-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CR4heSvmzGMAweBLjRS4hj0nUhutkgEQSeS65zb0ItXXjgaKSNoYthCIagplYxnK NEzOsVtKF+zztRlw1963DA== 0000950109-97-006356.txt : 19971016 0000950109-97-006356.hdr.sgml : 19971016 ACCESSION NUMBER: 0000950109-97-006356 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 25 FILED AS OF DATE: 19971015 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOFTWARE AG SYSTEMS INC CENTRAL INDEX KEY: 0000352683 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 541167173 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-36567 FILM NUMBER: 97696066 BUSINESS ADDRESS: STREET 1: 11190 SUNRISE VALLEY DR CITY: RESTON STATE: VA ZIP: 20191 BUSINESS PHONE: 7038605050 MAIL ADDRESS: STREET 1: 11190 SUNRISE VALLEY DR CITY: RESTON STATE: VA ZIP: 20191 S-1/A 1 AMENDMENT NO. 1 TO FORM S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 15, 1997 REGISTRATION NO. 333-36567 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION ---------------- AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------------- SOFTWARE AG SYSTEMS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ---------------- DELAWARE 54-1167173 (STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.) 5734 (PRIMARY STANDARD INDUSTRIAL CLASSIFICATION CODE NUMBER) 11190 SUNRISE VALLEY DRIVE RESTON, VA 20191 (703) 860-5050 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) ---------------- DANIEL F. GILLIS PRESIDENT AND CHIEF EXECUTIVE OFFICER 11190 SUNRISE VALLEY DRIVE RESTON, VA 20191 (703) 860-5050 (NAME AND ADDRESS OF AGENT FOR SERVICE) ---------------- COPIES TO: ROBERT B. OTT, ESQ. DANIEL A. RASKAS, ESQ. ARNOLD & PORTER 555 TWELFTH PETER B. TARR, ESQ. BRENT B. SILER, STREET, N.W. WASHINGTON, D.C. 20004 ESQ. HALE AND DORR LLP 1455 (202) 942-5000 PENNSYLVANIA AVENUE, N.W. WASHINGTON, D.C. 20004 ---------------- (202) 942-8400 APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE OF THE SECURITIES TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED OCTOBER 15, 1997 [LOGO OF SOFWARE AG AMERICAS APPEARS HERE] 7,700,000 SHARES COMMON STOCK Of the 7,700,000 shares of Common Stock offered hereby, 4,600,000 shares are being sold by Software AG Systems, Inc. (the "Company") and 3,100,000 shares are being sold by certain stockholders of the Company (the "Selling Stockholders"). See "Principal and Selling Stockholders." The Company will not receive any of the proceeds from the sale of shares being sold by the Selling Stockholders. Prior to this offering, there has been no public market for the Common Stock of the Company. It is currently estimated that the initial public offering price per share will be between $12.00 and $14.00 per share. See "Underwriting" for information relating to the method of determining the initial public offering price. The Common Stock has been approved for listing on the New York Stock Exchange ("NYSE") under the symbol "AGS," subject to official notice of issuance. --------- THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 7. --------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
UNDERWRITING PROCEEDS TO DISCOUNTS AND PROCEEDS TO SELLING PRICE TO COMMISSIONS COMPANY STOCKHOLDERS PUBLIC (1) (2) (3) (3) - -------------------------------------------------------------------------------- Per Share...................... $ $ $ $ - -------------------------------------------------------------------------------- Total (3)...................... $ $ $ $
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1) The Company and the Selling Stockholders have agreed to indemnify the Underwriters as stated herein (the "Underwriters") against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the "Securities Act"). See "Underwriting." (2) Before deducting expenses payable by the Company, estimated at $1,100,000. (3) The Company and the Selling Stockholders have granted to the Underwriters a 30-day option to purchase an aggregate of up to an additional 1,155,000 shares of Common Stock on the same terms as set forth above, solely to cover over-allotments, if any. See "Underwriting." If this option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions, Proceeds to Company and Proceeds to Selling Stockholders will be $ , $ , $ and $ , respectively. --------- The Common Stock is offered by the Underwriters as stated herein, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. It is expected that delivery of such shares will be made through the offices of BancAmerica Robertson Stephens, San Francisco, California, on or about , 1997. DONALDSON, LUFKIN & JENRETTE BANCAMERICA ROBERTSON STEPHENS SECURITIES CORPORATION The date of this Prospectus is , 1997 [COMPANY LOGO AND GRAPHICAL SCHEMATIC, UNDER THE CAPTION "ENTERPRISE BUSINESS SOLUTIONS," DEPICTING HOW THE COMPANY'S PRODUCTS AND SERVICES WORK TOGETHER AND WITH THIRD PARTY PRODUCTS IN BUSINESS COMPUTING ENVIRONMENTS TO DEVELOP ENTERPRISE LEVEL APPLICATIONS AND TO FACILITATE ACCESS TO INFORMATION. SUB- CAPTIONS INCLUDE "MISSION-CRITICAL SYSTEMS," "DATA WAREHOUSE," "INFORMATION ACCESS" AND "APPLICATION COMPONENT TECHNOLOGY."] CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF THE COMPANY, INCLUDING ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." 2 NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDER OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER TO, OR SOLICITATION OF, ANY PERSON IN ANY JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ---------------- TABLE OF CONTENTS
PAGE ---- Summary.................................................................. 4 Risk Factors............................................................. 7 Company Background....................................................... 15 Use of Proceeds.......................................................... 16 Dividend Policy.......................................................... 16 Capitalization........................................................... 17 Dilution................................................................. 18 Selected Consolidated Financial Data..................................... 19 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 21 Business................................................................. 32 Management............................................................... 44 Certain Relationships and Transactions................................... 50 Principal and Selling Stockholders....................................... 52 Description of Capital Stock............................................. 54 Shares Eligible for Future Sale.......................................... 57 Underwriting............................................................. 59 Legal Matters............................................................ 61 Experts.................................................................. 61 Additional Information................................................... 61 Index to Consolidated Financial Statements............................... F-1
---------------- The Company's principal executive offices are located at 11190 Sunrise Valley Drive, Reston, Virginia 20191, and its telephone number is (703) 860- 5050. The Company intends to mail to all of its stockholders an annual report containing financial statements audited by its independent accountants for each year and quarterly reports containing unaudited financial data for each of the first three quarters of each year. ENTIRE(R), SourcePoint(R), PREDICT(R), ADAPLEX +(R), ENTIRE NET-WORK(R) and ENTIRE ACCESS(R) are registered trademarks of the Company, and iXpress(TM), EntireX DCOM(TM), ENTIRE BROKER(TM), ENTIRE BROKER SDK(TM), ENTIRE BROKER APPC(TM), ENTIRE SAF Gateway(TM), INSIGHT 2000 (SM), INSIGHT 2000 Tool Kit(TM), CONSTRUCT(TM), NATURAL Lightstorm(TM), CONSTRUCT Spectrum(TM), CONSTRUCT Spectrum SDK(TM), CONSTRUCT Extract Service(TM), ADABAS Delta Save Facility(TM), ADABAS FASTPATH(TM), ADABAS SQL Server(TM), ADABAS Vista(TM) are trademarks or service marks of the Company. Trade names and trademarks of other companies appearing in this Prospectus are the property of their respective owners. 3 SUMMARY The following summary is qualified in its entirety by the more detailed information, including information set forth in "Risk Factors" and the Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Prospectus. This Prospectus contains forward-looking statements which involve risks and uncertainties. The Company's actual results may differ materially from those results discussed in these forward-looking statements and from the results historically experienced. Factors that might cause such a difference include, but are not limited to, those discussed in "Risk Factors." THE COMPANY Software AG Systems, Inc. is an enterprise solutions company that provides robust software products and related professional services to large organizations with complex computing requirements. The Company's products are used to build and enhance mission-critical applications that require reliability, scaleability and security, such as customer billing systems, financial accounting systems and inventory management systems. To complement its products, the Company has a comprehensive professional services offering, including consulting, software integration, systems implementation and large project management services. The Company has over 24 years of experience in addressing the needs of organizations with complex enterprise level computing environments. The Company provides enterprise development software products and related professional services used by organizations to develop new mission-critical applications and enterprise enablement software products and related professional services used to extend existing applications to new technologies. The Company's enterprise development products include ADABAS, a high- performance database management system designed to operate with a variety of data types and computer platforms, and NATURAL, a 4GL programming language that enables the development of applications that are portable, scaleable and interoperable across multiple computing platforms. The Company also provides software products and professional services that enable organizations to extend existing mission-critical applications to the Internet and intranets and to create new applications. Products in this area include ENTIRE, a family of middleware products that facilitates the communication between application components across heterogeneous computing environments; SourcePoint, an automated data warehouse management product; iXpress, a Web application assembly and deployment platform; and EntireX DCOM, a product that uses Microsoft's ActiveX technology to bridge applications written in a variety of programming languages. The Company's professional services that complement its products include application development and enhancement, application reengineering, application porting and rightsizing, Web integration and data warehouse design and implementation. The Company has a rapidly growing Year 2000 Program which offers a new, internally developed software product, INSIGHT 2000 Tool Kit, as well as project management and consulting services to assist customers in the resolution of their year 2000 problem. The Company believes that there are over one billion lines of NATURAL code in the United States alone, most of which are candidates for year 2000 analysis, remediation and testing. To address this opportunity, the Company has hired 78 new consultants in the first nine months of 1997 and has opened three Millenium Centers for code analysis, remediation and testing. The Company's strategy is to further leverage its current leadership position in building enterprise applications and data access solutions for large organizations by extending its product and professional service offerings into the Web integration, data warehouse, middleware and year 2000 markets. Key elements of this strategy include enhancing and extending product offerings through acquisitions of complementary products or technologies; internal product development and licensing additional products; leveraging the Company's current base of over 1,500 customers; expanding the Company's professional service offerings; and selling additional products and professional services through the Company's distribution channels. On March 31, 1997, the senior management of the Company and Thayer Equity Investors III, L.P. ("Thayer") acquired approximately 89% of the outstanding Common Stock of the Company (the 4 "Recapitalization"). Prior to the Recapitalization, the Company was a wholly owned subsidiary of Software AG, a large German software company ("SAG"), and the Company's management was constrained in its ability to develop new products, license third-party software, retain capital for expansion and make acquisitions of companies, products or technologies. Management has undertaken several strategic initiatives since the Recapitalization to increase revenue growth and profitability including building a product development organization, developing a product and professional services offering that addresses the year 2000 problem and acquiring R. D. Nickel and Associates Incorporated ("R.D. Nickel"), a software company with a family of application development products. The Company believes that, as an independent entity, it will continue to have significant opportunities to enhance growth. Immediately prior to the Recapitalization, the Company renegotiated its licensing agreement with SAG (as renegotiated, the "Cooperation Agreement") to provide the Company the exclusive and perpetual right to license and service in North America, South America, Japan and Israel (collectively, the "Territory") both existing and future products developed or acquired by SAG. The Company sells and markets its software products and professional services through direct and indirect channels. In North America, the Company sells and markets its products through a direct channel that includes over 120 people in 19 offices. The Company sells its products in over 20 additional countries through six exclusive distributorships in South America, Japan and Israel. In addition, the Company has access to the distribution channels of SAG in over 50 countries outside the Territory for the Company's products (other than those licensed from SAG). The Company recently implemented a reorganization of its sales force into three groups that focus separately on selling Enterprise License Agreements ("ELAs"), professional services and the Year 2000 Program. The Company believes that this reorganization and the resulting productivity improvements in its sales force have contributed to its revenue growth since the Recapitalization. The Company has over 1,500 customers, consisting primarily of major corporations, government agencies and educational institutions. The Company's customers include Morgan Stanley, Dean Witter, Discover & Co., Delta Air Lines, Inc., Sprint Corporation, Federal Express Corp., Nissan Motor Co., LTD., Cable and Wireless, PLC, Banorte Bank (Mexico), State of California, State of New Jersey, Federal Bureau of Investigation, Brown University and the University of Texas. Most of the Company's customers have been long term users of its products and services. For the twelve months ended September 30, 1997, approximately 96% of the Company's customers who were eligible renewed at least one of their maintenance agreements. THE OFFERING Common Stock Offered by the Company................. 4,600,000 shares Common Stock Offered by the Selling Stockholders.... 3,100,000 shares Common Stock to be Outstanding after the Offering (1)................................................ 28,937,500 shares Use of Proceeds..................................... To repay indebtedness; to fund an acquisition payment; and for working capital and other general corporate purposes. See "Use of Proceeds." Proposed NYSE Symbol................................ AGS
- -------- (1) Excludes (i) 4,947,525 shares of Common Stock issuable upon the exercise of stock options outstanding at October 15, 1997, granted under the Software AG Systems, Inc. 1997 Stock Option Plan (the "Stock Option Plan") at a weighted average exercise price of $4.90 per share and (ii) 1,927,475 additional shares of Common Stock reserved for future issuance under the Stock Option Plan. See "Management--Stock Option Plan." 5 SUMMARY CONSOLIDATED FINANCIAL DATA (in thousands, except per share data)
PREDECESSOR COMBINED PREDECESSOR -------------------------------------------------------- --------- ----------- NINE NINE THREE MONTHS MONTHS MONTHS YEARS ENDED DECEMBER 31, ENDED ENDED ENDED ---------------------------------------------- SEPT. 30, SEPT. 30, MARCH 31, 1992 1993 1994 1995 1996 1996 1997 1997 -------- -------- -------- -------- -------- --------- --------- ----------- CONSOLIDATED STATEMENT OF OPERATIONS DATA (1): Software license fees........... $ 50,498 $ 51,672 $ 51,832 $ 52,061 $ 52,163 $ 31,763 $ 40,053 $ 7,341 Maintenance fees................ 51,162 57,264 65,871 65,307 69,702 51,778 53,288 17,352 Professional service fees....... 24,139 31,175 29,552 35,194 34,975 26,980 30,976 9,948 -------- -------- -------- -------- -------- -------- -------- ------- Total revenues................. 125,799 140,111 147,255 152,562 156,840 110,521 124,317 34,641 Gross profit.................... 70,866 70,149 77,429 81,239 83,869 56,861 63,720 17,127 Operating expenses before write-off...................... 78,739 75,120 76,534 78,051 78,588 55,983 55,198 15,817 Write-off of acquired in-process research and development costs (2)...................... -- -- -- -- -- -- 6,051 -- Income (loss) from operations... (7,873) (4,971) 895 3,188 5,281 878 2,471 1,310 Net income (loss)............... (5,587) 6,380 1,382 3,326 6,209 1,910 297 1,373 ======== ======== ======== ======== ======== ======== ======== ======= Net income (loss) per share (3)............................ $ (0.18) $ 0.21 $ 0.05 $ 0.11 $ 0.20 $ 0.06 $ 0.01 $ 0.04 ======== ======== ======== ======== ======== ======== ======== ======= SUCCESSOR --------- SIX MONTHS ENDED SEPT. 30, 1997 --------- Software license fees........... $32,712 Maintenance fees................ 35,936 Professional service fees....... 21,028 --------- Total revenues................. 89,676 Gross profit.................... 46,593 Operating expenses before write-off...................... 39,381 Write-off of acquired in-process research and development costs (2)...................... 6,051 Income (loss) from operations... 1,161 Net income (loss)............... (1,076) ========= Net income (loss) per share (3)............................ $ (0.04) =========
SEPTEMBER 30, 1997 ---------------------------- ACTUAL AS ADJUSTED (4) -------- --- --------------- CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents.......................... $ 18,322 $ 67,411 Working capital ................................... 3,119 57,273 Total assets....................................... 141,056 190,505 Total stockholders' equity......................... 36,401 90,915
- -------- (1) The historical financial data set forth for the periods ended, or as of dates, on or prior to March 31, 1997 reflect the results of operations and balance sheet data of the Company prior to the Recapitalization when the Company was a wholly owned subsidiary of SAG and is captioned as "Predecessor." The historical financial data subsequent to March 31, 1997 reflect the results of operations and balance sheet data subsequent to the Recapitalization and is captioned as "Successor." "Combined" data combines financial data for the three months ended March 31, 1997 (prior to the Recapitalization) with financial data for the six months ended September 30, 1997 (subsequent to the Recapitalization). See "Company Background." (2) The write-off of acquired in-process research and development costs for the nine months ended September 30, 1997 relates to the Company's acquisition of R.D. Nickel. Before deducting the nonrecurring write-off for this period, income from operations was approximately $8.5 million, net income was approximately $6.3 million and net income per share was $0.23 (based on weighted average fully diluted shares outstanding of 27,421,472). (3) Shares used in computing net income (loss) per share for all periods presented are 30,583,942, except for the three month period ended March 31, 1997 and the six and nine month periods ended September 30, 1997, which are 27,421,472. See Note 1 of Notes to Consolidated Financial Statements. (4) As adjusted to give effect to the sale by the Company of 4,600,000 shares of Common Stock offered hereby by it at an assumed initial public offering price of $13.00 per share and the application of the net proceeds therefrom. See "Use of Proceeds." Except as otherwise indicated, the information contained in this Prospectus assumes no exercise of the Underwriters' over-allotment option and reflects a 275-for-1 stock split to be effected as a stock dividend prior to the closing of this offering. Unless the context otherwise requires, all references in this Prospectus to the "Company" or "Software AG Systems, Inc." refer to Software AG Systems, Inc., a Delaware corporation, and its consolidated subsidiaries. 6 RISK FACTORS This Prospectus contains forward-looking statements which involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements and from the results historically experienced as a result of certain factors, including those in the following risk factors and elsewhere in this Prospectus. In addition to the other information contained in this Prospectus, the following risk factors should be considered carefully in evaluating the Company and its business before purchasing shares of the Common Stock offered hereby. POTENTIAL FLUCTUATIONS IN QUARTERLY PERFORMANCE The Company has experienced significant quarterly and other fluctuations in revenues and results of operations and expects these fluctuations to continue in the future. The Company believes that these fluctuations have been primarily attributable to the budgeting and purchasing practices of its customers, and, to a lesser extent, the Company's sales commission practices, which are based partly on annual quotas, and other factors. The Company's revenues and results of operations may also be affected by seasonal trends which have resulted in higher revenues in the Company's third and fourth quarters and lower revenues in its first and second quarters. The Company's professional services fees tend to fluctuate due to the completion or commencement of significant projects, the number of working days in a quarter and the Company's ability to attract, retain and efficiently utilize professional services personnel. The Company's future revenues and operating results may fluctuate as a result of these and other factors, including the demand for the Company's products and services, the timing and cost of new product and service introductions and product enhancements by the Company or its competitors, changes in the mix of products and services sold by the Company and in the mix of sales by distribution channels, commencement or conclusion of significant service contracts, timing of any acquisitions and associated costs, the size, timing and terms of customer orders, including delays in significant orders, changes in pricing policies by the Company or its competitors, the timing of collection of accounts receivable, changes in foreign currency exchange rates, competitive conditions in the industry and general economic conditions. The Company's expense levels are based, in part, on its expectation of future revenues, and expense levels are, to a large extent, fixed in the short term. The Company may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. If revenue levels are below expectations for any reason, the Company's results of operations are likely to be materially and adversely affected. The Company's net income may be disproportionately affected by a reduction in revenue because a large portion of the Company's expenses cannot be easily reduced. In addition, the Company intends to increase its operating expenses by expanding its software product development staff, increasing its professional services and sales and marketing operations, expanding its distribution channels and hiring personnel in other operating areas. The Company expects to experience a significant time lag between the date professional services, sales and technical personnel are hired and the date such personnel become fully productive. The timing of such expansion and the rate at which new technical, professional services and sales personnel become productive as well as the timing of the introduction and the productivity of new distribution channels could cause material fluctuations in quarterly results of operations. Furthermore, to the extent such increased operating expenses precede or are not subsequently followed by increased revenues, the Company's business, financial condition and results of operations could be materially and adversely affected. Due to all of the foregoing factors, it is likely that in some future periods the Company's revenues or results of operations will be below the expectations of securities analysts or investors, in which case the market price of the Common Stock would likely be materially and adversely affected. See "Management's Discussion and Analysis of Financial Conditions and Results of Operations--Quarterly Results of Operations." RELATIONSHIP WITH SAG The Company has the exclusive and perpetual right to license and service in North America, South America, Japan and Israel both existing and future products developed or acquired by SAG and, historically, 7 substantially all of the Company's revenues have been derived from the licensing and servicing of products developed or acquired by SAG. As a result, a materially adverse change in the financial condition, or a change in control, of SAG could have a material adverse effect on the business, financial condition and results of operations of the Company. In the past, SAG has reported operating losses. In addition, the failure of SAG to develop new products or enhancements to existing products in a timely manner, to provide ongoing technical support for its products or to adequately protect its proprietary rights could have a material adverse effect on the business, financial condition and results of operations of the Company. In the past, the Company has experienced delays in receiving products from SAG in a timely manner. The Cooperation Agreement requires SAG to ensure that its products are year 2000 compliant in accordance with a specific timetable and any failure by SAG to adhere to that timetable also could have a material adverse effect on the Company's business, financial condition and results of operations. In 1995 and 1996, the Company's aggregate royalty payments to SAG were $23.9 million and $26.1 million, respectively. To the extent that the Company's aggregate royalty payments to SAG fall below $21.0 million in any calendar year through the year 2000, the Company generally is required to pay the differential to SAG, and any such payment could have a material adverse effect on the Company's business, financial condition and results of operations. SAG has the exclusive and perpetual right to license and service in all territories other than North America, South America, Japan and Israel both existing and future products developed or acquired by the Company. As a result, the Company is dependent on SAG for the distribution of these products outside of North America, South America, Japan and Israel. Any failure by SAG to distribute such products in a timely and effective manner could have a material adverse effect on the Company's business, financial condition and results of operations. See "Company Background." TECHNOLOGICAL CHANGE; DEPENDENCE ON NEW PRODUCTS AND PRODUCT ENHANCEMENTS The Company operates in a rapidly changing technological environment in which it must keep pace with new technologies and competitive forces in order to be successful. The Company's success will depend in part on its ability to acquire and/or develop product enhancements and new products that keep pace with continuing changes in technology and evolving customer preferences. There can be no assurance that the Company will be successful in acquiring and/or developing product enhancements or new products to adequately address changing technologies, that it can introduce such products or enhancements on a timely basis or that any such products or enhancements will be successful in the marketplace. The Company's failure to acquire and/or develop technological improvements or to adapt its products to technological change may have a material adverse effect on the Company's business, financial condition and results of operations. DEPENDENCE ON THE YEAR 2000 MARKET The Company believes that its future growth depends, in part, on increased demand for the Company's products and professional services relating to the resolution of the year 2000 problem. The Company had no revenues from its Year 2000 Program in 1996. For the nine months ended September 30, 1997, the Company had revenues of $3.7 million from its Year 2000 Program. Although the Company believes that the market for products and professional services relating to the year 2000 problem will grow as the year 2000 approaches, there can be no assurance that this market will develop to the extent anticipated by the Company. Significant expenses for sales and marketing may be required to educate potential clients of the year 2000 problem and the need for products and professional services addressing the problem. There can be no assurance that potential clients will understand or acknowledge the problem. In addition, affected organizations may not be willing or able to allocate the resources, financial or otherwise, to address the problem in a timely manner. Many organizations may attempt to resolve the problem internally rather than by contracting with outside firms such as the Company and value added integrators to which the Company may license its software products. Due to these and other factors, development of the market for the Company's year 2000 products and professional services is uncertain and unpredictable. In addition, the Company anticipates that demand for products and professional services that address the year 2000 problem will decline, perhaps rapidly, following the year 2000. 8 If the market for year 2000 products and professional services fails to grow, or grows more slowly than anticipated, the Company's business, financial condition and results of operations could be materially adversely affected. In addition, competition for personnel qualified to perform professional services relating to the year 2000 problem is intense, and there can be no assurance that the Company will be able to retain its employees who provide such professional services or be able to attract and retain such personnel in the future. RELIANCE ON ACQUISITIONS The Company believes that its future growth will depend, in part, on its ability to successfully identify, acquire and then develop promising technologies and products. In addition, the Company intends to build its product development staff in part through acquisitions. On September 30, 1997, the Company acquired R.D. Nickel. The integration of R.D. Nickel or any other future acquisitions into the Company's existing business could result in certain unanticipated difficulties that could require a disproportionate amount of management's attention and the Company's resources. Furthermore, there can be no assurance that the anticipated benefits of acquiring R.D. Nickel or any other future acquisition will be realized. The Company has limited experience in completing acquisitions and integrating acquired technologies or products into its operations. The Company may compete for future acquisition opportunities with other companies that have significantly greater financial and management resources. While the Company is continually searching for acquisition opportunities, the Company is not currently a party to any agreements, understandings or negotiations with respect to any material acquisition, and there can be no assurance that the Company will be successful in identifying, acquiring and developing products and technology. Acquisitions could also have adverse short-term effects on the Company's operating results, and could result in dilutive issuances of equity securities and the incurrence of debt and contingent liabilities. In addition, many business acquisitions must be accounted for as purchases and, because most software-related acquisitions involve the purchase of significant intangible assets, these acquisitions typically result in substantial amortization charges and may also involve charges for acquired research and development projects, which could have a material adverse effect on the Company's operating results. The Company has incurred significant charges of this nature in connection with its acquisition of R.D. Nickel. See "Company Background." MANAGEMENT OF PROFESSIONAL SERVICES GROWTH The Company recently has experienced a period of growth in its professional services business, with revenues from such business increasing from $27.0 million for the nine months ended September 30, 1996 to $31.0 million for the nine months ended September 30, 1997. The Company's ability to staff and effectively manage any future growth in this business will require it to continue to improve its operational, financial and management controls and reporting systems and procedures, and to hire, train, motivate and manage its professional services employees. There can be no assurance that the Company will be able to manage these challenges in an efficient or timely manner. If management of the Company is unable to manage growth effectively, the Company's business, financial condition and results of operations could be materially adversely affected. DEPENDENCE ON CUSTOMER BASE Most of the Company's sales are made to its existing customers. Customers typically pay a one-time licensing fee for use of the Company's products and generally pay an annual charge for maintenance services which include software updates and technical support. There can be no assurance that customers will continue to purchase the Company's products and services, that the Company's historic maintenance renewal rates will continue, or that the Company will be able to maintain its current pricing levels for products and maintenance services. Customers' decisions not to renew their maintenance agreements or to renew them on different terms could have a material adverse effect on the Company's business, financial condition and results of operations. RELIANCE ON MAINFRAME COMPUTING ENVIRONMENT The majority of the Company's products are purchased by customers using IBM and IBM-compatible mainframe computing platforms. Worldwide, an increasing proportion of computing functions are being 9 performed on alternative computing platforms, including mid-range computers and client/server networks. A significant shift in the way the Company's customers use computing platforms may have a material adverse effect on the Company's business, financial condition and results of operations. In addition, although the Company believes that any migration away from mainframe computing platforms is subsiding as a result of more cost effective mainframe technology and other factors, any further significant reduction in the role of mainframe or other legacy systems could have a material adverse effect on the Company's business, financial condition and results of operations. PROPRIETARY TECHNOLOGY The Company's success is dependent to a significant extent on its ability to protect its proprietary rights. The Company has no patents and depends upon a combination of trade secret, copyright and trademark laws, license agreements, nondisclosure, assignment of invention and other contractual provisions, and various security measures to protect its proprietary rights. The Company is also dependent on SAG and other third parties that license products to the Company to protect their respective proprietary rights in such products. There can be no assurance that the legal protections afforded to, or the precautions taken by, the Company or its third-party licensors will be adequate to prevent misappropriation of their respective proprietary rights. In addition, these protections do not prevent independent third-party development of functionally equivalent or superior technologies, products or professional services. Any infringement or misappropriation of the Company's proprietary rights, or those of its third-party licensors, could have a material adverse effect on the Company's business, financial condition and results of operations. In the future, litigation may be necessary to enforce and protect the Company's trade secrets, copyrights and other intellectual property or proprietary rights. The Company may also be subject to litigation to defend against claimed infringement of, or to determine the scope and validity of, the intellectual property or proprietary rights of others. In the event of litigation involving the use of technology by the Company, the Company could be required to expend significant resources to develop non-infringing technology or to obtain licenses to technology involved in litigation. There can be no assurance that the Company would be successful in such development or that any such licenses would be available on commercially reasonable terms, if at all. Although the Company is not aware that its products, trademarks or other proprietary rights infringe upon the proprietary rights of third parties, there can be no assurance that third parties will not assert infringement claims against the Company and that such claims will not have a material adverse effect on the Company's business, financial condition and results of operations. Any litigation involving the use of technology by the Company could result in substantial cost to the Company and divert management's attention from the Company's operations, either of which could have a material adverse effect on the Company's business, financial condition and results of operations. Adverse determinations in such litigation could result in the loss of the Company's proprietary rights, subject the Company to significant liabilities, require the Company to seek licenses from third parties or prevent the Company from selling its products, any one of which could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business--Proprietary Rights." DEPENDENCE ON THIRD-PARTY TECHNOLOGY The Company's products are currently designed, and may in the future be designed, to work on or in conjunction with certain third-party hardware and/or software products. If any of these current or future third- party vendors were to discontinue making their products available to the Company or to licensees of the Company's products or to increase materially the cost to the Company or its licensees to acquire, license or purchase such third-party vendor's products, or if a material problem were to arise in connection with the ability of the Company's products to properly use or operate with third- party hardware and/or software products, the Company's products would have to be redesigned by the Company, or the licensor of the product to the Company, to function with or on alternative third-party products. There can be no assurance that an alternative source of suitable technology would be available or that the Company, or the licensor of the product to the Company, would be able to develop an alternative product on a timely basis or at a reasonable cost. The failure of the Company to license, acquire or develop alternative technologies or products 10 on a timely basis and at a reasonable cost could have a material adverse effect on the Company's business, financial condition and results of operations. COMPETITION The markets for the Company's software products and professional services are highly competitive and characterized by continual change and improvement in technology. The Company provides products and professional services to several markets within the computer industry and encounters competitors within each such market. Many of the Company's competitors have significantly greater financial, marketing and other competitive resources than the Company. The Company's principal competitors currently include IBM Corporation ("IBM"), Oracle Corporation ("Oracle"), Microsoft Corporation ("Microsoft"), Informix Corporation ("Informix"), PLATINUM Technology, Inc. ("PLATINUM"), Sybase, Inc. ("Sybase"), VIASOFT, Inc. ("Viasoft"), Sterling Software, Inc. ("Sterling Software"), Visigenic Software, Inc. ("Visigenic"), SAS Institute, Inc. ("SAS"), Formal Systems, Inc. ("Formal Systems"), BDM International, Inc. ("BDM") and Electronic Data Systems Corporation ("EDS"). Few of the Company's competitors compete in all of the same markets as the Company. In certain markets in which the Company competes, such as the year 2000 market, there are no significant barriers to entry. Current and potential competitors may introduce new and better products, make strategic acquisitions, or establish cooperative relationships among themselves or with third parties, thereby increasing the ability of their products to address the needs of the Company's current and prospective customers. There can be no assurance that the Company will be able to compete successfully against current and future competitors, and its failure to do so would have a material adverse effect upon the Company's business, financial condition and results of operations. In addition, no assurance can be given that the Company will not be required to make substantial additional investments in connection with its research, development, marketing, sales and customer service efforts in order to meet any competitive threat, or that such required investments will not have a material adverse effect on operating margins. Increased competition could result in reduction in market share, pressure for price reductions and related reductions in gross margins, any of which could materially adversely affect the Company's business, financial condition and results of operations. See "Business--Competition." RISK ASSOCIATED WITH INTERNATIONAL SALES AND OPERATIONS The Company holds the exclusive and perpetual right to license SAG products in North America, South America, Japan and Israel. In South America, Japan and Israel, the Company has entered into exclusive distributorship arrangements with local firms. The Company's distributorships in South America, Japan and Israel have been in place for 25, 21 and 19 years, respectively, and collectively accounted for 11.3% and 11.2% of the Company's total revenues in 1996 and the first nine months of 1997, respectively. There can be no assurance that such distributors will continue to perform as they have historically and that they will not offer products that compete with the Company's products. Additionally, the distributorships generally may be terminated by either party at any time upon compliance with applicable notice provisions. In the event that any of the distributorships were terminated or expired, there can be no assurance that the Company could find an adequate replacement, and such a termination or expiration could have a material adverse effect on the Company's business, financial condition and results of operations. The Company is currently renegotiating its distributorship arrangements in Japan and South America. Sales of products and the provision of services to customers outside the United States accounted for 15.2% and 17.8% of the Company's total revenues in 1996 and the first nine months of 1997, respectively. The Company anticipates that revenues from international sales and services will continue to account for a material portion of its total revenues in the foreseeable future. As a result, the Company may be subject to certain risks associated with international operations, including risks associated with foreign currency exchange rate fluctuations and risks associated with the application and imposition of protective legislation and regulations relating to import or export (including export of high technology products) or otherwise resulting from foreign policy or the variability of foreign economic conditions. To date, the Company has not engaged in any hedging transactions to mitigate its risks relating to exchange rate fluctuations. Additional risks associated with international operations include costs of localizing products for foreign countries, lack of acceptance of localized products in foreign countries, difficulties in enforcing intellectual property, proprietary 11 and contract rights, the burdens of complying with a wide variety of foreign laws, potentially adverse tax consequences, tariffs, quotas and other barriers, and potential difficulties in collecting accounts receivable. There can be no assurance that these and other factors will not have a material adverse effect on the Company's business, financial condition and results of operations. RISK OF SOFTWARE DEFECTS Software products as complex as those offered by the Company frequently contain errors or defects, especially when first introduced or when new versions or enhancements are released. Despite product testing, new products may contain defects or software errors and, as a result, the Company may experience delayed or lost revenues during the period required to correct any defects or errors. Any such defects or errors could result in adverse customer reactions, negative publicity regarding the Company and its products, harm to the Company's reputation, or loss of or delay in market acceptance, or could require expensive product changes, any of which could have a material adverse effect upon the Company's business, financial condition and results of operations. The Company's Cooperation Agreement with SAG provides for only limited warranties by SAG with respect to the software products licensed by it to the Company and, therefore, the Company may be primarily liable to its customers for defects in SAG-supplied software. POTENTIAL FOR CONTRACT LIABILITY The Company markets its products and professional services to customers for developing, building, deploying, maintaining and managing mission-critical computer software applications and for addressing the year 2000 problem. The Company's license and other agreements with its customers typically contain provisions designed to limit the Company's exposure to potential liability claims relating to the Company's products or professional services. Despite this precaution, there can be no assurance that the limitations of liability set forth in the Company's agreements would be enforceable or would otherwise protect the Company from liability for damages. Although the Company has not experienced any material liability claims to date, the sale and support of the Company's products and professional services may entail the risk of such claims, which could be substantial in light of the use of such products in mission-critical applications. A material liability claim against the Company, regardless of its outcome, could result in substantial cost to the Company and divert management's attention from the Company's operations. Therefore, any material liability claim could have a material adverse effect on the Company's business, financial condition and results of operations. DEPENDENCE ON STATE, LOCAL AND OTHER GOVERNMENT CONTRACTS The Company derived 23.5% of its total revenues in 1996 and 27.6% of its total revenues for the first nine months of 1997 from selling its products and professional services directly or indirectly to state and local government agencies. In addition, the Company derived 8.9% of its total revenues in 1996 and 9.7% of its total revenues for the first nine months of 1997 from selling its products and professional services directly or indirectly to federal government agencies. Any failure to obtain a contract award, or a delay on the part of a government agency in making the award or in ordering products and professional services under an awarded contract, could have a material adverse effect on the Company's business, financial condition and results of operations. Other risks generally involved in government sales include the larger discounts (and thus lower margins) typically involved in government sales, the dependence of the Company on the ability of a prime contractor, if any, to obtain the award and perform the contract, the unpredictability of funding for various government programs, the ability of the government agency to unilaterally terminate the contract, and the dependence on the creditworthiness of any prime contractor (some of which are relatively small organizations without substantial funds). The Company anticipates that state, local and other government sales will continue to represent a significant but fluctuating portion of its revenues in the future. FIXED PRICE CONTRACTS Revenues from fixed price contracts represented approximately 8.0% and 10.3% of the Company's total revenues for 1996 and the first nine months of 1997, respectively. In making proposals for fixed price contracts, the Company relies on its estimated costs for completing the project. These estimates reflect, among 12 other factors, judgments as to the efficiencies of the Company's technology and services as applied to the project. Any increased or unexpected costs or unanticipated delays in connection with the performance of fixed price contracts could have a material adverse effect on the Company's business, financial condition and results of operations. In the past, the Company has suffered material losses on fixed price contracts. DEPENDENCE ON KEY PERSONNEL; NEED TO HIRE ADDITIONAL PERSONNEL The Company's future performance depends to a significant degree upon the continued service of the key members of its management, as well as marketing, sales, consulting and product development personnel, and its ability to attract and retain new management and other personnel. The loss of any one or more of the Company's key personnel could have a material adverse effect on the Company's business, financial condition and results of operations. Company employees are employed at-will and the Company has no fixed-term employment agreements with any of its employees. While historically the Company primarily has relied on SAG for product development, the Company believes its future success will also depend in part upon its ability to develop its own technologies and products and, consequently, upon its ability to attract and retain highly skilled technical and product development personnel. Competition for such personnel is intense, and there can be no assurance that the Company will be able to retain its key employees or that it will be successful in attracting, integrating and retaining new personnel in the future. Failure to attract, integrate and retain such personnel could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, at September 30, 1997, the Company had 106 independent contractors working as technical consultants primarily in connection with the Company's professional service offerings. Competition for such contractors is intense and the failure to continue to attract and hire such contractors when they are needed could have a material adverse effect on the Company's business, financial condition and results of operations. CONTROL BY OFFICERS, DIRECTORS AND THAYER Upon completion of this offering, the Company's officers and directors, and their affiliates, in the aggregate, will have voting control over approximately 73% of the Company's outstanding Common Stock. In particular, Thayer and its affiliates will have voting control over approximately 60% of the Company's outstanding Common Stock. As a result, these stockholders will be able to control all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. The voting power of Thayer and the Company's officers and directors under certain circumstances could have the effect of preventing or delaying a change in control of the Company. See "Principal and Selling Stockholders." ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS The Company's Second Amended and Restated Certificate of Incorporation and Second Amended and Restated Bylaws contain certain provisions that may have the effect of discouraging a third party from making an acquisition proposal for the Company. Such provisions could limit the price that investors might be willing to pay in the future for shares of the Company's Common Stock. For example, the Board of Directors is authorized to issue, without stockholder approval, up to 25,000,000 shares of preferred stock, $.01 par value, of the Company (the "Preferred Stock") with voting, conversion and other rights and preferences that may be superior to the Common Stock and that could adversely affect the voting power or other rights of the holders of Common Stock. The issuance of Preferred Stock or of rights to purchase Preferred Stock could be used to discourage an unsolicited acquisition proposal. Other provisions impose various procedural and other requirements that could make it more difficult for shareholders to effect certain corporate actions. In addition, the Company's Board of Directors is divided into three classes, the members of each of which will serve for a staggered three-year term, which may make it more difficult for a third party to gain control of the Company's Board of Directors. Certain provisions of the Cooperation Agreement with SAG may also have the effect of discouraging a third party from making an acquisition proposal for the Company. See "Company Background" and "Description of Capital Stock--Certain Provisions of Delaware Law, the Certificate of Incorporation and the Bylaws." 13 NO PRIOR MARKET FOR COMMON STOCK AND POSSIBLE VOLATILITY OF COMMON STOCK PRICE Prior to this offering, there has been no public market for the Common Stock, and there can be no assurance that an active trading market will develop following this offering. The initial public offering price will be determined through negotiations among the Company and the Underwriters and may not be indicative of the market price of the Common Stock after the completion of this offering. See "Underwriting" for factors to be considered in determining the initial public offering price. The market price for the Common Stock after this offering may be volatile and may be affected by a number of factors, including the announcement of new products, product enhancements or services by the Company or its competitors, quarterly variations in the Company's or its competitors' results of operations, changes in earnings estimates or recommendations by securities analysts, developments in the Company's industry, general market conditions and other factors, including factors unrelated to the operating performance of the Company or its competitors. In addition, stock prices for many companies in the technology sector have experienced wide fluctuations that often have been unrelated to the operating performance of such companies. Such factors and fluctuations, as well as general economic, political and market conditions, such as recessions, may materially adversely affect the market price of the Company's Common Stock. SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this offering, the Company will have outstanding 28,937,500 shares of Common Stock. Of these shares, the 7,700,000 shares offered hereby will be freely tradable without restriction in the public market. An additional 2,750,000 shares will be eligible for sale beginning 90 days after the date of this Prospectus (all of which will be subject to 180- day lock-up agreements between certain shareholders and the Representatives of the Underwriters), and 18,487,500 shares will be eligible for sale beginning March 31, 1998 (all of which will be subject to 180-day lock-up agreements). BancAmerica Robertson Stephens may, in its sole discretion and at any time without notice, release all or any portion of the securities subject to the lockup agreements. In addition, the Company intends to file registration statements on Form S-8 under the Securities Act of 1933, as amended (the "Securities Act"), as soon as practicable after consummation of this offering, in order to register all shares of Common Stock issuable or reserved for issuance under the Stock Option Plan. Sales of substantial amounts of Common Stock or the availability of such shares for sale could adversely affect prevailing market prices of the Common Stock. See "Shares Eligible for Future Sale" and "Underwriting." DILUTIVE EFFECT OF THE OFFERING Purchasers of Common Stock in this offering will experience immediate and significant dilution of approximately $11.01 in the net tangible book value per share of the Common Stock so purchased, based on an assumed initial public offering price of $13.00 per share. This will result in the existing stockholders of the Company realizing an immediate accretion in the net tangible book value of their investment. See "Dilution." DIVIDENDS The Company does not anticipate paying any cash dividends on its Common Stock in the foreseeable future. See "Dividend Policy." 14 COMPANY BACKGROUND In February 1981, the Company was incorporated as a Delaware corporation and established as a holding company for Software AG Americas, Inc. Since 1973, Software AG Americas, Inc. has primarily licensed and serviced SAG products in the United States and other countries through a series of licensing agreements with SAG. In June 1981, the Company sold approximately 30% of its outstanding common stock in an initial public offering. In 1988, SAG purchased all of the outstanding stock of the Company, thereby acquiring control of the Company. On March 31, 1997, the Company consummated the Recapitalization, pursuant to which the senior management of the Company and Thayer acquired approximately 89% of the outstanding Common Stock of the Company. See "Certain Relationships and Transactions." The Company believes that the Recapitalization provides several significant benefits to the Company, such as access to growth and development capital, equity ownership incentives for management and other key employees, and the opportunity and ability to pursue acquisitions and internal product development. Immediately prior to the Recapitalization, the Company and SAG entered into the Cooperation Agreement which generally (i) provides the Company the exclusive and perpetual right to license and service in North America, South America, Japan and Israel (the "Territory") both existing and future products developed or acquired by SAG and (ii) provides SAG the exclusive and perpetual right to license and service outside the Territory both existing and future products developed or acquired by the Company. Each of the Company and SAG must pay the other 24% of the net revenues derived from such licenses. This 24% royalty rate is fixed for 20 years. Except under certain circumstances, the Company's minimum annual royalty payment to SAG through the year 2000 must equal at least $21 million. In 1994, 1995 and 1996, the Company's aggregate royalty payments to SAG were approximately $29.0 million, $23.9 million and $26.1 million, respectively. See "Certain Relationships and Transactions." The Company anticipates that the Cooperation Agreement and SAG's equity interest in the Company will promote close collaboration between the Company and SAG. See "Principal and Selling Stockholders." The Cooperation Agreement contains certain safeguards to ensure that the Company and SAG are able to continue to exercise their respective rights to license and service each other's products in their respective territories. These safeguards include rights of first refusal with respect to transfers of proprietary rights to third parties and restrictions on SAG from competing against the Company in the Territory and on the Company from competing against SAG outside the Territory. The Cooperation Agreement also prohibits either party from consummating a change of control unless such party's successor agrees to be bound by the terms of the Cooperation Agreement with respect to all existing products of such party and future products that are materially derived therefrom. In addition, SAG is precluded from consummating a change of control unless its successor agrees to continue supporting the research and development of SAG's then existing and planned products for two years following the change in control. The Company is precluded from consummating a change in control in which certain specified entities would be its successor unless such entities agree to pay the Company's minimum annual royalty payments to SAG until the later of December 31, 2000 or two years following the change in control. On September 30, 1997, the Company acquired R.D. Nickel, a software company that develops, licenses and supports a family of application development products, including CONSTRUCT and CONSTRUCT Spectrum. Additionally, R.D. Nickel has served as the exclusive distributor of the Company's products in Canada since 1973. In the year ended November 30, 1996 and for the ten months ended September 30, 1997, R.D. Nickel had revenues of US$13.6 million and US$12.6 million, respectively. The Company purchased R.D. Nickel for Cdn$14.0 million (approximately US$10.1 million), consisting of a Cdn$7.0 million promissory note and Cdn$7.0 million in cash. The Company is required to repay the promissory note with proceeds from this offering. Upon consummation of this offering, the Company will owe an additional payment of Cdn$500,000 (approximately US$360,000) in connection with the acquisition, which also will be paid with proceeds from this offering. In connection with this acquisition, in the quarter ended September 30, 1997, the Company recorded approximately US$4.9 million of goodwill, which will be amortized on a straight-line basis over 10 years, and took a one-time charge of approximately US$6.1 million associated with the purchase of incomplete or in-process research and development. 15 USE OF PROCEEDS The net proceeds to the Company from the sale of the 4,600,000 shares of Common Stock offered by the Company hereby are estimated to be approximately $54.5 million, assuming an initial public offering price of $13.00 per share and after deducting the underwriting discounts and commissions and estimated offering expenses payable by the Company. The Company will not receive any proceeds from the sale of Common Stock by the Selling Stockholders. The principal purposes of this offering are to increase the Company's equity capital, to establish a public market for the Company's Common Stock, to provide enhanced equity incentives to attract and retain key employees, to increase the Company's visibility in its markets, to facilitate future access to public capital markets and to obtain additional working capital. The Company will use a portion of the net proceeds to repay a promissory note issued by the Company in connection with the acquisition of R.D. Nickel. This note bears simple interest at a rate of 9% per annum and will have an outstanding balance of principal and accrued interest at November 15, 1997 of approximately Cdn$7.1 million (US$5.1 million). It has a stated maturity date of September 30, 1999, but requires prepayment upon consummation of this offering. In accordance with the terms of the acquisition of R.D. Nickel, upon consummation of this offering, the Company will owe an additional payment of Cdn$500,000 (approximately US$360,000), which will be paid from the net proceeds of this offering. See "Company Background." The remainder of the net proceeds of this offering will be used for working capital and other general corporate purposes, including financing product development and augmenting the Company's professional services business. A portion of the net proceeds may also be used to fund acquisitions of complementary businesses, products or technologies. The Company is not currently a party to any agreements, understandings or negotiations with respect to any material acquisitions. Pending such uses, the Company intends to invest the net proceeds in short-term, interest bearing, investment grade securities. DIVIDEND POLICY In 1995 and 1996, while a wholly owned subsidiary of SAG, the Company paid aggregate cash dividends to SAG of $1.7 million and $9.0 million, respectively. The Company does not anticipate paying any cash dividends on its Common Stock in the foreseeable future. Certain of the Company's lines of credit have the effect of restricting the ability of the Company to pay cash dividends. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" and Note 6 of Notes to Consolidated Financial Statements. 16 CAPITALIZATION The following table sets forth as of September 30, 1997 the capitalization and short term debt of the Company on an actual basis and on an as adjusted basis to give effect to the sale by the Company of the 4,600,000 shares of Common Stock offered by it hereby at an assumed initial public offering price of $13.00 per share and the application of the net proceeds therefrom. See "Use of Proceeds." This table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus.
