
<PAGE>
10.7 Captions and Gender. The captions in this Agreement are for
-------------------
convenience only and shall not affect the construction or interpretation of any
term or provision hereof. The use in this Agreement of the masculine pronoun in
reference to a party hereto shall be deemed to include the feminine or neuter,
as the context may require.
10.8 Execution in Counterparts. For the convenience of the parties and to
-------------------------
facilitate execution, this Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which shall
constitute one and the same document.
10.9 Amendments. This Agreement may not be amended or modified, nor may
----------
compliance with any condition or covenant set forth herein be waived, except by
a writing duly and validly executed by each party hereto, or in the case of a
waiver, the party waiving compliance.
10.10 Publicity and Disclosures. No press releases or public disclosure,
-------------------------
either written or oral, of the transactions contemplated by this Agreement,
shall be made by a party to this Agreement without the prior knowledge and
written consent of Buyer, ARC and the Stockholders.
[SIGNATURE PAGE FOLLOWS]
31
<PAGE>
IN WITNESS WHEREOF the parties hereto have caused this Agreement to be
executed as of the date set forth above by their duly authorized
representatives.
BUYER: SEGUE SOFTWARE, INC.
- -----
By: /s/ J. Jeffrey Bingenheimer
--------------------------------
Name:
Title:
SELLERS: ARC - DR. AMBICHL & DR. REINDL
- ------- COMMUNICATION GmbH
By: /s/ Manfred Reindl
--------------------------------
Name:
Title:
/s/ Ernst Ambichl
-----------------------------------
Ernst Ambichl
/s/ Manfred Reindl
-----------------------------------
Manfred Reindl
/s/ Bernd Greifeneder
-----------------------------------
Bernd Greifeneder
<PAGE>
List of Exhibits and Schedules
Schedule 1.1.1(ii) Machinery, Equipment and Other Tangible Personal Property
Schedule 1.1.1(iii) Assigned Contracts
Schedule 1.1.1(iv) Assigned Permits
Schedule 1.1.1(viii) Computers and Computer Programs
Schedule 1.1.1(x) Copyrights, Trademarks, Patents and Other Similar Rights
Schedule 2.2 Organization and Qualifications of Sellers
Schedule 2.6(b) Leased Real Property
Schedule 2.6(c) Personal Property
Schedule 2.7 Financial Statements
Schedule 2.8 Tax Returns
Schedule 2.12 Banking Relations
Schedule 2.13 Intellectual Property
Schedule 2.14 Contracts
Schedule 2.17 Insurance
Exhibit 1.4 Form of ARC Note
Exhibit 1.5(a) Form of Bill of Sale
Exhibit 1.5(b) Form of Assignment and Assumption of Contracts Agreement
Exhibit 1.5(c) Form of Assignment and Assumption of Leases Agreement
Exhibit 1.5(d) Form of Assignment and Assumption of Intellectual
Property
Exhibit 7.1(d) Form of Opinion of Sellers' Counsel
Exhibit 7.1(i) Form of Employment Agreement
Exhibit 7.2(b) Form of Opinion of Buyer's Counsel
<PAGE>
EXHIBIT 10.12
SEGUE SOFTWARE, INC.
SPECIAL TERMINATION AND VESTING PLAN
------------------------------------
1. Executives Covered. This Special Termination and Vesting Plan (the
------------------
"Plan") shall apply to all executive employees with the title of President,
Chief Executive Officer, Chief Financial Officer, Chief Technical Officer,
Senior Vice President and Executive Vice President (each, a "Covered Executive;"
collectively, the "Covered Executives") of Segue Software, Inc. (the "Company")
or any of its subsidiaries or affiliates.