SEPTEMBER 30, 1997 -------------------- ACTUAL AS ADJUSTED ------- ----------- (in thousands) Short term debt........................................... $ 5,065 $ -- ======= ======= Stockholders' equity: Preferred Stock, $.01 par value; 25,000,000 shares authorized; none issued and outstanding actual or as adjusted ............................................. $ -- $ -- Common Stock, $.01 par value; 75,000,000 shares authorized; 24,337,500 shares issued and outstanding actual, and 28,937,500 shares issued and outstanding as adjusted (1)............................................. 243 289 Additional paid-in capital................................ 37,234 91,702 Retained earnings (deficit)............................... (1,076) (1,076) ------- ------- Total stockholders' equity.............................. 36,401 90,915 ------- ------- Total capitalization................................... $36,401 $90,915 ======= =======
- -------- (1) Excludes (i) 4,947,525 shares of Common Stock issuable upon the exercise of stock options outstanding at September 30, 1997, granted under the Stock Option Plan at a weighted average exercise price of $4.90 per share, and (ii) 1,927,475 shares of Common Stock reserved for future issuance pursuant to the Stock Option Plan. See "Management--Stock Option Plan." 17 DILUTION The net tangible book value of the Company as of September 30, 1997 was $3.0 million, or $0.12 per share of outstanding Common Stock. Net tangible book value per share is equal to the Company's total tangible assets less total liabilities, divided by the total number of shares of Common Stock outstanding. After giving effect to the sale of the 4,600,000 shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $13.00 per share and the receipt of the estimated net proceeds therefrom, the adjusted net tangible book value of the Company as of September 30, 1997 would have been $57.5 million, or $1.99 per share. This represents an immediate increase in net tangible book value of $1.87 per share to existing stockholders and an immediate dilution of $11.01 per share to investors purchasing shares of Common Stock in this offering. The following table illustrates this per share dilution: Assumed initial public offering price per share.............. $13.00 ------ Net tangible book value per share at September 30, 1997.... $0.12 Increase per share attributable to new investors........... 1.87 ----- Net tangible book value per share after this offering........ 1.99 ------ Dilution per share to new investors.......................... $11.01 ======
The following table summarizes as of September 30, 1997 the differences between the number of shares of Common Stock purchased from the Company, the total consideration paid and the average price per share paid by existing stockholders and by the new investors at an assumed initial public offering price of $13.00 per share.
SHARES PURCHASED (1) TOTAL CONSIDERATION ------------------------------------------ AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ------------ --------------------- ------- ------------- Existing stockholders (1).................... 24,337,500 84.1% $34,765,000 36.8% $ 1.43 New investors........... 4,600,000 15.9 59,800,000 63.2 13.00 ------------ ------- ----------- ----- Total................. 28,937,500 100.0% $94,565,000 100.0% ============ ======= =========== =====
- -------- (1) Sales by the Selling Stockholders in this offering will cause the number of shares of Common Stock held by existing stockholders to be reduced to 21,237,500 shares, or 73.4% of the total number of shares of Common Stock to be outstanding after this offering (20,660,000 shares, or 68.7%, if the Underwriters' over-allotment option is exercised in full), and will increase the number of shares of Common Stock held by the new investors to 7,700,000 shares, or 26.6% of the total number of shares of Common Stock to be outstanding immediately after this offering (8,855,000 shares, or 29.4%, if the Underwriters' over-allotment option is exercised in full). See "Principal and Selling Stockholders." The calculation of net tangible book value per share and the other computations above assume no exercise of outstanding options under the Stock Option Plan. As of October 15, 1997, 4,947,525 shares of Common Stock were issuable upon exercise of outstanding stock options at a weighted average exercise price of $4.90 per share. To the extent the outstanding options are exercised, or additional stock options are granted and exercised at a price per share below the initial public offering price in the future, there will be further dilution to new investors. See "Management--Stock Option Plan." 18 SELECTED CONSOLIDATED FINANCIAL DATA The consolidated statement of operations data set forth below for each of the years ended December 31, 1994, 1995 and 1996 and the consolidated balance sheet data as of December 31, 1995 and 1996 have been derived from the Company's consolidated financial statements, which statements have been audited by KPMG Peat Marwick LLP, independent certified public accountants, and are included elsewhere in this Prospectus. The consolidated balance sheet data at December 31, 1994 is derived from the Company's consolidated financial statements, which statements have been audited by KPMG Peat Marwick LLP and are not included in this Prospectus. The financial data presented as of and for the years ended December 31, 1992 and 1993 are derived from the Company's financial statements, which statements have been audited by other auditors and are not included in this Prospectus. The financial data presented as of September 30, 1997 and for the nine months ended September 30, 1996 and 1997 are derived from unaudited consolidated financial statements included elsewhere in this Prospectus, which, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial data for such periods. The results of operations for the nine months ended September 30, 1997 are not necessarily indicative of the results to be expected for the full year or for any future period. The selected consolidated financial data set forth below should be read in conjunction with the Consolidated Financial Statements and Notes thereto and with "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this Prospectus. The historical financial data set forth below for the periods ended, or as of the dates prior to, March 31, 1997 reflect the results of operations and balance sheet data of the Company prior to the Recapitalization when the Company was a wholly owned subsidiary of SAG and is captioned as "Predecessor." The historical financial information subsequent to March 31, 1997 reflect the results of operations and balance sheet data subsequent to the Recapitalization and is captioned as "Successor." See "Company Background."
PREDECESSOR COMBINED (1) PREDECESSOR SUCCESSOR -------------------------------------------------------- ------------ ----------- --------- NINE NINE THREE SIX MONTHS MONTHS MONTHS MONTHS YEAR ENDED DECEMBER 31, ENDED ENDED ENDED ENDED ---------------------------------------------- SEPT. 30, SEPT. 30, MARCH 31, SEPT. 30, 1992 1993 1994 1995 1996 1996 1997 1997 1997 -------- -------- -------- -------- -------- --------- ------------ ----------- --------- (in thousands, except per share data) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues: Software license fees....... $ 50,498 $ 51,672 $ 51,832 $ 52,061 $ 52,163 $ 31,763 $ 40,053 $ 7,341 $32,712 Maintenance fees............ 51,162 57,264 65,871 65,307 69,702 51,778 53,288 17,352 35,936 Professional service fees... 24,139 31,175 29,552 35,194 34,975 26,980 30,976 9,948 21,028 -------- -------- -------- -------- -------- -------- -------- ------- ------- Total revenues............ 125,799 140,111 147,255 152,562 156,840 110,521 124,317 34,641 89,676 -------- -------- -------- -------- -------- -------- -------- ------- ------- Cost of revenues: Software license............ 12,046 14,331 13,513 15,244 14,120 8,543 12,600 2,098 10,502 Maintenance................. 23,457 29,796 29,823 23,488 25,885 19,263 20,844 6,205 14,639 Professional services....... 19,430 25,835 26,490 32,591 32,966 25,854 27,153 9,211 17,942 -------- -------- -------- -------- -------- -------- -------- ------- ------- Total cost of revenues ... 54,933 69,962 69,826 71,323 72,971 53,660 60,597 17,514 43,083 -------- -------- -------- -------- -------- -------- -------- ------- ------- Gross profit................. 70,866 70,149 77,429 81,239 83,869 56,861 63,720 17,127 46,593 -------- -------- -------- -------- -------- -------- -------- ------- ------- Operating expenses: Software product development................ 6,219 3,045 900 900 1,372 1,372 595 -- 595 Sales and marketing......... 36,239 43,439 50,422 52,512 48,677 31,139 27,854 7,317 20,537 Administrative and general.................... 36,281 28,636 25,212 24,639 28,539 23,472 26,749 8,500 18,249 Write-off of acquired in- process research and development costs (2)...... -- -- -- -- -- -- 6,051 -- 6,051 -------- -------- -------- -------- -------- -------- -------- ------- ------- Total operating expenses.. 78,739 75,120 76,534 78,051 78,588 55,983 61,249 15,817 45,432 -------- -------- -------- -------- -------- -------- -------- ------- ------- Income (loss) from operations.................. (7,873) (4,971) 895 3,188 5,281 878 2,471 1,310 1,161 Other income and expense, net......................... 1,431 7,599 1,882 2,449 5,230 2,173 2,354 978 1,376 -------- -------- -------- -------- -------- -------- -------- ------- ------- Income (loss) before cumulative effect of change in accounting principle and income taxes................ (6,442) 2,628 2,777 5,637 10,511 3,051 4,825 2,288 2,537 Cumulative effect of change in accounting principle..... -- 5,070 -- -- -- -- -- -- -- Income tax provision (benefit) .................. (855) 1,318 1,395 2,311 4,302 1,141 4,528 915 3,613 -------- -------- -------- -------- -------- -------- -------- ------- ------- Net income (loss)............ $ (5,587) $ 6,380 $ 1,382 $ 3,326 $ 6,209 $ 1,910 $ 297 $ 1,373 $(1,076) ======== ======== ======== ======== ======== ======== ======== ======= ======= Net income (loss) per share (3)......................... $ (0.18) $ 0.21 $ 0.05 $ 0.11 $ 0.20 $ 0.06 $ 0.01 $ 0.04 $ (0.04) ======== ======== ======== ======== ======== ======== ======== ======= ======= Dividends.................... $ -- $ -- $ 600 $ 1,700 $ 9,000 $ -- $ -- $ -- $ ======== ======== ======== ======== ======== ======== ======== ======= =======
19
PREDECESSOR SUCCESSOR ------------------------------------------ --------- DECEMBER 31, ------------------------------------------ SEPT. 30, 1992 1993 1994 1995 1996 1997 ------- ------- ------- -------- -------- --------- (in thousands) CONSOLIDATED BALANCE SHEET DATA: Working capital (deficit).............. $ 7,239 $ 6,355 $ 5,167 $ (2,465) $ 30,421 $ 3,119 Total assets............ 75,647 74,175 86,466 125,612 158,088 141,056 Long-term debt, less current maturities..... 5,942 3,212 431 -- -- -- Total stockholders' equity................. 23,810 30,190 30,972 32,599 29,808 36,401
- -------- (1) Reflects combined data for the three months ended March 31, 1997 (prior to the Recapitalization) and for the six months ended September 30, 1997 (subsequent to the Recapitalization). (2) The write-off of acquired in-process research and development costs for the nine months ended September 30, 1997 relates to the Company's acquisition of R.D. Nickel. Before deducting the nonrecurring write-off for this period, income from operations was approximately $8.5 million, net income was approximately $6.3 million and net income per share was $0.23 (based on weighted average fully diluted shares outstanding of 27,421,472). (3) Shares used in computing net income (loss) per share for all periods presented are 30,583,942, except for the six and nine month periods ended September 30, 1997 which are 27,421,472. See Note 1 of Notes to Consolidated Financial Statements. 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion contains forward-looking statements which involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in "Risk Factors." OVERVIEW The Company is an enterprise solutions company that provides robust software products and related professional services to large organizations with complex computing requirements. The Company's revenues are primarily derived from license fees for the use of software products, fees for maintenance related to those products and fees for professional services. Since 1973, the Company has primarily licensed and serviced SAG products in the United States and other countries through a series of licensing agreements with SAG. In 1981, the Company sold approximately 30% of its outstanding Common Stock in an initial public offering. In 1988, SAG purchased all of the outstanding Common Stock of the Company, thereby acquiring control of the Company. On March 31, 1997, the Company consummated the Recapitalization, pursuant to which the senior management of the Company and Thayer acquired approximately 89% of the outstanding Common Stock of the Company. The Company believes the Recapitalization provides several significant benefits to the Company such as access to growth and development capital, equity ownership incentives for management and other key employees, and the opportunity and ability to pursue acquisitions and internal product development. See "Company Background" and "Certain Relationships and Transactions." Prior to the Recapitalization, the Company's management team was constrained by SAG in its ability to develop new products, license third-party software, retain capital for expansion and make acquisitions of companies, products or technologies. The Company's relatively low software product development expenditures resulted, in part, from these constraints. Management has undertaken several strategic initiatives since the Recapitalization to increase revenue growth and profitability, including building a product development organization, developing a product and professional services offering that addresses the year 2000 problem and acquiring R.D. Nickel. Software license fees are generated through the licensing of enterprise development and enterprise enablement products. Enterprise development products include ADABAS, a high-performance data management system, and NATURAL, a 4GL programming language. Enterprise enablement software products include ENTIRE, a family of middleware products; INSIGHT 2000 Tool Kit, a software product that addresses the year 2000 problem; and a number of Company and third-party products which address the data warehouse and Web enablement markets. The Company recognizes license fee revenues in accordance with Statement of Position 91-1, "Software Revenue Recognition" issued by the American Institute of Certified Public Accountants. Software license fee revenues are recognized upon shipment of the software if the software is not subject to customer acceptance or significant post-delivery obligations. If the license is subject to customer acceptance or significant post-delivery obligations, the recognition of license fees is deferred until customer acceptance or the significant post-delivery obligations have been met. The Company also provides maintenance and support services to its customers. Such maintenance services are typically provided in accordance with annual agreements, with maintenance fees charged as a percentage of current software license fees. Maintenance fees are recognized ratably over the term of the agreement. Software license and maintenance fees are derived from both direct and indirect channels. In North America, a direct sales and support structure is utilized through the Company's wholly 21 owned subsidiaries. In the remainder of the Territory, exclusive distributors sell the Company's products and provide maintenance support and pay the Company a royalty on the revenues derived therefrom. The Company has historically derived the majority of its revenues from sales within the United States. Sales outside of the United States represented 13.9%, 16.2% and 17.8% of the Company's total revenues in 1995, 1996 and the nine months ended September 30, 1997, respectively. The Company also generates revenues through the provision of professional services associated with the implementation and deployment of the Company's enterprise development and enterprise enablement products and through educational services. The Company recognizes revenue from professional services as such services are performed. The Company's professional services offerings include consulting, software integration, system implementation, large project management and year 2000 analysis and remediation. These services are delivered on either a time and materials basis or a fixed price basis. The Company is currently moving away from fixed price professional services contracts. However, year 2000 business will continue to be conducted using primarily fixed price contracts based on the number of lines of code analyzed or remediated, as opposed to a specific and defined set of deliverables as is the case in traditional fixed price contracts. The Company offers its products and professional services to certain customers under Enterprise License Agreements ("ELAs"). ELAs are typically long term contracts of three to five years which include the provision of software products, professional services and maintenance support. Revenues from software licenses sold as part of an ELA are recognized as revenue when such products are shipped and revenue from professional services and maintenance support are recognized as provided. As of September 30, 1997, 106 of the Company's customers had entered into ELAs with the Company. 22 RESULTS OF OPERATIONS The following table sets forth certain financial data for the periods indicated expressed as a percentage of total revenues.
PREDECESSOR COMBINED (1) ----------------------------------------------- ------------ NINE MONTHS NINE MONTHS YEAR ENDED ENDED ENDED DECEMBER 31, SEPT. 30, SEPT. 30, ---------------------------------- ----------- ------------ 1992 1993 1994 1995 1996 1996 1997 ----- ----- ----- ----- ----- ----------- ------------ Revenues: Software license fees................. 40.1% 36.9% 35.2% 34.1% 33.3% 28.7% 32.2% Maintenance fees...... 40.7 40.9 44.7 42.8 44.4 46.8 42.9 Professional services fees................. 19.2 22.2 20.1 23.1 22.3 24.5 24.9 ----- ----- ----- ----- ----- ----- ----- Total revenues...... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 ----- ----- ----- ----- ----- ----- ----- Cost of revenues: Software license...... 9.6 10.2 9.2 10.0 9.0 7.7 10.1 Maintenance........... 18.6 21.3 20.3 15.4 16.5 17.4 16.8 Professional services............. 15.4 18.4 18.0 21.4 21.0 23.4 21.8 ----- ----- ----- ----- ----- ----- ----- Total cost of revenues........... 43.6 49.9 47.5 46.8 46.5 48.5 48.7 ----- ----- ----- ----- ----- ----- ----- Gross profit............ 56.4 50.1 52.5 53.2 53.5 51.5 51.3 ----- ----- ----- ----- ----- ----- ----- Operating expenses: Software product development.......... 4.9 2.2 0.6 0.6 0.9 1.2 0.5 Sales and marketing... 28.8 31.0 34.2 34.4 31.0 28.2 22.4 Administrative and general.............. 28.8 20.4 17.1 16.2 18.2 21.2 21.5 Write-off of acquired in-process research and development costs (2).................. -- -- -- -- -- -- 4.9 ----- ----- ----- ----- ----- ----- ----- Total operating ex- penses............. 62.5 53.6 51.9 51.2 50.1 50.6 49.3 ----- ----- ----- ----- ----- ----- ----- Income (loss) from operations............. (6.1) (3.5) 0.6 2.0 3.4 0.9 2.0 Other income and expense, net .......... 1.1 5.4 1.3 1.6 3.3 2.0 1.9 ----- ----- ----- ----- ----- ----- ----- Income (loss) before cumulative effect of change in accounting principle and income taxes........... (5.0) 1.9 1.9 3.6 6.7 2.9 3.9 Cumulative effect of change in accounting principle.............. -- 3.6 -- -- -- -- -- Income tax provision (benefit).............. (0.7) 0.9 0.9 1.5 2.6 1.0 3.6 ----- ----- ----- ----- ----- ----- ----- Net income (loss)....... (4.3)% 4.6% 1.0% 2.1% 4.1% 1.9% 0.3% ===== ===== ===== ===== ===== ===== ===== The following table sets forth, for each component of revenues, the cost of such revenues as a percentage of such revenues for the periods indicated: PREDECESSOR COMBINED (1) ----------------------------------------------- ------------ NINE MONTHS NINE MONTHS YEAR ENDED ENDED ENDED DECEMBER 31, SEPT. 30, SEPT. 30, ---------------------------------- ----------- ------------ 1992 1993 1994 1995 1996 1996 1997 ----- ----- ----- ----- ----- ----------- ------------ Software license...... 23.9% 27.7% 26.1% 29.3% 27.1% 26.9% 31.5% Maintenance........... 45.8 52.0 45.3 36.0 37.1 37.2 39.1 Professional services............. 80.5 82.9 89.6 92.6 94.3 95.8 87.7
- -------- (1) Reflects combined data for the three months ended March 31, 1997 (prior to the Recapitalization) and for the six months ended September 30, 1997 (subsequent to the Recapitalization). (2) The write-off of acquired in-process research and development costs for the nine months ended September 30, 1997 relates to the Company's acquisition of R.D. Nickel. Before deducting the nonrecurring write-off for this period, income from operations as a percentage of total revenues was 6.9% and net income as a percentage of total revenues was 5.1%. 23 NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 Revenues Total Revenues. The Company's revenues are currently derived from fees from licensing the Company's software products, fees for providing maintenance to customers which have licensed the Company's software products and fees from professional services. The Company's total revenues were $124.3 million and $110.5 million for the nine months ended September 30, 1997 and 1996, respectively, representing an increase of 12.5%. Software License Fees. The Company's software license fees are derived primarily from the licensing of the Company's enterprise development and enterprise enablement products. Software license fees were $40.1 million and $31.8 million for the nine months ended September 30, 1997 and 1996, respectively, representing an increase of 26.1%. This increase was primarily attributable to the reorganization of the direct sales force at the beginning of 1997 into three groups, with one group focused on software products, another on professional services and a third on the Year 2000 Program. As a result of this reorganization, the Company has experienced increased acceptance of ELAs by its customer base. For the nine months ended September 30, 1997, the Company has entered into 30 new ELAs, compared to 14 new ELAs for the nine months ended September 30, 1996. Maintenance Fees. The Company's maintenance fees are derived primarily from providing technical support to customers which have licensed the Company's enterprise development and enterprise enablement products. Maintenance is available in various levels of support and priced as a percentage of the software license fees. The most commonly contracted level is priced at 18% of the applicable license fee at the time of renewal. Software customers are not required to renew their maintenance agreements and renewals can be expected only if the customer continues to use the licensed product. Maintenance fees were $53.3 million and $51.8 million for the nine months ended September 30, 1997 and 1996, respectively, representing an increase of 2.9%. This increase was due primarily to the effect of price increases, combined with an increase in the maintenance base from the sale of new software licenses. Professional Services Fees. The Company's professional services fees are derived primarily from work performed by the Company on behalf of customers who have licensed the Company's software products. Professional services fees were $31.0 million and $27.0 million for the nine months ended September 30, 1997 and 1996, respectively, representing an increase of 14.8%. This increase was primarily attributable to the Company's Year 2000 Program, which began in 1997 and contributed $3.7 million of professional services fees in the nine months ended September 30, 1997. Cost of Revenues Software License. Software license costs consist primarily of royalties paid to third parties. Software license costs were $12.6 million and $8.5 million for the nine months ended September 30, 1997 and 1996, respectively, representing 31.5% and 26.9% of software license fees for each respective period. The increase in dollar amount was due primarily to an increase in sales volume. The percentage increase was primarily due to a shift in product mix since royalty rates on third-party products vary from 24% to 40%. Maintenance. Maintenance costs consist of royalties paid to third parties, the costs of providing customer support and the distribution costs of new releases. Maintenance costs were $20.8 million and $19.3 million for the nine months ended September 30, 1997 and 1996, respectively, representing 39.1% and 37.2% of maintenance fees for each respective period. This increase was primarily attributable to the addition of staff to support new enterprise enablement products. 24 Professional Services. Professional services costs consist of labor and related overhead costs for the people performing the services. Such costs include costs for project management, quality control, proposal writing and project review. Professional services costs were $27.2 million and $25.9 million for the nine months ended September 30, 1997 and 1996, respectively, representing 87.7% and 95.8% of professional services fees for each respective period. The improvement in margin was primarily attributable to improved performance on fixed price contracts combined with improved utilization of resources. Both of these improvements were derived from process changes initiated in late 1995 that included enhanced infrastructure and tools for project management, improved estimating and bidding processes and expanded quality control procedures. Operating Expenses Software Product Development. Software product development expenses include all labor and overhead costs related to the development of software products owned by the Company. Software product development costs were $0.6 million and $1.4 million for the nine months ended September 30, 1997 and 1996, respectively, representing 1.4% and 4.3% of software license fees for each respective period. This decrease was the result of a sale, with transfer of the applicable software product development costs, of one of the Company's products in 1996 to a third party. Prior to the Recapitalization, the Company's ability to invest in software product development was constrained. The Company expects software product development expenses to increase in the future as a percentage of software license fees. Sales and Marketing. Sales and marketing expenses consist primarily of employee salaries, benefits, commissions, and associated overhead costs, and the cost of marketing programs, direct mailings, public relations, trade shows, seminars, advertising and related communications. Sales and marketing expenses were $27.9 million and $31.1 million for the nine months ended September 30, 1997 and 1996, respectively, representing 22.4% and 28.2% of total revenues for each respective period. This decrease was primarily attributable to reductions in the direct sales force and related support personnel, combined with reductions in marketing staff and programs. These reductions were begun in 1995 and substantially implemented by June 1997. The program reduced the number of direct sales, direct sales support and marketing personnel from 252 at December 31, 1994 to 124 at September 30, 1997. Administrative and General. Administrative and general expenses include employee salaries and benefits for administration, executive, finance, legal, human resources, data center, distribution and internal systems personnel and associated overhead costs, as well as bad debt expenses and accounting and legal expenses. Administrative and general expenses were $26.7 million and $23.5 million for the nine months ended September 30, 1997 and 1996, respectively, representing 21.5% and 21.2% of total revenues for each respective period. The increased dollar amount was the result of increases in personnel related expenses and infrastructure required to support an independent company. Write-off of Acquired In-Process Research and Development Costs. The write- off of acquired in-process research and development costs was attributable to certain of the products acquired in the acquisition of R. D. Nickel. See Note 4 of the Unaudited Condensed Consolidated Financial Statements. Other Other Income and Expense, Net. Other income and expense, net consists primarily of interest earned on cash, cash equivalents, short term investments and long term customer contracts carried by the Company, and miscellaneous income, offset in part by interest expense associated with equipment financing. Interest and investment income and expense, net was $2.4 million and $2.2 million for the nine months ended September 30, 1997 and 1996, respectively. Income Tax Provision (Benefit). Income tax provision (benefit) was $4.5 million and $1.1 million for the nine months ended September 30, 1997 and 1996, respectively, resulting in effective tax rates of 41.6% (exclusive of the write-off of acquired in-process research and development costs), and 37.4%, respectively. This increase in rate was primarily attributable to the non-deductible expenses incurred as a result of the Recapitalization. 25 YEARS ENDED DECEMBER 31, 1996 AND 1995 Revenues Total Revenues. The Company's total revenues were $156.8 million and $152.6 million in 1996 and 1995, respectively, representing an increase of 2.8%. Software License Fees. Software license fees were $52.2 million in 1996 and $52.1 million in 1995, or 33.3% and 34.1% of total revenues for each respective period. Maintenance Fees. Maintenance fees were $69.7 million in 1996 and $65.3 million in 1995, representing an increase of 6.7%. This increase was due primarily to the effect of price increases combined with an increase in the maintenance base from the sale of additional software licenses. Professional Services Fees. Professional services fees were $35.0 million in 1996 and $35.2 million in 1995, or 22.3% and 23.1% of total revenues for each respective period. This minimal decline from 1995 to 1996 was the result of actions taken in the latter part of 1995 to temporarily curb growth in the professional services operation so that the Company could build a stronger infrastructure and control process to support the rapid growth anticipated from the Year 2000 Program. These actions were largely accomplished and accounted for in the first half of 1996. Cost of Revenues Software License. Software license costs were $14.1 million in 1996 and $15.2 million in 1995, representing 27.1% and 29.3% of software license fees for each respective period. This decrease was primarily attributable to lower third-party royalty rates associated with a slight shift in product mix. Maintenance. Maintenance costs were $25.9 million in 1996 and $23.5 million in 1995, representing 37.1% and 36.0% of maintenance fees for each respective period. The increase from 1995 to 1996 was primarily attributable to royalties related to additional maintenance fees combined with a change in product mix. Professional Services. Professional services costs were $33.0 million in 1996 and $32.6 million in 1995, representing 94.3% and 92.6% of professional services fees in each respective period. This increase was primarily attributable to an increase in spending for infrastructure to support the anticipated growth in the Year 2000 Program, partially offset by improved margins on new projects. Operating Expenses Software Product Development. Software product development expenses were $1.4 million in 1996 and $0.9 million in 1995, representing 2.6% and 1.7% of software license fees, respectively. This increase was primarily attributable to the employment of additional staff to develop and enhance the Company's products. Sales and Marketing. Sales and marketing expenses were $48.7 million in 1996 and $52.5 million in 1995, representing 31.0% and 34.4% of total revenues, respectively. This decrease in expenses was primarily attributable to reductions made in 1995 to the direct sales force and to the direct support personnel. As discussed previously, these reductions commenced in 1995 and were substantially implemented by June 1997. The net effect of this reduction during 1996 was to reduce the direct selling and support personnel from 131 at December 31, 1995, to 98 at December 31, 1996, a net reduction of 25%. Administrative and General. Administrative and general expenses were $28.5 million in 1996 and $24.6 million in 1995, representing 18.2% and 16.2% of total revenues, respectively. This increase was primarily attributable to investments in computer equipment necessary to support anticipated growth of the Year 2000 Program and severance payments made to the Company's former chief executive officer. Other Other Income and Expense, Net. Other income and expense, net was $5.2 million in 1996 and $2.4 million in 1995. The difference was attributable to interest received on $30.0 million in loans made to SAG in three stages over 1995 and 1996, combined with income received for the sale of the rights to one of the Company's products. The loans were retired in March 1997 prior to the Recapitalization. 26 Income Tax Provision. Income tax provision was $4.3 million and $2.3 million in 1996 and 1995, respectively, resulting in effective tax rates of 40.9% and 41.0%, respectively. YEARS ENDED DECEMBER 31, 1995 AND 1994 Revenues Total Revenues. The Company's total revenues were $152.6 million and $147.3 million in 1995 and 1994, respectively, representing an increase of 3.6%. Software License Fees. Software license fees were $52.1 million in 1995 and $51.8 million in 1994, or 34.1% and 35.2% of total revenues for each respective period. Maintenance Fees. Maintenance fees were $65.3 million in 1995 and $65.9 million in 1994, or 42.8% and 44.7% of total revenues for each respective period. This decrease was primarily attributable to the transfer in 1994 of the rights to license SAG products in Southeast Asia from the Company to SAG. These rights accounted for 1994 maintenance revenue of $3.0 million. Adjusting 1994 for the impact of the loss of this territory and these rights in 1995, maintenance revenues would have grown 3.8% from $62.9 million in 1994 to $65.3 million in 1995. The increase was due primarily to the effect of price increases, combined with an increase in the maintenance base from the sale of new software licenses. Professional Services Fees. Professional services fees were $35.2 million in 1995 and $29.6 million in 1994, representing an increase of 18.9%. This growth was the result of an increased level of business in the customer base, aided significantly by the award to the Company of several large contracts. Costs of Revenues Software Licenses. Software license costs were $15.2 million in 1995 and $13.5 million in 1994, representing 29.3% and 26.1% of software license fees for each respective period. This increase was primarily attributable to an increase in third-party royalty rates associated with a shift in product mix. Maintenance. Maintenance costs were $23.5 million in 1995 and $29.8 million in 1994, representing 36.0% and 45.3% of maintenance fees for each respective period. This decrease from 1994 to 1995 was primarily attributable to personnel cost reductions made as a result of the transfer of the Southeast Asian territory to SAG, combined with a significant reduction in customer support and product release personnel. This planned reduction was combined with changes in support processes designed to improve productivity and customer service. Professional Services. Professional services costs were $32.6 million in 1995 and $26.5 million in 1994, representing 92.6% and 89.6% of professional services fees in each respective period. This increase was primarily attributable to losses on certain fixed price contracts. As a result, the Company temporarily slowed the growth in professional services in order to improve its infrastructure and control processes. Operating Expenses Software Product Development. Software product development expenses were $0.9 million in 1995 and $0.9 million in 1994, representing 1.7% of software license fees in both years. Sales and Marketing. Sales and marketing expenses were $52.5 million in 1995 and $50.4 million in 1994, representing 34.4% and 34.2% of total revenues, respectively. The increase in expenses was attributable to higher commissions resulting from the growth in software licenses and professional services fees. Administrative and General. Administrative and general expenses were $24.6 million in 1995 and $25.2 million in 1994, representing 16.2% and 17.1% of total revenues for each respective period. 27 Other Other Income and Expense, Net. Other income and expense, net was $2.4 million in 1995 and $1.9 million in 1994. Income Tax Provision. Income tax provision was $2.3 million and $1.4 million for 1995 and 1994, respectively, resulting in effective tax rates of 41.0% and 50.2%, respectively. QUARTERLY RESULTS OF OPERATIONS The following table sets forth certain unaudited quarterly statement of operations data for each of the eight most recent quarters. In the opinion of management, this information has been prepared on the same basis as the audited financial statements appearing elsewhere in this Prospectus, and all necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts stated below to present fairly the unaudited quarterly results when read in conjunction with the audited Consolidated Financial Statements and Notes thereto. The operating results for any quarter are not necessarily indicative of results for any future period.
PREDECESSOR SUCCESSOR --------------------------------------------------------- ------------------ QUARTER ENDED ---------------------------------------------------------------------------- DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, 1995 1996 1996 1996 1996 1997 1997 1997 -------- --------- -------- --------- -------- --------- -------- --------- (in thousands) Revenues: Software license fees............. $17,309 $ 6,609 $12,369 $12,785 $20,400 $ 7,341 $14,254 $18,458 Maintenance fees.................. 17,744 17,171 17,225 17,382 17,924 17,352 18,394 17,542 Professional services fees........ 8,206 8,506 7,515 10,959 7,995 9,948 10,299 10,729 ------- ------- ------- ------- ------- ------- ------- ------- Total revenues.................... 43,259 32,286 37,109 41,126 46,319 34,641 42,947 46,729 ------- ------- ------- ------- ------- ------- ------- ------- Cost of revenues: Software license.................. 5,020 1,758 3,291 3,494 5,577 2,098 4,074 6,428 Maintenance....................... 6,389 6,614 6,376 6,273 6,622 6,205 6,577 8,062 Professional services............. 7,689 8,480 7,291 10,083 7,112 9,211 9,451 8,491 ------- ------- ------- ------- ------- ------- ------- ------- Total cost of revenues............ 19,098 16,852 16,958 19,850 19,311 17,514 20,102 22,981 ------- ------- ------- ------- ------- ------- ------- ------- Gross profit....................... 24,161 15,434 20,151 21,276 27,008 17,127 22,845 23,748 ------- ------- ------- ------- ------- ------- ------- ------- Operating expenses: Software product development...... 260 410 591 371 -- -- 283 312 Sales and marketing............... 14,431 8,576 12,851 9,712 17,538 7,317 11,477 9,060 Administrative and general........ 6,774 7,349 8,784 7,339 5,067 8,500 8,932 9,317 Write-off of acquired in-process research and development costs (1).............................. -- -- -- -- -- -- -- 6,051 ------- ------- ------- ------- ------- ------- ------- ------- Total operating expenses.......... 21,465 16,335 22,226 17,422 22,605 15,817 20,692 24,740 ------- ------- ------- ------- ------- ------- ------- ------- Income (loss) from operations...... 2,696 (901) (2,075) 3,854 4,403 1,310 2,153 (992) Other income and expense, net...... 576 592 1,048 533 3,057 978 1,597 (221) ------- ------- ------- ------- ------- ------- ------- ------- Income (loss) before income taxes.. 3,272 (309) (1,027) 4,387 7,460 2,288 3,750 (1,213) Income tax provision (benefit)..... 1,070 (97) (404) 1,642 3,161 915 1,599 2,014 ------- ------- ------- ------- ------- ------- ------- ------- Net income (loss).................. $ 2,202 $ (212) $ (623) $ 2,745 $ 4,299 $ 1,373 $ 2,151 $(3,227) ======= ======= ======= ======= ======= ======= ======= =======
- -------- (1) The write-off of acquired in-process research and development costs for the quarter ended September 30, 1997 relates to the Company's acquisition of R.D. Nickel. Before deducting the nonrecurring write-off for this period, income from operations was approximately $5.1 million and net income was approximately $2.8 million. 28 The following table sets forth certain unaudited consolidated quarterly statement of operations data expressed as a percentage of total revenues for each of the eight most recent quarters.
PREDECESSOR SUCCESSOR --------------------------------------------------------- ------------------ QUARTER ENDED ---------------------------------------------------------------------------- DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, 1995 1996 1996 1996 1996 1997 1997 1997 -------- --------- -------- --------- -------- --------- -------- --------- Revenues: Software license fees.................. 40.0% 20.5% 33.3% 31.1% 44.0% 21.2% 33.2% 39.5% Maintenance fees....... 41.0 53.2 46.4 42.3 38.7 50.1 42.8 37.5 Professional service fees.................. 19.0 26.3 20.3 26.6 17.3 28.7 24.0 23.0 ----- ----- ----- ----- ----- ----- ----- ----- Total revenues....... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 ----- ----- ----- ----- ----- ----- ----- ----- Cost of revenue: Software license....... 11.6 5.4 8.9 8.5 12.0 6.1 9.5 13.8 Maintenance............ 14.8 20.5 17.2 15.3 14.3 17.9 15.3 17.3 Professional service... 17.8 26.3 19.6 24.5 15.4 26.6 22.0 18.2 ----- ----- ----- ----- ----- ----- ----- ----- Total cost of revenues............ 44.2 52.2 45.7 48.3 41.7 50.6 46.8 49.3 ----- ----- ----- ----- ----- ----- ----- ----- Gross profit............ 55.8 47.8 54.3 51.7 58.3 49.4 53.2 50.7 ----- ----- ----- ----- ----- ----- ----- ----- Operating expenses: Software product development........... 0.6 1.3 1.6 0.9 -- -- 0.7 0.7 Sales and marketing.... 33.4 26.6 34.6 23.6 37.9 21.1 26.7 19.4 Administrative and general............... 15.7 22.8 23.7 17.8 10.9 24.5 20.8 19.9 Write-off of acquired in-process research and development costs (1)................... -- -- -- -- -- -- -- 12.9 ----- ----- ----- ----- ----- ----- ----- ----- Total operating expenses............ 49.7 50.7 59.9 42.3 48.8 45.6 48.2 52.9 ----- ----- ----- ----- ----- ----- ----- ----- Income (loss) from oper- ations................. 6.1 (2.9) (5.6) 9.4 9.5 3.8 5.0 (2.2) Other income and expense, net........... 1.3 1.8 2.8 1.3 6.6 2.8 3.7 (0.5) ----- ----- ----- ----- ----- ----- ----- ----- Income (loss) before income taxes........... 7.4 (1.1) (2.8) 10.7 16.1 6.6 8.7 (2.7) Income tax provision (benefit).............. 2.5 (0.3) (1.1) 4.0 6.8 2.6 3.7 4.3 ----- ----- ----- ----- ----- ----- ----- ----- Net income (loss)....... 4.9% (0.8)% (1.7)% 6.7% 9.3% 4.0% 5.0% (7.0)% ===== ===== ===== ===== ===== ===== ===== =====
(1)The write-off of acquired in-process research and development costs for the quarter ended September 30, 1997 relates to the Company's acquisition of R.D. Nickel. Before deducting the nonrecurring write-off for this period, income from operations as a percentage of total revenues was 10.8% and net income as a percentage of total revenues was 6.0%. As a result of the Recapitalization on March 31, 1997, the Company is no longer a wholly owned subsidiary of SAG. Management has undertaken several strategic initiatives since the Recapitalization to increase revenue growth and profitability including building a product development organization, developing a product and professional services offering that addresses the year 2000 problem and acquiring R.D. Nickel. The revenue and profit improvements from the first quarter to the second and third quarters may be partially attributable to these changes, but there can be no assurance that this trend will continue in future quarters. Due in part to these initiatives, the Company expects that product development costs as a percentage of software license fees will increase and that administrative and general expenses as a percentage of total revenues will decrease. The Company's results of operations have historically fluctuated on a quarterly basis and are expected to be subject to quarterly fluctuations in the future. The Company's software license fees have tended to increase through each successive quarter of the year, with software license fees in the first quarter of a year being lower than those in the immediately preceding fourth quarter. Third quarter results have been favorably affected by increased end of the year spending by the Company's government customers. Fourth quarter results benefit from those customers who operate on a calendar year basis, combined with the Company's sales compensation plans which include incentives for achieving annual targets. In addition, due to the reorganization of the sales force and the increase in the number of ELAs, the Company's historic trend of third and fourth quarter revenues that are significantly larger than previous first and second quarter revenues may not continue. The Company typically does not have a material backlog of unfilled orders, and revenues in any quarter are substantially dependent on orders booked in that quarter. Maintenance fees generally have not fluctuated on a quarterly basis to the same degree as software license fees due to the large percentage of maintenance fees generated from renewals of annual maintenance contracts which are recognized ratably over the contract period. Revenues from professional services are influenced by the number of personnel providing such services, the utilization rates of such personnel and the number of billable days in a quarter. Other factors being equal, 29 a quarter ending December 31 will generally reflect lower professional services fees than other quarters due to the relatively large number of holidays falling in that quarter. In addition, the completion or commencement of significant professional services projects may affect the revenues from professional services in a particular quarter. Software license costs have varied from period to period and can be expected to fluctuate in the future primarily due to shifts in product mix since royalty rates on third party products vary from 24% to 40%. Historically, sales and marketing expenses have varied from quarter to quarter in absolute dollar terms and as a percentage of revenues, as a result of the size and timing of marketing programs. A significant portion of marketing program costs are variable in nature and subject to management discretion as to their timing and amount. The Company's quarterly operating results may continue to fluctuate due to numerous factors, including the demand for the Company's products and services, the timing and cost of new product and service introductions and product enhancements by the Company or its competitors, changes in the mix of products and services sold by the Company and in the mix of sales by distribution channels, commencement or conclusion of significant service contracts, timing of any acquisitions and associated costs, the size, timing and terms of customer orders, including delays in significant orders, changes in pricing policies by the Company or its competitors, the timing of collection of accounts receivable, changes in foreign currency exchange rates, competitive conditions in the industry and general economic conditions. The Company's expenses are generally fixed and do not vary significantly in the short term with revenues. As a result, operating and net income in a given quarter may be disproportionately affected by a reduction in revenues. See "Risk Factors--Potential Fluctuations in Quarterly Performance." LIQUIDITY AND CAPITAL RESOURCES Since 1988, when the Company became a wholly owned subsidiary of SAG, the Company has financed its operations principally through cash flow from operating activities. In order to meet its short term cash needs and to pay dividends to SAG, in 1992 the Company began to periodically sell long term customer receivable contracts. Sales of long term customer receivable contracts increased in subsequent years in order to meet SAG's directives and in connection with the Recapitalization. Since the Recapitalization, the Company has sold $27.9 million of long term customer receivable contracts, primarily to fund the repayment of certain obligations incurred in connection with the Recapitalization and to fund the acquisition of R.D. Nickel. The Company does not expect to sell additional long term customer receivable contracts in the foreseeable future. Investing activities used net cash of $3.1 million, $23.8 million, $4.3 million and $27.1 million during 1994, 1995, 1996 and the nine months ended September 30, 1997, respectively, primarily to fund capital expenditures needed to support expansion of the Company's business, to provide loans to SAG and as consideration for the Cooperation Agreement. Financing activities used net cash of $4.5 million, $4.8 million, $9.0 million and $2.2 million during 1994, 1995, 1996 and the nine months ended September 30, 1997, respectively, primarily for the repayment of long term obligations, the payment of dividends, and the repurchase of Common Stock. The Company has no long term debt, and as of September 30, 1997 had approximately $18.3 million in cash and investments. The Company has two accounts receivable lines of credit. Under these lines, the Company may sell long term receivable contracts. These transactions are treated as sales by the Company as the economic interest in the contract is transferred to the buyer. The Company's accounts receivable days sales outstanding at September 30, 1997 was 60. The Company's international distributors report and pay in U.S. dollars. In addition, royalties reported and paid by the Company to SAG under the Cooperation Agreement are in U.S. dollars. The Company's Mexican operations commenced in 1996 and represented less than 3% of total revenues in 1996. The 30 Company, therefore, has not to date engaged in foreign currency hedging transactions. In the event of significant growth in international operations, the Company may enter into hedging transactions. The Company traditionally leases all major equipment, and has no investment in inventory or facilities other than leasehold improvements. The Company believes that the proceeds from the sale of the Common Stock offered hereby, together with its existing cash balances, funds generated from operations and available accounts receivable lines of credit will be sufficient to finance the Company's operations for at least the next twelve months. Although operating activities may provide cash in certain periods, to the extent the Company grows in the future, its operating and investing activities may use such cash. There can be no assurances that any necessary additional financing will be available to the Company on commercially reasonable terms. 31 BUSINESS Software AG Systems, Inc. is an enterprise solutions company that provides robust software products and related professional services to large organizations with complex computing requirements. The Company's products are used to build and enhance mission-critical applications that require reliability, scaleability and security, such as customer billing systems, financial accounting systems and inventory management systems. To complement its products, the Company has a comprehensive services offering, including consulting, software integration, systems implementation and large project management services. The Company has over 24 years of experience in addressing the needs of organizations with complex enterprise level computing environments. The Company provides enterprise development software products and related professional services used by organizations to develop new mission-critical applications and enterprise enablement software products and related professional services used to extend existing applications to new technologies. The Company's enterprise development products include ADABAS, a high-performance database management system designed to operate with a variety of data types and computer platforms, and NATURAL, a 4GL programming language that enables the development of applications that are portable, scaleable and interoperable across multiple computing platforms. The Company also provides software products and professional services that enable organizations to extend existing mission-critical applications to the Internet and intranets and to create new applications. Products in this area include ENTIRE, a family of middleware products that facilitates the communication between application components across heterogeneous computing environments; SourcePoint, an automated data warehouse management product; iXpress, a Web application assembly and deployment platform; and EntireX DCOM, a product that uses Microsoft's ActiveX technology to bridge applications written in a variety of programming languages. The Company has also developed a software product, INSIGHT 2000 Tool Kit, and professional services that address the year 2000 problem. The Company's professional services that complement its products include application development and enhancement, application reengineering, application porting and rightsizing, Web integration and data warehouse design and implementation. The Company markets and sells its software products and services through direct and indirect channels in North America, South America, Japan and Israel. Over 1,500 customers in North America, South America, Japan and Israel have licensed the Company's products or purchased the Company's professional services since January 1996. These customers include large corporations, government agencies and educational institutions, such as Nabisco, Inc., Sprint Corporation, the National Aeronautics and Space Administration, the Federal Aviation Administration, Brown University, USX Corporation, the University of Texas and the State of California. INDUSTRY BACKGROUND Worldwide, large business and governmental organizations rely on large-scale computer applications to help manage their businesses. These applications, many of which are mission-critical, contain the core knowledge and processes that support the major operations of these organizations. Examples of such applications include customer billing systems, financial accounting systems and inventory management systems. Mainframes are the predominant computing platform for running mission- critical applications because they provide the high levels of reliability, scaleability, security, manageability and control required by such applications. Recently, with the proliferation of intranets, the growth of the Internet and the decreasing cost of operating mainframe systems, mainframes have gained increased importance as servers capable of managing and providing widespread access to corporate data. Large organizations are also seeking to leverage investments in existing systems by integrating their mainframe systems with distributed computing environments. International Data Corporation estimated that worldwide software revenue for the mainframe segment exceeded $26 billion in 1996. 32 Organizations must continually build, modify and maintain their information systems in order to respond to competitive pressures, regulatory changes and technological advances. For example, many organizations have initiated significant modifications of their information systems to address the increasing demands of management for more information for decision making and the needs of customers and suppliers for greater access to information. Organizations are constantly updating their information systems to exploit advances in database management, communication and software technologies and to maximize the return on their investments in existing systems. In addition, the size and complexity of the year 2000 problem, a problem expected in the year 2000 when applications with two-digit entries in the date code field will need to accept four-digit entries to distinguish twenty-first century dates from twentieth century dates, has created significant demand for technology and professional services that address that problem. The need to continually adapt information systems is placing increased demands on organizations. Already suffering from a shortage of qualified technical professionals, information technology ("IT") organizations are required to work more productively, to distribute information to users more quickly and to preserve the investments that have already been made in computing assets. The Company estimates that there are over one billion lines of NATURAL code in the United States alone. IT organizations are seeking to integrate new technologies into their mainframe systems to avoid the downtime, expense and risks involved in replacing these systems and the applications running on these systems. In many cases, IT organizations lack the resources and expertise required to cost-effectively implement and maintain distributed computing systems. The inability of these organizations to fully utilize available technology, together with the limited functionality of many existing processes and tools, has increased demand for integrated software development products and professional services. As a result, organizations are increasingly seeking to achieve the reliability, scaleability and interoperability of legacy systems while leveraging the speed, cost effectiveness and flexibility of new technologies. The Company believes that organizations are meeting this challenge by working with vendors that: (i) provide enterprise level performance; (ii) enhance and extend existing computing investments; and (iii) provide a comprehensive solution of products, professional services and support. THE COMPANY'S SOLUTIONS Over its 24 year history, the Company has developed significant expertise in addressing the needs of large, complex computing environments at the enterprise level. The Company's solutions enable its customers to leverage their investments in existing information systems and personnel, and to enhance and expand these systems to meet the changing needs of the enterprise. The Company believes its solutions provide the following benefits: Provide Enterprise Level Performance. The Company's solutions consist of software products and related professional services that are used for the development and enhancement of mission-critical enterprise applications. The Company's products are used to build, maintain and extend business applications that require reliability, scaleability and security, and constitute the core technology behind mission-critical systems, such as those used for customer billing, financial accounting and inventory management. Enhance and Extend Existing Computing Investments. The Company's application development and enablement products and related professional services allow its customers to preserve their investments in mainframe systems by updating and evolving their systems to meet changing business processes and needs. Enable New Enterprise Applications. The Company's products and professional services enable its customers to implement new enterprise applications that require access to existing corporate data wherever it resides. For example, the Company's software products and professional services expertise in building data warehousing applications allow IT organizations to create data warehouses that enable managers and knowledge workers to access and analyze corporate data previously unavailable to them for improved decision making. 33 Extend Mission-Critical Applications to Distributed Computing Environments. The Company's solutions allow its customers to extend their mission-critical applications to distributed computing environments. Organizations can use the Company's products and professional services to connect their network-based architectures, including Internet and intranet- based systems, to their mainframe applications, providing improved access to corporate data. In this manner, existing applications need not be rewritten in order to extend them to the network or the Web, and the security, extensibility and scaleability of mainframe environments can be extended. Provide Solutions to the Year 2000 Problem. The Company's year 2000 product, INSIGHT 2000 Tool Kit, and professional services assist its customers in resolving their year 2000 problem. Organizations can use the Company's year 2000 product and professional services to analyze the amount of remediation needed and to develop and implement a remediation and testing plan. In this manner, existing applications need not be abandoned or replaced upon the arrival of the year 2000. Provide a Comprehensive Solution of Products, Professional Services and Support. The Company's solutions represent a comprehensive offering of products, professional services and support from a single vendor. While many "point" products exist in the form of connectivity tools, programming languages and data management products, most are limited in their ability to support the enterprise computing environment. The Company's extensive experience in enterprise software and related professional services enables it to address customers' mission-critical computing needs. THE COMPANY'S STRATEGY The Company's strategy is to further leverage its current leadership position in building enterprise applications and data access solutions for large organizations by extending its product and professional services offerings into the Web integration, data warehouse, middleware and year 2000 markets. Key elements of the Company's strategy include the following: Enhance and Extend Product Offerings. The Company believes that a substantial opportunity exists to provide software products and professional services that assist organizations in building, modifying and maintaining mainframe systems. To pursue this opportunity, the Company intends to enhance its existing product offerings with added features and functionality. The Company also intends to broaden its product offerings through internal product development, additional licensed products from third parties and acquisitions. In furtherance of this strategy, the Company recently acquired R.D. Nickel, a software company with the CONSTRUCT family of application development products which are used in conjunction with NATURAL. In addition, pursuant to the Cooperation Agreement, the Company has an exclusive and perpetual right to license in North America, South America, Japan and Israel (the "Territory") any new products developed or acquired by SAG. The Company expects to continue to benefit from SAG's product development efforts, which in 1996 totaled approximately $56 million. See "Company Background." Leverage Customer Base. Most of the Company's customers are large, sophisticated organizations with complex information systems in dispersed, heterogeneous computing environments. Over 1,500 customers in North America, South America, Japan and Israel have licensed the Company's products or purchased the Company's professional services since January 1996. Typically, the IT budget of a customer of the Company substantially exceeds the annual amount that customer spends with the Company. The Company believes it can expand its share of its customers' IT budgets through increased and improved product and professional services offerings. Expand Professional Services Offerings. The Company believes that, due to the strategic nature of its products, customers require the Company to provide comprehensive professional services and support. The Company's strategy is to expand its key professional services offerings, which are centered around application development, data warehousing, Web integration and the year 2000 problem. The Company expects to hire additional consultants and to develop new professional services offerings to meet its customers' evolving service needs. The Company intends to expand its efforts to cross sell its professional services to its product customers. 34 Leverage Distribution Channels. The Company directly and indirectly sells its products in over 20 countries throughout the Territory through exclusive distributors. Through the Cooperation Agreement with SAG, the Company has access to SAG's distribution channels for the Company's products (other than those licensed from SAG) in over 50 additional countries outside the Territory. The Company intends to leverage this distribution channel by developing and acquiring additional products for distribution by SAG. PRODUCTS AND SERVICES The following diagram depicts how the Company provides enterprise solutions for its customers. The Company works at the highest level of IT organizations to evaluate the overall needs of the enterprise and develop solutions that use its products and professional services to effectively build, extend and enable complex computing environments. Typically, the Company's solutions focus either on building and deploying new mission-critical applications or enhancing and extending existing business-critical applications through building data warehouses and integrating with the Internet and intranets. The Company's products and professional services allow its customers to leverage their investments in existing information systems and personnel and to enhance and expand these systems to meet the changing needs of their organizations. [FLOW CHART APPEARS HERE] - ------------------------------------------------------------------------------- UNDERSTAND BUSINESS PROBLEMS - ------------------------------------------------------------------------------- IDENTIFY BUSINESS SOLUTIONS - ------------------------------------------------------------------------------- Build and Deploy Enhance and Extend ENTERPRISE DEVELOPMENT ENTERPRISE ENABLEMENT Mission-critical Business-critical APPLICATIONS DECISION SUPPORT WEB INTEGRATION Buy . Rightsize . Migrate . Build . Deploy Data Warehouse Internet/Intranet PLATFORMS MVS/VSE . UNIX . Windows NT . Windows NATURAL ADABAS ENTIRE YEAR 2000 4GL Development Data Middleware & Remediation Language Management Web Enabling PROFESSIONAL SERVICES Core Product . Web Integration . Data Warehouse . Year 2000 . Education Technology . Support 35 The following table summarizes the Company's product offerings by category, indicating the year the product was introduced, the shipment date of the product's current version, and the platforms supported by the product.
YEAR OF CURRENT PLATFORMS PRODUCTS (1) INTRODUCTION VERSION SUPPORTED ENTERPRISE DEVELOPMENT - ------------------------------------------------------------- NATURAL Product Line NATURAL 1979 12/95 MVS/VSE NATURAL 1993 7/96 UNIX NATURAL 1996 11/96 WIN NT NATURAL Lightstorm 1995 2/97 WIN CONSTRUCT 1988 9/97 MVS/VSE CONSTRUCT 1993 10/96 UNIX CONSTRUCT Spectrum 1997 8/97 MVS/VSE CONSTRUCT Spectrum 1997 8/97 WIN NT CONSTRUCT Spectrum SDK 1997 8/97 MVS/VSE CONSTRUCT Spectrum SDK 1997 8/97 WIN NT PREDICT 1983 2/97 MVS/VSE PREDICT 1993 2/97 UNIX - ------------------------------------------------------------- ADABAS Product Line ADABAS 1972 1/97 MVS/VSE ADABAS 1993 7/97 UNIX ADABAS Delta Save Facility 1996 2/96 MVS/VSE ADABAS FASTPATH 1991 12/96 MVS/VSE ADABAS SQL Server 1992 10/95 MVS/VSE ADABAS Vista 1997 9/97 MVS/VSE ADABAS ADAPLEX + 1996 2/97 MVS/VSE - ------------------------------------------------------------- ENTERPRISE ENABLEMENT - ------------------------------------------------------------- ENTIRE Product Line iXpress 1996 8/97 WIN NT ENTIRE ACCESS 1994 12/96 UNIX ENTIRE ACCESS 1995 12/96 WIN NT ENTIRE BROKER 1994 4/97 MVS/VSE ENTIRE BROKER 1996 8/97 UNIX ENTIRE BROKER 1996 7/97 WIN NT ENTIRE BROKER SDK 1997 9/97 WIN NT ENTIRE BROKER APPC 1991 2/95 MVS/VSE ENTIRE NET-WORK 1987 8/97 MVS/VSE ENTIRE NET-WORK 1993 9/97 UNIX ENTIRE NET-WORK 1995 3/97 WIN NT ENTIRE SAF Gateway 1997 4/97 MVS/VSE EntireX DCOM 1997 9/97 UNIX - ------------------------------------------------------------- Data Warehouse Product Line SourcePoint 1995 6/97 UNIX PASSPORT 1995 8/97 MVS/VSE CONSTRUCT Extract Service 1997 5/97 MVS/VSE CONSTRUCT Extract Service 1997 3/97 UNIX ESPERANT 1994 2/97 WIN DSS AGENT 1995 8/96 WIN - ------------------------------------------------------------- Year 2000 Product INSIGHT 2000 Tool Kit 1997 9/97 WIN
- -------- (1) CONSTRUCT, CONSTRUCT Spectrum, CONSTRUCT Spectrum SDK and INSIGHT 2000 Tool Kit are products owned by the Company. iXpress, PASSPORT, ESPERANT and DSS AGENT are products which the Company has the right to license pursuant to agreements with third parties other than SAG. The Company has the exclusive right to license and service all other products listed in this table in North America, South America, Japan and Israel pursuant to the Cooperation Agreement with SAG. 36 Enterprise Development Products and Professional Services The Company provides a family of enterprise development software products and related professional services that allow its customers to develop and deploy enterprise solutions that are integrated with existing data and applications. . NATURAL, the Company's 4GL programming language for the enterprise environment, is designed to increase productivity in application software design, development and deployment. NATURAL supports Rapid Application Development to RDBMS environments with applications that are portable, scaleable and interoperable across multiple computing platforms. . Add-on products for the NATURAL environment include: NATURAL LightStorm, for repository-based development environments; CONSTRUCT, for model-based Rapid Application Development; and CONSTRUCT Spectrum, for automated development of distributed components. The Company's family of data management solutions delivers access to data and are designed to ensure the reliability, integrity, and security of such data throughout an organization's computing environment. . ADABAS, the Company's flagship high-performance database management product, is designed to handle large volumes of changing data requiring high levels of availability. It provides multi-data model support, multi- platform support, comprehensive SQL support, and a variety of extended capabilities that take advantage of technological advances in both hardware and software. . Add-on products for the ADABAS environment include: ADABAS SQL Server, an SQL interface to ADABAS data; ADABAS ADAPLEX +, a technology that distributes and presents a single view of multiple databases; ADABAS FASTPATH, which optimizes database and application performance; and ADABAS Delta Save Facility, a product for reducing backup time and database recovery processing. . Core Product Services. These professional services focus on the deployment and use of the Company's database management and application development products, including application development and enhancement, application reengineering, application porting and rightsizing. Enterprise Enablement Products and Professional Services The Company's ENTIRE middleware products and professional services minimize the complexity of integrating a distributed computing environment that encompasses a variety of platforms, protocols, programming languages and databases. . The ENTIRE product family includes: ENTIRE BROKER, a cross-platform messaging middleware product that links mainframe applications and components to ActiveX- and Java-enabled desktops; and ENTIRE SAF Gateway, a central security administration environment. The Company also offers ENTIRE BROKER APPC, a product that links Advanced Program-to-Program Communication and IBM's MQSeries-enabled mainframe applications to ActiveX- and Java- enabled desktops; ENTIRE BROKER SDK, a set of software products for building and deploying distributed applications; and EntireX DCOM, a product that allows applications or pieces of applications to work together transparently on Windows and/or UNIX platforms. . iXpress is an Internet-enablement technology that combines component technology, such as Java and ActiveX, with enterprise systems, allowing organizations to deliver and manage business-critical information solutions via the Web. . Web Integration Services. The Company offers its customers a variety of Web integration professional services, such as integrating an organization's Internet site with an order entry system; integrating multiple sources of data, applications and services from multiple platforms; enabling secure access for suppliers to specific data and applications; and distributing application components across the network. 37 The Company's data warehousing solutions include both products and professional services for implementing a data warehouse, and its approach encompasses six elements: data acquisition, data warehouse administration, services and support, education, business analysis tools and database management. . SourcePoint is an administration product for automating data extraction, transportation and loading from operational data sources to data warehouse servers. SourcePoint works separately or in an integrated fashion with PASSPORT, a data extraction and transformation product. In addition, the Company's CONSTRUCT Extract Service offers a Rapid Application Development approach to creating NATURAL extraction programs that integrate directly with SourcePoint. . ESPERANT, a query and reporting product, and DSS AGENT, a relational online analytical processing (OLAP) product, offer users decision support tools for accessing and analyzing data for improved decision making. . Data Warehouse Services. The Company provides consulting services and methodologies for building and implementing data warehouses, with a focus on rapid delivery of scaleable data warehouses. The Company offers a software product and a professional services capability that address the year 2000 problem. . INSIGHT 2000 Tool Kit is a product that allows developers to analyze and remediate NATURAL code by providing a picture of how much code needs to be fixed and helping project managers break year 2000 projects into segments and develop a comprehensive work plan for executing remediation. . Year 2000 Services. The Company's year 2000 professional services offerings include impact assessment, analysis and implementation to assist customers in resolving their year 2000 problem. These services are provided through a professional staff with expertise in managing large projects and in the methodologies and products that underlie software integration and systems management. The Company also recently established Millennium Centers in Denver, Colorado, Fort Lee, New Jersey and Dallas, Texas to provide remediation and testing for its Year 2000 Program and plans to establish additional centers in the future. Year 2000 remediation can be done at one of the Company's Millennium Centers or at the customer's site. Other Services Education Services. The Company provides customers with in-depth training in the Company's products, with courses available through scheduled and customized classes. In addition, the Company offers programs to accelerate the implementation of application development, Web integration, data warehouse and year 2000 projects. Technology Services. The Company also provides system engineering services, supplementary database administration services and database application and network performance and tuning services. SOFTWARE PRODUCT DEVELOPMENT Prior to the Recapitalization, the Company was a wholly owned subsidiary of SAG and the Company's research and development efforts were directed by SAG. The Company's software product development expenses were $0.9 million, $0.9 million and $1.4 million in 1994, 1995 and 1996, respectively. Since the Recapitalization, the Company has begun building its internal product development group, which currently consists of 17 people, including 11 people added as a result of the acquisition of R.D. Nickel. The first product resulting from the Company's recent internal product development efforts is INSIGHT 2000 Tool Kit, which was released in September 1997. The Company intends to continue expanding its product development group through additional acquisitions and internal hiring. 38 Since the Cooperation Agreement provides the Company with an exclusive and perpetual right to license in the Territory products developed by SAG, the Company also expects to continue to benefit from SAG's product development efforts. In 1996, SAG's product development costs were approximately $56 million. In September 1997, SAG released EntireX DCOM, the first product resulting from SAG's strategic relationship with Microsoft. PRODUCT MAINTENANCE AND CUSTOMER SUPPORT The Company offers a wide range of product maintenance and customer support services. The Company believes that its future success is dependent in part on its ability to provide high levels of customer service in order to cultivate advocacy by the Company's installed customer base. For the twelve months ended September 30, 1997, approximately 96% of the Company's customers who were eligible renewed at least one of their maintenance agreements. As of September 30, 1997, the Company had 119 employees devoted to its maintenance and customer support services. Customers may choose from three levels of service and support offerings: basic, extended and custom, which are differentiated by service deliverables and access to support persons. Some of these customer support services include: . Support during product proof-of-concept/trial . Technical support 24 hours a day, seven days a week . Customized support offerings . Onsite installation and implementation . Remote analysis . Automated customer assistance and Web-based electronic services CUSTOMERS AND MARKETS Over 1,500 customers in North America, South America, Japan and Israel have licensed the Company's products or purchased the Company's professional services since January 1996. These customers consist primarily of major corporations, government agencies and educational institutions. The following examples are representative of how customers use the Company's products and professional services to build and enable enterprise level, mission-critical applications for large organizations. Utility Business Services, Incorporated ("UBS"). An information service bureau for water and wastewater companies, UBS needed to develop a new customer information system to handle approximately 600,000 customer accounts for 15 clients in New Jersey and New York. UBS decided to use the Company's ADABAS, NATURAL and CONSTRUCT products and related services to develop a system of enhanced services and applications that could be sold as an independent software package to UBS's water utility clients handling their own billing and information tracking. According to UBS, six of its programmers developed the entire system in less than two years at a cost of approximately $420,000 and the system resulted in savings of approximately $1.7 million compared to projected COBOL development costs. Federal Aviation Administration ("FAA"). In 1994, the FAA decided to migrate its 400 mainframe COBOL financial and accounting modules to a client/server windows architecture. To facilitate conversion of the online portion of the system, the FAA used the Company's NATURAL Lightstorm product to create new client/server components and the ADABAS product to manage data running in Microsoft's Windows and Windows NT environments. According to the FAA, the new system supports 1.7 million financial transactions each month, is utilized to pay vendors an average of $27 million a day and is used daily by approximately 2,000 employees worldwide to process departmental accounting information. City of New York. The City of New York was using an integrated, COBOL-based system to process various business and commercial compliance activities, such as license processing, inspections, cash management and consumer services. In order to keep up with the changing operational requirements of a diverse user community, the City of New York decided to switch to a new system using the Company's 39 ADABAS and NATURAL products. According to the City of New York, the new system produced a 60% decrease in license processing time and resulted in a 40% increase in revenue collections. Pepsi-Cola General Bottlers Inc. ("PCGB"). In 1990, PCGB, then one of the largest of Pepsi-Cola's bottlers, found that its systems were unable to handle the company's volume of transactions. PCGB decided to replace its existing systems with a system designed to centralize and support business processes in a single set of programs and files. PCGB chose the Company's ADABAS product and, in the process, developed its own enterprise methodology called Open Batch Architecture which uses the Company's NATURAL, CONSTRUCT and ADABAS products to streamline code development. According to PCGB, its new system for domestic operations processes approximately 40 million commands daily. Vincent Metal Goods ("Vincent"). As a result of a merger in 1995, Vincent, a large stainless steel and aluminum distributor, needed to consolidate and convert its two existing computing systems into a single system for use by Vincent's sales, warehouse and clerical employees located in 49 sites throughout the United States. Vincent used the Company's professional services offerings to develop, program and test new applications and selected a mainframe system running on the Company's ADABAS and NATURAL products. According to Vincent, its consolidated computer system is year 2000-ready and was successfully completed three months ahead of schedule, within budget and with minimal disruption to business functions and end-users. The following is a representative list of some of the Company's customers that produced revenues of at least $500,000 for the Company since January 1, 1996. American Community Mutual Insurance Co. National Aeronautics and Space American Electric Power Company, Inc. Administration Banorte Bank Nissan Motor Co., LTD. Brown University Ryerson Tull Burlington Northern Santa Fe Corporation Rykoff-Sexton, Inc. Cable and Wireless, PLC S.C. Johnson & Son Inc. Centers for Disease Control Sprint Corporation Central Hudson Gas & Electric Corporation State of California City of New York State of Hawaii City of Philadelphia State of Nevada Commonwealth of Virginia State of New Jersey Cutler-Hammer, Inc. State of Texas Delta Air Lines, Inc. State of Washington Duke Power Company Union Electric Company Federal Aviation Administration University of Arkansas Federal Bureau of Investigation University of Hawaii Federal Express Corp. University of Texas KN Energy, Inc. University of Toronto Morgan Stanley, Dean Witter, Discover & Co. US Airways Group, Inc. Nabisco Inc. US Patent & Trademark Office USX Corporation In 1996 and during the first nine months of 1997, no single customer accounted for more than 10% of the Company's total revenues. SALES AND MARKETING The Company sells and markets its products through both direct and indirect channels. Recently, the Company reorganized its sales organization into three groups which focus separately on sales of ELAs, professional services and the Year 2000 Program. The reorganization of the sales force has resulted in significantly increased productivity per salesperson. 40 In North America, the Company sells and markets its products through a direct channel that included over 120 people in 19 offices as of September 30, 1997. The Company sells its products in over 20 additional countries through six exclusive distributorships in South America, Japan and Israel. In addition, the Company has access to SAG's distribution channels for the Company's products (other than those licensed from SAG) in over 50 countries outside North America, South America, Japan and Israel. As of September 30, 1997, in North America, the Company directly sold its professional services through 29 people. In addition, as of September 30, 1997, the Company had nine people in the United States focused on selling its Year 2000 Program. As of September 30, 1997, the Company's corporate marketing organization supported the Company's sales and professional services channels through the efforts of 35 professionals with expertise in product marketing, marketing communications, database marketing, inside sales and strategic development. The Company also has strategic marketing relationships with certain vendors of computing products and services, including IBM, Microsoft, Digital Equipment Corporation, Andersen Consulting and BDM. COMPETITION The markets for the Company's software products and professional services are highly competitive and characterized by continual change and improvement in technology. The Company provides products and professional services to several markets within the computer industry and encounters a variety of competitors within each such market. Many of the Company's competitors have significantly greater financial, marketing and other competitive resources than the Company. In addition, in certain markets in which the Company competes, such as the year 2000 market, there are no significant barriers to entry. Few of the Company's competitors compete in all of the same markets as the Company. In the enterprise development markets, the Company's competitors with respect to enterprise and departmental database management products include IBM, Oracle, Informix, Sybase and Microsoft. In addition, the Company's 4GL applications programming language, NATURAL, competes with offerings from both large and small companies, including Oracle, Microsoft, IBM and Sterling Software. In the enterprise enablement markets, the Company's products compete in both the component/object and the message oriented segments of the middleware market, where its competitors include IBM, Microsoft, and Visigenic. The Company's competitors in the data warehousing segment of the enablement markets include IBM, SAS, and PLATINUM and database vendors such as Oracle, Sybase and Informix. In the market for year 2000 products and professional services, the Company's competitors include Formal Systems, Viasoft, BDM and EDS. The principal competitive factors affecting the markets for the Company's product and professional services offerings include: (1) product functionality, performance, reliability and ease of use, (2) quality of technical support, training and consulting services, (3) responsiveness to customer needs, (4) reputation, experience and financial stability and (5) cost of ownership, including initial price and deployment costs as well as ongoing maintenance costs. Due to the continued increase in new product licenses and professional services revenues, the Company believes that it has competed effectively in each of these areas. Nevertheless, current and potential competitors may introduce new and better products, make strategic acquisitions, or establish cooperative relationships among themselves or with third parties, thereby increasing the ability of their products to address the needs of the Company's current and prospective customers. There can be no assurance that the Company will be able to compete successfully against current and future competitors, and the failure to do so would have a material adverse effect upon the Company's business, financial condition and results of operations. See "Risk Factors--Competition." PROPRIETARY RIGHTS The products sold by the Company consist of products developed by SAG (e.g., ADABAS, NATURAL and ENTIRE), products owned by other third parties which are distributed by the Company (e.g., 41 ESPERANT and iXpress) and products developed or acquired by the Company (i.e., INSIGHT 2000 Tool Kit, CONSTRUCT, CONSTRUCT Spectrum and CONSTRUCT Spectrum SDK). For all of these products, the Company, if not the developer, is contractually obligated to provide appropriate security measures to protect the proprietary materials of SAG and other third parties against misappropriation and illegal copying. The Company treats all of the products that it distributes as proprietary trade secrets and confidential information. It relies primarily upon a combination of trade secret, copyright and trademark laws, its license agreements with customers, and its internal security systems, confidentiality procedures and employee agreements to maintain the security of its products. The Company typically provides its products to users under nonexclusive, nontransferable perpetual licenses which generally permit use of the licensed software solely for internal operations on designated computers at specific sites. Under certain circumstances, the Company makes available the source code for its products under an escrow arrangement which restricts access to and use of the source code. Although the Company takes steps to protect its trade secrets and other proprietary rights, there can be no assurance that misappropriation will not occur. In addition, the laws of some foreign countries do not protect proprietary rights to the same extent as the laws of the United States. The Company seeks to protect its software, documentation and other written materials under copyright law, and to assert trademark rights in its product names. The Company has not sought to protect its products under patent laws, though SAG and some third parties have patented, in the United States, Japan and/or the European Union, certain of the products which the Company distributes. Although the Company is not aware of any claims that its products, trademarks or other proprietary rights infringe on the proprietary rights of third parties, there can be no assurance that third parties will not assert infringement claims against the Company in the future with respect to current and future products or that any such assertion may not require the Company to enter into royalty arrangements or result in costly litigation. See "Risk Factors--Proprietary Technology." EMPLOYEES As of September 30, 1997, the Company employed 826 people, with 372 in professional services and consulting, 124 in sales and marketing, 175 in customer support, 14 in research and development and 141 in general and administrative. As of September 30, 1997, the Company also utilized approximately 106 individuals under independent contracts. None of the Company's employees is represented by a labor union, and the Company has never experienced any work stoppage. The Company considers its relations with its employees to be good. The Company's success will depend in part on its continued ability to attract and retain highly qualified personnel in a competitive market for experienced software developers, professional services staff and sales and marketing personnel. See "Risk Factors--Dependence on Key Personnel; Need to Hire Additional Personnel." FACILITIES The Company's executive offices, principal marketing and data center facility are located in approximately 170,000 square feet of space in a three building campus that the Company leases in Reston, Virginia. The Company's Customer Service and Support Center is located in approximately 85,000 square feet that the Company leases in Highlands Ranch, Colorado. The Company leases product sales and professional services branch offices in Irvine and Sacramento, California; Atlanta, Georgia; Chicago, Illinois; Braintree, Massachusetts; Bloomington, Minnesota; Fort Lee, New Jersey; Plymouth Meeting, Pennsylvania; Dallas, Texas; Bellevue, Washington and Reston, Virginia in the United States. The Company's subsidiary in Mexico leases offices in Mexico City and Monterrey, Mexico. As a result of the acquisition of R.D. Nickel, the Company leases product sales and professional services branch offices in the following cities in Canada: Calgary, Cambridge, Edmonton, Montreal, Ottawa and Toronto. 42 LEGAL PROCEEDINGS From time to time, the Company is involved in legal proceedings and litigation arising in the ordinary course of business. As of the date of this Prospectus, the Company is not a party to any litigation or other legal proceeding that, in the opinion of management, could have a material adverse effect on the Company's business, financial condition or results of operations. 43 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The executive officers and directors of the Company, and their respective ages as of September 26, 1997, are as follows:
NAME AGE POSITION - ---- --- -------- Carl J. Rickertsen (1) (2).................... 37 Chairman of the Board Daniel F. Gillis........ 51 President, Chief Executive Officer and Director Harry K. McCreery....... 51 Vice President, Treasurer and Chief Financial Officer Timothy L. Hill......... 39 Vice President--Marketing Derek M. Brigden........ 45 Vice President--Operations and Chief Information Officer James H. Daly........... 54 Vice President, Secretary and General Counsel Thomas E. Gorley........ 51 Vice President--Professional Services Dr. Philip S. Dauber (1).................... 56 Director Dr. Erwin Koenigs....... 47 Director Edward E. Lucente (2)... 57 Director Dr. Paul G. Stern (1) (2).................... 58 Director