2. Certain Definitions. For purposes of this Plan, the following terms
-------------------
shall have the following meanings:
(a) Change in Control. A "Change in Control" shall mean the
-----------------
occurrence of any one of the following events:
(i) any "person," as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934 (the "Act") (other than
the Company, any of its subsidiaries, any trustee, fiduciary or other
person or entity holding securities under any employee benefit plan or
trust of the Company, or any of its subsidiaries), together with all
"affiliates" and "associates" (as such terms are defined in Rule 12b-2
under the Act) of such person, shall become the "beneficial owner" (as
such term is defined in Rule 13d-3 under the Act), directly or
indirectly, of securities of the Company representing 50% or more of
the then outstanding shares of Common Stock of the Company (the
"Stock") (other than as a result of an acquisition of securities
directly from the Company); or
(ii) persons who, as of the date hereof, constitute the
Company's Board of Directors (the "Incumbent Directors") cease for any
reason, including, without limitation, as a result of a tender offer,
proxy contest, merger or similar transaction, to constitute at least a
majority of the Board, provided that any person becoming a director of
the Company subsequent to the date hereof whose election or nomination
for election was approved by a vote of at least a majority of the
Incumbent Directors shall, for purposes of this Plan, be considered an
Incumbent Director; or
(iii) the stockholders of the Company shall approve (A) any
consolidation or merger of the Company or any subsidiary of the
Company where the shareholders of the Company, immediately prior to
the consolidation or merger, would not, immediately after the
consolidation or merger, beneficially own (as such term is defined in
Rule 13d-3 under the Act), directly or indirectly, shares representing
in the aggregate 50% of the voting shares of the corporation issuing
cash or securities in the consolidation or merger (or of its ultimate
parent corporation, if any), (B) any sale, lease, exchange or other
<PAGE>
transfer (in one transaction or a series of transactions contemplated
or arranged by any party as a single plan) of all or substantially all
of the assets of the Company or (C) any plan or proposal for the
liquidation or dissolution of the Company.
Notwithstanding the foregoing, a "Change in Control" shall not be
deemed to have occurred for purposes of the foregoing clause (i) solely as
the result of an acquisition of securities by the Company which, by
reducing the number of shares of Stock outstanding, increases the
proportionate number of shares of Stock beneficially owned by any person to
50% or more of the shares of Stock then outstanding; provided, however,
-------- -------
that if any such person shall thereafter become the beneficial owner of any
additional shares of Stock (other than pursuant to a share split, stock
dividend, or similar transaction), then a "Change in Control" shall be
deemed to have occurred for purposes of the foregoing clause (i).
(b) Terminating Event. A "Terminating Event" shall mean any of the
-----------------
following events:
(i) termination by the Company of the employment of the Covered
Executive with the Company for any reason other than for Cause or the
death of the Covered Executive. "Cause" shall mean, and shall be
limited to, the occurrence of any one or more of the following events:
(A) a willful act of dishonesty by the Covered Executive
with respect to any matter involving the Company or any
subsidiary or affiliate; or
(B) conviction of the Covered Executive of a crime involving
moral turpitude; or
(C) the deliberate or willful failure by the Covered
Executive (other than by reason of the Covered Executive's
physical or mental illness, incapacity or disability) to
substantially perform the Covered Executive's duties with the
Company and the continuation of such failure for a period of 30
days after delivery by the Company to the Covered Executive of
written notice specifying the scope and nature of such failure
and its intention to terminate the Covered Executive for Cause.