- -------- (1) Member of the Compensation Committee. (2)Member of the Audit Committee. Carl J. Rickertsen has served as Chairman of the Board of the Company since April 1997. Mr. Rickertsen is also a member of TC Equity Partners, LLC and TC Management LLC, which are, respectively, the sole general partner and managing agent of Thayer. Thayer is a private equity fund in Washington, D.C. that targets investments in the information technology and services industries. From September 1994 to April 1996, Mr. Rickertsen was a partner with Thayer Capital Partners, an affiliate of Thayer. Prior to that, Mr. Rickertsen acted as a private financial consultant from 1993 through August 1994, and was a partner at Hancock Park Associates, a private equity investment firm based in Los Angeles, from 1989 to 1993. Before joining Hancock Park Associates, Mr. Rickertsen was an associate at Brentwood Associates from 1987 to 1989, and worked in the high technology group at Morgan Stanley & Co., Inc. from 1983 to 1985. Mr. Rickertsen currently serves as a director of MLC Holdings, Inc. Daniel F. Gillis has served as President and Chief Executive Officer of the Company and the Company's wholly owned subsidiary, Software AG Americas, Inc. ("Software Americas"), since May 1996. He also has served as a director of the Company since February 1997. Previously, Mr. Gillis served as Senior Vice President of U.S. Sales of Software Americas from April 1995 to May 1996 and as Vice President of Federal Systems Sales of Software Americas from January 1995 to March 1995. From August 1994 to January 1995, he was a private consultant. From May 1987 through August 1994, he was Executive Vice President at Falcon Microsystems Inc., a computer products reseller and systems integrator. Mr. Gillis currently serves as a director of Carleton Corporation. Harry K. McCreery has served as Vice President, Treasurer and Chief Financial Officer of the Company since April 1997. He also has served as Treasurer of Software Americas since May 1991, Chief Financial Officer of Software Americas since June 1989 and Chief Information Officer of Software Americas from June 1989 to December 1990. Timothy L. Hill has served as Vice President--Marketing of the Company since August 1997. Previously, Mr. Hill served from July 1994 through July 1997 as Vice President, Worldwide Marketing & Sales for Iomega Corporation, a manufacturer of computer storage products. From August 1993 through July 1994, Mr. Hill served as Vice President, Marketing for Falcon Microsystems Inc. From January 1988 to August 1993, Mr. Hill was Director of Marketing & Sales, Consumer Business Division, at Gates Energy Products, a manufacturer of consumer and commercial rechargeable battery products. 44 Derek M. Brigden has served as Vice President--Operations and Chief Information Officer of the Company since April 1997. He has been Vice President--Operations and Chief Information Officer of Software Americas since December 1990. James H. Daly has served as Vice President and General Counsel of the Company since April 1997 and as Secretary of the Company since 1992. Mr. Daly also has served as Vice President, General Counsel and Secretary of Software Americas since May 1991. Thomas E. Gorley has served as Vice President--Professional Services of the Company since April 1997. He has served as Vice President--Professional Services of Software Americas since February 1996. From September 1994 to June 1995, Mr. Gorley served as Senior Vice President of Electronic Data Systems Corporation, a systems integration and consulting company. He also served as President of Bell Atlantic Utilities Systems, a software development and services company, from June 1992 to December 1993. Mr. Gorley was a private consultant from June 1995 to February 1996 and from January 1994 to September 1994. Dr. Philip S. Dauber has served as a director of the Company since April 1997. Dr. Dauber has served as a consultant at IQI, Inc., a telemarketing firm, since November 1996, and as the acting President of IQI, Inc. from February 1997 through August 1997. Before joining IQI, Inc., Dr. Dauber was employed as an independent consultant, providing services to several technology oriented businesses. Dr. Dauber served as a Senior Vice President of Unisys Corporation from 1981 to 1987 during which time he was also Chairman and Chief Executive Officer of Memorex, Inc., a wholly owned subsidiary of Unisys Corporation. Before joining Unisys Corporation, Dr. Dauber was employed by IBM from 1965 to 1981 and served as Secretary of its Corporate Management Committee from 1980 to 1981. Dr. Erwin Koenigs has served as a director of the Company since December 1996 and was Chairman of the Board of the Company from December 1996 through March 1997. Dr. Koenigs has served as Chairman of the Board of SAG since September 1996 and Chief Executive Officer of SAG since November 1996. From April 1989 to November 1996, Dr. Koenigs was Chief Executive Officer of Linotype-Hell AG in Eschborn, Germany, a supplier of prepress and publishing technology. Edward E. Lucente has served as a director of the Company since April 1997. Since May 1995, Mr. Lucente has served as the Chief Executive Officer and President of Liant Software Corporation, a software development company. Previously, he was a marketing consultant from May 1994 until April 1995, and Executive Vice President of Sales and Marketing of Digital Equipment Corporation, a computer hardware, software and services company, from March 1993 through April 1994. From February 1991 until March 1993, Mr. Lucente was a Member of the Executive Office of Northern Telecom Limited, a supplier of digital telecommunications systems, serving from January 1992 until March 1993 as an Executive Vice President of Northern Telecom Limited. Mr. Lucente currently serves as a director of Compuserve Corporation, Genicom Corporation and Information Resources, Inc. Dr. Paul G. Stern has served as a director of the Company since April 1997. Dr. Stern is also a member of TC Equity Partners, LLC and TC Management LLC, which are, respectively, the sole general partner and managing agent of Thayer. In 1995, Dr. Stern joined Thayer as a co-founder. Prior to that, Dr. Stern was a Special Limited Partner at Forstmann Little & Co., a private investment firm, from June 1993 to June 1995. From March 1989 until June 1993, Dr. Stern served as Chief Executive Officer and Chairman of the Board of Northern Telecom Limited. Dr. Stern currently serves as a director of The Dow Chemical Company, The LTV Corporation and Whirlpool Corporation. The Company's Second Amended and Restated Bylaws (the "Bylaws") provide for the Company's Board of Directors to be comprised of six directors, and permit the Board of Directors from time to time to increase or decrease the number of directors. Pursuant to the terms of the Company's Second Amended and Restated Certificate of Incorporation (the "Certificate of Incorporation"), upon the consummation of this offering the directors will be divided into three classes. One class will hold office initially for a term expiring at the annual 45 meeting of the stockholders to be held in 1998, a second class will hold office initially for a term expiring at the annual meeting of stockholders to be held in 1999 and a third class will hold office initially for a term expiring at the annual meeting of stockholders to be held in 2000. Each director will hold office for the term to which he is elected and until his successor is duly elected and qualified or until his earlier death, resignation or removal. Mr. Gillis and Dr. Dauber will have terms expiring in 1998, Dr. Koenigs and Mr. Lucente will have terms expiring in 1999, and Mr. Rickertsen and Dr. Stern will have terms expiring in 2000. At each annual meeting of the stockholders of the Company, the successors to the class of directors whose terms expire at such meeting will be elected to hold office for a term expiring at the third succeeding annual meeting of stockholders after their election. Executive officers of the Company are elected by the Board of Directors on an annual basis and serve until the first meeting of the Board of Directors following the next annual meeting of stockholders following their election and until their successors have been duly elected and qualified or until their earlier death, resignation or removal. There are no family relationships among any of the executive officers or directors of the Company. COMMITTEES OF THE BOARD OF DIRECTORS In April 1997, the Board of Directors established an Audit Committee and a Compensation Committee. The Audit Committee makes recommendations concerning the engagement of independent public accountants, reviews with the Company's independent public accountants the plans and results of the audit engagement, approves professional services provided by the Company's independent public accountants and reviews any recommendations made by the Company's auditors regarding the Company's accounting methods and the adequacy of the Company's internal accounting controls. The current members of the Audit Committee are Messrs. Lucente and Rickertsen and Dr. Stern. The Compensation Committee establishes general guidelines regarding the compensation of the officers and executives of the Company and its subsidiaries, and determines the compensation of the executive officers of the Company. The Compensation Committee also administers the Stock Option Plan. The current members of the Compensation Committee are Mr. Rickertsen and Drs. Stern and Dauber. The Audit Committee and the Compensation Committee are comprised solely of directors who are not officers or employees of the Company or any of its subsidiaries ("Independent Directors"). DIRECTOR COMPENSATION The Company's directors were not compensated during 1996 for any services provided as directors and did not receive during such fiscal year any benefits or other forms of compensation, cash or otherwise, from the Company for their service as directors. The Company has no present plans to pay such benefits or compensation to directors. The Company intends to reimburse directors for certain out-of-pocket expenses incurred in connection with attendance at Board of Directors and committee meetings. Each of Dr. Dauber and Mr. Lucente has received grants of nonstatutory stock options under the Stock Option Plan to purchase 54,450 shares of Common Stock at an exercise price equal to $1.47 per share. The options vest in equal annual installments over a period of four years, commencing March 31, 1998. The options become exercisable in full upon a change in control of the Company. See "--Stock Option Plan." 46 EXECUTIVE COMPENSATION The following table sets forth certain information concerning the compensation paid to the persons who served as the Company's Chief Executive Officer during 1996 and each of the four other most highly compensated executive officers of the Company whose annual salary and bonus compensation for 1996 exceeded $100,000 (collectively, the "Named Executive Officers"). The Named Executive Officers did not receive any stock option grants in 1996, hold any stock options at the end of 1996 or exercise any stock options during 1996. SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION ---------------------------------- OTHER ANNUAL ALL OTHER NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION (1) COMPENSATION (2) - --------------------------- -------- -------- ---------------- ---------------- Current Executive Officers Daniel F. Gillis (3) President and Chief Executive Officer......... $249,039 $240,500 $24,000 $ 179,671 Harry K. McCreery (4) Vice President, Treasurer and Chief Financial Officer................... 170,000 132,600 -- 235,933 Derek M. Brigden (4) Vice President--Operations and Chief Information Officer................... 150,000 101,346 -- 7,500 James H. Daly (4) Vice President, Secretary and General Counsel....... 142,000 92,300 20,208 159,183 Former Executive Officers Michael J. King (5) President and Chief Executive Officer......... 130,344 -- -- 2,800,874(5) William P. Cripe (6) Vice President--Human Resources................. 123,613 81,900 -- 97,060(6)
- ------- (1) Consists of sales commissions paid to the Named Executive Officer. In accordance with the rules of the Securities and Exchange Commission (the "Commission"), other compensation in the form of perquisites and other personal benefits has been omitted because such perquisites and other personal benefits constituted in the aggregate less than the lesser of $50,000 or 10% of the total annual salary and bonus reported for the Named Executive Officer during 1996. (2) Unless otherwise indicated, consists of (i) amounts of deferred compensation earned and credited to deferred compensation accounts of the Named Executive Officer during 1996 and (ii) $7,500 of contributions paid by the Company on behalf of the Named Executive Officer under the 401(k) Plan. See "--Deferred Compensation Agreements," "--401(k) Plan" and footnotes 5 and 6 below. The Company does not have any long term incentive plans. (3) Mr. Gillis served as President and Chief Executive Officer of the Company from May 6, 1996. (4) In 1996, these individuals served as executive officers of Software Americas, the Company's wholly owned subsidiary, and performed policy making functions for both Software Americas and the Company. (5) Mr. King served as President and Chief Executive Officer of the Company and Software Americas prior to Mr. Gillis. Amounts reported as All Other Compensation include (i) severance payments in the amount of $950,000, (ii) deferred compensation payments in the amount of $1,843,374 and (iii) $7,500 of contributions paid by the Company under the 401(k) Plan. (6) During 1996, Mr. Cripe served as Vice President--Human Resources of Software Americas. His employment with Software Americas was terminated on March 21, 1997. Amounts reported as All Other Compensation include (i) $90,930 of deferred compensation earned and credited to Mr. Cripe's deferred compensation account and (ii) $6,130 of contributions paid by the Company on behalf of Mr. Cripe under the 401(k) Plan. 47 Messrs. Gillis, McCreery, Brigden, Daly, Gorley and Hill have received grants of nonstatutory stock options under the Stock Option Plan to purchase aggregate amounts of 2,472,800 and 1,017,289 shares of Common Stock at an exercise price per share equal to $1.47 and $12.00, respectively. The options granted to Messrs. Gillis and McCreery vest in equal annual installments over a period of three years, and the options granted to Messrs. Brigden, Daly, Gorley and Hill vest in equal annual installments over a period of four years. The options become exercisable in full upon a change in control of the Company and may be partially accelerated in connection with the executive officer's termination of employment with the Company. See "--Stock Option Plan." Messrs. Gillis, McCreery, Brigden, Daly, Gorley and Hill have also received grants of nonstatutory stock options under the Stock Option Plan to purchase an aggregate of 618,200 shares of Common Stock at an exercise price per share equal to $9.60, which options are fully vested. STOCK OPTION PLAN In connection with the Recapitalization, which was consummated on March 31, 1997, the Company authorized the granting of stock options to purchase an aggregate of 3,300,000 shares of Common Stock at an exercise price equal to $1.47, the per share purchase price of the Recapitalization. On April 29, 1997, the Company adopted the Software AG Systems, Inc. 1997 Stock Option Plan (the "Stock Option Plan"). The Stock Option Plan is intended to assist the Company and its affiliates in attracting and retaining employees, directors, consultants and advisors (collectively, the "Eligible Individuals") and to promote the identification of their interests with those of the stockholders of the Company. The Stock Option Plan permits a maximum of 6,875,000 shares of Common Stock to be issued to Eligible Individuals pursuant to grants of stock options. Unless sooner terminated by the Company's Board of Directors, the Stock Option Plan will terminate on April 11, 2007. Options granted under the Stock Option Plan may be either "incentive stock options" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or nonstatutory stock options. No option granted under the Stock Option Plan is exerciseable after the tenth anniversary of the option's date of grant. The Company has granted to Eligible Individuals nonstatutory stock options to acquire an aggregate of 4,947,525 shares of Common Stock at a weighted average exercise price of $4.90 per share. 401(K) PLAN Software Americas provides a 401(k) plan (the "401(k) Plan") giving eligible employees, including executive officers, the opportunity to accrue additional income and to save for retirement on a before-tax basis. The 401(k) Plan is qualified as a 401(k) plan under the Code. Software Americas employees are generally eligible to participate in the plan after six months of full-time employment. The 401(k) Plan provides that each participant may contribute up to 15% of the participant's annual pre-tax compensation, but not more than the annual maximum prescribed by law. The 401(k) Plan provides for Software Americas to make matching contributions equal to 100% of pre-tax contributions up to 5% of the participant's compensation for the payroll period or other period over which contributions are made, as further limited by law. The 401(k) Plan also permits Software Americas to make discretionary employer contributions, which if made, are allocated in proportion to the compensation of each employee to the total compensation for the year of all employees. The 401(k) Plan does not allow contributions to exceed 6% of compensation. Earnings under the 401(k) Plan accumulate tax free until distributed. DEFERRED COMPENSATION AGREEMENTS Software Americas has entered into deferred compensation agreements with Messrs. Gillis, McCreery and Daly (the "Deferred Compensation Agreements"). Pursuant to these agreements, each of Messrs. Gillis, McCreery and Daly annually receives a credit of $41,838, $46,000 and $24,000, respectively, to his deferred compensation account plus an additional credit to such account equal to 53%, 100% and 120%, respectively, of his bonus for such year. The deferred compensation accounts earn interest at an annual rate of 6%. Under the Deferred Compensation Agreements, no additional credits, other than interest, will be made to any of the deferred compensation accounts after December 31, 1998. The deferred compensation accounts of Messrs. McCreery and Daly are fully vested. Mr. Gillis' deferred compensation account is currently 40% vested and will vest in full as of December 31, 1998. Except under certain circumstances, upon termination of employment, each of Messrs. Gillis, McCreery and Daly is entitled to receive from Software Americas payments totaling the vested portion of his deferred compensation account. 48 SEVERANCE AGREEMENTS Mr. Gillis has entered into a memorandum of understanding with the Company with respect to the termination of his employment as President and Chief Executive Officer of the Company. Under this agreement, the Company is required to pay Mr. Gillis a severance benefit equal to twelve months of his then-current salary plus annual bonus ($460,000 minimum payment), and, for a period not to exceed twelve months, to continue to make available his health and other fringe benefits if (i) the Company terminates his employment other than for cause or (ii) he resigns within ninety days of a substantial change in his title or a substantial reduction in his compensation and benefits or job responsibilities. Each of Messrs. McCreery, Brigden and Daly has entered into a memorandum of understanding with Software Americas with respect to the termination of his employment on terms and conditions substantially similar to Mr. Gillis' memorandum of understanding with the Company, provided, however, that (i) the severance benefit due each such executive officer upon termination under his respective memorandum of understanding is equal to twelve months of his then- current salary plus a pro-rated bonus payment and (ii) no severance or other benefits are due under these agreements if the executive officer resigns within ninety days of a substantial reduction in his compensation and benefits related to a company wide reduction or a substantial reduction in his job responsibilities that is deemed to be in the best business interests of Software Americas. Pursuant to the terms of a Shareholders Agreement dated as of April 1, 1997, each of Messrs. Gillis, McCreery, Brigden, Daly and Gorley has agreed that (i) prior to the fifth anniversary of the termination of his employment with the Company, he will not influence any employee to leave the Company and (ii) prior to the third anniversary of the termination of his employment with the Company (unless such termination is by the Company without cause), he will not directly or indirectly compete with the Company by soliciting any of its customers, clients or suppliers. Mr. Hill has agreed to similar restrictions pursuant to a subscription agreement between Mr. Hill and the Company dated as of August 22, 1997, as amended. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Prior to April 1997, the Company did not have a Compensation Committee or other committee of the Board of Directors performing an equivalent function, and the compensation of the Company's executive officers was determined by the Company's Board of Directors. Since April 29, 1997, the Compensation Committee of the Company's Board of Directors has been comprised of Mr. Rickertsen and Drs. Stern and Dauber, each of whom is an Independent Director. Mr. Rickertsen and Dr. Stern are members of TC Equity Partners, LLC, which is the sole general partner of Thayer, a stockholder of the Company. 49 CERTAIN RELATIONSHIPS AND TRANSACTIONS At the closing of the Recapitalization, the senior management of the Company and Thayer acquired approximately 89% of the outstanding voting equity of the Company pursuant to an agreement among the Company, SAG, Thayer and the following officers of the Company: Daniel F. Gillis, Harry K. McCreery, Gary Hayes, James H. Daly, Derek M. Brigden and Thomas E. Gorley (collectively, such individuals are referred to as the "Managers"). Prior to the Recapitalization, SAG owned all of the Company's 27,500,000 outstanding shares of Common Stock. In connection with the Recapitalization, the Company (i) repurchased 24,750,000 shares of Common Stock from SAG for an aggregate purchase price of 57,000,000 Deutsche Marks ($33.9 million) and (ii) issued and sold 20,678,350 shares of Common Stock to Thayer and an aggregate of 771,650 shares of Common Stock to the Managers for an aggregate purchase price of $31,526,820, or $1.47 per share. Of the Common Stock purchased by the Managers, Messrs. Gillis and McCreery each purchased 204,050 shares and Messrs. Hayes, Daly, Brigden and Gorley purchased 84,975, 108,625, 67,925 and 102,025 shares, respectively. After the Recapitalization, SAG retained 2,750,000 shares of Common Stock, representing approximately 11% of the outstanding Common Stock. Dr. Erwin Koenigs, the Chairman of the Board and Chief Executive Officer of SAG, is currently a director of the Company. As a result of the Recapitalization, Thayer and the Managers respectively owned 85.4% and 3.2% of the outstanding Common Stock. Dr. Stern and Mr. Rickertsen, directors of the Company, are members of TC Equity Partners, LLC, which is the sole general partner of Thayer. In addition, Mr. Gillis is currently, and was at the time of the Recapitalization, a director of the Company. In connection with the Recapitalization, on March 31, 1997, Software Americas borrowed $5,000,000 from Thayer under a short term note agreement for working capital requirements. This note accrued interest at a simple rate equal to 10% per annum and was repaid on April 11, 1997. In addition, Software Americas paid to TC Management LLC ("TC Management") a financial advisory fee of $840,000 in consideration for investment banking and advisory services provided by TC Management in connection with the Recapitalization, and reimbursed TC Management for its out-of-pocket expenses in connection with the Recapitalization. On April 1, 1997, Software Americas also agreed to pay on a quarterly basis an annual fee of $300,000 to TC Management for management and consulting services to be provided by TC Management to Software Americas in connection with the operation and conduct of Software Americas' business. Through September 30, 1997, Software Americas has paid $150,000 of such fees. TC Management is the managing agent of and provides management services to Thayer. Dr. Stern and Mr. Rickertsen, directors of the Company, are members of TC Management. In connection with the Recapitalization, Software Americas also paid a one-time advisory fee of $250,000 to MLC Group, Inc., a wholly owned operating subsidiary of MLC Holdings, Inc. Mr. Rickertsen, a director of the Company, is a director of MLC Holdings, Inc. Prior to the Recapitalization, the Company licensed and serviced SAG products pursuant to a license agreement entered into by SAG and Software Americas on January 1, 1995 (the "License Agreement"). The License Agreement gave Software Americas the exclusive rights to license and service SAG products in North America, South America, Japan and Israel, and gave SAG the exclusive rights to license and service Software Americas products in all other areas. Immediately prior to the Recapitalization, Software Americas and SAG entered into a Cooperation Agreement dated March 31, 1997, which terminated and superseded the License Agreement. The Cooperation Agreement generally provides (i) Software Americas the exclusive and perpetual right to license and service in North America, South America, Japan and Israel (the "Territory") both existing and future products developed or acquired by SAG and (ii) SAG the exclusive and perpetual right to license and service outside the Territory both existing and future products developed or acquired by Software Americas. Each of Software Americas and SAG must pay the other 24% of the net revenues derived from such licenses. Except in certain circumstances, Software Americas' minimum annual royalty payment to SAG through the year 2000 must at least equal $21 million. This 24% royalty rate is fixed for 20 years. In 1994, 1995, 1996 and the first nine months of 1997, Software Americas' royalty payments to SAG were approximately $29.0 million, $23.9 million, $26.1 million and $19.8 million, respectively. In the same periods, 50 SAG's royalty payments to Software Americas were approximately $0.0, $0.3 million, $0.3 million and $0.5 million, respectively. As consideration for the Cooperation Agreement, Software Americas paid SAG 38,000,000 Deutsche Marks (approximately $22.6 million) on March 31, 1997. See "Company Background." On December 5, 1993, Software Americas and SAG entered into a Products and Research & Development Operations Transfer Agreement (the "R&D Agreement") which required Software Americas to provide certain services relating to certain SAG employees who utilized Software Americas facilities. In connection with the Recapitalization, on March 31, 1997, Software Americas entered into an Administrative Services Agreement (the "ASA") with SAG, terminating the R&D Agreement and requiring that Software Americas provide services similar to those required under the R&D Agreement. SAG is required under the ASA to reimburse Software Americas for its costs incurred in connection with the ASA and to pay Software Americas $500,000 per year during the years 1997, 1998 and 1999 for the use of certain machinery leased by Software Americas. In 1994, 1995, 1996 and the first nine months of 1997, payments to Software Americas under the R&D Agreement and the ASA were approximately $7.5 million, $8.8 million, $15.9 million and $8.7 million, respectively. From 1988 until the Recapitalization, the Company was a wholly owned subsidiary of SAG. Accordingly, during that period, there were a variety of intercompany transactions, including loans and dividends, between the Company and SAG. In 1994, 1995 and 1996, the Company paid aggregate dividends to SAG of $0.6 million, $1.7 million and $9.0 million, respectively. Except as described above, all of these transactions that were material terminated in connection with the Recapitalization. See "Dividend Policy" and Note 6 of the Notes to the Consolidated Financial Statements. On August 22, 1997, the Company entered into a subscription agreement with Timothy L. Hill, the Company's Vice President--Marketing, pursuant to which the Company issued and sold to Mr. Hill 137,500 shares of Common Stock for an aggregate purchase price of $202,095. Pursuant to the subscription agreement, the Company has the right to repurchase Mr. Hill's shares at $1.47 per share if Mr. Hill's employment with the Company is terminated for cause or if Mr. Hill voluntarily terminates his employment prior to August 17, 1999. The Company's repurchase right terminates in the event of a change of control of the Company. In addition, the Company has issued options to purchase an aggregate of 94,325 shares of Common Stock at an exercise price of $1.47 to the members of Thayer's Advisory Board. The Company and Thayer have entered into a registration rights agreement for the benefit of all holders as of September 26, 1997 of "restricted securities" of the Company within the meaning of Rule 144 of the Commission, and certain transferees of such holders. Pursuant to this agreement, a majority-in- interest of such holders has the right to require the Company to register their restricted securities for resale under the Securities Act on up to five occasions (only one of which may be on Form S-1) and such holders have been granted certain "piggy-back" registration rights with regard to certain securities offerings initiated by the Company. The Company has agreed to pay certain expenses in connection with such registrations. Messrs. Gillis, McCreery, Daly and Gorley borrowed $250,000, $250,000, $182,605 and $75,000, respectively, from Software Americas under individual promissiory notes, each of which is dated March 24, 1997, and Messrs. McCreery and Daly borrowed $363,000 and $120,740, respectively, from Software Americas under individual promissory notes, each of which is dated August 9, 1996. Each of the promissory notes accrues interest at the rate of 6% per annum and is due and payable upon termination of its maker's employment with Software Americas. 51 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth certain information known to the Company regarding beneficial ownership of the Company's Common Stock as of October 15, 1997, and as adjusted to reflect the sale of the shares pursuant to this offering, by (i) each person who is known by the Company to own beneficially more than 5% of the outstanding shares of Common Stock, (ii) each director and Named Executive Officer of the Company, (iii) all directors and executive officers of the Company as a group and (iv) each Selling Stockholder. Except as otherwise indicated below, to the knowledge of the Company, each person listed below has sole voting power and investment power with respect to the shares beneficially owned by such person, subject to community property laws where applicable.
SHARES SHARES BENEFICIALLY OWNED BENEFICIALLY OWNED PRIOR TO OFFERING (2) SHARES TO BE AFTER OFFERING (2) ------------------------- SOLD IN ------------------ NAME AND ADDRESS (1) NUMBER PERCENT OFFERING (3) NUMBER PERCENT - -------------------- ------------- ----------------------- ---------- ------- Thayer Equity Investors 20,209,200 83.0% 3,083,260 17,125,940 59.2% III, L.P............... 1455 Pennsylvania Avenue, N.W. Washington, DC 20004 Software AG............. 2,750,000 11.3 -- 2,750,000 9.5 Uhlandstrasse 12, D- 64297 Darmstadt, Germany TC Co-Investors, LLC.... 109,725 * 16,740 92,985 * 1455 Pennsylvania Avenue, N.W. Washington, DC 20004 Daniel F. Gillis........ 561,550 2.3 -- 561,550 1.9 Harry K. McCreery....... 396,550 1.6 -- 396,550 1.4 James H. Daly........... 125,675 * -- 125,675 * Derek M. Brigden........ 84,975 * -- 84,975 * Carl J. Rickertsen (4).. 20,318,925 83.5 3,100,000 17,218,925 60.0 Dr. Philip S. Dauber 67,925 * -- 67,925 * (5).................... Dr. Erwin Koenigs (6)... 2,852,025 11.7 -- 2,852,025 9.9 Edward E. Lucente....... -- -- -- -- -- Dr. Paul G. Stern (4)... 20,318,925 83.5 3,100,000 17,218,925 60.0 Michael J. King......... -- -- -- -- -- William Cripe........... -- -- -- -- -- All directors and executive officers as a group (11 persons) (7).................... 24,664,200 98.9% 3,100,000 21,564,200 73%
- -------- * Less than 1% of the outstanding Common Stock. (1) The business address for Messrs. Gillis, McCreery, Brigden and Daly is 11190 Sunrise Valley Drive, Reston, Virginia 20191. The business address for Mr. Rickertsen and Dr. Stern is c/o Thayer Equity Investors III, L.P., 1455 Pennsylvania Avenue, N.W., Washington, DC 20004. The business address for Dr. Koenigs is c/o Software AG, Uhlandstrasse 12, D-64297, Darmstadt, Germany. 52 (2) The number of shares of Common Stock outstanding prior to this offering includes (i) 24,337,500 shares outstanding as of October 15, 1997 and (ii) with respect to each person, the shares issuable by the Company pursuant to options held by such person which may be exercised within 60 days following October 15, 1997 ("Presently Exercisable Options"). The number of shares of Common Stock deemed outstanding after this offering includes an additional 4,600,000 shares that are being offered for sale by the Company in this offering. Beneficial ownership is determined in accordance with the rules of the Commission that deem shares to be beneficially owned by any person or group who has or shares voting and investment power with respect to such shares. Presently Exercisable Options are deemed to be outstanding and to be beneficially owned by the person holding such options for the purpose of computing the percentage ownership of such person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person or group. (3) If the Underwriters exercise their over-allotment option to purchase up to 1,155,000 shares, the following stockholders named in the table above will sell up to the following number of additional shares: Thayer Equity Investors III, L.P., 574,381 shares; and TC Co-Investors, LLC 3,119 shares. (4) Consists of 20,209,200 shares held of record by Thayer and 109,725 shares held of record by TC Co- Investors, LLC ("TC Co-Investors"). Thayer is a Delaware limited partnership whose sole general partner is TC Equity Partners, LLC, a Delaware limited liability company ("TC Equity Partners"). TC Equity Partners beneficially owns, and has sole voting and investment power with respect to, the shares of Common Stock held of record by Thayer. TC Co-Investors is a Delaware limited liability company whose managing member is TC Management LLC ("TC Management"). TC Management beneficially owns, and has sole voting and investment power with respect to, the shares of Common Stock held of record by TC Co- Investors. The members of each of TC Equity Partners and TC Management are Frederic V. Malek, Dr. Paul G. Stern and Carl J. Rickertsen. Dr. Stern and Mr. Rickertsen may be deemed to be the beneficial owners of the shares of Common Stock held by each of Thayer and TC Co-Investors. (5) All of the reported shares are held of record by PSERD Trust, of which Dr. Dauber is a trustee. Dr. Dauber shares voting and investment power with respect to all shares held by PSERD Trust and may be deemed to be the beneficial owner of all such shares. (6) 2,750,000 of the reported shares are held of record by Software AG ("SAG"). Dr. Koenigs, a director of the Company, is the Chairman of the Board and Chief Executive Officer of SAG, and may be deemed to have or share voting and investment power with respect to all shares held of record by SAG. Dr. Koenigs disclaims beneficial ownership of all shares held of record by SAG. (7) Includes 20,209,200 shares held of record by Thayer, 2,750,000 shares held of record by SAG, 109,725 shares held of record by TC Co-Investors and 67,925 shares held of record by PSERD Trust. See footnotes (4), (5) and (6). 53 DESCRIPTION OF CAPITAL STOCK The authorized capital stock of the Company consists of 75,000,000 shares of Common Stock, $.01 par value per share, and 25,000,000 shares of preferred stock, $.01 par value per share (the "Preferred Stock"). The following summary of certain provisions of the Common Stock and Preferred Stock does not purport to be complete and is subject to, and qualified in its entirety by, the provisions of applicable law and by the Company's Certificate of Incorporation, a copy of which is filed as an exhibit to the Registration Statement of which this Prospectus is a part. COMMON STOCK As of October 15, 1997, there were 24,337,500 shares of Common Stock outstanding held of record by 18 stockholders. Based on the number of shares outstanding as of that date and giving effect to the issuance of the 4,600,000 shares of Common Stock being offered by the Company hereby, there will be 28,937,500 shares of Common Stock outstanding upon the consummation of this offering. Holders of Common Stock are entitled to one vote per share on all matters to be voted on by stockholders. There are no cumulative voting rights. All outstanding shares of Common Stock are, and all shares of Common Stock issued and sold in this offering will be, duly authorized, validly issued, fully paid and nonassessable. Subject to such preferential rights as may be granted by the Board of Directors in connection with the issuance of Preferred Stock, distributions may be paid to the holders of Common Stock when, as and if declared by the Board of Directors out of funds legally available therefore. The Company does not intend to pay cash dividends on its Common Stock in the foreseeable future. See "Dividend Policy." Holders of Common Stock have no preemptive or other rights to subscribe for additional shares of Common Stock, redemption rights or conversion rights. Upon liquidation, dissolution or winding up of the Company, the holders of the Common Stock are entitled to share ratably in all assets of the Company that are legally available for distribution after payment of all debts and other liabilities and subject to any prior rights of holders of Preferred Stock, if any, then outstanding. PREFERRED STOCK The Board of Directors has authority to issue 25,000,000 shares of Preferred Stock in one or more series and to fix the relative rights, preferences, privileges, qualifications, limitations and restrictions thereof, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting any series or the designation of such series, without further vote or action by the stockholders. The Board of Directors could, without the approval of the stockholders, issue Preferred Stock having voting or conversion rights that could adversely affect the voting power of the holders of Common Stock, and the issuance of Preferred Stock could be used, under certain circumstances, to render more difficult or discourage a hostile takeover of the Company. The Company has no present plans to issue any shares of Preferred Stock. LIMITATION ON LIABILITY AND INDEMNIFICATION OF DIRECTORS The Company has adopted provisions in its Certificate of Incorporation limiting the liability of directors of the Company for monetary damages. The effect of this provision in the Certificate of Incorporation is to eliminate the rights of the Company and its stockholders (through stockholders' derivative suits on behalf of the Company) to recover monetary damages against a director for breach of the fiduciary duty of care as a director (including breaches resulting from negligent or grossly negligent behavior) except in certain limited situations. This provision does not limit or eliminate the rights of the Company or any stockholder to seek nonmonetary relief such as an injunction or rescission in the event of a breach of a director's duty of care. The provisions of the Certificate of Incorporation described above apply to an officer of the Company only if 54 he or she is a director of the Company and is acting in his or her capacity as director, and do not apply to officers of the Company who are not directors. These provisions will not alter the liability of directors under federal securities laws. The Company's Certificate of Incorporation and Bylaws contain provisions indemnifying the directors and officers of the Company to the fullest extent permitted by the Delaware General Corporate Law ("DGCL"). The Company believes that these provisions will assist the Company in attracting and retaining qualified individuals to serve as directors and officers. CERTAIN PROVISIONS OF DELAWARE LAW, THE CERTIFICATE OF INCORPORATION AND THE BYLAWS The Company is subject to the provisions of Section 203 of the DGCL. Subject to certain exceptions, Section 203 prohibits a Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the interested stockholder attained such status with the approval of the Board of Directors, the business combination is approved in a prescribed manner or certain other conditions are satisfied. A "business combination" includes, among other transactions, mergers, asset sales and other transactions resulting in a financial benefit to the interested stockholder. Subject to certain exceptions, an "interested stockholder" is a person who, together with affiliates and associates, owns, or within three years did own, 15% or more of the corporation's voting stock. The Company's Certificate of Incorporation and Bylaws contain certain provisions that could make more difficult the acquisition of the Company by means of a tender offer, a proxy contest or otherwise. These provisions are intended to discourage certain types of coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control of the Company to negotiate first with the Board of Directors. The Company believes that the benefits of these provisions outweigh the potential disadvantages of discouraging such proposals because, among other things, negotiation of such proposals might result in an improvement of their terms. Classified Board of Directors. The Certificate of Incorporation provides that, upon consummation of an underwritten public offering of the Company's Common Stock, the Board of Directors will be divided into three classes of directors, each class constituting approximately one-third of the total number of directors and the classes serving staggered three-year terms. The classification of directors will have the effect of making it more difficult for stockholders to change the composition of the Board of Directors. The Company believes, however, that the longer time required to elect a majority of a classified Board of Directors will help to ensure continuity and stability of the Company's management and policies. The classification provisions could also have the effect of discouraging a third party from accumulating large blocks of the Company's Common Stock or attempting to obtain control of the Company, even though such an attempt might be beneficial to the Company and its stockholders. Accordingly, stockholders could be deprived of certain opportunities to sell their shares of Common Stock at a higher market price than might otherwise be the case. See "Management-- Executive Officers and Directors." Number of Directors; Removal; Filling Vacancies. The Certificate of Incorporation provides that the number of directors will be fixed by, or determined pursuant to, the Bylaws. The Bylaws provide that the Board of Directors shall consist of six directors and that the Board of Directors may increase or decrease the number of directors. The Bylaws also provide that, after consummation of an underwritten public offering of the Company's Common Stock, the number of directors shall not be increased by 50% or more in any 12-month period without the approval of at least two-thirds of the directors then in office. The Certificate of Incorporation provides that any vacancies will be filled only by the affirmative vote of a majority of the remaining directors then in office, even if less than a quorum. Accordingly, the Board of Directors could temporarily prevent any stockholder from enlarging the Board of Directors and filling the new directorships with such stockholder's own nominees. The Certificate of Incorporation also provides that directors (or the entire Board) may be removed from office by the stockholders for cause by the vote of the holders of at least a majority of the Common Stock. 55 No Stockholder Action by Written Consent; Special Stockholder Meetings. The Certificate of Incorporation provides that, after the consummation of an underwritten public offering of the Company's Common Stock, stockholder action can be taken only at an annual or special meeting of stockholders and can not be taken by written consent in lieu of a meeting. The Bylaws provide that special meetings of the stockholders may be called only by the Chairman of the Board of Directors, a majority of the Board of Directors or the Chief Executive Officer of the Company. These provisions may have the effect of delaying consideration of a stockholder proposal until the next annual stockholder meeting. These provisions may also discourage another person or entity from making a tender offer for the Company's Common Stock. Advance Notice Provisions for Stockholder Nominations and Stockholder Proposals. The Bylaws establish an advance notice procedure for stockholders to make nominations of candidates for election as directors or to bring other business before an annual meeting of stockholders of the Company (the "Stockholder Notice Procedure"). The Stockholder Notice Procedure provides that (i) only persons who are nominated by, or at the direction of, the Board of Directors, or by a stockholder who has given timely written notice containing specified information to the Secretary of the Company prior to the meeting at which directors are to be elected, will be eligible for election as directors of the Company and (ii) at an annual meeting only such business may be conducted as has been brought before the meeting by, or at the direction of, the Board of Directors, or by a stockholder who has given timely written notice to the Secretary of the Company of such stockholder's intention to bring such business before the meeting. Except for stockholder proposals submitted in accordance with the federal proxy rules as to which the requirements specified therein shall control, notice of stockholder nominations or business to be conducted at a meeting must be received by the Company not less than 60 days nor more than 90 days prior to the date of the annual meeting if the notice is to be submitted at an annual meeting, or not later than 10 days following the day on which notice of the date of a special meeting was given if the notice is to be submitted at a special meeting. The purpose of requiring stockholders to give the Company advance notice of nominations and other business is to afford the Board of Directors a meaningful opportunity to consider the qualifications of the proposed nominees or the advisability of the other proposed business and, to the extent deemed necessary or desirable by the Board of Directors, to inform stockholders and make recommendations about such qualifications or business, as well as to provide a more orderly procedure for conducting meetings of stockholders. Although the Bylaws do not give the Board of Directors any power to disapprove stockholder nominations for the election of directors or proposals for action, they may have the effect of precluding a contest for the election of directors or the consideration of stockholder proposals if the proper procedures are not followed and of discouraging or deterring a third party from conducting a solicitation of proxies to elect its own slate of directors or to approve its own proposal without regard to whether consideration of such nominees or proposals might be harmful or beneficial to the Company and its stockholders. Amendment of Certificate of Incorporation and Bylaws. The Certificate of Incorporation provides that, after consummation of an underwritten public offering of the Company's Common Stock, the provisions therein relating to the staggered Board of Directors, the availability of action by written consent by stockholders, removal of directors and filling of vacancies on the Board of Directors may be amended, altered, changed or repealed only by the affirmative vote of the holders of at least two-thirds of the voting power of all the shares of capital stock then entitled to vote, voting as a single class. The Certificate of Incorporation also provides that the Bylaws may be adopted, amended, altered, changed or repealed by the affirmative vote of the majority of the members of the Board of Directors. After consummation of an underwritten public offering of the Company's Common Stock, any action taken by the stockholders with respect to adopting, amending, altering, changing or repealing any Bylaw may be taken only by the affirmative vote of the holders of at least two-thirds of the voting power of all of the shares of capital stock then entitled to vote generally in the election of directors, voting as a single class. TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar for the Company's Common Stock is Bank of New York. 56 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no market for the Common Stock of the Company. Future sales of substantial amounts of Common Stock in the public market, or the perception that such sales might occur, could adversely affect the market price of the Common Stock and could impair the ability of the Company to raise equity capital in the future. Upon completion of this offering, the Company will have 28,937,500 outstanding shares of Common Stock (assuming no exercise of the Underwriters' over-allotment option). Of these shares, the 7,700,000 shares of Common Stock sold in this offering will be freely tradable without restriction or further registration under the Securities Act, except for any shares purchased by "affiliates" of the Company, as that term is defined under the Securities Act and the regulations promulgated thereunder (an "Affiliate"). The remaining 21,237,500 shares of Common Stock (the "Restricted Shares") held by existing stockholders were sold by the Company in reliance on exemptions from the registration requirements of the Securities Act and are "restricted securities" within the meaning of Rule 144. Notwithstanding possible earlier eligibility for sale under the provisions of Rules 144, 144(k) or 701 promulgated under the Securities Act, of the Restricted Shares, 2,750,000 shares will be eligible for sale beginning 90 days after the date of this Prospectus (all of which will be subject to 180- day lock-up agreements between certain shareholders and the Representatives of the Underwriters), and 18,487,500 additional shares will be eligible for sale beginning March 31, 1998 (all of which will be subject to 180-day lock-up agreements). All of the holders of Restricted Shares have agreed with the Representatives that, until 180 days from the effective date of the Registration Statement of which this Prospectus is a part, subject to certain limited exceptions, they will not, directly or indirectly, sell, offer, contract to sell, pledge, grant any option to purchase or otherwise dispose of any shares of Common Stock or any securities convertible into, or exchangeable for, or any rights to purchase or acquire, shares of Common Stock, owned directly by such holders or with respect to which they have the power of disposition, without the prior written consent of BancAmerica Robertson Stephens. BancAmerica Robertson Stephens may, in its sole discretion and at any time without notice, release all or any portion of the securities subject to the lockup agreements. In general, under Rule 144 as currently in effect, beginning 90 days after the date of this Prospectus, any holder of Restricted Shares, including an Affiliate of the Company, as to which at least one year has elapsed since the later of the date of the acquisition of such Restricted Shares from the Company or an Affiliate, would be entitled within any three-month period to sell a number of shares that does not exceed the greater of 1% of the then outstanding shares of Common Stock (289,375 shares immediately following the closing of this offering) or the average weekly trading volume of the Common Stock during the four calendar weeks preceding the date on which notice of the sale is filed with the Commission. Sales under Rule 144 are also subject to certain manner of sale provisions, notice requirements and the availability of current public information about the Company. Affiliates of the Company must comply with the restrictions and requirements of Rule 144 (except for the one- year holding period requirement) in order to sell shares of Common Stock which are not "restricted securities" (such as shares acquired by Affiliates in this offering). Further, under Rule 144(k) a person who holds restricted shares as to which at least two years have elapsed since the later of their acquisition from the Company or an Affiliate, and who is not deemed to have been an Affiliate of the Company at any time during the three months preceding a sale, is entitled to sell such shares under Rule 144 without regard to volume limitations, manner of sale provisions, notice requirements or availability of current public information concerning the Company. Rule 701 permits resales of shares in reliance upon Rule 144 but without compliance with certain restrictions, including the holding period requirement, of Rule 144. Any employee, officer or director of or consultant to the Company who purchased his or her shares pursuant to a written compensatory plan or contract may be entitled to rely on the resale provisions of Rule 701. Rule 701 permits affiliates to sell their Rule 701 shares under Rule 144 without complying with the holding period requirements of Rule 144. Rule 57 701 further provides that non-affiliates may sell such shares in reliance on Rule 144 without having to comply with the holding period, public information, volume limitation or notice provisions of Rule 144. In both cases, a holder of Rule 701 shares is required to wait until 90 days after the date of this Prospectus before selling such shares. As of October 15, 1997, options to purchase 4,947,525 shares were outstanding under the Stock Option Plan, and an additional 1,927,475 shares were reserved for issuance under the Stock Option Plan. The Company intends to file a registration statement on Form S-8 under the Securities Act covering the shares issuable and reserved for issuance under the Stock Option Plan. Such registration statement is expected to be filed and become effective as soon as practicable after consummation of this offering. After the effective date of such registration statement, shares of Common Stock issued under the Stock Option Plan will be immediately eligible for sale in the public market, subject in certain cases to the lock-up restrictions described above and to Rule 144 volume limitations applicable to Affiliates. All holders of Restricted Shares have been granted certain rights to have their shares of Common Stock registered for sale under the Securities Act. See "Certain Relationships and Transactions." 58 UNDERWRITING The Underwriters named below, acting through their representatives, BancAmerica Robertson Stephens and Donaldson, Lufkin & Jenrette Securities Corporation (the "Representatives"), have severally agreed, subject to the terms and conditions of the Underwriting Agreement, to purchase from the Company and the Selling Stockholders the number of shares of Common Stock set forth opposite their respective names below. The Underwriters are committed to purchase and pay for all such shares if any are purchased. No such reduction shall change the amount of proceeds to be received by the Company as set forth on the cover page of this Prospectus.