A Terminating Event shall not be deemed to have occurred pursuant
to this Section 2(b)(i) solely as a result of the Covered Executive
being an employee of any direct or indirect successor to the business
or assets of the Company, rather than continuing as an employee of the
Company following a Change in Control. For purposes of clauses (A)
and (C) of this Section 2(b)(i), no act, or failure to act, on the
Covered Executive's part shall be deemed
2
<PAGE>
"willful" unless done, or omitted to be done, by the Covered Executive
without reasonable belief that the Covered Executive's act, or failure
to act, was in the best interest of the Company and its subsidiaries
and affiliates; or
(ii) termination by the Covered Executive of the Covered
Executive's employment with the Company for Good Reason. "Good
Reason" shall mean the occurrence of any of the following events:
(A) a substantial adverse change, not consented to by the
Covered Executive, in the nature or scope of the Covered
Executive's responsibilities, authorities, powers, functions, or
duties from the responsibilities, authorities, powers, functions,
or duties exercised by the Covered Executive immediately prior to
the Change in Control; or
(B) a reduction in the Covered Executive's annual base
salary as in effect on the date of adoption of this Plan or as
the same may be increased from time to time except for across-
the-board salary reductions similarly affecting all or
substantially all management employees; or
(C) the relocation of the Company's offices at which the
Covered Executive is principally employed immediately prior to
the date of a Change in Control to a location more than fifty
(50) miles from such offices, or the requirement by the Company
for the Covered Executive to be based anywhere other than the
Company's offices at such location, except for required travel on
the Company's business to an extent substantially consistent with
the Covered Executive's business travel obligations immediately
prior to the Change in Control; or
(D) the failure by the Company to pay to the Covered
Executive any portion of his compensation or to pay to the
Covered Executive any portion of an installment of deferred
compensation under any deferred compensation program of the
Company within fifteen (15) days of the date such compensation is
due without prior written consent of the Covered Executive; or
(E) the failure by the Company to obtain an effective
agreement from any successor to assume and agree to perform this
Agreement.
Any termination by the Covered Executive of such Covered Executive's
employment with the Company for any reason other than Good Reason shall not be
deemed to be a Terminating Event hereunder.
3
<PAGE>
3. Special Termination Benefits. Subject to the provisions of Section 4
----------------------------
below, in the event that a Terminating Event occurs with respect to a Covered
Executive within one (1) year after a Change in Control, such Covered Executive
shall be provided with the following Special Termination Benefits:
(a) the Company shall pay to the Covered Executive an amount equal to
the base salary received by the Covered Executive in the calendar year
immediately prior to the Change in Control, determined prior to any
reductions for pre-tax contributions to a cash or deferred arrangement or a
cafeteria plan. Said amount shall be paid in periodic installments in
accordance with the Company's usual practice for its senior executives;
(b) the Company shall continue to provide health, dental, long-term
disability, and life insurance benefits to the Covered Executive, on the
same terms and conditions as though the Covered Executive had remained an
active employee, for a period of twelve (12) months; and
(c) the Company shall provide COBRA benefits to the Covered Executive
following the end of the period referred to in Section 3(b) above, such
benefits to be determined as though employment had terminated at the end of
such period.
4. Adjustments in Special Termination Benefits. The Special Termination
-------------------------------------------
Benefits payable pursuant to Section 3 above shall be adjusted as follows:
(a) All payments shall be reduced by the amount of any severance pay
benefits payable to any officer under any employment, change in control or
special termination agreement or severance pay benefits or notice pay to
any employee under any "tin parachute," WARN, or similar law.
(b) In the event that the Special Termination Benefits payable to any
Covered Executive pursuant to this Plan, together with any payments to or
for the benefit of the Covered Executive under any other agreement or plan
pursuant to which the Covered Executive is entitled to receive payments or
benefits, in the aggregate exceeds the amount that may be deducted by the
entity making the payment by reason of the operation of Section 280G of the
Internal Revenue Code of 1986, as amended, the amount of the Special
Termination Benefits shall be reduced to the maximum which may be deducted
by such entity.
(c) All payments will be subject to usual and customary tax
withholding.
(d) Notwithstanding anything to the contrary contained herein, the
Special Termination Benefits payable pursuant to Section 3 above shall be
subject to the Covered Executive's continued compliance with any non-compete,
confidentiality or other obligations of such Covered Executive pursuant to any
written agreement between the Company and the Covered Executive.
4
<PAGE>
5. Vesting of Options. In the event that a Terminating Event occurs with
------------------
respect to a Covered Executive within one (1) year after a Change in Control,
notwithstanding anything to the contrary contained in the Company's Amended and
Restated Incentive and Non-qualified Stock Option Plan (as amended from time to
time, the "Option Plan"), any option agreement granted under the Option Plan or
any other agreement between the Company and a Covered Executive pursuant to
which options to purchase shares of Stock of the Company have been or are
granted (including, without limitation, the definition of "cause" contained
therein), upon such Terminating Event, all outstanding options held by such
Covered Executive, whether or not previously exercisable by such Covered
Executive, shall become exercisable by the Covered Executive.
6. Enforceability. If any portion or provision of this Plan shall to any
--------------
extent be declared illegal or unenforceable by a court of competent
jurisdiction, then the remainder of this Plan, or the application of such
portion or provision in circumstances other than those as to which it is so
declared illegal or unenforceable, shall not be affected thereby, and each
portion and provision of this Plan shall be valid and enforceable to the fullest
extent permitted by law.
7. Effect on Other Plans. Nothing in this Plan shall be construed to
---------------------
limit the rights of the Covered Executive under the Company's benefit plans,
programs or policies except as otherwise provided in Section 3 hereof, and
except that the Covered Executive shall have no rights to any severance benefits
under any severance pay plan.
8. Obligations of Successors. In addition to any obligations imposed by
-------------------------
law upon any successor to the Company, the Company will use its best efforts to
require any successor (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the business or
assets of the Company to expressly assume and agree to perform this Plan in the
same manner and to the same extent that the Company would be required to perform
if no such succession had taken place.
9. Amendment or Termination of Plan. The Company may amend or terminate
--------------------------------
this Plan at any time or from time to time; provided, however, that no such
-------- -------
amendment or termination shall, without the written consent of the Covered
Executives, in any material adverse way affect the rights of a Covered Executive
with respect to benefits earned prior to the date of amendment or termination.
10. No Contract for Continuing Services. This Plan shall not be construed
-----------------------------------
as creating any contract for continued services between the Company and any
Covered Executive and nothing herein contained shall give any Covered Executive
the right to be retained as an employee of the Company.
5
<PAGE>
11. Governing Law. This Plan shall be construed, administered, and
-------------
enforced in accordance with the laws of the Commonwealth of Massachusetts.
Adopted: February 5, 1997
6
<PAGE>
[SEGUE SOFTWARE, INC. LOGO APPEARS HERE]
EXHIBIT 10.13
December 11, 1997
BY HAND
- -------
Ms. Elisabeth Elterman
66 Brookline Street
Newton, MA 02167
Dear Elisabeth:
This letter will confirm the agreement that we have reached regarding your
resignation. The purpose of this agreement is to establish an amicable
arrangement for ending our relationship, to release Segue Software, Inc. (the
"Company") from any liability to you and to permit you to receive fair and
reasonable separation pay and related benefits.
With that understanding, you and the Company agree as follows:
1. Resignation
-----------
You have resigned from your employment, your office of President and your
directorship with the Company effective December 31, 1997 ("your resignation
date").
2. Severance Pay
-------------
During the period January 1, 1998 through December 31, 1998, the Company
will pay you $180,000 as severance, payable in twenty-four equal payments of
$7,500 each, less applicable withholdings and deductions, on the Company's
regular bi-weekly paydays.
3. Benefits
--------
You may continue your participation in the Company's group family medical
and family dental plans for the 18-month period following your resignation date
pursuant to the provisions of COBRA. The Company will pay your premium expenses
with respect to the group medical and dental plans until the earlier of December
31, 1998 or the date on which you otherwise become employed; thereafter, your
participation in these plans will be at your own expense.
The Company has been informed by its insurance agent that you will be
permitted to continue your group term life insurance coverage under the
Company's policy with The Guardian through December 31, 1998. The Company has
also been informed by its insurance agent that you will be permitted to convert
your group life insurance coverage with The Guardian to an
<PAGE>
Ms. Elisabeth Elterman
December 11, 1997
Page 2
individual whole life policy with a death benefit of $180,000 within 31 days of
December 31, 1998. Our insurance agent has informed us that no medical
examination will be necessary if you exercise your conversion right within that
time.
All other benefits, except as expressly provided elsewhere in this
Agreement, will cease as of December 31, 1997.