NUMBER UNDERWRITER OF SHARES ----------- --------- BancAmerica Robertson Stephens.................................. Donaldson, Lufkin & Jenrette Securities Corporation............. --------- Total....................................................... 7,700,000 =========
The Company has been advised by the Representatives that the Underwriters propose to offer the shares of Common Stock to the public at the initial public offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession of not more than $ per share, of which $ per share may be reallowed to other dealers. After the initial public offering, the public offering price, concession and reallowance to dealers may be reduced by the Representatives. The Company and the Selling Stockholders have granted to the Underwriters an option, exercisable during the 30-day period after the date of this Prospectus, to purchase an aggregate of up to an additional 1,155,000 shares of Common Stock at the same price per share as the Company and the Selling Stockholders receive for the 7,700,000 shares that the Underwriters have agreed to purchase. To the extent that the Underwriters exercise such option, each of the Underwriters will have a firm commitment to purchase approximately the same percentage of such additional shares that the number of shares of Common Stock to be purchased by it shown in the above table represents as a percentage of the 7,700,000 shares offered hereby. If purchased, such additional shares will be sold by the Underwriters on the same terms as those on which the 7,700,000 shares are being sold. The Company and the Selling Stockholders subject to such over-allotment option will be obligated, pursuant to the option, to sell shares to the Underwriters to the extent the option is exercised. The Underwriters may exercise such option only to cover over- allotments made in connection with the sale of shares of Common Stock offered hereby. The Underwriting Agreement contains covenants of indemnity among the Underwriters, the Company and the Selling Stockholders against certain civil liabilities, including liabilities under the Securities Act and liability arising from breaches of representations and warranties contained in the Underwriting Agreement or the inaccuracy of certain information set forth herein that was provided by the Underwriters. All current executive officers, directors and stockholders of the Company will have agreed with the Representatives that, until 180 days from the effective date of the Registration Statement of which this Prospectus is a part, subject to certain limited exceptions, they will not, directly or indirectly, offer, sell, contract to sell, grant any option to purchase, pledge, or otherwise dispose of or transfer, any shares of Common Stock, or any securities convertible into or exchangeable for, or any rights to purchase or acquire, shares of Common Stock, now owned or hereafter acquired by such holders or with respect to which they have or hereafter acquire the power of disposition, without the prior written consent of BancAmerica Robertson Stephens. BancAmerica 59 Robertson Stephens may, in its sole discretion and without notice, release all or any portion of the securities subject to the lock-up agreements. In addition, the Company has agreed that, until 180 days from the date of this Prospectus, the Company will not, without the prior written consent of BancAmerica Robertson Stephens, subject to certain exceptions, sell or otherwise dispose of any shares of Common Stock, any options or warrants to purchase any shares of Common Stock or any securities convertible into, exercisable for or exchangeable for shares of Common Stock other than the Company's sale of shares in this offering, the issuance of Common Stock upon the exercise of outstanding options, or the Company's grant of options and issuance of stock under the Stock Option Plan. See "Shares Eligible for Future Sale." The Representatives have advised the Company and the Selling Stockholders that the Underwriters do not intend to confirm sales to accounts over which they exercise discretionary authority. Certain persons participating in this offering may overallot or effect transactions which stabilize, maintain or otherwise affect the market price of the Common Stock at levels above those which might otherwise prevail in the open market, including by entering stabilizing bids, effecting syndicate covering transactions or imposing penalty bids. A stabilizing bid means the placing of any bid or effecting of any purchase for the purpose of pegging, fixing or maintaining the price of the Common Stock. A syndicate covering transaction means the placing of any bid on behalf of the underwriting syndicate or the effecting of any purchase to reduce a short position created in connection with this offering. A penalty bid means an arrangement that permits the Underwriters to reclaim a selling concession from a syndicate member in connection with this offering when shares of Common Stock sold by the syndicate member are purchased in syndicate covering transactions. Such transactions may be effected, where permitted, on the NYSE or otherwise. Such stabilizing, if commenced, may be discontinued at any time. The Underwriters have reserved for sale, at the initial public offering price, up to 5% of the shares of Common Stock offered hereby for employees of the Company and certain individuals who have expressed an interest in purchasing shares of Common Stock in this offering. The number of shares available for sale to the general public will be reduced to the extent such persons purchase such reserved shares. Any reserved shares not so purchased will be offered by the Underwriters to the general public on the same basis as other shares offered hereby. Prior to this offering, there has been no public market for the Common Stock of the Company. Consequently, the initial public offering price for the Common Stock will be determined through negotiations among the Company and the Representatives. The material factors to be considered in such negotiations will be prevailing market and economic conditions, certain financial information of the Company for recent periods, the market valuations of other companies engaged in activities similar to those of the Company, estimates of the business potential and prospects of the Company, the present state of the Company's business operations, the Company's management and other factors deemed relevant. The estimated initial public offering price range set forth on the cover of this preliminary prospectus is subject to change as a result of market conditions and other factors. There can be no assurance that an active or orderly trading market will develop for the Common Stock or that the Common Stock will trade in the public market subsequent to this offering at or above the initial trading price. See "Risk Factors--No Prior Market for Common Stock and Possible Volatility of Common Stock Price". 60 LEGAL MATTERS The validity of the shares of Common Stock offered hereby will be passed upon for the Company and the Selling Stockholders by Arnold & Porter, Washington, D.C. Certain legal matters in connection with this offering will be passed upon for the Underwriters by Hale and Dorr LLP, Washington, D.C. EXPERTS The consolidated financial statements and schedule of the Company as of December 31, 1995 and 1996, and for each of the years in the three-year period ended December 31, 1996 have been included in this Prospectus and elsewhere in the Registration Statement in reliance upon the reports of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. On July 11, 1997, the Company retained KPMG Peat Marwick LLP to act as its independent public accountants and informed the prior auditors, Gocial & Company, P.C., the Company's independent accountants since January 1992, of its decision. In connection with the prior auditors' audit of the consolidated financial statements for the years ended December 31, 1995 and 1996, there were no disagreements with the Company on any matters of accounting principles or practices, financial statement disclosure or auditing scope or procedures. The prior auditors' report on the Company's consolidated financial statements for the years ended December 31, 1995 and 1996 contained no adverse opinion or disclaimer of opinion and was not modified or qualified as to uncertainty, audit scope, or accounting principles. The decision to change was approved by the Board of Directors of the Company. The Company has provided the prior auditors with a copy of the disclosure contained in this section of the Prospectus. ADDITIONAL INFORMATION The Company has filed with the Commission a Registration Statement (of which this Prospectus is a part) on Form S-1 (together with all amendments, schedules and exhibits thereto, the "Registration Statement") under the Securities Act with respect to the shares of Common Stock offered hereby. This Prospectus does not contain all the information set forth in the Registration Statement, certain portions of which have been omitted as permitted by the rules and regulations of the Commission. Statements contained in this Prospectus as to the content of any contract or other documents are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference and the exhibits and schedules hereto. For further information regarding the Company and the Common Stock offered hereby, reference is hereby made to the Registration Statement and such exhibits and schedules which may be obtained from the Commission at its principal office in Washington, D.C. upon payment of the fees prescribed by the Commission. In addition, the Company will provide without charge to each person, including any beneficial owner, to whom this Prospectus is delivered, upon written or oral request of such person, a copy of any and all information that is incorporated by reference in this Prospectus. Any such requests are to be directed to Software AG Systems, Inc., Legal Department, 11190 Sunrise Valley Drive, Reston, VA 20191; telephone (703) 860-5050. The Registration Statement, including the exhibits and schedules forming a part thereof, filed by the Company with the Commission can be inspected and copies obtained from the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following regional offices of the Commission: Seven World Trade Center, Suite 1300, New York, New York 10048, and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such material can be obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. In addition, the Commission maintains a Web site (http:\\www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. 61 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Independent Auditors' Report.............................................. F-2 Consolidated Balance Sheets as of December 31, 1995 and 1996.............. F-3 Consolidated Statements of Operations for each of the years in the three- year period ended December 31, 1996...................................... F-4 Consolidated Statements of Stockholder's Equity for each of the years in the three-year period ended December 31, 1996............................ F-5 Consolidated Statements of Cash Flows for each of the years in the three- year period ended December 31, 1996...................................... F-6 Notes to Consolidated Financial Statements................................ F-7 Unaudited Condensed Consolidated Balance Sheet as of September 30, 1997... F-18 Unaudited Condensed Consolidated Statements of Operations for the nine months ended September 30, 1996, the three months ended March 31, 1997, and the six months ended September 30, 1997.............................. F-19 Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 1996, the three months ended March 31, 1997, and the six months ended September 30, 1997.............................. F-20 Notes to Unaudited Condensed Consolidated Financial Statements............ F-21
F-1 WHEN THE STOCK SPLIT TRANSACTION REFERRED TO IN NOTE 14 OF THE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS HAS BEEN CONSUMMATED, WE WILL BE IN A POSITION TO RENDER THE FOLLOWING REPORT. /s/ KPMG PEAT MARWICK LLP INDEPENDENT AUDITORS' REPORT Board of Directors Software AG Systems, Inc.: We have audited the accompanying consolidated balance sheets of Software AG Systems, Inc. and subsidiaries as of December 31, 1995 and 1996, and the related consolidated statements of operations, stockholder's equity, and cash flows for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Software AG Systems, Inc. and subsidiaries as of December 31, 1995 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. McLean, Virginia September 12, 1997, except for note 14, which is as of F-2 SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1995 AND 1996
1995 1996 -------- -------- (in thousands) ASSETS Current: Cash and cash equivalents.................................. $ 1,573 $ 25,773 Accounts receivable, net of allowance for doubtful accounts.................................................. 58,983 67,370 Notes receivable, SAG...................................... -- 30,000 Current portion of deferred income taxes................... 3,666 3,412 Prepaid expenses........................................... 1,600 3,298 Other current assets....................................... 816 2,686 -------- -------- Total current assets..................................... 66,638 132,539 Installment accounts receivable, net of current portion...... 19,114 10,955 Note receivable, SAG......................................... 20,000 -- Property, equipment and leasehold improvements, net of accumulated depreciation and amortization................... 15,026 8,923 Deferred income taxes........................................ -- 1,469 Other assets................................................. 4,834 4,202 -------- -------- Total assets........................................... $125,612 $158,088 ======== ======== LIABILITIES AND STOCKHOLDER'S EQUITY Current: Accounts payable........................................... $ 3,301 $ 6,773 Accrued payroll and employee benefits...................... 12,986 10,792 Payable to SAG............................................. 17,132 33,317 Income taxes payable....................................... 1,821 3,106 Other current liabilities.................................. 3,694 5,265 Current portion of deferred revenues, net of deferred royalties of $7,126,000 and $7,923,000.................... 30,169 42,865 -------- -------- Total current liabilities................................ 69,103 102,118 Deferred revenues, net of deferred royalties of $7,131,000 and $7,415,000.............................................. 23,883 23,472 Deferred gain................................................ -- 2,690 Deferred income taxes........................................ 27 -- -------- -------- Total liabilities...................................... 93,013 128,280 -------- -------- Commitments and contingencies Stockholder's equity: Common stock ($.01 par value; 55,000,000 shares authorized, 27,500,000 shares issued and outstanding)................. 275 275 Additional paid-in capital................................. 11,877 11,877 Retained earnings.......................................... 20,447 17,656 -------- -------- Total stockholder's equity............................... 32,599 29,808 -------- -------- Total liabilities and stockholder's equity............. $125,612 $158,088 ======== ========
See accompanying notes to consolidated financial statements. F-3 SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
1994 1995 1996 ------------- ------------- ------------- (in thousands, except per share amounts) Revenues: Software license fees............. $ 51,832 $ 52,061 $ 52,163 Maintenance fees.................. 65,871 65,307 69,702 Professional services fees........ 29,552 35,194 34,975 ------------- ------------- ------------- Total revenues.................. 147,255 152,562 156,840 ------------- ------------- ------------- Cost of revenues: Software license.................. 13,513 15,244 14,120 Maintenance....................... 29,823 23,488 25,885 Professional services............. 26,490 32,591 32,966 ------------- ------------- ------------- Total cost of revenues.......... 69,826 71,323 72,971 ------------- ------------- ------------- Gross profit........................ 77,429 81,239 83,869 ------------- ------------- ------------- Operating expenses: Software product development...... 900 900 1,372 Sales and marketing............... 50,422 52,512 48,677 Administrative and general........ 25,212 24,639 28,539 ------------- ------------- ------------- Total operating expenses........ 76,534 78,051 78,588 ------------- ------------- ------------- Income from operations.............. 895 3,188 5,281 Other income and expense, net....... 1,882 2,449 5,230 ------------- ------------- ------------- Income before income taxes.......... 2,777 5,637 10,511 Income tax provision................ 1,395 2,311 4,302 ------------- ------------- ------------- Net income.......................... $ 1,382 $ 3,326 $ 6,209 ============= ============= ============= Net income per share................ $ 0.05 $ 0.11 $ 0.20 ============= ============= ============= Shares used in computing net income per share.......................... 30,584 30,584 30,584 ============= ============= =============
See accompanying notes to consolidated financial statements. F-4 SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
COMMON STOCK $0.01 PAR VALUE ADDITIONAL TOTAL ---------------- PAID-IN- RETAINED STOCKHOLDER'S SHARES AMOUNT CAPITAL EARNINGS EQUITY -------- ------- ---------- -------- ------------- (in thousands) Balance at December 31, 1993..................... 27,500 $ 275 $11,877 $18,039 $30,191 Net income................ 1,382 1,382 Cash dividends ($0.02 per share)................... (600) (600) -------- ------ ------- ------- ------- Balance at December 31, 1994..................... 27,500 275 11,877 18,821 30,973 Net income................ 3,326 3,326 Cash dividends ($0.06 per share)................... (1,700) (1,700) -------- ------ ------- ------- ------- Balance at December 31, 1995..................... 27,500 275 11,877 20,447 32,599 Net income................ 6,209 6,209 Cash dividends ($0.33 per share)................... (9,000) (9,000) -------- ------ ------- ------- ------- Balance at December 31, 1996..................... 27,500 $ 275 $11,877 $17,656 $29,808 ======== ====== ======= ======= =======
See accompanying notes to consolidated financial statements. F-5 SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
1994 1995 1996 -------- -------- -------- (in thousands) Cash flows from operating activities: Net income.................................. $ 1,382 $ 3,326 $ 6,209 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.............. 3,952 3,921 3,660 Loss on sales of property and equipment.... 139 67 156 Deferred income taxes...................... 1,509 (408) (1,242) Deferred gain.............................. -- -- (140) Net proceeds from sales of accounts receiv- able...................................... -- 28,852 28,448 Change in: Accounts receivable, excluding net pro- ceeds from sales........................ (14,303) (47,331) (28,674) Prepaid expenses......................... (913) 348 (1,698) Other current assets..................... (224) 225 (1,870) Accounts payable......................... 451 (817) 3,472 Accrued payroll and employee benefits.... 508 3,181 (2,194) Payable to SAG........................... 6,749 8,495 16,185 Other current liabilities................ 329 646 1,571 Income taxes payable..................... 967 1,678 1,285 Deferred revenues, net................... 7,210 27,435 12,285 -------- -------- -------- Net cash provided by operating activi- ties................................. 7,756 29,618 37,453 -------- -------- -------- Cash flows from investing activities: Additions to property, equipment and lease- hold improvements.......................... (2,973) (1,839) (3,740) Proceeds from sales of property and equip- ment....................................... 18 200 9,044 Short-term investment....................... (150) 150 -- Notes receivable, SAG....................... -- (20,000) (10,000) Change in other assets, net................. 41 (2,287) 443 -------- -------- -------- Net cash used in investing activi- ties................................. (3,064) (23,776) (4,253) -------- -------- -------- Cash flows from financing activities: Payment of long-term obligations............ (3,882) (3,124) -- Dividends paid.............................. (600) (1,700) (9,000) -------- -------- -------- Net cash used in financing activi- ties................................. (4,482) (4,824) (9,000) -------- -------- -------- Net increase in cash and cash equivalents.... 210 1,018 24,200 Cash and cash equivalents, beginning......... 345 555 1,573 -------- -------- -------- Cash and cash equivalents, ending............ $ 555 $ 1,573 $ 25,773 ======== ======== ======== Noncash investing and financing activity: Deferred gain on sale leaseback of customer support facility .......................... $ -- $ -- $ 2,830 ======== ======== ======== Supplemental disclosures: Interest paid............................... $ 446 $ 350 $ 103 ======== ======== ======== Income taxes paid (refunded), net........... $ (743) $ 387 $ 3,481 ======== ======== ========
See accompanying notes to consolidated financial statements. F-6 SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1994, 1995 AND 1996 (1) DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Reporting Entity and Principles of Consolidation Software AG Systems, Inc. and subsidiaries (the "Company") is a wholly owned subsidiary of Software AG, a German corporation ("SAG"). Subsequent to year- end 1996, the Company was recapitalized. See note 14. The consolidated financial statements include the accounts of Software AG Systems, Inc. and its wholly owned subsidiaries, including Software AG Americas, Inc. (formerly Software AG of North America, Inc.). All inter-company balances and transactions between the Company and its wholly owned subsidiaries have been eliminated. Description of Operations The Company provides software products and professional services utilized by organizations to build and enhance enterprise-level applications. The Company's products are used for mission-critical applications that require reliability, scaleability and security, such as customer billing systems, financial accounting systems, and inventory management. The Company's business is focused on database management and applications development products. The Company markets and sells its software products and services, as well as third-party products, through direct and indirect channels in North America, South America, Japan and Israel. Revenue Recognition The Company recognizes revenue in accordance with the provisions of the American Institute of Certified Public Accountants Statement of Position No. 91-1, Software Revenue Recognition. Product license revenues are recognized when there is an executed license agreement, the software and authorization code have been delivered, collectibility from the customer is probable, and there are no significant remaining obligations to the customer. Maintenance revenues, which include unspecified when-and-if deliverable software upgrades, user documentation, and technical support for software products, are deferred and recognized on a straight-line basis over the term of the maintenance agreement, generally one year. Customer training revenues and revenues from time and material type professional consulting and custom application contracts are recognized as the services are provided and the work is performed. Revenues from long-term fixed price professional consulting and custom application contracts are accounted for under the percentage of completion method. When estimates of costs, on long-term fixed price contracts, indicate a loss, such a loss is provided for currently. Sales of enterprise license agreements, which generally bundle a combination of products, technical services, and professional consulting services, are accounted for according to their component parts using the criteria described above. Property, Equipment and Leasehold Improvements Property, equipment and leasehold improvements are recorded at cost. Depreciation of property and equipment is provided on a straight-line basis over the estimated useful asset lives, generally 31.5 years for property and three to five years for equipment. Leasehold improvements are amortized on a straight-line basis over the lesser of the respective lease term or estimated useful asset lives. F-7 SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1994, 1995 AND 1996 Income Taxes The Company uses the asset and liability method to account for income taxes. Under the asset and liability method, deferred income taxes are recognized for the future tax consequences attributable to future years for differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Use of Estimates The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash Equivalents The Company considers all highly liquid instruments with a maturity of three months or less at time of purchase to be cash equivalents. Cash equivalents consist of commercial paper and overnight repurchase agreements. Net Income per Share Net income per share is computed using the weighted average number of common and common equivalent shares outstanding during the period. Pursuant to the Securities and Exchange Commission Staff Accounting Bulletins and staff policy, such computations include all common and common equivalent shares issued within the 12 months preceding the Company's initial public offering as if they were outstanding for all periods presented. See note 14. (2) CONCENTRATIONS OF CREDIT RISK AND FAIR VALUES OF FINANCIAL INSTRUMENTS Concentrations of Credit Risk Financial instruments that potentially subject the Company to credit risk include accounts receivable and cash. Management believes that credit risk related to the Company's accounts receivable is limited due to a large number of customers in differing industries and geographic areas. The Company does not require collateral for accounts receivable. Historically, the Company has not experienced significant losses on accounts receivable except in isolated situations. The Company maintains depository relationships with several banks. At times, the Company's cash deposits may exceed federally insured limits. Periodically, the Company invests excess cash in low risk, highly liquid repurchase agreements and other instruments through high credit quality financial institutions. The Company has not experienced any losses in its depository accounts or short-term investments and management believes that the Company is not exposed to any significant credit risks. Fair Value of Financial Instruments The carrying amounts of cash, accounts receivable, notes receivable from SAG, accounts payable, payable to SAG, and amounts included in other current assets and current liabilities that meet the definition of a financial instrument, approximate fair value because of the short-term nature of these amounts. F-8 SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1994, 1995 AND 1996 The carrying amount of installment accounts receivable, net of related deferred revenues approximates the fair value. (3) ACCOUNTS RECEIVABLE At December 31, 1995 and 1996, accounts receivable include:
1995 1996 ------- ------- (in thousands) Domestic: Currently billed......................................... $31,305 $25,988 Advanced billings on maintenance......................... -- 14,593 Unbilled services........................................ 2,209 6,029 Installment.............................................. 35,790 26,255 Other.................................................... 2,745 1,059 ------- ------- 72,049 73,924 International.............................................. 10,814 9,381 ------- ------- 82,863 83,305 Less: allowance for doubtful accounts...................... 4,766 4,980 ------- ------- 78,097 78,325 Less: long-term portion of installment accounts receivable................................................ 19,114 10,955 ------- ------- Current portion of accounts receivable..................... $58,983 $67,370 ======= =======
Installment Accounts Receivable Installment accounts receivable represent unbilled receivables from enterprise license agreements and other long-term and short-term contracts with deferred invoicing terms. At December 31, 1995 and 1996, installment accounts receivable include:
1995 1996 ------- ------- (in thousands) Gross installment accounts receivable....................... $37,709 $27,258 Less: unearned interest..................................... 1,919 1,003 ------- ------- 35,790 26,255 Less: current portion....................................... 16,676 15,300 ------- ------- $19,114 $10,955 ======= =======
The effective interest rate on the installment accounts receivable, net of related deferred revenues, at December 31, 1995 and 1996 was approximately 12%. F-9 SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1994, 1995 AND 1996 At December 31, 1996, installment accounts receivable are scheduled to be invoiced as follows:
YEARS ENDING DECEMBER 31, AMOUNT ------------------------- -------------- (in thousands) 1997..................................................... $15,884 1998..................................................... 4,874 1999..................................................... 4,034 2000..................................................... 1,260 2001..................................................... 1,206 ------- $27,258 =======
In 1995 and 1996, the Company sold installment accounts receivable relating to certain enterprise license agreements and other long-term contracts to unrelated financing companies, receiving net proceeds of $28,852,000 and $28,448,000, respectively. The installment accounts receivable sold include those relating to product and license fees, technical services, and professional consulting services. Under the terms of the agreements with the financing companies, the Company continues to service the receivables sold, including invoicing and collection, and makes payments to the financing companies under pre-determined amortization schedules based on the scheduled invoicing dates of the receivables sold. The amortization schedules provide rates of return to the financing companies ranging from 8.5% to 8.9%. The agreements allow for substitution of contracts for early terminations and require the Company to repurchase contracts that cease to meet eligibility requirements, such as those contracts that become 90 days past due. At December 31, 1995 and 1996, the Company remained contingently liable under the recourse provisions for $26,468,000 and $44,801,000, respectively. The Company's allowance for doubtful accounts is maintained at a level that management believes is sufficient to cover potential losses under the recourse provisions on receivables sold. Under the terms of the agreements, the Company is required to maintain specified amounts of net worth and cash availability, and a debt to equity ratio that does not exceed a specified amount. If the Company fails to maintain these specified amounts, the financing companies may assume the servicing rights on receivables sold. Unbilled Services Unbilled services relate primarily to long-term professional consulting services and custom application contracts accounted for using the percentage of completion method. Billings on these contracts generally are tied to achieving specific milestones. At December 31, 1995 and 1996, unbilled services include:
1995 1996 ------- ------- (in thousands) Unbilled work in process.................................... $ 3,712 $ 6,775 Retainage................................................... 1,008 1,474 ------- ------- 4,720 8,249 Less: advance billings and prepayments...................... 2,511 2,220 ------- ------- $ 2,209 $ 6,029 ======= =======
F-10 SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1994, 1995 AND 1996 (4) PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
DECEMBER 31, --------------- 1995 1996 ------- ------- (in thousands) Building and land........................................... $ 6,589 $ -- Computer equipment.......................................... 16,705 18,138 Furniture and other equipment............................... 7,032 7,713 Leasehold improvements...................................... 8,410 9,021 ------- ------- 38,736 34,872 Less: accumulated depreciation and amortization............. 23,710 25,949 ------- ------- $15,026 $ 8,923 ======= =======
Depreciation and amortization for 1994, 1995, and 1996, was $3,829,000, $3,733,000, and $3,473,000, respectively. (5) SALE OF CUSTOMER SUPPORT FACILITY In 1996, the Company recorded a sale-leaseback transaction for its customer support facility. In connection with the sale, the Company realized a gain of $2,830,000, which is being recognized on a straight-line basis over the term of the related operating lease. (6) TRANSACTIONS WITH RELATED PARTY Royalties In 1994, the Company licensed and serviced SAG products under a pre-existing license agreement pursuant to which the Company was required to make payments to SAG based on a specified percentage of the net sales amount for licenses of, and technical services on, SAG's products. Effective January 1, 1995, the Company and SAG entered into a new license agreement whereby the Company was required to pay royalties of 24% of such net sales amounts. For 1994, 1995 and 1996, royalty expense related to SAG's products was $29,026,000, $23,887,000 and $26,058,000, respectively. Under the license agreement, SAG pays royalties to the Company on sales of the Company's products under the same terms. For 1995 and 1996, royalty revenues related to the Company's products were $295,000 and $294,000, respectively. As more fully described in note 14, prior to the Recapitalization, the Company and SAG entered into a Cooperation Agreement on March 31, 1997. Cost Reimbursements As an accommodation to SAG, the Company houses certain of SAG's product development and quality assurance personnel. SAG reimburses the Company for the costs incurred related to such product development and quality assurance activities. All intellectual property resulting from this work is the sole property of SAG. The reimbursements from SAG are netted against costs incurred and included in software product development costs in the statement of operations. Reimbursements for 1994, 1995, and 1996, were $7,518,000, $8,767,000, and $15,931,000, respectively. F-11 SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1994, 1995 AND 1996 Notes Receivable/Payable In 1995, the Company loaned $20,000,000 to SAG, which originally was scheduled to be repaid in 2000. In 1996, the Company loaned an additional $10,000,000 to SAG, which originally was scheduled to be repaid in 2001. Interest at 6.5% and 7%, respectively, is payable quarterly on the 1995 and 1996 loans. Interest earned for 1995 and 1996 was $280,000 and $1,590,000, respectively. The payable to SAG of $17,132,000 and $33,317,000 at December 31, 1995 and 1996, respectively, includes royalties due under the license agreement on sales of both product licenses and technical services, as well as net amounts due on other transactions between the Company and SAG. These amounts are non- interest bearing. In March, 1997, the Company and SAG agreed to offset the entire balance of the notes receivable from SAG as of December 31, 1996 against the payable to SAG. In 1995, SAG loaned $2,500,000 to the Company, which was repaid during the year. Interest expense on this note was $119,000, computed at 8%. Dividends In 1994, 1995, and 1996, the Company paid dividends of $600,000, $1,700,000 and $9,000,000, respectively, to SAG, which at the time owned 100% of the outstanding common stock of the Company. (7) INCOME TAXES Income tax expense for 1994, 1995, and 1996 consisted of:
1994 1995 1996 ------ ------ ------- (in thousands) Current expense: Federal.............................................. $ (719) $1,744 $ 4,167 State................................................ (85) 274 586 Foreign.............................................. 690 701 791 ------ ------ ------- (114) 2,719 5,544 ------ ------ ------- Deferred expense (benefit): Federal.............................................. 1,350 (265) (1,136) State................................................ 159 (143) (106) ------ ------ ------- 1,509 (408) (1,242) ------ ------ ------- $1,395 $2,311 $ 4,302 ====== ====== =======
F-12 SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1994, 1995 AND 1996 (7) INCOME TAXES--(CONTINUED) Income tax expense for 1994, 1995, and 1996, differed from the amounts computed by applying the U.S. federal income tax rate of 34% to pretax income as a result of the following:
1994 1995 1996 ------ ------ ------ (in thousands) Computed "expected" tax expense:......................... $ 944 $1,917 $3,573 Increase (reduction), in income taxes resulting from: State income taxes, net of federal benefit............. 106 181 296 Expenses, principally meals and entertainment, not de- ductible.............................................. 310 277 224 Other, net............................................. 35 (64) 209 ------ ------ ------ $1,395 $2,311 $4,302 ====== ====== ======
The tax effects of temporary differences that give rise to significant portions of deferred income tax assets (liabilities) at December 31, 1995 and 1996 consist of:
1995 1996 ------- ------- (in thousands) Deferred tax assets arising from deductible temporary differ- ences: Accrued compensation costs and other expenses.............. $ 1,808 $ 1,533 Allowance for doubtful accounts............................ 1,859 1,879 Depreciation and amortization.............................. 600 917 Deferred gain--installment method.......................... 172 1,022 ------- ------- 4,439 5,351 Deferred tax liabilities arising from taxable temporary dif- ferences: Leases of product licenses................................. 800 470 ------- ------- Net deferred income taxes.................................... 3,639 4,881 Less: current portion, deferred tax assets................... 3,666 3,412 ------- ------- Noncurrent portion, deferred tax assets (liabilities)........ $ (27) $ 1,469 ======= =======
In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Based upon the level of historical taxable income and projections for future taxable income over the periods for which the deferred tax assets are deductible, management believes that it is more likely than not that the Company will realize the benefits of these deductible differences. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income are reduced. (8) RETIREMENT PLANS The Company has a retirement plan covering substantially all of its employees. This plan meets the requirements of Section 401(k) of the Internal Revenue Code. The Company matches employee contributions and may make additional contributions based on the Company's profitability. For 1994, 1995, and 1996, the Company's matching (and total) contributions were $1,967,000, $1,789,000, and $1,854,000, respectively. F-13 SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1994, 1995 AND 1996 (8) RETIREMENT PLANS--(CONTINUED) The Company also has entered into deferred compensation agreements with certain key executives. Under these agreements, the executives are credited with annual pre-determined amounts and amounts based on bonuses received, and earn interest on the deferred amounts. Total deferrals, which are included in accrued payroll and employee benefits, were $3,038,000 and $1,504,000, at December 31, 1995 and 1996, respectively, net of loans of $0 and $558,000, respectively. The expense for these agreements was $653,000 and $1,218,000, for 1995 and 1996, respectively. To assist in the funding of these agreements the Company has purchased corporate-owned life insurance on certain of these executives. The cash surrender value of these policies, which is included in other assets, was $1,067,000 and $668,000, at December 31, 1995 and 1996, respectively. (9) OPERATING LEASE COMMITMENTS The Company leases office space and equipment under operating lease agreements that expire at various dates through 2015. Future minimum rent payments under operating leases, net of aggregate rents of $1,924,000 expected to be received from subleasing of a portion of the customer support facility and another facility, at December 31, 1996, are:
YEARS ENDING DECEMBER 31, FACILITIES EQUIPMENT TOTAL - ------------------------- ---------- --------- ------- (in thousands) 1997.............................................. $ 5,770 $1,357 $ 7,127 1998.............................................. 5,969 1,162 7,131 1999.............................................. 6,102 811 6,913 2000.............................................. 6,030 148 6,178 2001.............................................. 5,426 39 5,465 Thereafter........................................ 29,392 -- 29,392 ------- ------ ------- $58,689 $3,517 $62,206 ======= ====== =======
Facility rent expense for 1994, 1995, and 1996, was $5,942,000, $6,105,000, and $7,002,000, respectively. Rent expense includes the current year effect of determinable scheduled rent increases and initial rent abatement periods contained in certain of the Company's facility lease agreements. Equipment lease expense for 1994, 1995, and 1996, was $706,000, $l,532,000, and $1,678,000, respectively. The Company's operating lease agreement for its customer support facility requires the Company to maintain minimum amounts of net worth and retained earnings. If the minimum amounts are not maintained, the Company will be required to post a $500,000 irrevocable letter of credit for each $2,000,000 shortfall, to be applied by the lessor in the event of default under the lease. (10) CONTINGENCIES The Company is involved in various claims and legal proceedings of a nature considered normal to its business, primarily relating to product and contract performance issues, and employee termination matters. While it is not feasible to predict or determine the final outcome of these proceedings, management does not believe that they will have a material adverse effect on the Company's financial position or results of operations. F-14 SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1994, 1995 AND 1996 (11) NEW ACCOUNTING STANDARDS In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 128, "Earnings per Share," which is effective for all interim and annual periods ending after December 15, 1997. This statement replaces "primary" and "fully diluted" earnings per share ("EPS") with "basic" and "diluted" EPS on the face of the statement of operation. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income," which is effective for the year ending December 31, 1998. This statement established standards for the reporting and display of comprehensive income and its components in the financial statements. Earlier application of this standard is permitted. However, upon its adoption the Company will be required to reclassify previously reported annual and interim financial statements. The Company does not expect that the adoption of these new accounting standards will have a material effect on the Company's financial position or results of operation. (12) REVENUES FROM INTERNATIONAL DISTRIBUTORS Royalty revenues from international distributors for 1994, 1995, and 1996 are as follows:
1994 1995 1996 -------- -------- -------- (in thousands) Japan............................................... $ 8,145 $ 8,607 $ 9,207 Brazil.............................................. 2,800 5,931 7,000 Canada.............................................. 4,410 3,981 4,640 Other............................................... 8,610 3,046 6,114 -------- -------- -------- Total royalty revenues from international distrib- utors............................................ 23,965 21,565 26,961 Domestic revenues................................. 123,290 130,997 129,879 -------- -------- -------- Total revenues.................................. $147,255 $152,562 $156,840 ======== ======== ========
Royalty revenues from international distributors included in software license fees and maintenance fees on the consolidated statements of operations were approximately $12,379,000 and $11,586,000, respectively, in 1994, $13,316,000 and $8,249,000, respectively, in 1995, and $16,982,000 and $9,979,000, respectively, in 1996. (13) OTHER INCOME AND EXPENSE, NET Other income and expense, net on the consolidated statements of operations primarily includes interest income of $1,293,000 in 1994; interest income of $1,406,000 in 1995; and interest income of $2,914,000, and gain on sale of other assets of $1,000,000 in 1996. (14) SUBSEQUENT EVENTS On March 31, 1997, the Company consummated a Recapitalization Agreement under which the Company repurchased from its parent 24,750,000 shares of common stock and sold 21,450,000 shares of common stock to an unrelated entity and certain of the Company's senior managers. F-15 SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1994, 1995 AND 1996 (14) SUBSEQUENT EVENTS--(CONTINUED) Prior to the consummation of the Recapitalization Agreement, the Company entered into a perpetual (unless otherwise terminated by the written agreement of the parties) Cooperation Agreement with SAG that terminated and superseded the license agreement dated January 1, 1995. As consideration for the Cooperation Agreement, the Company paid SAG approximately $22,600,000. Under the Cooperation Agreement, each of the Company and SAG are required to pay the other royalties of 24% of net revenues from sales of licenses of, and technical services on, each other's products for the initial 20 years of the perpetual term of the agreement. For calendar years 1997 through 2000, the Company will be required to pay SAG minimum annual royalties of $21,000,000, provided that SAG's worldwide product and technical services revenues for each of those years are at least equal to SAG's 1996 worldwide revenues. In the event of a decrease in SAG's worldwide revenues, the minimum annual royalty requirement will be reduced proportionately. In connection with the Recapitalization Agreement, which was consummated on March 31, 1997, the Company authorized the granting of stock options to acquire an aggregate of 3,300,000 shares of common stock at an exercise price of $1.47, of which options to acquire an aggregate of 3,059,650 shares have been granted. This exercise price represents the amount per share that Thayer and management paid to acquire approximately an 89% interest in the Company on March 31, 1997 pursuant to the Recapitalization Agreement. The Company adopted the Software AG Systems, Inc. 1997 Stock Option Plan (the "Plan") on April 29, 1997. On August 8, 1997, 749,650 and 106,975 options were granted with exercise prices of $9.60 and $1.47 per share, respectively, under the Plan. On September 23, 1997, 1,031,250 options were granted with an exercise price of $12.00 per share, under the Plan. On September 30, 1997, the Company acquired 100% of the issued and outstanding shares of the common stock of R.D. Nickel and Associates, Inc. ("Nickel"). The transaction was accounted for using the purchase method of accounting for a business combination. The aggregate purchase price of Cdn$14,000,000 (US$10,130,000) was funded through a cash payment of Cdn$7,000,000 (US$5,065,000) and a note payable of Cdn$7,000,000 (US$5,065,000). Nickel is a software company that has a family of application development products and that has been the exclusive distributor of SAG's products in Canada since 1973. In connection with the transaction, the Company recorded a $6,051,000 non- recurring charge against earnings for in-process research and development costs. The remaining excess purchase price of $4,864,000 represents goodwill, and has been recorded as other intangible assets. The related amortization period for the goodwill is ten years. In September, 1997, the Company's Board of Directors authorized management of the Company to file a Registration Statement with the Securities and Exchange Commission permitting the Company to sell shares of its common stock to the public. The Company's Board of Directors also approved a 275-for-1 stock split to be effected prior to the closing of the initial public offering of the Company's common stock. Common share and per share data in these consolidated financial statements have been retroactively adjusted to reflect the stock split. Additionally, the Company's Certificate of Incorporation was amended and restated to authorize an additional 20,000,000 shares of $.01 par value common stock and an additional 11,250,000 shares of $.01 par value preferred stock, for a total of 75,000,000 authorized shares of common stock and 25,000,000 authorized shares of $.01 par value preferred stock. The Company had previously authorized 13,750,000 shares of $.01 par value preferred stock on March 14, 1997. F-16 SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED) DECEMBER 31, 1994, 1995 AND 1996 (15) QUARTERLY FINANCIAL DATA (UNAUDITED) Unaudited summarized financial data by quarters for 1995 and 1996 is as follows:
QUARTER ENDED ------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 -------- ------- ------------ ----------- 1995 (in thousands, except per share data) ---- Revenue......................... $32,623 $38,763 $37,917 $43,259 Gross profit.................... 16,193 19,668 21,217 24,161 Net income (loss) .............. (3,637) 2,653 2,108 2,202 Net income (loss) per share..... $ (0.12) $ 0.09 $ 0.07 $ 0.07 1996 ---- Revenue......................... $32,286 $37,109 $41,126 $46,319 Gross profit.................... 15,434 20,151 21,276 27,008 Net income (loss) .............. (212) (623) 2,745 4,299 Net income (loss) per share..... $ (.01) $ (.02) $ 0.09 $ 0.14
F-17 SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997 -------------- (in thousands) ASSETS Current: Cash and cash equivalents.................................... $ 18,322 Accounts receivable, net of allowance for doubtful accounts.. 58,857 Current portion of deferred income taxes..................... 3,411 Other current assets......................................... 4,721 -------- Total current assets....................................... 85,311 Installment accounts receivable, net of current portion........ 8,028 Property, equipment and leasehold improvements, net of accumulated depreciation and amortization..................... 9,213 Deferred income taxes.......................................... 1,469 Cooperation agreement, net of accumulated amortization......... 22,325 Other intangible asset, net of accumulated amortization........ 11,042 Other assets................................................... 3,668 -------- Total assets............................................. $141,056 ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current: Accounts payable............................................. $ 6,066 Accrued payroll and employee benefits........................ 12,133 Payable to SAG............................................... 8,650 Other current liabilities.................................... 12,222 Current portion of deferred revenues, net of deferred royalties................................................... 43,121 -------- Total current liabilities.................................. 82,192 Deferred revenues, net of deferred royalties................... 22,463 -------- Total liabilities ....................................... 104,655 -------- Stockholders' equity........................................... 36,401 -------- Total liabilities and stockholders' equity............. $141,056 ========
See accompanying notes to unaudited condensed consolidated financial statements. F-18 SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
PREDECESSOR SUCCESSOR -------------------------- ------------- NINE MONTHS THREE MONTHS SIX MONTHS ENDED ENDED ENDED SEPTEMBER 30, MARCH 31, SEPTEMBER 30, 1996 1997 1997 ------------- ------------ ------------- (in thousands, except per share amounts) Revenues: Software license fees.............................................................. $31,763 $ 7,341 $32,712 Maintenance fees................................................................... 51,778 17,352 35,936 Professional services fees......................................................... 26,980 9,948 21,028 ------- ------- ------- Total revenues................................................................... 110,521 34,641 89,676 ------- ------- ------- Cost of revenues: Software license................................................................... 8,543 2,098 10,502 Maintenance........................................................................ 19,263 6,205 14,639 Professional services.............................................................. 25,854 9,211 17,942 ------- ------- ------- Total cost of revenues........................................................... 53,660 17,514 43,083 ------- ------- ------- Gross profit......................................................................... 56,861 17,127 46,593 ------- ------- ------- Operating expenses: Software product development....................................................... 1,372 -- 595 Sales and marketing................................................................ 31,139 7,317 20,537 Administrative and general......................................................... 23,472 8,500 18,249 Write-off of acquired in-process research and development costs.................... -- -- 6,051 ------- ------- ------- Total operating expenses......................................................... 55,983 15,817 45,432 ------- ------- ------- Income (loss) from operations........................................................ 878 1,310 1,161 Other income and expense, net........................................................ 2,173 978 1,376 ------- ------- ------- Income (loss) before income taxes.................................................... 3,051 2,288 2,537 Income tax expense (benefit)......................................................... 1,141 915 3,613 ------- ------- ------- Net income (loss).................................................................... $ 1,910 $ 1,373 $(1,076) ======= ======= ======= Net income (loss) per share.......................................................... $ 0.06 $ 0.04 $ (0.04) ======= ======= ======= Shares used in computing net income (loss) per share................................. 30,584 30,584 27,422 - -------------------------------------------------- ======= ======= =======
See accompanying notes to unaudited condensed consolidated financial statements. F-19 SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
PREDECESSOR SUCCESSOR -------------------------- ------------- NINE MONTHS THREE MONTHS SIX MONTHS ENDED ENDED ENDED SEPTEMBER 30, MARCH 31, SEPTEMBER 30, 1996 1997 1997 ------------- ------------ ------------- (in thousands) Cash flows from operating activities: Net income (loss).................................................................. $ 1,910 $ 1,373 $ (1,076) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization.................................................... 2,743 941 3,429 Gain on sales of property and equipment.......................................... (8) -- (4) Deferred gain.................................................................... -- (36) -- Net proceeds from sales of accounts receivable................................... 9,258 -- 27,859 Write-off of acquired in-process research and development costs.................. -- -- 6,051 Stock options issued............................................................. -- -- 129 Changes in operating accounts, net of effect of acquisition...................... (16,068) 8,148 (25,860) ------- ------- -------- (2,165) 10,426 10,528 ------- ------- -------- Cash flows from investing activities: Additions to property, equipment and leasehold improvements........................ (2,064) (208) (2,134) Proceeds from sales of property and equipment...................................... 8,699 -- 2 Purchase of Cooperation Agreement.................................................. -- -- (22,612) Acquisition, net of cash received.................................................. -- -- (1,260) ------- ------- -------- 6,635 (208) (26,004) ------- ------- -------- Cash flows from financing activities: Repurchase of common stock......................................................... -- -- (33,920) Issuance of common stock........................................................... -- -- 31,727 Dividends paid..................................................................... (3,000) -- -- ------- ------- -------- (3,000) -- (2,193) ------- ------- -------- Net increase (decrease) in cash and cash equivalents................................. 1,470 10,218 (17,669) Cash and cash equivalents, beginning................................................. 1,573 25,773 35,991 ------- ------- -------- Cash and cash equivalents, ending.................................................... $ 3,043 $35,991 $ 18,322 - -------------------------------------------------- ======= ======= ========