4. Stock Options
-------------
Any options that you hold to purchase shares of the Company's Common Stock
pursuant to its 1996 Amended and Restated incentive and Non-Qualified Stock
Option Plan or any predecessor plan that are not vested at the time of your
resignation (the "previously unvested options") will accelerate and vest as of
December 31, 1997. Nothwithstanding anything to the contrary contained in your
option agreements with respect to the previously unexercised options, your right
to exercise the previously unvested options will continue until September 30,
1998.
Pursuant to the terms of your option agreements, your right to exercise
those options that vested prior to your resignation date will expire on March
31, 1998.
5. Release of Claims
-----------------
In exchange for the payments described in paragraphs 2, 3 and 4 above, you
voluntarily agree to release the Company, its affiliates, subsidiaries,
successors and assigns, and their current and former officers, directors,
shareholders, employees, and agents in their official and personal capacities
(collectively referred to as the "Releasees") generally from all claims, demands
and liabilities of every name and nature, known or unknown, which exist or have
existed up to and including the date you sign this letter, including but not
limited to claims relating to your employment by and resignation from the
Company, including but not limited to wrongful discharge claims, breach of
contract claims, discrimination claims (including without limitation claims of
age discrimination under the Age Discrimination in Employment Act), tort claims,
statutory claims, claims for wages, bonuses, incentive compensation, vacation
pay or any other compensation or benefits, and claims for compensation or
punitive damages or attorneys fees; provided, however, that this release shall
not affect your vested rights under the Company's 401(k) retirement savings
plan.
You acknowledge that, in entering into this agreement, the Company does not
admit that it violated any legal or other obligation to you.
<PAGE>
Ms. Elisabeth Elterman
December 11, 1997
Page 3
6. No Financial Irregularities
---------------------------
You acknowledge and represent that you know of no reason to believe that
you or the Company has engaged in any financial irregularities or possible
violations of disclosure requirements or other laws.
7. Confidentiality
---------------
You agree to keep the existence and terms of this Agreement in the
strictest confidence and to not reveal the terms of this Agreement to any
persons except your immediate family, your attorney and your financial advisors,
provided they also agree to keep the information confidential.
If the Company determines that it is necessary to make any public
disclosure concerning the terms of this agreement, it will notify you in advance
and give you an opportunity to discuss the nature and scope of the disclosure.
8. Return of Company Property
--------------------------
You will return all Company property, including keys, credit cards,
equipment, files, software and other documents (including all originals and
copies) by December 31, 1997.
9. Voicemail
---------
The Company will continue your voicemail through March 31, 1998. Your
access to any other Company system will be shut off on December 31, 1997.
10. Continuing Obligations Under Employment Agreement
-------------------------------------------------
You acknowledge that following your resignation date you will continue to
be bound by your obligations under the Employee Agreement that you signed on
January 4, 1993 (attached as Exhibit A hereto).
11. Future Cooperation
------------------
You agree to cooperate reasonably with the Company and all of its
affiliates (including its and their outside counsel) in connection with the
contemplation, prosecution and defense of all phases of existing, past and
future litigation about which the Company believes you have
<PAGE>
Ms. Elisabeth Elterman
December 11, 1997
Page 4
knowledge or information and, in doing so, to make yourself available at
mutually convenient times and in all reasonable locations. The Company will pay
you in advance for any pre-approved costs to be incurred in connection with your
cooperation pursuant to this paragraph, or if you incur travel expenses which
are approved in advance by the Company, the Company will reimburse you for those
approved expenses incurred by you on or within 10 days of receipt of itemized
bills (with receipts attached). The reasonableness of expenses is to be
determined under the Company's business travel policy. For all time (except
testimony at depositions, hearings or trials) you expend in cooperating with the
Company or any of its affiliates pursuant to this paragraph after December 31,
1998, you shall, in addition to the Company's payment of expenses, be
compensated at the rate of $100 per hour.
12. Non-Disparagement
-----------------
You will refrain from making any disparaging statements, taking any
actions, or conducting yourself in any way that adversely affects the reputation
or goodwill of the Company and/or its affiliated companies and their officers,
directors, shareholders, employees and agents. Senior officers of the Company
will be instructed not to make disparaging statements about you.
13. Legal Representation
--------------------
This agreement is a legally binding document and your signature will commit
you to its terms. You acknowledge that you have been advised to discuss all
aspects of this agreement with your attorney, that you have carefully read and
fully understand all of the provisions of this agreement and that you are
voluntarily entering into this agreement.
14. Other Provisions
----------------
You acknowledge that you have been given the opportunity to consider this
agreement for twenty-one (21) days before signing it. If you sign this
agreement within less than twenty-one (21) days of the date of its delivery to
you, you acknowledge that such decision was entirely voluntary and that you had
the opportunity to consider this agreement for the entire twenty-one (21) day
period. For a period of seven (7) days from the date you sign this agreement,
you have the right to revoke this agreement by written notice to the
undersigned. This agreement shall not become effective or enforceable until the
expiration of the revocation period.
This letter constitutes the entire agreement regarding your resignation
from the Company and supersedes any previous agreements or understandings
between us, except the
<PAGE>
Ms. Elisabeth Elterman
December 11, 1997
Page 5
Indemnification Agreement, dated April 22, 1996, between you and the Company
(Exhibit B hereto) and your obligations under your Employee Agreement (Exhibit
A), which remain in full force and effect. In signing this agreement, you are
not relying upon any oral promises made by anyone at the Company. This agreement
will be interpreted and enforced under the laws of the Commonwealth of
Massachusetts.
Please indicate your agreement to the terms of this agreement by signing
and returning to me a copy of this letter.
Very truly yours,
SEGUE SOFTWARE, INC.
By: /s/ Stephen B. Butler
-----------------------
Stephen B. Butler
Chief Executive Officer
The foregoing is agreed to and accepted by:
Date: December 31, 1997 /s/ Elisabeth Elterman
----------------- -----------------------------
Elisabeth Elterman
<PAGE>
SUPPLEMENT TO LETTER AGREEMENT
This AGREEMENT, made as of December 11, 1997, by and between Segue
Software, Inc. (the "Company") and Elisabeth Elterman ("Elterman"), amends and
supplements that certain letter agreement between the parties, dated December
11, 1997 (the "Letter Agreement"), as follows:
1. The Company shall use its best efforts to maintain the effectiveness of
its registration on Form S-8 covering the issuance of shares under the Company's
1996 Amended and Restated Incentive and Non-Qualified Stock Option Plan or any
predecessor plan thereof. In the event that such effectiveness shall lapse at a
time when the right of Elterman to exercise any said option has not expired,
such right to exercise shall be extended for a period of 90 days subsequent to
the re-establishment of such effectiveness.
2. The Company warrants and represents that as of the date hereof, it is
unaware of any claims or causes of action, of any kind, against Elterman arising
out of her relationship with the Company as a director, officer or employee.
SO AGREED Segue Software, Inc.
By: /s/ Stephen B. Butler
----------------------------
Stephen B. Butler
Chief Executive Officer
/s/ Elisabeth Elterman
--------------------------------
Elisabeth Elterman
<PAGE>
EXBIBIT 21.1
Subsidiaries of the Registrant
Segue Canada, Inc.
incorporated in the province of Ontario, Canada
Segue Securities Corporation
incorporated in the state of Massachusetts
Segue Export, Inc.
incorporated in the island of Barbados, West Indies
SGE Merger Corporation
incorporated in the state of Delaware
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement of
Segue Software, Inc. on Form S-8 (File No. 333-09393) of our report dated
February 5, 1998, on our audits of the consolidated financial statements of
Segue Software, Inc. as of December 31, 1997 and 1996, and for the years ended
December 31, 1997, 1996 and 1995, which report is included in this Annual Report
on Form 10-K.
/s/COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
March 27, 1998
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