See accompanying notes to unaudited condensed consolidated financial statements. F-20 SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (1) BASIS OF PRESENTATION In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting of only normal recurring accruals, necessary for a fair presentation of the financial position of Software AG Systems, Inc. and subsidiaries (the "Company") as of September 30, 1997, and the results of its operations for the nine months ended September 30, 1996, and the three-month period ended March 31, 1997 and the six month period ended September 30, 1997. These condensed consolidated financial statements are unaudited and do not include all related footnote disclosures. The September 30, 1997 condensed consolidated balance sheet reflects the Recapitalization of the Company (see note 2), and is not comparative to the financial positions of prior periods. The interim unaudited condensed financial statements should be read in conjunction with the audited financial statements. The Company's results of operations for the nine months ended September 30, 1996 and the three month period ended March 31, 1997, respectively, are based on operations which occurred prior to the acquisition of the Company by Thayer Equity Investors III, L.P. ("Thayer") and certain members of the Company's management and are not comparative with the results of operations for the six month period ended September 30, 1997. The results of operations for the three month period ended March 31, 1997 and the six month period ended September 30, 1997 are not necessarily indicative of the results of operations to be expected in the future. (2) RECAPITALIZATION OF THE COMPANY On March 31, 1997, the Company consummated a Recapitalization Agreement under which the Company repurchased from its former parent, Software AG, a German corporation ("SAG"), 24,750,000 shares of common stock and sold 21,450,000 shares of common stock to Thayer and certain of the Company's managers. As a result of this change in control, the acquisition by Thayer and such managers was accounted for as a purchase business combination, and as such the fair value of the Company's assets and liabilities was recorded as of April 1, 1997. Prior to the consummation of the Recapitalization Agreement, the Company entered into a perpetual (unless otherwise terminated by the written agreement of the parties) Cooperation Agreement with SAG that terminated and superseded the license agreement dated January 1, 1995. As consideration for the Cooperation Agreement, the Company paid SAG approximately $22,600,000. Under the Cooperation Agreement, each of the Company and SAG are required to pay the other royalties of 24% of net revenues from sales of licenses of, and technical services on, each other's products for the initial 20 years of the perpetual term of the agreement. For calendar years 1997 through 2000, the Company will be required to pay SAG minimum annual royalties of $21,000,000, provided that SAG's worldwide product and technical services revenues for each of those years are at least equal to SAG's 1996 worldwide revenues. In the event of a decrease in SAG's worldwide revenues, the minimum annual royalty requirement will be reduced proportionately. Pursuant to the Recapitalization Agreement, Thayer and certain of the Company's managers acquired approximately an 89% interest in the Company for approximately $31.5 million. The determination of fair value allocated to the identifiable assets and liabilities of the Company has been estimated by management based on the nature of the assets and liabilities acquired, and general economic factors. Based on this preliminary allocation, the fair value of the Company's Cooperation Agreement has been estimated at approximately $23,500,000, based on an independent appraisal. The fair value of the Company's remaining assets and liabilities has been presumed to be equal to the book value as of the date of the acquisition. Based on preliminary allocation of the purchase price to the net assets and liabilities, an excess of purchase price over net assets acquired (goodwill) of approximately $6,401,000 was recorded. Such goodwill is being amortized on a straight-line basis over 10 years. In the opinion of management of the Company, the final allocation of the purchase price will not be materially different from the preliminary purchase price allocation. F-21 SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (3) STOCK OPTION PLAN In connection with the Recapitalization Agreement, which was consummated on March 31, 1997, the Company authorized the granting of stock options to acquire an aggregate of 3,300,000 shares of common stock at an exercise price of $1.47, of which options to acquire an aggregate of 3,059,650 shares have been granted. This exercise price represents the amount per share that Thayer and management paid to acquire approximately an 89% interest in the Company on March 31, 1997 pursuant to the Recapitalization Agreement. The Company adopted the Software AG Systems, Inc. 1997 Stock Option Plan (the "Plan") on April 29, 1997. On August 8, 1997, 749,650 and 106,975 options were granted with exercise prices of $9.60 and $1.47 per share, respectively, under the Plan. On September 23, 1997, 1,031,250 options were granted with an exercise price of $12.00 per share, under the Plan. (4) ACQUISITION On September 30, 1997, the Company acquired 100% of the issued and outstanding shares of the common stock of R.D. Nickel and Associates, Inc. ("Nickel"). The transaction was accounted for using the purchase method of accounting for a business combination. The aggregate purchase price of Cdn$14,000,000 (US$10,130,000) was funded through a cash payment of Cdn$7,000,000 (US$5,065,000) and a note payable of Cdn$7,000,000 (US$5,065,000). Nickel is a software company that has a family of application development products and that has been the exclusive distributor of SAG's products in Canada since 1973. In connection with the transaction, the Company recorded a $6,051,000 non- recurring charge against earnings for in-process research and development costs. The remaining excess purchase price of $4,864,000 represents goodwill, and has been recorded as other intangible assets. The related amortization period for the goodwill is ten years. At September 30, 1997, the net assets acquired have been reported in the Company's unaudited condensed consolidated financial statements. The Nickel acquisition was not determined to be significant to the operations or balance sheet of the Company; accordingly, the pro forma financial information has not been presented. (5) SUBSEQUENT EVENTS In September, 1997, the Company's Board of Directors authorized management of the Company to file a Registration Statement with the Securities and Exchange Commission permitting the Company to sell shares of its common stock to the public. The Company's Board of Directors also approved a 275-for-1 stock split to be effected prior to the closing of the initial public offering of the Company's Common Stock. Common share and per share data in these condensed consolidated financial statements have been retroactively adjusted to reflect the stock split. Additionally, the Company's Certificate of Incorporation was amended and restated to authorize an additional 20,000,000 shares of $.01 par value Common Stock and an additional 11,250,000 shares of $.01 par value preferred stock, for a total of 75,000,000 authorized shares of common stock and 25,000,000 authorized shares of $.01 par value preferred stock. The Company had previously authorized 13,750,000 shares of $.01 par value preferred stock on March 14, 1997. F-22 [Outside Back Cover] Graphical depiction of five computer screens, one large central screen and four smaller screens in each corner, with the text "FREE YOUR INFORMATION" superimposed over the large screen. Each of the four smaller screens has text that describes certain of the Company's products or services. The text for each smaller screen is set forth below: 1. ENTERPRISE DEVELOPMENT Application Development & Database Management Tools . NATURAL . NATURAL Lightstorm . CONSTRUCT . ADABAS . PREDICT 2. ENTERPRISE ENABLEMENT Middleware & Web Enabling Solutions . iXpress . ENTIRE BROKER . ENTIRE NET-WORK . ENTIRE SAF Gateway 3. DATA WAREHOUSE Data Management & Access Technologies . SourcePoint . PASSPORT . CONSTRUCT Extra Service . ESPERANT . DSS AGENT 4. PROFESSIONAL SERVICES Customized Consulting . Core Services . Web Integration . Data Warehouse . Year 2000 . Education PART II. INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following are the estimated expenses in connection with the issuance and distribution of the securities being registered, all of which will be paid by the Company. SEC registration fee............................................. $ 37,567 NASD filing fee.................................................. 12,897 New York Stock Exchange listing fee.............................. 179,100 Blue Sky fees and expenses....................................... 12,000 Printing and engraving expenses.................................. 200,000 Legal fees and expenses.......................................... 300,000 Accounting fees and expenses..................................... 300,000 Transfer agent and registrar fees................................ 12,000 Miscellaneous.................................................... 46,436 ---------- Total........................................................ $1,100,000 ==========
-------- The Company intends to pay all expenses of registration, issuance and distribution, excluding underwriters' discounts and commissions, with respect to the shares being sold by the Selling Stockholders. In addition, the Company expects to pay approximately $100,000 to obtain further director and officer liability insurance coverage in connection with this offering. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 145 of the Delaware General Corporation Law sets forth conditions and limitations governing the indemnification of officers and directors of the Company and certain other persons. The Company has adopted provisions in its Second Amended and Restated Certificate of Incorporation and Second Amended and Restated Bylaws which provide for indemnification of its officers and directors to the maximum extent permitted under the Delaware General Corporation Law. As authorized by the Delaware General Corporation Law, the Company's Second Amended and Restated Certificate of Incorporation limits the liability of directors of the Company for monetary damages. The effect of this provision is to eliminate the rights of the Company and its stockholders (through stockholders' derivative suits on behalf of the Company) to recover monetary damages against a director for breach of the fiduciary duty of care as a director (including breaches resulting from negligent or grossly negligent behavior) except in certain limited situations. This provision does not limit or eliminate the rights of the Company or any stockholder to seek non-monetary relief such as an injunction or rescission in the event of breach of a director's duty of care. These provisions will not alter the liability of directors under federal securities laws. The Company has purchased an insurance policy which purports to insure the officers and directors of the Company against certain liabilities incurred by them in the discharge of their functions as such officers and directors except for liabilities resulting from their own malfeasance. Under the terms of the Underwriting Agreement, the Underwriters have agreed to indemnify, under certain conditions, the Company, its directors, certain of its officers and persons who control the Company within the meaning of the Securities Act against certain civil liabilities and liabilities arising from breaches of representations and warranties contained in the Underwriting Agreement or the inaccuracy of certain information set forth herein that was provided by the Underwriters. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. Prior to February 25, 1997, the Company was an indirect wholly owned subsidiary of Software AG ("SAG"), and on February 25, 1997, the Company became a direct wholly owned subsidiary of SAG II-1 and SAG became the owner of the one outstanding share of the Company's common stock, par value $1.00 per share. On March 31, 1997, the senior management of the Company and Thayer Equity Investors III, L.P. ("Thayer") acquired approximately 89% of the then outstanding Common Stock of the Company (the "Recapitalization") pursuant to an agreement among the Company, SAG, Thayer and the following officers of the Company: Daniel F. Gillis, Harry K. McCreery, Gary Hayes, James H. Daly, Derek M. Brigden and Thomas E. Gorley (collectively, such individuals are referred to as the "Managers"). In connection therewith, (i) 24,750,000 shares of Common Stock were repurchased by the Company from SAG for an aggregate purchase price of 57,000,000 Deutsche Marks ($33.9 million), (ii) 20,678,350 shares of Common Stock were issued and sold to Thayer for an aggregate purchase price of $30,392,662.86 and (iii) an aggregate of 771,650 shares of Common Stock were issued and sold to the Managers for an aggregate purchase price of $1,134,157.14. In addition, on August 22, 1997 the Company entered into a subscription agreement with Timothy L. Hill, the Company's Vice President--Marketing, pursuant to which the Company issued and sold to Mr. Hill 137,500 shares of Common Stock for an aggregate purchase price of $202,095. The Company has also granted options to purchase an aggregate of 4,947,525 shares of Common Stock at a weighted average exercise price equal to $4.90 per share. All such options and shares of Common Stock were issued in private placements exempt from registration under Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act"), or Rule 701 thereunder. All such shares reflect a 275-for-1 stock split with respect to the Common Stock to be effected as a dividend prior to the effective date of the Registration Statement. No underwriters were involved in the sales or issuances of the securities described above. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. An index to exhibits appears on page E-1. ITEM 17. UNDERTAKINGS. The undersigned registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 479(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-2 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT HAS DULY CAUSED THIS AMENDMENT NO. 1 TO REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN RESTON, VIRGINIA ON OCTOBER 15, 1997. Software AG Systems, Inc. /s/ Daniel F. Gillis By: _________________________________ DANIEL F. GILLIS Director, President and Chief Executive Officer PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THIS AMENDMENT NO. 1 TO REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED ON OCTOBER 15, 1997. /s/ Daniel F. Gillis By: _________________________________ DANIEL F. GILLIS Director, President and Chief Executive Officer (Principal Executive Officer) /s/ Harry K. McCreery By: _________________________________ HARRY K. MCCREERY Vice President, Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer) * By: _________________________________ CARL J. RICKERTSEN Chairman of the Board of Directors * By: _________________________________ DR. PHILIP S. DAUBER Director * By: _________________________________ DR. ERWIN KOENIGS Director * By: _________________________________ EDWARD E. LUCENTE Director * By: _________________________________ DR. PAUL G. STERN Director /s/ Harry K. McCreery *By: ________________________________ Harry K. McCreery Attorney-In-Fact II-3 ACCOUNTANT'S REPORT ON SCHEDULE WHEN THE STOCK SPLIT TRANSACTION REFERRED TO IN NOTE 14 OF THE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS HAS BEEN CONSUMMATED, WE WILL BE IN A POSITION TO RENDER THE FOLLOWING REPORT. /s/ KPMG PEAT MARWICK LLP The Board of Directors Software AG Systems, Inc. The audits referred to in our report dated September 12, 1997, except for note 14, which is as of . . . included the related financial statement schedule for each of the years in the three-year period ended December 31, 1996, included in the registration statement. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. McLean, Virginia September 12, 1997, except for Note 14, which is as of . . . S-1 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS DEDUCTIONS ---------- ---------- BALANCE AT CHARGED TO BALANCE BEGINNING COSTS AND AT END DESCRIPTION OF PERIOD EXPENSES WRITE-OFFS OF PERIOD ----------- ---------- ---------- ---------- --------- 1/1/94 - 12/31/94 Allowance for Doubtful Accounts 4,741,158 (262,269) 409,298 4,069,591 1/1/95 - 12/31/95 Allowance for Doubtful Accounts 4,069,591 2,331,608 1,635,681 4,765,518 1/1/96 - 12/31/96 Allowance for Doubtful Accounts 4,765,518 1,298,361 1,083,575 4,980,304
S-2 INDEX TO EXHIBITS
EXHIBIT NO. ------- *** 1.1 Form of Underwriting Agreement * 3.1 Second Amended and Restated Certificate of Incorporation of the Registrant * 3.2 Second Amended and Restated Bylaws of the Registrant *** 4 Specimen Common Stock Certificate of the Registrant *** 5 Opinion of Arnold & Porter regarding the legality of the shares of Common Stock being registered **10.1 Recapitalization Agreement among Software AG, Software AG Systems, Inc., Thayer Equity Investors III, L.P. and certain Managers of Software AG Systems, Inc. (dated as of March 18, 1997) *10.2 Cooperation Agreement between Software AG and Software AG Americas, Inc. (dated as of March 31, 1997) **10.3 Share Purchase Agreement among Software AG Americas, Inc., Software AG (Canada), Inc., Robert D. Nickel and Caelum Investments, Inc. (dated as of September 26, 1997) **10.4 Memorandum of Understanding between Daniel F. Gillis and Software AG Systems, Inc. (dated as of April 24, 1997) **10.5 Memorandum of Understanding between Harry K. McCreery and Software AG Americas, Inc. (dated as of December 16, 1996) **10.6 Memorandum of Understanding between Derek M. Brigden and Software AG Americas, Inc. (dated as of December 13, 1996) **10.7 Memorandum of Understanding between James H. Daly and Software AG Americas, Inc. (dated as of December 18, 1996) **10.8 Memorandum of Understanding between Thomas E. Gorley and Software AG Americas, Inc. (dated as of August 22, 1996) **10.9 Software AG Systems, Inc. 1997 Stock Option Plan, as amended **10.10 Management and Consulting Agreement between TC Management LLC and Software AG Americas, Inc. (dated as of April 1, 1997) **10.11 Deferred Compensation Agreement between Daniel F. Gillis and Software AG Americas, Inc. (dated as of July 1, 1995), as amended **10.12 Deferred Compensation Agreement between James H. Daly and Software AG Americas, Inc. (dated as of January 1, 1993), as amended **10.13 Deferred Compensation Agreement between Harry K. McCreery and Software AG Americas, Inc. (dated as of January 1, 1991), as amended **10.14 Administrative Services Agreement between Software AG and Software AG Americas, Inc. (dated as of March 31, 1997) **10.15 Registration Rights Agreement between Software AG Systems, Inc. and Thayer Equity Investors III, L.P. (dated as of September 26, 1997) **10.16 Subscription Agreement between Timothy L. Hill and Software AG Systems, Inc. (dated as of August 22, 1997), as amended **10.17 Shareholders Agreement among Software AG Systems, Inc., Thayer Equity Investors III, L.P. and certain shareholders of Software AG Systems, Inc. (dated as of April 1, 1997) **10.18 Promissory Note made by Thomas E. Gorley (effective date March 24, 1997) **10.19 Promissory Note made by Daniel F. Gillis (effective date March 24, 1997) **10.20 Promissory Note made by Harry K. McCreery (effective date March 24, 1997) **10.21 Promissory Note made by James H. Daly (effective date March 24, 1997) **10.22 Promissory Note made by Harry K. McCreery (effective date August 9, 1996) **10.23 Promissory Note made by James H. Daly (effective date August 9, 1996) **11 Computations of Earnings per Share ***16 Letter regarding Change in Certifying Accountant ***21 Subsidiaries of the Registrant ***23.1 Consent of Arnold & Porter (included in its opinion filed as Exhibit 5) **23.2 Consent of KPMG Peat Marwick LLP *24.1 Powers of Attorney *27 Financial Data Schedule
- -------- * Previously filed ** Filed herewith *** To be filed by amendment E-1 EX-10.1 2 RECAPITALIZATION AGREEMENT EXHIBIT 10.1 EXECUTION COPY RECAPITALIZATION AGREEMENT This RECAPITALIZATION AGREEMENT (this "Agreement") is made as of March 18, 1997, by and among Software AG, a German corporation with its principal place of business in Darmstadt, Germany (the "Seller"), Software AG Systems, Inc., a Delaware corporation (the "Company"), Thayer Equity Investors III, L.P., a Delaware limited partnership ("Thayer"), and the managers of the Company listed on Exhibit A hereto (collectively, such managers are referred to herein as the "Managers" and together with Thayer are referred to herein as the "Buyers"). W I T N E S S E T H: WHEREAS, the Company has 200,000 shares of authorized common stock, par value $.0l per share, (the "Common Stock") of which, at the date hereof, 100,000 shares have been issued and are outstanding and all of which issued and outstanding shares are owned by the Seller; WHEREAS, subject to the terms and the conditions specified herein, the Buyers desire to purchase from the Company, and the Seller and the Company desire that the Company issue to the Buyers, 78,000 shares of Common Stock (such shares are referred to herein as the "Shares"); and WHEREAS, simultaneously with such purchase and sale of the Shares, the Company desires to repurchase 90,000 shares (the "Repurchase Shares") of the Common Stock shares owned by Seller; NOW, THEREFORE, in consideration of the premises and the mutual agreements, representations, warranties and covenants contained herein and intending to be legally bound hereby, the parties hereto hereby agree as follows: ARTICLE 1. DEFINITIONS 1.1. "Claim" shall mean all actions, causes of action, suits, Liabilities, amounts due, sums of money, accounts, reckonings, bonds, bills, controversies, trespasses, damages, judgments, executions, claims, and demands whatsoever, in law or equity. - 2 - 1.2. "Closing" shall mean the closing described in Article 7 hereof at which the Parties shall consummate the transactions contemplated hereby. 1.3. "Closing Date" shall mean the date that the Closing occurs. 1.4. "Code" shall mean the Internal Revenue Code of 1986, as amended. 1.5. "Cooperation Agreement" shall mean the Cooperation Agreement between Seller and SAGA substantially in the form attached hereto as Exhibit B. 1.6. "Damages" shall mean any and all Liabilities, losses, damages, fines, penalties, costs, fees and expenses of every kind, nature or description (including without limitation interest which may be imposed in connection therewith, court costs, costs resulting from any judgments, orders, awards, decrees or equitable relief, and reasonable fees and disbursements of counsel, consultants and expert witnesses). 1.7. "Encumbrance" shall mean any title defect, conflicting claim of ownership, order, decree, judgment, stipulation, settlement, attachment, restriction, lien, pledge, right of first refusal, option, charge, security interest, mortgage, reservation, lease or any other encumbrance of any nature whatsoever. 1.8. "Environmental Claims" shall mean any claim, action, suit, proceeding, investigation, order, demand, obligation, duty or government directive or like matter, based on any Environmental Law, which is pending or asserted (or unasserted but considered probable of assertion) or threatened against the Company or any Subsidiary or to which the Company or any Subsidiary is subject, including, without limitation, claims for reimbursement, contribution, fines, penalties and punitive damages. 1.9. "Environmental Laws" shall include all United States federal, state and local laws, regulations, standards, rules, ordinances, binding governmental requirements, binding judicial or administrative orders, regulatory permits, and common law legal obligations pertaining to environmental concerns, or to employee and occupational health and safety, or to public health, including without limitation the federal Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. (S) 9601 et seq., the federal Resource Conservation - 3 - and Recovery Act, 42 U.S.C. (S) 6901 et seq., the federal Clean Water Act, 33 U.S.C. (S) 1251 et seq., the federal Clean Air Act, 42 U.S.C. (S) 7401 et seq. and analogous state and local laws. 1.10. "Environmental Properties" shall mean all property currently or formerly owned, leased or used by the Company or any Subsidiary, including without limitation any property not owned by the Company or any Subsidiary but used or affected by any of their off-site waste disposal and similar practices, and including without limitation all surface water, ground water, subsurface soils, and air associated with such properties. 1.11. "Equity Contribution" shall mean, with respect to each Buyer, the dollar amount set forth opposite such Buyer's name on Exhibit A hereto. 1.12. "Financial Statements" shall mean (i) the audited consolidated balance sheets of the Company as of December 31, 1994, and 1995 and the related audited consolidated statements of income, cash flows and changes in stockholders' equity (including related notes, if any) for the years ended December 31, 1994, and 1995; and (ii) as Previously Disclosed, the consolidated balance sheets of the Company as of December 31, 1996 and the related consolidated statements of income, cash flows and changes in stockholders' equity (including related notes, if any) for the year ended December 31, 1996. 1.13. "Governmental Entity" shall mean any federal, state, local or foreign legislative authority, court, governmental agency or other regulatory, judicial or administrative authority. 1.14. "Hazardous Substances" shall mean uncontained petroleum products and wastes and those materials designated or defined as hazardous substances, toxic pollutants, toxic substances, hazardous pollutants, hazardous wastes or other similar terms in any Environmental Laws, or any other substance which by law or regulation requires special handling in its collection, storage, treatment, disposal or transportation. 1.15. "Intellectual Property" shall mean all of the following, throughout the universe that is owned by, controlled by, used by, licensed by third parties to or registered in the name of, the Company or any Subsidiary: (i) patents and patent applications and all forms and equivalents thereof, including divisions, continuations, - 4 - continuations-in-part, utility patents or models, design patents, extensions, reissued and reexamined patents, patents of addition, confirmation patents, importation patents, registration patents, and inventor's certificates; (ii) rights to file patent applications and other interests in inventions and discoveries, whether reduced to practice or not, on which no patent application has been filed; (iii) copyrights and all related and equivalent rights, including copyright registrations, applications for copyright registration, moral rights, and neighboring rights; (iv) common law and other trademarks, trade names, trade dress, and service marks, and registrations and applications for registration thereof; (v) rights in industrial designs, mask works, and the like, and registrations and applications for registration thereof; (vi) trade secrets; (vii) methods, processes, computer software, designs, drawings, laboratory notebooks, technical data, research and development data, know--how, market reports, consumer investigations, product surveys, distribution methods, and customer lists, whether or not secret and whether or not reduced to writing; (viii) other proprietary rights; (ix) licenses to or under and shop rights in any of the foregoing; and (x) all other factual and proprietary information, whether or not secret and whether or not reduced to writing. 1.16. "Liabilities" shall mean any liabilities, debts or obligations, whether accrued, absolute, contingent or otherwise, known or unknown. 1.17. "Material Adverse Effect" shall mean, with respect to any Person, a material adverse effect on (i) the consolidated business, results of operations, financial condition or prospects of such Person or (ii) the ability of such Person to consummate the transactions contemplated hereby. 1.18. "Materials of Environmental Concern" shall mean Hazardous Substances and other chemicals, pollutants, contaminants, or wastes that present an identifiable risk to human health or the environment. 1.19. "Parties" shall mean Seller, the Company, and each of the Buyers. 1.20. "Per Share Price" shall mean the dollar amount (rounded to two decimal points) equal to the Purchase Price divided by 78,000. - 5 - 1.21. "Permits" shall mean permits, licenses, orders, authorizations, certificates or approvals of any Governmental Entity 1.22. "Person" shall mean an individual, partnership, corporation, trust, unincorporated organization, government or any department or agency thereof and any other entity. 1.23. "Previously Disclosed" shall mean disclosed in a schedule attached hereto. 1.24. "Purchase Price" shall mean the greater of (i) $29,035,000 or (ii) the sum of the Equity Contributions of each Buyer as set forth on Exhibit A hereto. 1.25. "Properties" shall mean all properties (real or personal) and other assets (tangible or intangible) owned, leased or used by the Company or any Subsidiary. 1.26. "Related Agreements" shall mean the Cooperation Agreement, Release and Tax Matters Agreement. 1.27. "Release" shall mean the Release executed by Seller, substantially in the form attached hereto as Exhibit C. 1.28. "Rights" shall mean warrants, options, rights, convertible securities and other arrangements or commitments which obligate an entity to issue or dispose of any of its capital stock, and stock appreciation rights, performance units, repurchase rights and other similar stock-based rights whether they obligate the issuer thereof to issue stock or other securities or to pay cash. 1.29. "SAGA" shall mean Software AG Americas, Inc., a Virginia corporation that is a wholly-owned subsidiary of the Company. 1.30. "Securities Act" shall mean the Securities Act of 1933, as amended. 1.31. "Tax Matters Agreement" shall mean the Tax Matters Agreement between Seller, the Company and Thayer substantially in the form attached hereto as Exhibit D. Other capitalized terms used herein are defined in the preamble and the recitals to this Agreement and in the other Articles hereof. - 6 - ARTICLE 2. PURCHASE AND SALE; REPURCHASE At the Closing, on the terms and subject to the conditions set forth herein, the following actions shall occur simultaneously: (i) The Company shall issue and sell to the Buyers, and each Buyer shall purchase severally and not jointly, at a purchase price per Share equal to the Per Share Price, the number of Shares equal to (x) the Equity Contribution of such Buyer, divided by (y) the Per Share Price, provided, however, that any fractional Share to which any Buyer (other than Thayer) would otherwise be entitled to hereunder shall be purchased by Thayer instead of such Buyer; (ii) The Company shall deliver to each Buyer stock certificates representing the Shares purchased by such Buyer and shall take and cause to be taken all actions necessary to transfer to each Buyer good and valid title to the Shares purchased by such Buyer and to record the issuance of such Shares to such Buyer on the books and records of the Company; (iii) Each Buyer shall pay his, her or its Equity Contribution (adjusted for each Buyer to account for Thayer's purchase of any fractional Shares pursuant to clause (i) of this Article) to the Company in immediately available funds by wire transfer to the account designated by the Company in writing at least two business days prior to the Closing; and (iv) The Company shall repurchase from Seller the Repurchase Shares for an aggregate price of Fifty--Seven Million (57,000,000) Deutsche Marks. The Company shall pay the amount owed to Seller pursuant to this clause (iv) in immediately available funds by wire transfer to the account designated by Seller in writing at least two business days prior to the Closing. Seller shall deliver to the Company stock certificates representing the - 7 - Repurchase Shares, and the Company shall take and cause to be taken all actions necessary to cancel such shares. ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF SELLER Except as Previously Disclosed, Seller represents and warrants to the Buyers as follows: 3.1. Capital Structure of the Company The authorized capital stock of the Company (the "Capital Stock") consists solely of (i) 200,000 shares of Common Stock, of which 100,000 shares are issued and outstanding and no shares are held in treasury and (ii) 50,000 shares of preferred stock, $.0l par value per share (the "Preferred Stock"), of which none are issued and outstanding. No shares of Capital Stock are reserved for issuance. All outstanding shares of Common Stock have been duly authorized and issued and are validly outstanding, fully paid and nonassessable. The Company does not have and is not bound by any Rights which are authorized, issued or outstanding with respect to the Capital Stock, and there are no agreements, understandings or commitments relating to the right of Seller to vote or to dispose of any of such Capital Stock. None of the shares of the Company's Capital Stock has been issued in violation of the preemptive or other rights of any Person. Seller owns all of the outstanding shares of Common Stock, with good and marketable title thereto free and clear of all Encumbrances. 3.2. Organization, Standing and Authority Each of Seller and the Company and each Subsidiary is a duly organized corporation, validly existing and in good standing under the laws of its jurisdiction of incorporation. Each of Seller and the Company and each Subsidiary (i) has full corporate power and authority to carry on its business as now conducted and (ii) is duly licensed or qualified to do business in all jurisdictions of the United States and foreign jurisdictions where its ownership or leasing of property or the conduct of its business requires such licensing or qualification, except where the failure to be so licensed or qualified would not have a Material Adverse Effect on the Company. - 8 - 3.3. Subsidiaries and Related Interests The Company owns, directly or indirectly, all of the outstanding capital stock or other voting securities or interests of the corporations listed on Exhibit E hereto (collectively the "Subsidiaries" and individually a "Subsidiary"). The Company does not own, directly or indirectly, any capital stock or other voting securities or interests of any other corporation, partnership, limited liability company or other organization or entity. The outstanding shares of capital stock or other voting securities or interests of each Subsidiary are duly authorized and issued and are validly outstanding, fully paid and nonassessable; all such shares are directly or indirectly owned by the Company with good and marketable title thereto free and clear of all Encumbrances. No Subsidiary has or is bound by any Rights which are authorized, issued or outstanding with respect to the capital stock of any Subsidiary and there are no agreements, understandings or commitments relating to the right of the Company to vote or to dispose of any such capital stock. None of the shares of capital stock of any Subsidiary has been issued in violation of the preemptive rights of any Person. 3.4. Authorized and Effective Agreement (a) Each of Seller, the Company and SAGA has all requisite corporate power and authority to enter into and perform all of its obligations under this Agreement and the Related Agreements to which it is a party. The execution and delivery of this Agreement and the Related Agreements to which Seller, the Company or SAGA is a party, and the consummation of the transactions contemplated hereby and thereby, have been duly and validly authorized by all necessary corporate action in respect thereof on the part of Seller, the Company and SAGA. This Agreement has been, and each of the Related Agreements to which Seller, the Company or SAGA is a party when executed and delivered by Seller, the Company or SAGA, as the case may be, shall be, executed and delivered by a duly authorized agent of Seller, the Company or SAGA, as the case may be. The Shares, when issued, sold and delivered in accordance with this Agreement, shall be duly authorized, validly issued, fully paid and nonassessable and will not have been issued in violation of any preemptive rights. Upon consummation of the purchase of the Shares, Buyers will acquire from the Company good and marketable title to the Shares, free and clear of all Encumbrances. - 9 - (b) Assuming the accuracy of the representations contained in Sections 4.2(a) and 4.2(c) hereof, this Agreement and the Related Agreements to which Seller, the Company or SAGA is a party, constitute legal, valid and binding obligations of Seller, the Company and SAGA, as the case may be, enforceable against it in accordance with their respective terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, moratorium, reorganization, bulk sales, or similar laws from time to time in effect which affect the enforcement of creditors' rights generally and by general equity principles. (c) Neither the execution and delivery of this Agreement or any of the Related Agreements, nor consummation of the transactions contemplated hereby or thereby, nor compliance by Seller, the Company or SAGA with any of the provisions hereof or thereof shall (i) conflict with or result in a breach of any provision of the certificate of incorporation or bylaws (or similar charter documents) of Seller, the Company or any Subsidiary, (ii) constitute or result in a breach of any term, condition or provision of, or constitute a default under, or give rise to any right of termination, cancellation or acceleration with respect to, or result in the creation of any Encumbrance upon any property or asset of the Company or any Subsidiary pursuant to, any note, bond, mortgage, indenture, license, lease, contract, agreement or other instrument or obligation, or (iii) violate any order, writ, injunction, decree, statute, rule or regulation applicable to Seller, the Company or any Subsidiary, except (in the case of clauses (ii) and (iii) above) for such violations, rights, breaches, Encumbrances or defaults which, either individually or in the aggregate, will not have a Material Adverse Effect on the Company or any Subsidiary. (d) No consent, approval or authorization of, or declaration, notice, filing or registration with, any Governmental Entity or any other Person, is required to be made or obtained by Seller, the Company or any Subsidiary in connection with the execution, delivery and performance of this Agreement or the Related Agreements or the consummation of the transactions contemplated hereby or thereby, other than (i) any applicable filings under federal or state securities laws or state anti-takeover laws and (ii) filings required pursuant to the Hart Scott Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"). - 10 - 3.5. Constitutive Documents Seller has delivered to Buyers complete and correct copies of the Company's and each Subsidiary's certificate of incorporation and bylaws (or similar charter documents), each as amended as of the date hereof, and all resolutions of the boards of directors of the Company and any Subsidiary (or any committees thereof) relating to this Agreement or any Related Agreement or any of the transactions contemplated hereby or thereby. The minute book of the Company, a copy of which has been delivered to Buyers, contains a complete, correct and current record of all meetings and other corporate actions of the stockholders and the board of directors (and any committee thereof) of the Company since its incorporation. 3.6. Compliance with Laws; Regulatory Filings The Company and each Subsidiary is in compliance in all material respects with all statutes and regulations applicable to the conduct of its business. The Company and each Subsidiary has filed all reports required by statute, regulation or other requirement to be filed with any Governmental Entity, except where the failure to so file would not have a Material Adverse Effect on the Company, and such reports were prepared in all material respects in accordance with the applicable statutes, regulations and instructions in existence as of the date of filing of such reports. Neither the Company nor any Subsidiary has received notification from any Governmental Entity (i) asserting a violation of any, statute, regulation or other requirement or (ii) restricting or in any way limiting its operations. Neither the Company nor any Subsidiary is subject to any regulatory or supervisory order, agreement, directive, memorandum of understanding, commitment or similar requirements and none of them has received any communication requesting that it enter into any of the foregoing. 3.7. Financial Statements; Books and Records (a) The Financial Statements fairly present the financial position of the Company as of the dates indicated and the results of operations, changes in stockholders' equity and cash flows of the Company for the periods presented, all in conformity with U.S. generally accepted accounting principles applied on a consistent basis except as disclosed therein. The books and records of the Company fairly reflect in all material respects the transactions to which it is a party or by which its Properties are subject or bound. All accounts receivable - 11 - included in the Financial Statements dated as of December 31, 1996 (the "1996 Financial Statements") are valid and enforceable and, to the knowledge of Seller, the Company and the Subsidiaries (collectively, the "Seller's Knowledge"), collectible net of reserves. Such reserves have been established in accordance with U.S. generally accepted accounting principles. (b) Seller's Previously Disclosed consolidated balance sheet as of December 31, 1996 and its related, Previously Disclosed consolidated statement of income (including related notes, if any) for the year ended December 31, 1996, fairly present Seller's financial position as of the date indicated and the results of operations of Seller for the period presented, all in conformity with generally accepted accounting principles applied on a consistent basis except as disclosed therein. 3.8. Material Adverse Change The Company has not, on a consolidated basis, suffered any material adverse change in its financial condition, results of operations, business or prospects since December 31, 1996. 3.9. Absence of Undisclosed Liabilities Except as disclosed in the 1996 Financial Statements, neither the Company nor any Subsidiary has any Liability that is material to the Company on a consolidated basis, or that, when combined with all similar Liabilities, would be material to the Company on a consolidated basis; to the Seller's Knowledge, no set of circumstances exist that are reasonably likely to give rise to any such Liability. 3.10. Properties The Company or a Subsidiary has good title, free and clear of all Encumbrances, to all of the Properties which, individually or in the aggregate, are material to the business of the Company and its Subsidiaries taken as a whole, and which are reflected on the 1996 Financial Statements or acquired after December 31, 1996, except (i) liens for taxes not yet due and payable for which adequate reserves have been established on the books of the Company and (ii) such imperfections of title as are not material in character, amount or extent. All leases pursuant to which the Company or any Subsidiary, as lessee, leases Properties which, individually or in the aggregate, are material to the business of the Company and - 12 - its Subsidiaries taken as a whole (x) have been Previously Disclosed and (y) are valid, in full force and effect and enforceable in accordance with their respective terms. 3.11. Permits Seller has Previously Disclosed a list and description of all material Permits which are issued to, held or used by the Company or any Subsidiary, or for which the Company or any Subsidiary has applied. There are no other required Permits which are material to (i) the operation of the Company's or any Subsidiary's business as now conducted or (ii) the ownership or use of any of the Properties. All Permits Previously Disclosed by Seller are in good standing and are valid and effective in accordance with their respective terms; such Permits will continue in effect after the Closing. The Company and its Subsidiaries are in material compliance with all Permits Previously Disclosed by Seller, and no governmental proceedings or investigations are pending or, to the Seller's Knowledge, threatened against Seller, the Company or any Subsidiary relating to noncompliance with such Permits. 3.12. Employment Benefit Plans Seller has Previously Disclosed true and complete copies of all qualified pension or profit-sharing plans, any deferred compensation, consulting, bonus or group insurance contract or any other incentive, welfare or employee benefit plan or agreement maintained for the benefit of employees or former employees of the Company or any Subsidiary (collectively, the "Plans"). No liability under Title IV of the Employment Retirement Income Security Act of 1974, as amended ("ERISA") has been incurred by the Company or any of its Subsidiaries that has not been satisfied in full, and no condition exists that presents a material risk of the Company or any Subsidiary incurring any such liability. With respect to each Plan that is subject to Title IV of ERISA, the present value of accrued benefits under such Plan, based upon the actuarial assumptions used for funding purposes in the most recent actuarial report prepared with respect to such Plan, did not, as of the valuation date used in such report, exceed the current value of such Plan's assets allocable to such accrued benefits, and no material adverse change in the funded status of any such Plan has occurred since such valuation date. Full payment has been made of all amounts that the Company or any of its Subsidiaries is required to pay under section 412 of the - 13 - Code or under the terms of the Plans. To the Seller's Knowledge, each Plan that is intended to be "qualified" within the meaning of section 401(a) of the Code is so qualified and each Plan that is intended to satisfy the requirements of section 125 or 501(c) (9) of the Code satisfies such requirements. Each of the Plans has been operated and administered in all material respects in accordance with its terms and applicable laws. There are no actions, suits, claims, or actions pending, or, to the Seller's Knowledge, threatened or anticipated (other than routine claims for benefits) against any Plan or any related trust or against the Company or any of its Subsidiaries. None of the Plans is the subject of an audit, investigation, or examination by the IRS, Pension Benefit Guaranty Corporation, Department of Labor or any other Governmental Entity. None of the Plans is a multiemployer plan within the meaning of section 3(37) of ERISA. 3.13. Certain Contracts Neither the Company nor any Subsidiary is a party to, or is bound by, (i) any material contract or any other contract pursuant to which any party thereto has an obligation or commitment of greater than $3,000,000, (ii) any agreement restricting the nature or geographic scope of its business activities in any material respect, other than the Cooperation Agreement (iii) any agreement, indenture or other instrument relating to the borrowing of more than $1,000,000 by the Company or any Subsidiary or the guarantee by the Company or any Subsidiary of any such obligation, (iv) any agreement, arrangement or commitment relating to the employment of a consultant who was formerly a director or executive officer or the employment, election, retention in office or severance of any present or former director or officer, or (v) any agreement, contract or other instrument relating to or involving any swap, hedge or other similar off- balance sheet transaction. Neither the Company nor any Subsidiary is in default under any material agreement, commitment, arrangement, lease, insurance policy or other instrument whether written or oral, and there has not occurred any event (including the execution, delivery and performance of this Agreement or any of the Related Agreements) that, with the lapse of time or giving of notice or both, would constitute such a default, except for such defaults which would not, individually or in the aggregate, have a Material Adverse Effect on the Company. - 14 - 3.14. Legal Proceedings There are no actions, suits or proceedings instituted, pending or, to the Seller's Knowledge, threatened (or unasserted but considered probable of assertion) against the Seller, Company or any Subsidiary or against any asset, interest or right of Seller, the Company or any Subsidiary which could have a Material Adverse Effect on the Company and, to the Seller's Knowledge, there are no other such actions, suits or proceedings instituted, pending or threatened (or unasserted but considered probable of assertion). To the Seller's Knowledge, there are no instituted, pending or threatened actions, suits or proceedings that present a claim to restrain or prohibit the transactions contemplated in this Agreement or any of the Related Agreements or to impose any material liability in connection therewith. 3.15. Labor and Related Matters Neither the Company nor any Subsidiary is a party to, or is bound by, any contract, agreement or understanding with any labor union, organization, group or association, and none of them has engaged in any unfair labor practice. Since January 1, 1995, neither the Company nor any Subsidiary has experienced any attempt by organized labor or its representatives to make the Company or any Subsidiary conform to demands of organized labor relating to employees of the Company or any Subsidiary or enter into a binding agreement with organized labor that would cover employees of the Company or any Subsidiary. There is no pending or threatened charge of unfair labor practice or any other action, complaint or investigation by or before any Governmental Entity brought by or on behalf of any employee, prospective employee or former employee of the Company or any Subsidiary. There is no labor strike or labor disturbance pending against the Company or any Subsidiary; and neither the Company nor any Subsidiary has experienced any organized work stoppage or other labor difficulty since January 1, 1995. Neither the Company nor any Subsidiary is a party to or affected by or threatened with any dispute or controversy with any supplier, subcontractor, or customer, the outcome of which could have a Material Adverse Effect on the Company. 3.16. Brokers and Finders None of Seller, the Company, the Subsidiaries or any of their respective officers, directors or employees, has employed any broker, finder or financial advisor or - 15 - incurred any Liability for any brokerage or finders fees or commissions in connection with the transactions contemplated in this Agreement or the Related Agreements. 3.17. Environmental Matters (a) Except as disclosed in the 1996 Financial Statements, and except for liabilities incurred in the ordinary course of business subsequent to December 31, 1996, neither the Company nor any Subsidiary has any material Liability arising under any Environmental Law, nor, to the Seller's Knowledge, is there any basis for the assertion of any such Liabilities. (b) There is no pending or threatened (or unasserted but considered probable of assertion) Environmental Claim against or otherwise involving the Company or any Subsidiary or any of their officers, directors, businesses or assets nor, to the Seller's Knowledge, does any valid basis for such a claim or controversy exist. There is no judgment, order, injunction, award or consent decree outstanding against or affecting the Company or any Subsidiary which arises from or relates to an Environmental Claim. (c) The Environmental Properties are free from any and all contamination by Materials of Environmental Concern for which material remedial action is required under Environmental Laws. (d) Neither the Company nor any Subsidiary has conducted, engaged in or permitted others to conduct or engage in any business, operation or activity on or at the Environmental Properties that involved the manufacture, treatment, processing or on-site disposal of any Materials of Environmental Concern. (e) The Company and the Subsidiaries are in compliance with all Environmental Laws in all material respects. (f) Seller has Previously Disclosed a true and complete list of all environmental permits, authorizations and licenses required under all Environmental Laws for the conduct of the business of the Company or the Subsidiaries (collectively, the "Authorizations") and the expiration dates, if any, of such Authorizations. All Authorizations necessary for the Company or the Subsidiaries to continue to conduct their business in compliance with all Environmental Laws are in full force and effect. - 16 - (g) Neither the Company nor any Subsidiary has received or anticipates receiving any notice, letter, citation, order, warning, complaint, inquiry, claim or demand alleging or asserting that: (a) the Company or any Subsidiary has violated, or is about to violate, any Environmental Laws; (b) there has been a release or there is a threat of a release of any Material of Environmental Concern at, from or onto any of the Environmental Properties; (c) the Company or any Subsidiary may be or is liable, in whole or in part, for the costs of cleaning up, remediating, removing or responding to a release or threat of a release of any Material of Environmental Concern at, from or onto any of the Environmental Properties or, as a result of its operation of such Environmental Properties, at, from or onto any other property wherever located; or (d) any of the Environmental Properties are subject to a lien in favor of any Governmental Entity for any Damages, under Environmental Laws, arising from costs incurred by such Governmental Entity. 3.18. Intellectual Property (a) Seller has Previously Disclosed (i) all of the Intellectual Property that has been registered in, filed in or issued by the United States Patent and Trademark Office or the United States Copyright Office or any similar office in any country and (ii) all Intellectual Property that is not so registered, filed or issued, but the use of which is material to the ability of the Company to operate the business of the Company and the Subsidiaries, taken as a whole. The Company or a Subsidiary is the sole and exclusive owner of the entire right, title and interest in and to the Intellectual Property; neither the Company nor any Subsidiary has granted, nor does there exist by implication or operation of law, any license or other right in respect thereof which does or which will, subsequent to the Closing, permit or enable any Person other than the Company and the Subsidiaries to use the Intellectual Property, except for software licenses granted by the Company or a Subsidiary to a distributor or an end user customer in the ordinary course of business. None of the Intellectual Property is subject to any outstanding order, decree, judgment, stipulation, settlement, lien, charge, encumbrance or attachment. There is no pending or, to the Seller's Knowledge, threatened (or unasserted but considered probable of assertion) Claim (A) asserting that any of the Intellectual Property, or that the past, present or contemplated future conduct of the Company's or its Subsidiaries' business, infringes or violates the intellectual property rights of any third parties, - 17 - (B) asserting that any third parties have any rights to use any of the Intellectual Property or (C) which could, if adversely determined against the Company or any Subsidiary, adversely affect the Company's ability to use any of the Intellectual Property upon consummation of the transactions contemplated hereby or thereafter, and to the Seller's Knowledge, there is no basis for any claim of the foregoing types. Neither Seller nor the Company nor any Subsidiary has given any notice to any third parties asserting infringement by such third parties of any of the Intellectual Property. Neither the Company nor any Subsidiary is subject to any bars or other restrictions with respect to its rights to utilize any of the Intellectual Property, and, to the Seller's Knowledge, no bars or other restrictions on such rights will be created by the consummation of the transactions contemplated herein. (b) Seller has Previously Disclosed a list of all Intellectual Property owned by third parties and licensed to the Company or any Subsidiary (the "Licensed Intellectual Property"). All of the Licensed Intellectual Property is licensed pursuant to valid written agreements (the "License Agreements"), enforceable in accordance with their terms, except as may be limited by bankruptcy, insolvency, moratorium or other similar laws affecting or relating to the enforcement of creditors' rights generally and by general principles of equity. There is no pending or, to the Seller's Knowledge, threatened claim that the Company, any Subsidiary or any licensor is in breach of any of the License Agreements and, to the Seller's Knowledge, no basis for any such claim exists. There is no pending or, to the Seller's Knowledge, threatened claim against the Company, any Subsidiary or the licensor of any Licensed Intellectual Property asserting that any of the Licensed Intellectual Property infringes or conflicts with the rights of third parties, or that the present, past or contemplated future conduct of the business of the Company and its Subsidiaries infringes or violates the rights of third parties, and to the Seller's Knowledge, no basis for any such claim exists. 3.19. Insurance The Company and each Subsidiary currently maintains insurance in amounts reasonably necessary for its operations. Such policies (i) are valid and enforceable in accordance with their terms with financially sound and reputable insurance companies and are in full force and effect, (ii) are sufficient for compliance with all requirements of law and all agreements to which the - 18 - Company or any Subsidiary is a party or is subject, and (iii) provide insurance coverage of the Properties, operations and employees of the Company and its Subsidiaries generally comparable in type and amount to that which is customarily carried by other corporations engaged in similar businesses. Neither the Company nor any Subsidiary has received any notice of a premium increase or cancellation with respect to any of its insurance policies or bonds, and within the last three years, neither the Company nor any Subsidiary has been refused any insurance coverage sought or applied for. The Company and the Subsidiaries have no reason to believe that existing insurance coverage cannot be renewed as and when the same shall expire, upon terms and conditions as favorable as those presently in effect, other than possible increases in premiums or unavailability in coverage that have not resulted from any extraordinary loss experience of the Company or any Subsidiary. ARTICLE 4. REPRESENTATIONS AND WARRANTIES OF BUYERS Except as Previously Disclosed, each Buyer hereby severally represents and warrants (but only with respect to the representations and warranties in this Article applicable to him, her or it) to Seller as follows: 4.1. Organization, Standing and Authority of Thayer Thayer is duly organized, validly existing and in good standing under the laws of Delaware. Thayer (i) has all requisite partnership power and authority to carry on its business as now conducted or proposed to be conducted and (ii) is duly licensed or qualified to do business in all jurisdictions of the United States and foreign jurisdictions where its ownership or leasing of property or the conduct of its business requires such licensing or qualification, except where the failure to be so licensed or qualified would not have a Material Adverse Effect on Thayer. 4.2. Authorized and Effective Agreement (a) Each of the Managers has the legal capacity to enter into and perform all of his or her obligations under this Agreement and the Related Agreements to which he or she is a party. Upon execution and delivery by each Manager of this Agreement and each of the Related Agreements to which such Manager is a party, assuming the accuracy of the representations contained in - 19 - Section 3.4(b) hereof, the Agreement and each such Related Agreement shall constitute the legal, valid and binding obligations of such Manager, enforceable against him or her in accordance with their respective terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, moratorium, reorganization, bulk sales, or similar laws from time to time in effect which affect the enforcement of creditors' rights generally and by general equity principles. (b) Thayer has all requisite partnership power and authority to enter into and perform all of its obligations under this Agreement. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by all necessary partnership action in respect thereof on the part of Thayer. This Agreement, when executed and delivered by Thayer, shall be executed and delivered by a duly authorized agent of Thayer. (c) Assuming the accuracy of the representations contained in Sections 3.4(b) hereof, this Agreement constitutes a legal, valid and binding obligation of Thayer, enforceable against it in accordance with the terms thereof, except as such enforceability may be limited by applicable bankruptcy, insolvency, moratorium, reorganization, bulk sales, or similar laws from time to time in effect which affect the enforcement of creditors' rights generally and by general equity principles. (d) Neither the execution and delivery of this Agreement nor consummation of the transactions contemplated hereby, nor compliance by Thayer with any of the provisions hereof, shall (i) conflict with or result in a breach of Thayer's charter documents, (ii) constitute or result in a breach of any term, condition or provision of, or constitute a default under, or give rise to any right of termination, cancellation or acceleration with respect to, or result in the creation of any Encumbrance upon any property or asset of Thayer pursuant to, any note, bond, mortgage, indenture, license, lease, contract, agreement or other instrument or obligation, or (iii) violate any order, writ, injunction, decree, statute, rule or regulation applicable to Thayer, except (in the case of clauses (ii) and (iii) above) for such violations, rights, breaches, Encumbrances or defaults which, either individually or in the aggregate, will not have a Material Adverse Effect on Thayer. (e) No consent, approval or authorization of, or declaration, notice, filing or registration with, any - 20 - Governmental Entity or any other Person, is required to be made or obtained by Thayer in connection with the execution, delivery and performance of this Agreement or the consummation of the transactions contemplated hereby, other than (i) any applicable filings under federal or state securities laws or state anti-takeover laws and (ii) filings required pursuant to the HSR Act. 4.3. Brokers and Finders Thayer has not employed any broker, finder or financial advisor or incurred any Liability for any brokerage or finders fees or commissions in connection with the transactions contemplated in this Agreement or the Related Agreements, other than payments made or to be made to MLC Group, Inc. 4.4. Access; Sophistication Seller has provided to each Buyer copies of the Financial Statements and each Buyer has reviewed such documents. Each Buyer acknowledges that all documents, books and records requested by such Buyer pertaining to the Company or the Shares have been made available for inspection by such Buyer and his, her or its agents and representatives; that such Buyer and his, her or its agents and representatives have had a reasonable opportunity to ask questions of and receive answers from Seller, the Company or officers or employees acting on behalf of the Company and Seller, concerning the terms and conditions of the offering of the Shares and the business and prospects of the Company. Each Buyer is an "accredited investor," as such term is defined in Rule 501 under the Securities Act. Each Buyer and his, her or its respective agents and representatives have such knowledge and experience in financial and business matters as to enable them to utilize the information made available to them in connection with the transactions contemplated hereby, to evaluate the merits and risks of an investment in the Shares and to make an informed decision with respect thereto, and such an evaluation and informed decision have been made. The questionnaires Previously Disclosed to Seller relating to each of the Managers are accurate and complete in all material respects. 4.5. Investment Representation Each Buyer is acquiring the Shares to be received by such Buyer at the Closing for such person's own account for investment only and not with a view to - 21 - making a distribution thereof within the meaning of the Securities Act. Each Buyer agrees not to sell or transfer such Shares, except in accordance with the terms of the legend set forth below. Each Buyer is aware that the Shares have not been registered under the Securities Act or any state or other jurisdiction's securities laws, and that the Shares must be held indefinitely unless subsequently registered or an exemption from such registration is available. Each Buyer acknowledges that investment in the Shares involves substantial risks, including the risk of total loss of his, her or its investment in the Shares. Each Buyer represents that he, she or it (i) is able to hold the Shares for an indefinite period of time; (ii) has adequate means, other than the Shares or funds invested therein, of providing for his, her or its current and foreseeable needs; (iii) has no foreseeable need to sell or otherwise dispose of any of the Shares; and (iv) has sufficient net worth to sustain a loss of his, her or its entire investment in the Shares in the event such loss should occur. Each Manager is a bona fide resident of Virginia, Maryland, or the District of Columbia and has no present intention of changing his or her residence. Each Buyer understands and agrees that the certificate or certificates representing the Shares to be received by such Buyer will bear a legend substantially to the effect set forth below and that a stop transfer order may be placed with respect thereto. THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE SECURITIES LAW OF ANY JURISDICTION AND MAY NOT BE TRANSFERRED UNTIL (A) A REGISTRATION STATEMENT UNDER SUCH SECURITIES ACT AND SUCH APPLICABLE SECURITIES LAWS SHALL HAVE BECOME EFFECTIVE WITH REGARD THERETO OR (B) IN THE OPINION OF COUNSEL REASONABLY ACCEPTABLE TO THE COMPANY, REGISTRATION UNDER SUCH SECURITIES ACT AND SUCH APPLICABLE SECURITIES LAWS IS NOT REQUIRED IN CONNECTION WITH SUCH PROPOSED TRANSFER. - 22 - ARTICLE 5. COVENANTS 5.1. Conduct of the Company's Business (a) Prior to the earlier of termination of this Agreement or the Closing Date, and except as otherwise provided for by this Agreement or as consented to or approved by Thayer in writing, Seller and the Company shall cause the Company and each Subsidiary to, use its best efforts to preserve its Properties, business and relationships with customers, employees, suppliers, licensors, licensees, advertisers, distributors and other Persons. (b) Prior to the earlier of termination of this Agreement or the Closing Date, Seller and the Company shall cause the Company and each Subsidiary only to carry on its business in the usual, regular and ordinary course in substantially the same manner as heretofore conducted. Prior to the earlier of termination of this Agreement or the Closing Date, Seller and the Company shall not permit the Company Or any of the Subsidiaries to, except with the prior written consent of Thayer or except as expressly contemplated or permitted by this Agreement: (i) declare, set aside, make or pay any dividend or other distribution in respect of its capital stock; (ii) issue any shares of its capital stock or permit any treasury shares to become outstanding; (iii) enter into any swap, hedge or other similar off-balance sheet transaction; (iv) incur any additional debt obligation or other obligation for borrowed money or guarantee any indebtedness of another Person; (v) fail to comply with any of the representations, warranties, covenants, conditions or other terms of any existing obligation for borrowed money; (vi) make any loans, advances or capital contributions to, or investments in, any other Person, other than to any of the Subsidiaries; (vii) issue, grant or authorize any Rights or effect any recapitalization, reclassification, stock - 23 - dividend, stock split or like change in capitalization, or redeem, repurchase or otherwise acquire any shares of its capital stock; (viii) amend its certificate of incorporation or bylaws (or similar charter documents); impose, or suffer the imposition, on any share of its capital stock or stock held by it, of any Encumbrance, or permit any such Encumbrance to exist; (ix) merge with any other Person, permit any other Person to merge into it, consolidate with any other Person, acquire control over any Person, or create any subsidiary; (x) waive, transfer or release any material right, modify or change in any material respect any material agreement, or cancel, settle or compromise any material debt, claim or litigation; (xi) enter into any material contract, agreement or other arrangement that is not terminable at will, with less than 30 days notice, without payment or penalty, except in the ordinary course of business consistent with past practice; (xii) liquidate, sell, license, mortgage, lease or otherwise encumber or dispose of any material assets, except sales of inventory in the ordinary course of business; or acquire any material assets; (xiii) increase the rate of compensation of, pay or agree to pay any bonus to, or provide any other employee benefit or incentive to, any of its directors, officers or employees, except as Previously Disclosed; enter into or modify any employment or severance contract; or enter into or substantially modify (except as may be required by applicable law) any pension, retirement, stock option, stock purchase, stock appreciation right, savings, profit sharing, deferred compensation, consulting, bonus, group insurance or other employee benefit, incentive or welfare contract, plan or arrangement, or any trust agreement related thereto; (xiv) change its methods of accounting in effect at December 31, 1996, except as required by changes in U.S. generally accepted accounting principles concurred in by its independent certified public accountants, or change any of its methods of reporting income and deductions for U.S. federal income tax purposes from those employed in the preparation of its federal income tax - 24 - returns for the year ended December 31, 1995, except as required by law; or (xv) agree to do any of the matters specified in clauses (i) through (xiv) of this Section 5.1(b). 5.2. Other Offers. Neither Seller nor the Company shall solicit or encourage inquiries or proposals with respect to, furnish any information relating to, participate in any negotiations or discussions concerning, or enter into any transaction involving, (i) any acquisition or purchase of all or a substantial portion of the assets of, or a substantial equity interest in, the Company or any Subsidiary, or (ii) any business combination with the Company or any Subsidiary, except as contemplated in this Agreement. Each of Seller and the Company will instruct its officers, directors, agents, subsidiaries and other affiliates to refrain from doing any of the above. Seller and the Company will notify Thayer if any such inquiries or proposals are received by, any such information is received from, or any such negotiations or discussions are sought to be initiated with Seller, the Company or any of the other persons or entities referred to above. Seller and the Company will promptly inform Thayer in writing of all of the relevant details with respect to the foregoing. Each of Seller and the Company acknowledges and agrees that any remedy at law for breach of the foregoing covenant will be inadequate, and in addition to any other relief which may be available, Buyers will be entitled to temporary and permanent injunctive relief without the necessity of proving actual damages and without regard to the adequacy of any remedy at law. 5.3. Buyer's Access Following the execution and delivery of this Agreement, and prior to the Closing, Seller and the Company will (a) continue to provide to Buyers and their authorized representatives reasonable access during normal business hours to the Company's books, records and Properties, (b) make reasonably available to Buyers and their authorized representatives, during normal business hours and at their normal places of work, additional personnel of the Company having knowledge of any matters to be investigated by Buyers and (c) furnish to Buyers promptly upon request such generally available financial and operating data and other information relating to the Company's business and Properties as Buyers or their - 25 - authorized representatives may reasonably request. Buyers shall conduct their investigations in such a manner as to minimize any disruption of the Company's normal business operations. 5.4. Compliance The Parties covenant and agree that between the date hereof and the Closing, none of them shall take any action that would cause their representations and warranties made herein not to be true and correct, in all material respects, as of such Closing. Seller and the Company shall promptly inform Thayer in writing of (i) any matter that has caused the representations and warranties of Seller to become untrue or incorrect in any material respect or (ii) any materially adverse change in the Company's financial condition, results of operations, business or prospects since December 31, 1996. Each Buyer shall promptly inform Seller and the Company in writing of any matter that has caused the representations and warranties of such Buyer to become untrue or incorrect in any material respect. 5.5. Best Efforts Subject to the terms and conditions of this Agreement, each Party shall use its reasonable best efforts and shall cooperate with the other Parties as promptly as practicable to take, or cause to be taken, all actions, and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations or otherwise to consummate, as soon as practicable, the transactions contemplated hereby and by the Related Agreements. Seller and the Company shall use all reasonable efforts to secure approvals and consents of any Person necessary to the consummation of the transactions contemplated by this Agreement and by the Related Agreements and to obtain any consent or approval required for the continued effectiveness after the Closing of any contract, agreement or customer relationship to which the Company or any Subsidiary is a party. 5.6. Right of First Refusal (a) Before any Common Stock shares (or securities convertible into or exercisable or exchangeable for such shares) owned or controlled by Seller ("Seller Shares") may be sold or otherwise disposed or transferred (collectively, "Transferred"), Thayer and the Company shall be offered the following rights with respect to such shares: - 26 - (i) Seller shall first deliver a written notice (a "Seller Notice") to Thayer and the Company stating (i) the number of Seller Shares that Seller proposes to Transfer and (ii) the price and other material terms of the proposed Transfer. The Seller Notice shall be accompanied by a certificate of the Seller certifying that it has received from a third party (the "Third Party") a bona fide offer to acquire such Seller Shares at such price and on such terms as are set forth in the Seller Notice and shall identify such Third Party. (ii) Within thirty (30) days after receipt of a Seller Notice (the "Company Period"), the Company may elect, by delivering to Seller and Thayer a written notice of its election, to purchase all or any part of the Seller Shares to which the Seller Notice refers, on the same terms and conditions specified in such notice. In the event that the Company does not elect to purchase any of such shares, the Company shall send a notice to such effect to Seller and Thayer prior to the end of the Company Period. (iii) In the event that the Company does not elect during the Company Period to purchase all of the Seller Shares to which the Seller Notice refers, then Thayer may elect, by delivering to Seller a written notice (a "Thayer Notice") of its election, within forty-five (45) days after receipt of the Seller Notice (the "Thayer Period"), to acquire on the same terms and conditions specified in the Seller Notice, any of the Seller Shares to which the Seller Notice refers that are not acquired by the Company. (iv) In the event that the Company and/or Thayer elects to acquire Seller Shares pursuant to this Section 5.7, the Company, Thayer and Seller shall consummate the sale and purchase of such shares within ninety (90) days after the date that the Company and Thayer have received the Seller Notice. (v) To the extent the Company and Thayer do not exercise their respective rights under this Section 5.7 within the specified time periods, Seller may Transfer the Seller Shares specified in the Seller Notice (and not purchased by the Company or Thayer) to the Third Party specified in such Seller Notice at the price and on the terms specified in such notice, provided that (i) such Transfer is consummated within one hundred twenty (120) days of the date of delivery of such Seller Notice and (ii) prior to the Transfer, such Third Party agrees in - 27 - writing, in a form satisfactory to the Company and Thayer and as a condition of the Transfer, that such Third Party shall receive and hold such shares subject to the rights of first refusal of the Company and Thayer set forth in this section. (b) Seller agrees that all certificates representing shares of Common Stock owned or controlled by Seller will contain the following legend: THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE RESTRICTED AS TO TRANSFER IN ACCORDANCE WITH AN AGREEMENT DATED AS OF MARCH 18, 1997 AMONG SOFTWARE AG, SOFTWARE AG SYSTEMS, INC. (THE "COMPANY"), THAYER EQUITY INVESTORS, III, L.P., AND CERTAIN MANAGERS OF THE COMPANY, A COPY OF WHICH MAY BE OBTAINED FROM THE COMPANY. (c) The rights and obligations set forth in this Section 5.7 shall terminate upon consummation of an underwritten public offering of Common Stock pursuant to an effective registration statement under the Securities Act that is underwritten by one or more nationally-recognized investment banking firms. ARTICLE 6. INDEMNIFICATION 6.1. Indemnification by Seller Subject to the limitations set forth in Sections 6.4 and 6.5 hereof, Seller hereby indemnifies and holds harmless Buyers and their respective affiliates, directors, officers, employees and agents from and against any and all Damages (other than consequential and punitive damages that do not result from third party Claims) arising out of, based upon or with respect to: (i) any breach of any representation or warranty made by Seller in this Agreement or the Related Agreements or any material misrepresentation in or omission from any certificate, schedule, exhibit or other document delivered to Buyers pursuant to this Agreement or the Related Agreements; or (ii) any failure, on the part of the Company prior to the Closing and on the part of - 28 - Seller at any time, to perform any material covenant, agreement or undertaking contained in this Agreement or the Related Agreements. 6.2. Indemnification By Buyers Subject to the limitations set forth in Sections 6.4 and 6.5 hereof, Buyers hereby jointly and severally indemnify and hold harmless Seller and each of its affiliates, directors, officers, employees and agents from and against any and all Damages (other than consequential and punitive damages that do not result from third party Claims) arising out of, based upon or with respect to: (i) any breach of any representation or warranty made by Buyers in this Agreement or the Related Agreements or any material misrepresentation in or omission from any certificate, schedule, exhibit or other document delivered to Seller pursuant to this Agreement or the Related Agreements; or (ii) any failure of Buyers to perform any material covenant, agreement or undertaking of Buyers contained in this Agreement or the Related Agreements. 6.3. Indemnification Procedures (a) Promptly after the occurrence of any event or the discovery of any facts which could give rise to a right to indemnification under this Article 6, the person who may be entitled to indemnification (the "Indemnified Person") shall promptly give notice to the Party required to indemnify the Indemnified Person (the "Indemnitor"), in writing, describing in reasonable detail the facts and circumstances giving rise to the claim for indemnification, the Damages suffered or incurred, including the amount of such Damages, if known, or as estimated, and the provisions of this Agreement relating to such claim for indemnification. The failure of an Indemnified Person to give prompt notice in the manner provided herein shall not relieve the Indemnitor of its obligations under this Article 6, except to the extent that the Indemnitor is actually prejudiced by such failure to give prompt notice. Upon receipt of a notice of a claim for indemnification, the Indemnitor shall promptly pay to the Indemnified Person the amount of such Damages in accordance with and subject to the provisions of this Article 6; provided, however, that no such payment shall - 29 - be due during any period in which the Indemnitor is contesting in good faith either its obligation to make such indemnification or the amount of Damages payable. (b) If any Claim is instituted by a third party with respect to which an Indemnified Person intends to, or may be entitled to, claim a right to indemnification under this Article 6, the Indemnified Person shall promptly notify the Indemnitor of such Claim. The failure of an Indemnified Person to give notice in the manner provided herein shall not relieve the Indemnitor of its obligations under this Article 6, except to the extent that the Indemnitor is actually prejudiced by such failure to give notice. The Indemnitor shall have the right to control, at its expense and through counsel of its choosing, the defense of any such third party Claim, but may compromise or settle the same only with the consent of the Indemnified Person, which consent shall not be unreasonably withheld. The Indemnified Person shall cooperate fully with the Indemnitor and its counsel in the defense of any such third party Claim and shall make available to the Indemnitor any books, records or other documents within its control that are necessary or appropriate for such defense. After providing notice of its intent to exercise its right to control such defense, the Indemnitor shall not be responsible for any legal or other expenses subsequently incurred by the Indemnified Person in connection therewith; provided, however, that an Indemnified Person shall have the right to control its defense of any such third party Claim and retain its own counsel, with the reasonable fees and expenses to be paid by the Indemnitor, if such Indemnitor shall have consented to such retention of counsel or the Indemnified Party shall have reasonably concluded that representation of such Indemnified Person by the counsel retained by the Indemnitor would be inappropriate due to actual or potential differing interests between such Indemnified Person and any other party represented by such counsel in such proceeding. (c) At no time may an Indemnitor assert as a defense to its obligation to provide indemnification as set forth in this Article 6 that, prior to the Closing, the Indemnified Person or any of its employees, agents or affiliates had any knowledge of the matter to which the claim for indemnification relates, or conducted any investigation relating thereto, and each Party hereby irrevocably waives all such defenses. - 30 - 6.4. Limitations on Recoveries Notwithstanding anything to the contrary contained herein, no indemnification claim under this Article 6 shall be (i) enforced against any Indemnitor to the extent any insurance proceeds or other recoveries actually are received by the Indemnified Person with respect to any Damages otherwise payable by the Indemnitor or (ii) valid against an Indemnitor unless a written notice pursuant to Section 6.3 of this Agreement (a "Claims Notice") has been delivered to such Indemnitor with respect to such claim. 6.5. Remedies for Damages The right to indemnification under this Article 6 constitutes an Indemnified Person's sole remedy for damages with respect to the breach of any representation or warranty contained in this Agreement. In circumstances where Seller is the Indemnitor, an Indemnified Person shall have the right to seek indemnification under this Article either (i) directly from Seller or (ii) indirectly from Seller by causing the Company to (x) pay such indemnification claim and (y) make a corresponding deduction in the amount payable or to be paid by the Company to Seller pursuant to the Cooperation Agreement. In circumstances where the Seller is the Indemnitor, the Indemnified Person shall specify in its Claims Notice the indemnification source from which the Indemnified Person intends to recover. ARTICLE 7. CLOSING; CONDITIONS 7.1. Closing The transactions contemplated by this Agreement shall be consummated at a Closing to be held at the offices of Arnold & Porter, 555 Twelfth Street, N.W., Washington, D.C. 20004 or at such other place as Seller and Thayer shall agree, at the close of business on the first business day following satisfaction of the conditions set forth in Sections 7.2 and 7.3 hereof or such later date within 14 days thereafter as shall be specified by Thayer. All actions taken at the Closing shall be deemed to occur simultaneously, and no document shall be deemed to be delivered until all documents are delivered. Unless otherwise indicated, each document delivered at the Closing shall be dated as of the date of the Closing. - 31 - 7.2. Conditions to the Obligations of Buyers The obligations of Buyers under this Agreement are subject to the satisfaction at or prior to Closing of the following conditions, but compliance with any such conditions may be waived by Thayer: (a) The representations and warranties of Seller contained in this Agreement shall be true and correct, in all material respects, at and as of the Closing, and Seller and the Company shall have performed and complied with all the covenants and agreements and satisfied all the conditions, in all material respects, required by this Agreement to be performed or complied with or satisfied by Seller and the Company at or prior to the Closing. Thayer shall have received a certificate signed by Dr. Erwin Koenigs and Daniel Gillis stating that, to the best of their knowledge, the conditions specified in this Section 7.2(a) have been satisfied. (b) No order, judgment or decree shall have been issued restraining or prohibiting the consummation of the transactions contemplated by this Agreement or any of the Related Agreements. No inquiry, action or proceeding which, in the opinion of Thayer, is material shall have been instituted to restrain or prohibit the consummation of the transactions contemplated by this Agreement or any of the Related Agreements, or to challenge the validity of such transactions or any part thereof, or seeking damages on account or as a result thereof. (c) There shall have been no material adverse change in the financial condition, results of operations, business or prospects of the Company since December 31, 1996. (d) All required consents and approvals shall have been obtained, all other requirements prescribed by law which are necessary to the consummation of the transactions contemplated hereby or by any Related Agreement shall have been satisfied, and all statutory waiting periods in respect thereof shall have expired or been terminated. (e) Buyers shall have received one or more opinions from counsel to Seller and the Company, in form and substance reasonably satisfactory to Thayer addressing the matters set forth in Exhibit F hereto. (f) Seller and SAGA shall have executed and delivered the Cooperation Agreement. - 32 - (g) The Company shall have received the resignations of (i) all of the directors of the Company, other than Dr. Erwin Koenigs and Daniel Gillis, (ii) all of the officers of the Company, other than Daniel Gillis, and (iii) all of the directors of SAGA, other than Daniel Gillis, in each case effective as of the Closing. (h) Seller shall have executed and delivered to the Company and Thayer the Release. (i) Seller and the Company shall have executed and delivered to Thayer the Tax Matters Agreement. (j) The Products and Research and Development Operations Transfer Agreement dated as of December 5, 1993 between Seller and SAGA shall have been amended in a manner satisfactory to Thayer. (k) Buyers shall have received from Seller and the Company such other documents confirming the accuracy and completeness of the representations and warranties of Seller as Buyers may reasonably request. 7.3. Conditions to the Obligations of Seller The obligations of Seller under this Agreement are subject to the satisfaction at or prior to Closing of the following conditions, but compliance with any such conditions may be waived by Seller: (a) The representations and warranties of Buyers contained in this Agreement shall be true and correct, in all material respects, at and as of the Closing, and Buyers shall have performed and complied with all the covenants and agreements and satisfied all the conditions, in all material respects, required by this Agreement to be performed or complied with or satisfied by Buyers at or prior to the Closing. (b) No order, judgment or decree shall have been issued restraining or prohibiting the consummation of the transactions contemplated by this Agreement or any of the Related Agreements . (c) All required consents and approvals shall have been obtained, all other requirements prescribed by law which are necessary to the consummation of the transactions contemplated hereby or by any Related Agreement shall have been satisfied, and all statutory - 33 - waiting periods in respect thereof shall have expired or been terminated. (d) Seller shall have received from Buyers such other documents confirming the accuracy and completeness of the representations and warranties of Buyers as Seller may reasonably request. ARTICLE 8. TERMINATION 8.1. Termination This Agreement may be terminated and the transactions contemplated hereby abandoned at any time prior to the Closing Date, only as follows: (a) By the mutual consent in writing of Seller and Thayer; (b) By Thayer in writing, if Seller or the Company has, or by Seller in writing, if any Buyer has, in any material respect, breached (i) any covenant or agreement contained herein or (ii) any representation or warranty contained herein, and in either case if such breach has not been cured by the earlier of 15 business days after the date on which written notice of such breach is given to the Party committing such breach or the Closing Date; (c) By any party hereto in writing, if the Closing Date has not occurred by the close of business on May 1, 1997, unless the failure of the Closing to occur by such date shall be due to the failure of the Party seeking to terminate this Agreement to perform or observe the covenants and agreements set forth herein; or (d) By Seller or Thayer in writing, if any Governmental Entity of competent jurisdiction shall have issued a final non-appealable order enjoining or otherwise prohibiting the transactions contemplated hereby. 8.2. Effect of Termination In the event this Agreement is terminated pursuant to Section 8.1 hereof, this Agreement shall become void and have no effect, provided, however, that nothing herein shall relieve any Party from liability for the breach of any representations or warranties or the breach of, or failure to perform, any covenant made by it herein. - 34 - ARTICLE 9. MISCELLANEOUS 9.1. Survival of Representations and Warranties The representations, warranties and covenants contained in this Agreement shall survive the Closing and any and all investigations and inquiries by the Parties made prior to the Closing Date in connection with this Agreement and the transactions contemplated hereby. The representations, warranties, covenants and agreements of the Parties contained in this Agreement and the Related Agreements shall not be affected by or diminished in any way by any investigation (or failure to investigate) made at any time by or on behalf of the Party for whose benefit such representations, warranties, covenants and agreements were made. 9.2. Amendment This Agreement may be amended or supplemented at any time by the mutual agreement in writing of Seller, the Company and Thayer. Seller and the Company agree to approve, execute and deliver any amendment to this Agreement and any additional plans and agreements requested by Thayer to modify the structure of, or to substitute parties to, the transactions contemplated hereby; provided, however, that no such change shall (i) alter or change the amount or kind of consideration to be delivered to the Seller in connection with the transactions contemplated hereby, or (ii) materially impede or delay the consummation of the transactions contemplated by this Agreement. Notwithstanding anything to the contrary herein, Thayer shall have the right, at any time prior to the Closing, to modify or amend Exhibit A hereto without the consent of any other party hereto, provided that (x) Thayer shall provide notice of any such amendment or modification to all the other parties hereto and (y) no such amendment or modification shall increase the Equity Contribution of any Manager without such Manager's consent. 9.3. No Waiver of Rights No failure or delay on the part of any Party in the exercise of any power or right hereunder shall operate as a waiver thereof. No single or partial exercise of any right or power hereunder shall operate as a waiver of such right or of any other right or power. The waiver by any Party of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any other or - 35 - subsequent breach hereunder. Except as otherwise expressly provided herein, all rights and remedies existing under this Agreement are cumulative with, and not exclusive of, any rights or remedies otherwise available. 9.4. Expenses Each Party hereto shall bear and pay all costs and expenses incurred by it in connection with the transactions contemplated in this Agreement, including fees and expenses of its own financial consultants, accountants and counsel. 9.5. Entire Agreement; Successors; Third Parties This Agreement and the Related Agreements contain the entire agreement between the Parties with respect to the transactions contemplated hereunder and thereunder and supersede all prior arrangements or understandings with respect thereto, written or oral, other than documents referred to herein or therein. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the Parties hereto and their respective successors and permitted assigns. Except as specifically set forth herein or in any Related Agreement, nothing in this Agreement or any Related Agreement, expressed or implied, is intended to confer upon any party, other than the parties hereto and thereto, and their respective successors and permitted assigns, any rights, remedies, obligations or liabilities. 9.6. No Assignment No Party hereto may assign any of its rights or obligations under this Agreement to any other Person, except that Thayer may assign its rights and/or obligations to an affiliate of Thayer. 9.7. Notices All notices or other communications which are required or permitted hereunder shall be in writing and sufficient if delivered personally, by facsimile or sent by overnight express or by registered or certified mail, postage prepaid, addressed as follows: - 36 - If to Seller to: Software AG Uhlandstrasse 12, D-64297 Darmstadt, Germany Attention: Dr. Erwin Koenigs Facsimile: 49-6151-921868 with a required copy to: Software AG Uhlandstrasse 12, D-64297 Darmstadt, Germany Attention: Christine Schwab Facsimile: 49-6151-921600 If to the Company: Software AG Systems, Inc. 11190 Sunrise Valley Drive Reston, VA 20191 Attention: Harry Mccreery Facsimile: 703-391-6504 If to Thayer: Thayer Equity Investors, III, L.P. 1455 Pennsylvania Avenue, N.W. Washington, D.C. 20004 Attention: Robert E. Michalik Facsimile: (202) 371-0391 With a required copy to: Arnold & Porter 555 Twelfth Street, N.W. Washington, D.C. 20004 Attention: Robert B. Ott, Esq. Facsimile: (202) 942-5999 If to any of the Managers, to the address set forth beneath the signature of such Manager on the signature page hereof. All such deliveries shall be deemed effective when received by the Persons entitled to such receipt or when delivery has been attempted but refused by such Person or Persons. Any Party may change the Persons or addresses to which such deliveries shall be made with respect to such Party by delivering notice thereof to the other Parties hereto in accordance with this Section 9.7. - 37 - 9.8. Captions The captions contained in this Agreement are for reference purposes only and are not part of any such agreement. 9.9. Counterparts This Agreement may be executed in any number of counterparts, and each such counterpart shall be deemed to be an original instrument, but all such counterparts together shall constitute but one agreement. 9.10. Governing Law and Venue The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the Commonwealth of Virginia applicable to agreements made and entirely to be performed within such jurisdiction. The Party bringing any action under this Agreement shall only be entitled to choose the federal or state courts in the Commonwealth of Virginia as the venue for such action, and each Party consents to the jurisdiction of the court chosen in such manner for such action. 9.11. Severability The provisions of this Agreement are severable, and the unenforceability of any provision of this Agreement shall not affect the enforceability of the remainder of this Agreement. The parties acknowledge that it is their intention that if any provision of this Agreement is determined by a court to be invalid, illegal or unenforceable as drafted, that provision should be construed in a manner designed to effectuate the purpose of that provision to the greatest extent possible under applicable law. 9.12. Specific Performance The rights of the Parties under this Agreement and the Related Agreements are unique and the failure of a Party to perform its obligations hereunder or thereunder would irreparably harm the other Parties hereto. Accordingly, the Parties shall, in addition to such other remedies as may be available at law or in equity, have the right to enforce their rights hereunder by actions for specific performance to the extent permitted by law. - 38 - 9.13. Further Assurances Subject to the terms and conditions herein provided, each of the Parties hereto shall use reasonable efforts to take, or cause to be taken, such action, to execute and deliver, or cause to be executed and delivered, such additional documents and instruments and to do, or cause to be done, all things necessary, proper or advisable under the provisions of this Agreement and the Related Agreements and under applicable law to consummate and make effective the transactions contemplated by this Agreement and the Related Agreements. 9.14. Publicity Any general notices, releases, statements or communications to employees, suppliers, distributors, licensees or customers of the Company or Seller, or to the general public or the press, relating to the purchase price of either the Shares or the Repurchase Shares pursuant to this Agreement, shall be made only at such times and in such manner as may be mutually agreed upon by Seller and Thayer. - 39 - IN WITNESS WHEREOF, the Parties hereto, intending to be legally bound hereby, have caused this Agreement to be executed as of the day and year first above written. SOFTWARE AG By: ---------------------------------- Dr. Erwin Koenigs Chairman of the Board and By: ---------------------------------- Volker Dawedeit Board Member SOFTWARE AG SYSTEMS, INC. By: ---------------------------------- Dr. Erwin Koenigs President THAYER EQUITY INVESTORS, III, L.P. By: TC Equity Partners, L.L.C., its General Partner By: /s/ Rick Rickertsen ------------------------------ Rick Rickertsen Member - 40 - MANAGERS: /s/ Daniel Gillis ----------------------------------- Daniel Gillis 9513 Fox Hollow Drive Potomac, MD 20854 Facsimile: (703) 391-6782 /s/ Harry McCreery ----------------------------------- Harry McCreery 10727 Midsummer Drive Reston, VA 20191 Facsimile: (703) 391-6504 /s/ James Daly ----------------------------------- James Daly 2606 Barnside Ct. Herndon, VA 20171 Facsimile: (7O3) 391-6980 /s/ Derek Brigden ----------------------------------- Derek Brigden 11317 Bright Pond Lane Reston, VA 20194 Facsimile: (703) 391-6504 /s/ Gary Hayes ----------------------------------- Gary Hayes 7924 Longridge Ct. Cabin John, MD 20818 Facsimile: (7O3) 391-8111 /s/ Thomas Gorley ----------------------------------- Thomas Gorley 12801 Cross Creek Lane Oak Hill, VA 20171 Facsimile: (703) 391-6760 - 39 - IN WITNESS WHEREOF, the Parties hereto, intending to be legally bound hereby, have caused this Agreement to be executed as of the day and year first above written. SOFTWARE AG By: /s/ Dr. Erwin Koenigs ------------------------------- Dr. Erwin Koenigs Chairman of the Board and By: /s/ Volker Dawedeit ------------------------------- Volker Dawedeit Board Member SOFTWARE AG SYSTEMS, INC. By: /s/ Dr. Erwin Koenigs ------------------------------- Dr. Erwin Koenigs President THAYER EQUITY INVESTORS, III, L.P. By: TC Equity Partners, L.L.C., its General Partner By: --------------------------- Rick Rickertsen AMENDED EXHIBIT A Equity Contribution Buyers ($) - ----------------------------------- ------------ Thayer Equity Investors III, L.P. 30,392,662.86 Managers Daniel Gillis 299,908.98 Harry McCreery 299,908.98 Gary Hayes 124,894.71 James Daly 159,655.05 Derek Brigden 99,834.93 Thomas Gorley 149,954.49 ---------- Total Equity Contributions: 31,526,820.00 EX-10.3 3 SHARE PURCHASE AGREEMENT EXHIBIT 10.3 SHARE PURCHASE AGREEMENT THIS AGREEMENT is entered into this 26/th/ day of September, 1997, among Software AG Americas, Inc., a corporation incorporated under the laws of the Commonwealth of Virginia (the "Guarantor"), Software AG Systems (Canada) Inc., a corporation incorporated under the Business Corporations Act (Ontario) (the "Buyer"), Robert D. Nickel and Joyce Nickel, of the Township of Puslinch in the Province of Ontario (collectively, the "Principals"), and Caelum Investments Inc., a corporation incorporated under the Business Corporations Act (Ontario) (the "Seller"); WITNESSETH: WHEREAS the Seller is the holder of all of the issued and outstanding securities in the capital of R.D. Nickel & Associates Incorporated, a corporation amalgamated under the Business Corporations Act (Ontario) (as hereinafter further defined, the "Corporation"); AND WHEREAS the Corporation is the successor corporation resulting from the amalgamation effective September 26, 1997 of R. D. Nickel & Associates Incorporated (the "Predecessor Corporation") and its wholly-owned subsidiary R.D. Nickel & Associates International Inc. (the "Subsidiary"); AND WHEREAS the Corporation continues to carry on the software and information services businesses formerly carried on by the Predecessor Corporation and the Subsidiary (the "Software Business") comprised of the marketing, distribution, licensing, maintenance, and support of certain of the systems and applications computer programs described in the Disclosure Schedule attached hereto (the "Distributed Software Programs") and the acquisition, development, marketing, distribution, licensing, maintenance and support of certain of the systems and applications computer programs described in the Disclosure Schedule attached hereto (the "Owned Software Programs") (the Distributed Software Programs and the Owned Software Programs being referred to collectively herein as the "Software Programs"); AND WHEREAS the Seller desires to sell to the Buyer, and the Buyer desires to buy from the Seller, the Purchased Securities (as hereinafter defined) being all of the issued and outstanding securities in the capital of the Corporation (other than the Special Share, as hereinafter defined, to be redeemed prior to the Closing Date) thereby acquiring ownership of the Software Business, all upon the terms and conditions set forth herein; AND WHEREAS the Guarantor is the registered and beneficial owner of all of the issued and outstanding securities of the Buyer, and the Principals are the registered and beneficial owners of all of the securities of the Seller; NOW, THEREFORE, in consideration of the mutual representations, warranties, covenants, and agreements of the Parties hereinafter set forth, the Parties, intending to be legally bound, do hereby agree as follows: --2-- ARTICLE I INTERPRETATION 1.01 Defined Terms. As used in this Agreement, the following terms have the following meanings: "AG Security Agreement" means the general security agreement of the Buyer in favour of the Seller securing the payment and performance by the Buyer of its obligations under the Note and the Other Obligations to be entered into on the Closing Date substantially in the form of the agreement attached hereto as Exhibit "1"; "Agreement" means this share purchase agreement and all schedules, exhibits and instruments in amendment or confirmation of it; "hereof", "hereto" and "hereunder" and similar expressions mean and refer to this Agreement and not to any particular Article, Section, Subsection or other subdivision; "Article", "Section", "Subsection" or other subdivision of this Agreement followed by a number means and refers to the specified Article, Section, Subsection or other subdivision of this Agreement; "Amalgamation" means the amalgamation of the Predecessor Corporation and the Subsidiary implemented under the OBCA pursuant to certificate and articles of amalgamation dated September 26, 1997; "Americas Guarantee" means the guarantee of the Guarantor in favour of the Seller of the obligations of the Buyer under the Note and the Other Obligations to be entered into on the Closing Date substantially in the form of the agreement annexed hereto as Exhibit "2"; "Americas Security Agreement" means the security agreement of the Guarantor in favour of the Seller securing the payment and performance of its obligations under the AG Guarantee, to be entered into on the Closing Date substantially in the form attached hereto as Exhibit "3"; "Ancillary Agreements" means the AG Security Agreement, the Americas Guarantee, the Americas Security Agreement, the Consulting Agreement, the Lease, the Note, the Non-Compete Agreement, the RD Guarantee, the RD Security Agreement and all other agreements, certificates and other instruments delivered or given pursuant to this Agreement and "Ancillary Agreement" means any one of such agreements, certificates or other instruments; "Auditor" means Messrs. KPMG Peat Marwick, Chartered Accountants; "Authorization" means, with respect to any person, any governmental authorization, order, permit, approval, grant, license, consent, right, franchise, privilege, certificate, judgement, writ, injunction, award, determination, direction, decree, variance, permission, to or from, or filings, notices, or recordings to or with or by rule or regulation of any Governmental Entity having jurisdiction over such person; --3-- "Balance Sheet Date" means November 30, 1996; "business day" means any day of the year, other than a Saturday, Sunday or any other day on which Canadian chartered banks are required or authorized to close in Toronto, Ontario; "Claim" means, in respect of any person, any claim of any nature whatsoever against such person, including any demand, liability, obligation, debt, cause of action, suit, proceeding, judgement, award, assessment, or reassessment; "Closing" means the completion of the transaction of purchase and sale contemplated by this Agreement on the Closing Date; "Closing Date" means September 30, 1997, or such earlier or later date as the Parties may mutually agree upon in writing; "Consents" means the consents of each contracting party to each Material Contract that requires the consent of such party to the change in control of the Corporation contemplated by either or both of the Amalgamation and this Agreement and the consummation of the transactions contemplated thereby and hereby in order to preserve and maintain the rights of the Corporation thereunder after the Closing Date, and "Consent" means any one of such Consents; "Consulting Agreement" means the consulting agreement among the Guarantor, the Buyer and the Principals to be entered into on the Closing Date substantially in the form of the agreement annexed hereto as Exhibit "4"; "Corporation" means, as of and after the date hereof, the corporation resulting from the Amalgamation and includes, for all purposes of this Agreement in respect of all periods referred to herein prior to the effective date of the Amalgamation, each of the Predecessor Corporation and the Subsidiary; "Disclosure Schedule" means the disclosure schedule attached hereto as Schedule "1" providing full disclosure of all matters required or permitted to be disclosed by the Seller to the Buyer under this Agreement with respect to the Principals, the Seller, the Corporation, the Predecessor Corporation, the Subsidiary and the Software Business; "Dividend Refund" has the meaning specified in Section 2.04; "Encumbrances" means liens, charges, mortgages, pledges, security interests, Claims, defects of title, restrictions and any other rights of third parties relating to any property, including rights of set-off, and other encumbrances of any kind and "Encumbrance" means any of the foregoing; "Excluded Assets" means the assets listed in Schedule "2"; --4-- "Financial Statements" means the balance sheets of the Predecessor Corporation for the fiscal year ending November 30, 1996 and of the Subsidiary for the fiscal year ended December 31, 1996 and the accompanying statements of income, retained earnings and changes in financial position for the year then ended and all notes thereto copies of which are attached as Schedule "3"; "GAAP" means, at any time, accounting principles generally accepted in Canada at such time; "Governmental Entity" means (i) any multinational, federal, provincial, state, municipal, local or other governmental or public department, court, commission, board, bureau, agency or instrumentality, domestic or foreign; (ii) any subdivision, agent, commission, board, or authority of any of the foregoing; or (iii) any quasi-governmental or private body exercising any regulatory, expropriation or taxing authority under or for the account of any of the foregoing; "Interim Period" means the period between the date hereof and the Closing Date; "Interim Statement Date" means July 31, 1997; "Interim Financial Statements" means the unaudited combined balance sheet of the Predecessor Corporation and the Subsidiary as at July 31, 1997 and the accompanying unaudited statements of income and retained earnings for the 8 months then ended, copies of which are attached hereto as Schedule "4"; "knowledge" means, with reference to any information that is provided or any statement that is made by any person under this Agreement or any Ancillary Agreement, and that is qualified as being "to their knowledge", that such information or statement has been provided or made to the best of their knowledge, information and belief (and, in the case of the Seller and Principals, is based on their own knowledge and after making inquiries of Andrew Coutts and Allan Foerster), without concealment, suppression or omission of any material information relevant to such statement or information; "laws" means all statutes, codes, ordinances, decrees, rules, regulations, municipal by-laws, judicial or arbitral or administrative or ministerial or departmental or regulatory judgements, orders, decisions, rulings or awards, policies, voluntary restraints, guidelines, or any provisions of such laws, including general principles of common and civil law and equity, binding on or affecting the person referred to in the context in which such word is used; and "law" means any of the foregoing. "Lease" means the lease agreement between the Corporation and Deanel Corp. to be entered into as of the Closing Date providing for the lease by Deanel Corp. to the Corporation of the real property, including buildings, structures, and other improvements located thereon, fixtured therein, and appurtenances thereto, and easements and other rights relative to the building located at 151 Savage Drive, Cambridge, Ontario, substantially in the form of the agreement annexed hereto as Exhibit "5"; --5-- "loss" means any loss whatsoever, including expenses, costs, damages, penalties, fines, any and all legal fees and disbursements, interest, and debt; "material", "material information", "material facts", "material change", and words having similar meaning, mean, unless the context otherwise requires, information relating to the business and affairs of the Corporation, the Predecessor Corporation, the Subsidiary and their respective properties, assets and liabilities that, if generally disclosed, would result in, or would reasonably be expected to result in, a significant decrease in the market price or value of the Purchased Securities or the Software Business, and for purposes of this Agreement, each reference to any material adverse effect upon the financial condition, operation, or prospects of the Software Business or the Material Assets, or any other reference to a material item or circumstance, shall be construed to include any act, omission, event, or circumstances that would entail loss, liability, damage, or expense to the Buyer (with respect to the rights and benefits expected by the Buyer to be obtained under this Agreement) of $5,000 in any single instance, whether under one or more representations, warranties, covenants, or agreements contained herein, or $25,000 in the aggregate, taken as a whole under all representations, warranties, covenants, and agreements contained herein; "Material Assets" has the meaning specified in Section 3.12; "Material Contracts" means all material contracts with respect to the Software Business to which the Corporation (including the Predecessor Corporation and the Subsidiary) is a party, including all contracts, leases of personal property, licenses, undertakings, engagements or commitments of any nature, written or oral, to which the Corporation is entitled in connection with the Software Business, including (a) contracts that either involve expenditure of more than $50,000 or require performance by any party thereto more than six (6) months after the Closing Date; (b) unfilled purchase orders; (c) forward commitments for supplies or materials entered into the ordinary course of the Software Business; (d) all restrictive agreements and negative covenant agreements which the Corporation may have with its employees, past or present; and (e) all of the contracts specifically listed in the Disclosure Schedule; "Non-Compete Agreement" means the non-compete agreement of the Principals and the Seller in favour of the Guarantor and the Buyer to be entered into on the Closing Date substantially in the form of the agreement attached hereto as Exhibit "6" "Note" means the secured promissory note of the Buyer in favour of the Seller referred to in Section 2.03 to be entered into on the Closing Date in the form of the note attached hereto as Exhibit "7"; "OBCA" means the Business Corporations Act (Ontario); "Other Obligations" means, collectively, (i) the obligations of the Buyer (if any) under the Consulting Agreement; (ii) the obligations of the Buyer (if any) under Section 2.07; and (iii) the obligations of the Buyer (if any) under Section 8.05(c); --6-- "Parties" means the Seller, Buyer, Principals and Guarantor and "Party" means any one of them; "Permitted Encumbrances" means (i) Encumbrances for taxes, assessments or governmental charges or levies on property not yet due and delinquent; (ii) easements, encroachments and other minor imperfections of title which do not, individually or in the aggregate, materially detract from the value of, or impair the use or marketability of, any property so encumbered; and (iii) the Encumbrances disclosed in the Disclosure Schedule; "person" means an individual, partnership, corporation, trust, unincorporated association, joint venture or other entity or any Governmental Entity, and pronouns have a similarly extended meaning; "Public Offering" means the completion of an initial public offering of its securities completed in accordance with the requirements of the Securities Act of 1933, as amended by (i) Software AG Systems, Inc.; (ii) the Guarantor; (iii) any successor corporation resulting from the merger or reorganization of either or both of such corporations which does not result from a third party acquisition of control of such corporations; and (iv) in the case of an acquisition of control under (iii), any successor corporation that is not, at the time of such acquisition of control, already a public company; "Purchase Price" has the meaning specified in Section 2.02; "Purchased Securities" means 1,000 common shares in the capital of the Corporation; "RD Guarantee" means the guarantee of the Corporation in favour of the Seller of the obligations of the Buyer under the Note and the Other Obligations to be entered into on the Closing Date substantially in the form of the agreement annexed hereto as Exhibit "8"; "RD Security Agreement" means the security agreement of the Guarantor in favour of the Seller securing the payment and performance of its obligations under the RD Guarantee, to be entered into on the Closing Date substantially in the form attached hereto as Exhibit "9"; "Redemption Amount" means the amount for which the Special Share is redeemable; "Software AG Canada" means Software AG of Canada Inc., a corporation incorporated under the Canada Business Corporations Act; "Special Dividend" means the special dividend declared by the Corporation in the amount of $5,000,000 to be paid to the Seller prior to the Closing Date as contemplated by Section 2.04; "Special Share" means the special share of the Corporation held as of the date hereof by the Seller; --7-- "Special Share Redemption" means the special share redemption completed in accordance with Section 2.04; "subsidiary" has the meaning specified in the OBCA; and "Time of Closing"' means 1:00 p.m. (Toronto time) on the Closing Date or such other time on the Closing Date as the Closing may occur. 1.02 Gender and Number. Any reference in this Agreement to gender shall include all genders, and words importing the singular number only shall include the plural and vice versa. 1.03 Headings, Etc. The provision of a Table of Contents, the division of this Agreement into Articles, Sections, Subsections and other subdivisions and the insertion of headings are for convenience of reference only and shall not affect or be utilized in the construction or interpretation of this Agreement. 1.04 Currency. All references in this Agreement or any Ancillary Agreement to dollars, unless otherwise specifically indicated, are expressed in Canadian dollars. 1.05 Severability. Any Article, Section, Subsection or other subdivision of this Agreement or any Ancillary Agreement or any other provision of this Agreement or any Ancillary Agreement which is, or becomes, illegal, invalid or unenforceable shall be severed from this Agreement and any Ancillary Agreement and be ineffective to the extent of such illegality, invalidity or unenforceability and shall not affect or impair the remaining provisions hereof or thereof. 1.06 Entire Agreement. This Agreement together with the Ancillary Agreements constitutes the entire agreement between the Parties pertaining to the subject matter hereof and supersedes all prior agreements, understandings, negotiations and discussions, whether oral or written, of the Parties including, without limitation, the letter of intent dated August 20, 1997 among, inter alia, Thayer Capital Partners and Robert Nickel. There are no representations, warranties, conditions or other agreements, express or implied, statutory or otherwise, between the Parties in connection with the subject matter of this Agreement, except as specifically set forth herein and therein. If there is any conflict between the provisions of this Agreement and the provisions of any Ancillary Agreement, the provisions of this Agreement shall govern. --8-- 1.07 Amendments. This Agreement and any Ancillary Agreement may only be amended, modified or supplemented by a written agreement signed by all of the Parties to such agreement. 1.08 Waiver. Any of the terms or conditions of this Agreement may be waived in writing at any time by the party that is entitled to the benefits thereof. No waiver of any of the provisions of this Agreement shall be deemed to or shall constitute a waiver of any other provision hereof (whether or not similar). No waiver of any of the provisions of this Agreement or any Ancillary Agreement shall be deemed to constitute a waiver of any other provision (whether or not similar), nor shall such waiver constitute a waiver or continuing waiver unless otherwise expressly provided in writing duly executed by the party to be bound thereby. 1.09 Governing Law. This Agreement and all Ancillary Agreements shall be governed by and interpreted and enforced in accordance with the laws of the Province of Ontario and the laws of Canada applicable therein which apply to contracts made and to be performed entirely in Ontario without giving effect to the principles of conflicts of law thereof. 1.10 Inclusion. Where the word "including" or "includes" is used in this Agreement it means "including (or includes) without limitation". Words of inclusion shall not be construed as terms of limitation herein, so that references to "included" matters shall be regarded as nonexclusive, noncharacterizing illustrations. 1.11 Accounting Terms. All accounting terms not specifically defined in this Agreement shall be construed in accordance with GAAP. 1.12 Incorporation of Exhibits and Schedules. The following are the exhibits schedules attached to and incorporated in this Agreement:
Exhibit Schedule - ------- -------- "1" -- Form of AG Security Agreement "1" -- Disclosure Schedule "2" -- Form of Americas Guarantee "2" -- Excluded Assets "3" -- Form of Americas Security Agreement "3" -- Financial Statements "4" -- Form of Consulting Agreement "4" -- Interim Financial Statements "5" -- Form of Lease Agreement "5" -- Americas Interim Financial Statements
--9--
Exhibit Schedule - ------- -------- "6" -- Form of Non-Compete Agreement "6" -- Employee Bonus Allocation "7" -- Form of Note "7" -- Foreign Royalties Credit "8" -- Form of RD Guarantee "9" -- Form of RD Security Agreement
ARTICLE II PURCHASED SECURITIES AND PURCHASE PRICE 2.01 Purchase of Purchased Securities. On the terms and subject to the conditions of this Agreement, the Buyer agrees to purchase from the Seller, and the Seller agrees to sell and deliver to the Buyer, on the Closing Date, all right, title, and interest of the Seller in and to the Purchased Securities, being all of the issued and outstanding securities in the capital of the Corporation as of the Closing Date. 2.02 Purchase Price. The aggregate purchase price for the Purchased Securities (the "Purchase Price") shall be $14,000,000. 2.03 Payment of Purchase Price. On the Closing Date, against delivery by the Seller of certificates evidencing the Purchased Securities duly endorsed for transfer and accompanied by instruments of transfer in the manner contemplated by this Agreement, and upon satisfaction of all other terms and conditions to be satisfied by the Seller and the Principals hereunder, the Buyer shall pay the Purchase Price to the Seller. The Purchase Price shall be paid by or on behalf of the Buyer as to $7,000,000 by wire transfer in same day available funds to the Seller on the Closing Date, and the balance of the Purchase Price shall be paid upon the terms and conditions of the Note which shall be delivered by the Buyer to the Seller on the Closing Date. 2.04 Special Dividend and Special Share Redemption. The Buyer acknowledges that, prior to the Closing Date: 1. the Corporation shall pay to the Seller the Special Dividend in cash on its common shares; 2. the Special Share is redeemable prior to the Closing Date for an amount equal to 75% of the dividend refund received pursuant to subsection 129(1) of the Income Tax Act (Canada) by the Corporation in respect of dividends paid by it prior to the Closing Date as more particularly set forth in the terms and conditions of the --10-- Special Share contained in the articles of the Corporation (the "Dividend Refund"); and 3. the Corporation shall redeem the Special Share prior to the Closing Date for $773,500 by payment in cash. The Buyer and Seller hereby acknowledge and agree that the Dividend Refund may be subject to adjustment in the event that there shall be issued to the Corporation a notice of assessment or reassessment pursuant to any taxing statute, which assessment or reassessment is based upon a determination that the Corporation was not entitled to the Dividend Refund or to some portion thereof. Neither the Corporation nor the Buyer shall have any obligation to appeal such assessment but the Principals and the Seller shall be able to contest such assessment or reassessment at their own expense. In this event, the Dividend Refund shall be deemed to be and to have always been the amount of the dividend refund ultimately determined by the taxing authority. In the event that the Redemption Amount is subsequently adjusted in accordance with the terms of the Special Share as a result of an assessment or reassessment under a taxing statute relating to the Dividend Refund, the Seller shall pay to the Corporation, or the Corporation shall pay to the Seller, as the case may be, within 30 days of the Corporation receiving notice from the taxation authority of such adjustment such amount as shall be required to ensure that the Seller has received and retained an amount equal to the Redemption Amount as so adjusted. The Buyer shall have the right to set-off any obligations owing by the Seller to the Corporation pursuant to this Section 2.04 against any amounts owing by the Buyer to the Seller under the Note or otherwise under this Agreement or any Ancillary Agreement, and the indemnities provided by the Seller and the Principals to the Buyer under Article IX shall extend to and specifically include any obligations of the Seller to the Corporation pursuant to this Section 2.04. 2.05 Removal. The Buyer acknowledges that Seller shall be entitled, on or prior to the Closing Date, to remove the Excluded Assets from the Corporation and obtain full ownership thereof. 2.06 AG Amalgamation. The Seller and Principals acknowledge that the Buyer shall be entitled to complete a short-form vertical amalgamation of the Buyer and the Corporation on or forthwith following the Closing Date pursuant to the provisions of the OBCA whereupon the RD Guarantee and RD Security Agreement shall terminate and the AG Security Agreement shall continue in full force and effect to secure the obligations due under the Note and the Other Obligations. 2.07 Royalty Repayment. The Buyer and the Guarantor acknowledge that the Subsidiary was credited in the amount of $1,500,000 (the "Credit") by the Guarantor in respect of estimated royalties due to the Corporation as a result of certain sales of the Corporation's Owned Software Programs in jurisdictions outside of North America up to the Closing Date (the "Foreign Royalties"). The --11-- countries and the periods of time in respect of which such Credit has been granted and the allocation of the Credit among them is set forth in Schedule "7". The Guarantor shall, after the Closing Date, use reasonable commercial efforts to collect ("collect", "collection" and "collected" including the exercise of rights of set-off in respect of, or the obtaining of other equivalent compensation for) Foreign Royalties and, in doing so, shall use currently available site audit procedures for license compliance customary in the industry. The Guarantor shall provide the Seller with semi-annual reporting, by March 31, 1998 and September 30, 1998, as to Foreign Royalties collected and the efforts made by the Guarantor to do so. In the event that the actual amount of Foreign Royalties due to the Corporation (determined in accordance with current practice and based upon the royalties actually collected by the Guarantor) in respect of the countries and the periods of time identified in Schedule "7", exceeds the amount of the Credit, the Guarantor and the Corporation shall pay such excess amount to the Seller within 30 days following the final determination of the actual amount of such Foreign Royalties collected by the Guarantor. In the event that the Guarantor collects Foreign Royalties which relate to countries and/or periods of time other than those identified in Schedule "7" due to the Corporation (determined in accordance with current practice and based upon the royalties actually collected by the Guarantor), the Guarantor shall pay such Foreign Royalties collected, that would have otherwise been payable to the Corporation, to the Seller. Such payments shall be made in full within 30 days following the collection by the Guarantor of such Foreign Royalties. In the event that the Seller disagrees with the calculation by the Corporation and/or the Guarantor of the amount of Foreign Royalties collected or the amount due to the Seller hereunder (if any), the Seller may, at its own expense, audit the records of the Guarantor and the Corporation relating to the collection of Foreign Royalties and related records on reasonable notice and during normal business hours. Any difference between the amount actually paid by the Corporation and/or the Guarantor to the Seller hereunder and the amount determined upon such audit to have been collected by the Guarantor and/or the Corporation shall be payable by the Corporation and/or the Guarantor to the Seller, or by the Seller to the Corporation and/or the Guarantor, as the case may be. In the event that, as a result of such audit, the Corporation and/or the Guarantor is required to pay to the Seller an amount in excess of 5% of the amount previously paid by the Corporation and/or the Guarantor to the Seller hereunder, the Corporation and/or the Guarantor shall reimburse the Seller for the cost of such audit up to a maximum of $10,000. The payment and performance by the Corporation of its obligations (if any) to pay such amount hereunder shall be secured pursuant to the guarantees and security of the Guarantor, the Buyer and the Corporation forming part of the Ancillary Documents. The Corporation shall cease to have any obligation hereunder after November 30, 1998 provided that such final determination has been made as of September 30, 1998, the reports required hereunder have been provided to the Seller, and any amounts due to the Seller hereunder have been paid. The Seller shall thereafter have the right, in consultation with the Guarantor, acting reasonably (and the Guarantor having no obligation to assist the Seller) to directly pursue the collection of unpaid Foreign Royalties, at its own cost and expense, until March 3 1, 1999 if it determines, acting reasonably, that additional amounts may be payable. --12-- ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE PRINCIPALS AND SELLER The Principals and Seller hereby jointly and severally represent and warrant to the Buyer, acknowledging the Buyer is relying thereon in entering into this Agreement and completing the transactions contemplated hereby, as follows: 3.01 Organization of Corporation and Seller. The Corporation is, and each of the Predecessor Corporation and the Subsidiary prior to the Amalgamation were, corporations validly existing and in good standing under the OBCA with the corporate power and authority to conduct the Software Business and to own and lease their respective properties and assets. As to the conduct of the Software Business and the use and ownership of the Material Assets specifically, the Corporation is and each of the Predecessor Corporation and the Subsidiary prior to the Amalgamation were, duly qualified or licensed to do business and is in good standing to do business in the jurisdictions identified in the Disclosure Schedule which are the only jurisdictions in which the failure to be so qualified or licensed would be material. The Seller is validly existing and in good standing under the laws of the Province of Ontario, Canada with the corporate power and authority to conduct its business and to own the Purchased Securities. 3.02 Capacity, Power and Authority. The Principals have the capacity, and the Seller has the power and authority, in each case to execute, deliver, and perform its obligations under this Agreement and the Ancillary Agreements to be executed and delivered by it in connection with the transactions contemplated hereby. The Principals and the Seller have taken all necessary corporate and other action to authorize the execution and delivery of this Agreement and such other Ancillary Agreements and the consummation of the transactions contemplated hereby and thereby. This Agreement is, and the Ancillary Agreements shall be, the legal, valid, and binding obligations of the Principals and the Seller, enforceable against each of them in accordance with their respective terms. The Principals have executed and delivered this Agreement after having obtained such independent legal and other professional advice as they deemed necessary or appropriate, on a fully informed basis, and without duress or coercion. 3.03 Restrictive Documents. None of the Corporation, the Predecessor Corporation, the Subsidiary or the Seller is subject to, or a party to, any charter or by-law restriction, any law, any Claim, any shareholders agreement, voting trust, contract or instrument, any Encumbrance or any other restriction of any kind or character which would prevent the consummation of the transactions contemplated by this Agreement or compliance with the terms, conditions and provisions of this Agreement and the Ancillary Agreements, or the continued operation of the Software Business after the date hereof on substantially the same basis as heretofore operated, or which would restrict the ability of the Buyer to acquire any of the Purchased Securities, except for the necessity of obtaining the --13-- Consents required or contemplated by this Agreement, provided that the Buyer acknowledges that it has directed the Seller not to obtain the Consents otherwise required in connection with the Material Contracts marked "*" in Section 3.12 (c)(l) of the Disclosure Schedule. 3.04 Authorized and Issued Capital. The authorized capital of the Corporation, after giving effect to the Amalgamation, consists solely of the securities identified in the articles of amalgamation of the Corporation dated as of September 26, 1997, true and complete copies of which have been provided to the Buyer as of the date hereof. The issued capital of the Corporation at the date hereof, after giving effect to the Amalgamation, consists solely of the Purchased Securities and the Special Share which is to be redeemed by the Corporation prior to the Closing Date as contemplated by Section 2.04. The Purchased Securities have been duly issued and are outstanding as fully paid and non-assessable shares in the capital of the Corporation and the Seller is their sole registered and beneficial holder. All of the issued and outstanding securities of Software AG Canada are owned by the Principals. 3.05 Options, etc. Except for the Buyer's right hereunder, no person has or will have any option, warrant, right, call, commitment, conversion right, right of exchange or other agreement or any right, privilege or entitlement (whether by law, pre-emptive or contractual) capable of becoming an option, warrant, right, call, commitment, conversion right, right of exchange or other agreement for the purchase from the Seller of any of the Purchased Securities or the Special Share, or from the Principals of the securities of Software AG Canada or for the purchase, subscription, allotment or issuance of any unissued securities in the capital of the Corporation (in each case both before and after giving effect to the Amalgamation), or of Software AG Canada. 3.06 Title to Purchased Shares. The Purchased Securities are owned by the Seller with a good and marketable title thereto, free and clear of all Encumbrances other than the rights of the Buyer under this Agreement. The Seller has the right, power and authority to enter into this Agreement and to sell such Purchased Securities as contemplated herein. The delivery of the Purchased Securities to the Buyer pursuant to the provisions hereof on the Closing Date will transfer to the Buyer valid title thereto, free and clear of all Encumbrances. 3.07 Dividends and Distributions. Since the Balance Sheet Date, except for the Special Dividend, the Special Share Redemption and the payment of a dividend in December, 1996 in the amount of $800,000 from the Subsidiary to the Predecessor Corporation and from the Predecessor Corporation to the Seller, none of the Corporation, the Predecessor Corporation, the Subsidiary or Software AG Canada has, directly or indirectly, declared, paid or otherwise become obligated to make any dividend or --14-- other distribution on any of its securities, redeemed, purchased or otherwise acquired any of its securities of any class or agreed to do any of the foregoing. 3.08 Corporate Records. The corporate records of each of the Corporation, the Predecessor Corporation, the Subsidiary and Software AG Canada are materially complete and accurate, and all material corporate proceedings and actions reflected therein have been conducted or taken in compliance with all applicable laws and with their articles and by-laws, in each case in all material respects, and without limiting the generality of the foregoing, (i) the minute books contain complete and accurate minutes of all meetings and written resolutions of the directors and shareholders held since the date of incorporation of the Corporation for which minutes or other records of proceedings exist; (ii) all material acts and proceedings of such shareholders, directors and officers of each of such corporations have been duly approved or ratified by the directors or shareholders of the Corporation in compliance with applicable laws; (iii) the share certificate books, register of shareholders and register of transfers are complete and accurate, in all material respects, and all such transfers have been duly completed and approved and any exigible tax payable in connection with the transfer of any of their securities has been duly paid; and (iv) the registers of directors and officers are complete and accurate in all material respects and all former and present directors and officers were duly elected or appointed as the case may be. 3.09 Residence of the Seller. The Seller is not a non-resident of Canada within the meaning of the Income Tax Act (Canada). 3.10 Required Government Consent. No Authorization of any Governmental Entity is required to be obtained by the Seller or the Corporation for the execution and delivery of this Agreement and the Ancillary Agreements, the consummation of the transactions contemplated hereby and thereby. 3.11 Title to Tangible Property. Except for Permitted Encumbrances, the Corporation holds good and marketable title to all of the properties and assets of the Corporation used in connection with the Software Business, including without limitation all of the Material Assets formerly owned and used by the Predecessor Corporation and the Subsidiary (other than the Excluded Assets), free and clear of all Claims and Encumbrances of any nature whatsoever. 3.12 Disclosure of Properties and Material Assets. The Disclosure Schedule contains complete lists of the following: (a) Software Business. All Distributed Software Programs, all Owned Software Programs and all software programs currently under development; --15-- (b) [Intentionally Deleted] (c) Software Contracts. All contracts, with any person respecting the ownership, license, acquisition, design, development, distribution, marketing, use, or maintenance of computer program code, related technical or user documentation, and databases, including all the software contracts consisting of (1) licenses from third parties (development and/or marketing); (2) licenses from third parties (internal use only); (3) development contracts, work-for-hire agreements, and consulting and employment agreements; (4) distributorships, dealerships, franchises, and manufacturer's representative contracts; (5) licenses and sublicenses to others; and (6) maintenance, support, or enhancement agreements (the "Software Contracts"); (d) Computer Equipment. All equipment and devices (including data processing hardware and related telecommunications equipment, media, and tools) and the Corporation's rights under all related warranties; (e) Other Fixed Assets. All office furniture, fixtures and other fixed assets; (f) [Intentionally Deleted] (g) Authorizations. All Authorizations currently applicable to the Software Business other than such Authorization as are required to carry on business generally; (h) Intellectual Property. All patents, trademarks, service marks and trade names (including registrations and applications pertaining thereto) (the "Intellectual Property"); (i) Leases. All personal property leases or rental contracts agreements, and other commitments and arrangements currently in effect to which the Corporation is a party that either (1) have an annual rental, if any individual instance, in excess of $15,000, or (2) continue in effect for a period of twelve (12) months or longer without allowing the Corporation to terminate without penalty for any reason upon the delivery of any required action with respect to: 1. equipment, including data processing hardware and associated telecommunications equipment, media, and tools; 2. office furnishings and fixtures; and 3. other personal property used in the Software Business (the "Leases"). (j) General Contracts. All other material contracts, agreements, licenses, commitments, arrangements, and permissions with respect to the Software Business (the "General Contracts") to the extent not otherwise disclosed in this Agreement. --16-- (k) Accounts Receivable. All accounts receivable, including all license fees and maintenance fees and charges owing or to become owing to the Corporation under Software Contracts, in each case relating to or arising from the Software Business (the "Accounts Receivable"). (1) Claims. All Claims the Corporation may have against any person relating to or arising from the Material Assets or the Software Business, including rights to recoveries for damages or defective goods, to refunds, insurance claims, and choices in action. (m) [Intentionally Deleted] (n) Business Interests, Participations, and Ownership Positions. All interests, participations, and ownership positions held by the Corporation in any corporation, partnership, joint venture, co-marketing arrangement, or similar enterprise or undertaking relating to the Software Business. 3.13 Condition of Properties and Material Assets. All of the Material Assets of the Software Business, to the extent that they are tangible property, are in good operating order, condition, and repair, ordinary wear and tear excepted, are suitable for use in the Software Business in the ordinary course. 3.14 Intellectual Property. (a) Ownership. Except for the rights and licenses validly and effectively established by the Software Contracts in favour of third parties, the Corporation owns or has the right to use, and will continue to own after the Closing Date, all Intellectual Property. The Disclosure Schedule sets forth all registered trademarks and service marks, all reserved trade names, all registered copyrights, and all filed patent applications and issued patents listed in the Disclosure Schedule used in the Software Business or otherwise necessary for the conduct of the Software Business as heretofore conducted. (b) Procedures for Trade Secret Protection. The Corporation has used its best efforts to enforce an adequate trade secret protection program through contractual agreements with officers, employees, developers, consultants and other persons dealing with the Software Business. To the knowledge of the Principals and the Seller, there has been no material violation of such program by any person. The source code and system documentation relating to the Software Programs (1) to the best knowledge of the Principals and the Seller have at all times been maintained in confidence and (2) have been disclosed by the Corporation only to employees and consultants having "a need to know" the contents thereof in connection with the performance of their duties. (c) Personnel Agreements. All personnel, including employees, agents, consultants, and contractors, who have contributed to or participated in the conception and development of the Owned Software Programs, technical documentation, or Intellectual Property on behalf of the Corporation have executed the agreement included in the Disclosure Schedule in Section 3.12(c)(3). --17-- (d) Absence of Claims. No Claims have been asserted by any person to the use of the Intellectual Property, and the Principals and the Seller do not know of any valid basis for any such Claim. The use of the Intellectual Property, such as patents and trademarks, by the Corporation does not infringe on the rights of any person. (e) Name. Software AG Canada has not received any notification that it does not have the right to the use of the name "Software AG" within Canada as its corporate name and shall continue to have such right following the Closing Date. 3.15 Adequacy of Technical Documentation. The technical documentation with respect to the current versions of the Owned Software Programs includes the source code, generation and administration user's manuals and specifications and written procedures for all such Owned Software Programs as may be necessary to render such materials understandable and usable by a trained computer programmer. The technical documentation also includes any program (including compilers), "workbenches," tools, and higher level (or "proprietary") language used for the development, maintenance, and implementation of the Owned Software Programs. 3.16 Third-Party Components in Software Programs. The Corporation has validly and effectively obtained the right and license to use, copy, modify, and distribute the third-party programming and materials contained in the Owned Software Programs and is in possession of related technical documentation. The Owned Software Programs and related technical documentation contain no other programming or materials in which any third party may claim superior, joint, or common ownership, including any right or license. The Software Programs and related technical documentation do not contain derivative works of any programming or materials not owned in their entirety by the Corporation except for derivative works which result from the inclusion of Software licensed by the Corporation from Apex Software Corporation in the Corporation's CONSTRUCT SPECTRUM software. 3.17 Third-Party Interests or Marketing Rights in Software Programs. The Corporation has not granted, transferred, or assigned any right or interest in the Owned Software Programs, the related technical documentation, or the Intellectual Property to any person, except pursuant to the Software Contracts identified as "distributorships, dealerships, franchises, and manufacturer's representative contracts" or "licenses and sublicenses to others" in the Disclosure Schedule. Except as set forth in the Disclosure Schedule, all Software Contracts identified as "licenses and sublicenses to others" in the Disclosure Schedule constitute only end-user agreements, each of which grants the end-user thereunder solely the nonexclusive right and license to use identified Software Programs and related user documentation for internal purposes only except that some of such Software Contracts provide that (a) a service bureau may use the Software Programs and related technical documentation to process data for an end-user; (b) subsidiaries, affiliates and related corporations of an end-user may use the Software Programs and --18-- related technical documentation; and (c) the end-user may assign such Software Contract to a purchaser of all or substantially all of the assets of such end-user. There are no contracts, agreements, licenses, and other commitments and arrangements in effect with respect to the marketing, distribution, licensing, or promotion of the Software Programs, the related technical documentation, or the Intellectual Property by any independent salesperson, distributor, sublicensor, or other remarketer or sales organization, except for the Software Contracts identified as "distributorships, dealerships, franchises, and manufacturer's representative contracts" in the Disclosure Schedule. 3.18 Leases. All of the Leases are valid, binding, and enforceable in accordance with their terms and are in full force and effect. There are no existing defaults by the Corporation thereunder, and no act, event, or omission has occurred that, whether with or without notice, lapse of time, or both, would constitute a default thereunder. Full, true and complete copies of the Leases, other than the proposed lease for the Toronto site, have been provided to the Buyer. 3.19 Leased Property. The Corporation is not a party to, or under any agreement or option to become a party to, any lease with respect to real property, whether as landlord or tenant, other than the leased premises identified in the Disclosure Schedule (the "Leased Premises"). Full, true and complete copies of the leases with respect to the Leased Premises have been provided to the Buyer. 3.20 Subsidiaries and Investments. Except as disclosed in the Disclosure Schedule, the Corporation does not have any subsidiaries or any agreements of any nature to establish or acquire any subsidiary or to acquire or lease any other business operations and the Corporation has not made or agreed to make any loan to or investment in any other person. None of the Corporation, the Seller or the Principals is a party to any joint venture or other similar agreement or arrangement that involves any sharing of profits of the Software Business or is similar to or competitive with the Software Business, other than the Software Contracts identified as "licenses from third parties (development and/or marketing)" or "distributorships, dealerships, franchises, and manufacturer's representative contracts" in the Disclosure Schedule. 3.21 Material Contracts. The contracts listed in the Disclosure Schedule, full, true and complete copies of which have been provided to the Buyer, constitute all the Material Contracts of the Corporation. Except as disclosed in the Disclosure Schedule, Financial Statements and Interim Financial Statements and as contemplated by this Agreement the Corporation is not a party to or bound (including as a result of the Amalgamation) by any agreement not identified as a Material Contract that involves: --19-- (a) any employment agreement, bonus, deferred compensation, pension, profit sharing, stock option, phantom stock plan, employee stock purchase, health, insurance, retirement or other employee benefit plan, any collective agreements or any agreement (oral or written) providing for compensation to be paid to any employee consequent upon the sale of any substantial portion of outstanding securities in its capital or any direct or indirect change in its ownership or control; (b) any material agreement or commitment relating to the borrowing of money; (c) any material agreement or commitment relating to capital expenditures other than capital expenditures incurred in the ordinary course of business consistent with past practice; (d) any loan or advance to, or investment in, any other person or any agreement or commitment relating to the making of any such loan, advance or investment; (e) any bonds, debentures, mortgages, notes or other similar indebtedness or liabilities whatsoever or any agreement to create or issue any bonds, debentures, mortgages, notes or other similar indebtedness; (f) any guarantee or other contingent liability in respect of any indebtedness or obligation of any other person (other than the endorsement of negotiable instruments for collection in the ordinary course of business); (g) any management, consulting or any other similar agreement or commitment; (h) any non-competition, non-solicitation or similar agreement or commitment limiting its freedom or that of any successor to the ownership of the assets or the Software Business to engage in any line of business or to compete with any other person; (i) any licensing or other agreement or commitment relating to intellectual property used in the conduct of the Software Business; (j) any agreement or commitment entered into in the ordinary course of the Software Business involving an expenditure or commitment of more than $25,000 (other than purchase orders accepted from time to time consistent with current practice) which is not cancelable without penalty within thirty (30) days; (k) any material agreement or commitment not entered into in the ordinary course of the Software Business; and (1) any agreement or arrangement with any person with whom the Corporation or the Seller (or their directors, officers or employees) does not deal at arm's length within the meaning of the Income Tax Act (Canada). --20-- All of the Material Contracts are valid, binding, and enforceable in accordance with their terms and are in full force and effect. There are no existing material defaults by the Corporation (or, to their knowledge material defaults by the other parties hereto) under any such contracts and no act, event, or omission has occurred that, whether with or without notice, lapse of time, or both, would constitute a default thereunder. The customers of the Corporation who are, to the knowledge of the Corporation, currently in default of their license obligations with respect to the Software Programs are identified in the Disclosure Schedule. 3.22 Accounts Receivable. All Accounts Receivable are fully collectible within the customary collection cycle, subject only to bad debts that will not exceed the amount of bad debt reserves set forth in the Interim Financial Statements. All Accounts Receivable call for payment to be made within ninety (90) days to the principal office of the Corporation. 3.23 Financial Matters. (a) Financial Statements. The Financial Statements have been prepared in accordance with GAAP, consistently applied with the principles and procedures employed in prior periods by the Predecessor Corporation and the Subsidiary. The Financial Statements properly reflect all properties, assets and liabilities of the Corporation. The Financial Statements fairly present the results of operation and the financial position of the Corporation as of the Balance Sheet Date in conformity with GAAP consistently applied with the principles and procedures employed in prior periods. (b) Interim Financial Statements. The Interim Financial Statements have been prepared in accordance with GAAP, consistently applied with the principles and procedures employed in prior interim periods by the Predecessor Corporation and the Subsidiary except that: (i) such statements are not accompanied by notes; (ii) no provision has been made in the Interim Financial Statements for taxes payable; (iii) no provision has been made in the Interim Financial Statements for foreign royalties receivable; and (iv) no provision has been made in the Interim Financial Statements for employee bonuses. The Interim Financial Statements properly reflect all properties, assets and liabilities of the Corporation. The Interim Financial Statements fairly present the results of operation and the financial position of the Corporation as of the Interim Statement Date in conformity with GAAP consistently applied with the principles and procedures employed in prior periods. (c) Cash Balances. As of September 23, 1997, the cash balances of the Corporation, comprised of deposits with the Corporation's banker and readily marketable securities on deposit with Royal Bank of Canada and RBC Dominion Securities Ltd., are approximately $5 million, after payment of the amounts permitted under Article II hereof, after assuming that all cheques and similar obligations that have been issued by the Corporation have been presented for payment as of September 23, 1997. Between such date and the date hereof, there has been no material changes in such cash balances. --21-- (d) Capital Expenditures. No material capital expenditures have been made or authorized by the Corporation since the Balance Sheet Date, other than as disclosed in the Interim Financial Statements and the Disclosure Schedule. (e) Undisclosed Liabilities. Except as set forth in this Agreement, or in the Disclosure Schedule, there are no liabilities or obligations, secured or unsecured (whether absolute, accrued, contingent, or otherwise, and whether due or to become due), of a nature required by GAAP to be reflected in a balance sheet of the Corporation, except such liabilities and obligations that either (1) are accrued and reserved against in the Interim Financial Statements or (2) have arisen or been incurred in the ordinary course of business since the Interim Statement Date. 3.24 Conduct of Software Business. (a) Ordinary Course of Business; No Removal or Disposal of Material Assets. Except as set forth in the Interim Financial Statements and the Disclosure Schedule, the Corporation has operated the Software Business in the ordinary course consistent with past practices since the Balance Sheet Date, and has not disposed of any Material Assets (other than the Excluded Assets); (b) No Material Adverse Change. Except as set forth in the Disclosure Schedule and the Interim Financial Statements, since the Balance Sheet Date, there has been no material adverse change in the Software Business or in the financial condition, operations, or prospects of the Software Business without restricting the foregoing, the Seller has not (1) suffered any damage or destruction adversely affecting the Software Business or involving the Material Assets in the amount of $10,000 in any one instance; (2) increased the compensation payable or to become payable to employees of the Seller involved in the Software Business or declared any bonus (except for a general increase in compensation rates effective December 1, 1996 the terms of which have been disclosed to the Buyer and an increase in the compensation of Stan Dushko to $60,000 per annum); (3) incurred any liability or obligation relating to the Software Business other than in the ordinary course consistent with past practice; (4) made any change in any method, practice, or principle of accounting involving the Software Business (other than changes to US generally accepted accounting principles requested by the Buyer); (5) paid, loaned, or advanced any material monetary amount or other asset to, or sold, transferred, or leased any asset to, any employee involved in the Software Business except for normal compensation involving salary and benefits; or (6) agreed to take any action described in this Section 3.24(b). 3.25 Vendors and Customers. The Disclosure Schedule lists each licensor, developer, remarketer, distributor, and supplier of property or services to whom the Corporation, the Predecessor Corporation or the Subsidiary paid in the aggregate $50,000 or more during the fiscal year ended November 30, 1996 (none of which have been paid more than $200,000), and each licensee, end-user, or customer of, the Corporation as of the Balance Sheet Date. None of such customers or suppliers has terminated, or materially changed or reduced, its relationship with the Corporation since such date or advised the Corporation, the Seller or the Principals that it intends to do so. --22-- 3.26 Legal Matters. (a) Litigation. Except as set forth in the Disclosure Schedule, no Claim is pending, or, to the best of their knowledge, threatened against the Corporation, its present or former directors, officers, or employees, or any party to any Software Contract, affecting, involving, or relating to the Software Business. The Corporation is not, to their knowledge, subject to any judgement, order or decree entered in respect of any Claim. (b) Compliance With Laws. There is no outstanding or, to the best of their knowledge, threatened order, writ, injunction, or decree of any court, governmental agency, or arbitration tribunal against the Corporation affecting, involving, or relating to the Software Business or the Material Assets. The Corporation is not in violation of any applicable law affecting, involving, or relating to the Software Business or the Material Assets except where noncompliance has no material adverse effect upon the financial condition, operation, or prospects of the Software Business or the Material Assets, and they have received no notices of any allegation of any such violation. (c) Adequacy of Authorizations. The Authorizations listed in the Disclosure Schedule constitute all Authorizations of Governmental Entities that are required for the ownership and use of the Material Assets and the conduct of the Software Business under Canadian law, other than Authorizations required to carry on business generally. The Corporation is in compliance with all terms and conditions of such required Authorizations. All of the Authorizations are in full force and effect, and, to the best of their knowledge, no suspension or cancellation of any of them is being threatened, nor will any of the Authorizations be affected by the consummation of the transactions described in this Agreement. The Corporation is in compliance with all other applicable limitations, restrictions, conditions, standards, prohibitions, requirements, obligations, schedules, and timetables contained in those laws or contained in any law, regulation, code, plan, order, decree, judgment, notice, or demand letter issued, entered, promulgated, or approved thereunder relating to or affecting the Software Business. (d) Environmental Compliance. Except as set forth in the Disclosure Schedule, neither the Seller, nor, to the best of their knowledge, any prior owner, user, controller, or occupant, nor any tenant, subtenant, prior tenant, or prior subtenant has ever used Hazardous Materials (as hereinafter defined) on, from, or affecting the Material Assets or any facility, site, area, or property owned, used, controlled, or occupied by the Software Business, in any manner that violates any Canadian law, regulation, governmental restriction, order, judgment, or decree governing the use, storage, treatment, transportation, manufacture, handling, production, or disposal of Hazardous Materials. For purposes hereof, "Hazardous Materials" include any flammable materials, explosives, radioactive materials, hazardous materials, hazardous wastes, hazardous or toxic substances, or related materials defined under applicable Canadian federal and provincial environmental laws. The term "material" includes asbestos, polychlorinated biphenyls, kerosene, and fuel oil. The term "release" means any spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping, or disposing into the environment. The term "environment" --23-- means any surface or groundwater water supply, land, surface, or subsurface strata or the ambient air. 3.27 Taxes and Filings. The Corporation has filed or caused to be filed, within the times and within the manner prescribed by law, all federal, provincial, local and foreign tax returns and tax reports which are required to be filed by it. Such returns and reports reflect accurately all liability for taxes for the periods covered thereby and full, true and complete copies of such returns and reports for the past 3 fiscal years have been provided to the Buyer. To their knowledge all federal, provincial, local and foreign income, profits, franchise, sales, use, occupancy, excise and other taxes and assessments (including interest and penalties) payable by or due from the Corporation have been fully paid or are adequately disclosed and fully provided for in the books and records and the Financial Statements or the Interim Financial Statements (except as set forth in Section 3.23(b) above) as the case may be. The federal income tax liability of the Corporation has been assessed for all fiscal years up to but excluding its current fiscal year. No field audit of any tax return is currently in progress nor has the Corporation been notified in writing that any tax returns previously filed by it will be subject to reassessment. There are no outstanding agreements or waivers extending the statutory period of limitation applicable to any tax return of the Corporation, except in respect of the fiscal years 1991 through 1993. The Buyer acknowledges that in 1997 a scientific research and experimental development tax credit claim of the Predecessor Corporation for the fiscal year ended November 30, 1995 and the prior years was reassessed (and details of such reassessment have been provided to the Buyer) by Revenue Canada, Taxation and that the corresponding Ontario and Alberta claims have not yet been assessed by the Ontario and Alberta Ministries of Revenue and the amount of such claims may be reduced upon such assessments. The Corporation records scientific research and experimental development tax credits on its financial statements only when and to the extent the same was applied against income taxes otherwise payable and the future tax benefit to the Corporation regarding such claims is not recorded on the Financial Statements or the Interim Financial Statements. The Buyer agrees that neither the Seller nor the Principals shall have any liability pursuant to this Section 3.27 in respect of assessments or potential reassessments of federal or provincial scientific research and experimental development tax credits claimed until the amount of such liability exceeds the amount of the Corporation's scientific research and experimental development tax credit carry-forward as at the date hereof. 3.28 Employee Matters. To their knowledge: (1) The Corporation is in compliance with all laws respecting employment and employment practices, terms and conditions of employment, pay equity and wages and hours and has not and is not engaged in any unfair labour practice. (2) No unfair labour practice, complaint or grievance against the Corporation is pending or, to the best of the knowledge of the Corporation, threatened before any labour relations board or similar Governmental Entity with respect to the Software Business. --24-- (3) There is no labour strike, dispute, slowdown or stoppage actually pending or involving or, to the best of the knowledge of the Corporation, threatened against the Corporation with respect to the Software Business. (4) No union representation question exists respecting the employees of the Corporation in connection with the Software Business. (5) No grievance which might have a material adverse effect upon the Corporation or the conduct of the Software Business exists, no arbitration proceeding arising out of or under any collective agreement is pending, and no Claim therefor has been asserted. (6) No collective bargaining agreement is currently being negotiated by the Corporation with respect to any of its employees and true, correct and complete copies of the only collective agreements in force with respect to employees have been provided to the Buyer. (7) A complete list of all permanent and full time employees of the Corporation, their salaries and wage rates, bonus arrangements, benefits, positions and length of service has been provided to the Buyer by the Seller. (8) No employee of the Corporation has any agreement as to length of notice required to terminate his or her employment, other than such agreements as have been referred to in the Disclosure Schedule and except as results by law from the employment of an employee without agreement as to such notice or as to length of employment. (9) All bonuses, commissions and other benefit payments due to current and former employees of the Corporation are reflected and have been accrued in the Interim Financial Statements of the Corporation. The Buyer acknowledges that (a) the Corporation does not accrue vacation pay in its books and records; (b) employees of the Corporation are entitled to carry forward the unused portion of their vacation entitlement in any year into the following year only; and (c) the Corporation only pays vacation pay to its employees upon cessation of employment with the Corporation based on the foregoing. (10) The aggregate amount of salaries, pensions, bonuses, or other remuneration of any nature paid or payable by the Corporation to or for its present or former officers, directors, shareholders, employees or persons not dealing at arm's length (as such term is construed under the Income Tax Act (Canada)) with them during the year ended on the Balance Sheet Date, and during the period ended July 31, 1997 are fully reflected in the Financial Statements, or the Interim Financial Statements, as the case may be, and since that date, payments to such persons have been made at no greater rates except for the payments disclosed in the Disclosure Schedule. (11) The only benefit plans existing in respect of the employees of the Corporation are the benefit plans identified in the Disclosure Schedule. True, correct and complete copies of all written benefit plans and related documentation have been provided to the Buyer and any oral or written benefit plans are accurately described in the Disclosure Schedule. The benefit plans are --25-- duly registered where required by, and are in good standing under, all applicable laws. All required employer and employee contributions and premiums under the benefit plans to the date hereof have been made, the respective fund or funds established under the benefit plans are funded in accordance with applicable laws, and no past service funding liabilities exist thereunder. (12) No pension plans exist in respect of the employees of the Corporation. (13) No payments have been made or authorized since the Balance Sheet Date by the Corporation to its officers, directors, former directors, shareholders or employees or to any person not dealing at arm's length (as such term is construed under the Income Tax Act (Canada)) with any of the foregoing, except in the ordinary course of the Software Business and at the regular rates payable to them of salary, pension, bonuses, rents or other remuneration of any nature and except for the bonus payments and salary increases made subsequent to November 30, 1996 and disclosed to the Buyer, full provision for which has been made in the Interim Financial Statements. (14) To the best of their knowledge, no certification or decertification question or organizational drive exists or has existed within the past twelve (12) months respecting the Corporation, the Predecessor Corporation or the Subsidiary or their employees. (15) To the best of their knowledge, there are no charges, investigations, administrative proceedings, or formal complaints of discrimination (including discrimination based upon sex, age, marital status, race, national origin, sexual preference, handicap, or veteran status) pending or, to their knowledge, threatened before any Governmental Entity pertaining to the Corporation, the Predecessor Corporation, the Subsidiary or their employees and, to their knowledge, no basis for any such charge, investigation, administrative proceeding, or complaint exists. 3.29 Insurance Polices. The Disclosure Schedule lists all insurance policies of the Corporation relating to the Software Business in force as of the date hereof, naming the Corporation as an insured or beneficiary or as a loss-payable payee or for which the Corporation has paid or is obligated to pay all or part of the premiums. All such policies of insurance coverage are in full force and effect and full, true and complete copies of such policies have been provided to the Buyer. The Corporation is not, to their knowledge, in default with respect to any of the provisions contained in any such insurance policy and, to their knowledge, has not failed to give any notice or present any Claim under any such insurance policy in due and timely fashion. The Corporation has not received notice of any pending or threatened termination or retroactive premium increase with respect thereto; and the Corporation is in compliance with all conditions contained therein, the noncompliance with which could result in termination of insurance coverage or increased premiums for prior or future periods. There are no pending material Claims against such insurance by the Corporation as to which insurers have denied liability or are defending under any reservation of rights, and, to their knowledge, there exists no material Claim under such insurance that has not been properly filed by the Corporation. --26-- 3.30 Broker's or Finder's Fees. Neither the Seller nor the Principals has authorized any person to act as broker or finder or in any other similar capacity in connection with the transactions contemplated by this Agreement in any manner that may or will impose liability on the Buyer, the Corporation or the Software Business. 3.31 Related-Party Transactions. Except as disclosed in the Disclosure Schedule, the Corporation is not a party to any contract, agreement, license, lease, or arrangement with, or any other commitment to, directly or indirectly, (1) any officer or salaried employee of the Software Business in office within two (2) years of the date of execution hereof; (2) any corporation, trust, or other entity in which any such officer or salaried employee has a material equity or participating interest; or (3) or any partnership in which any such officer or salaried employee has a partnership or participating interest, in each case, relating to or involving the Software Business, except, in each instance, for existing compensation arrangements listed in the Disclosure Schedule. Each such contract, agreement, license, lease, arrangement, and commitment was entered into by the Seller in the ordinary course of business upon terms that are fair and reasonable to the Software Business without regard to the status and relationship of such other parties. 3.32 Real Property The Corporation is not the owner of, or under any agreement or option to own, any real property or any interest therein. 3.33 Bank Accounts and Powers of Attorney The Disclosure Schedule contains an accurate list showing (i) the name of each bank in which the Corporation has an account or safe deposit box and the names of all persons authorized to draw thereon or to have access thereto; and (ii) the names of any persons holding powers of attorney from the Corporation and a summary statement of the terms thereof. 3.34 Amalgamation The Amalgamation has not and will not cause or result in any material adverse change in the ability of the Buyer to conduct the Software Business after the Closing Date on substantially the same terms as currently conducted, whether as a result of the right of any person to terminate any Material Contract, assert any Claim against any Material Asset or against the Corporation, discontinue its relationship to or dealings with the Corporation, or otherwise. 3.35 Disclosure. No representation, warranty, or statement made by the Seller or the Principals in this Agreement or in any Ancillary Agreement contains or will contain any untrue statement or omits or will omit to --27-- state any fact necessary to make the statements contained herein or therein not misleading. None of this Agreement or any Ancillary Agreement or any certificate or statement in writing which has been supplied by or on behalf of the Corporation, the Seller or the Principals, or by any of the directors, officers or employees of the Corporation or the Seller in connection with the transactions contemplated hereby contains any untrue statement of a material fact, or omits any statement of a material fact necessary in order to make the statements contained herein or therein not misleading. 3.36 Software AG Canada. Software AG Canada does not have any material assets, liabilities (actual or contingent), commitments, or other obligations whatsoever, and has been used solely for purposes of preserving the rights of the Principals to the name "Software AG". Software AG Canada is currently in good standing in respect of its obligations under all applicable laws, including tax and similar laws, and is not in default of any material filing or other obligation under such laws. 3.37 Truth at Closing. Except as otherwise disclosed to and agreed to by the Buyer in writing after the date hereof, all of the representations, warranties, and agreements of the Seller and Principals contained in this Article III shall be true and correct and in full force and effect on and as of the Closing Date. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF BUYER AND GUARANTOR The Buyer and Guarantor hereby jointly and severally represent and warrant to the Seller acknowledging the Seller is relying thereon in entering into this Agreement and completing the transactions contemplated hereby, as follows: 4.01 Organization. The Buyer and the Guarantor are corporations validly existing and in good standing under the laws of their jurisdictions of incorporation with the corporate power and authority to conduct their business and to own and lease its properties and assets, and are duly qualified or licensed to do business and in good standing in each jurisdiction in which the failure to be so qualified or licensed would have a material adverse effect on its financial condition or operations. 4.02 Power and Authority. Each of the Buyer and the Guarantor has the power and authority to execute, deliver, and perform this Agreement and the Ancillary Agreements to be executed and delivered by it in connection with the transactions contemplated hereby and thereby, and each of the Buyer and the Corporation has taken all necessary corporate action to authorize the execution and delivery of this Agreement and the Ancillary Agreements and the consummation of the transactions contemplated hereby and thereby. This Agreement is, and, when such other and Ancillary Agreements are executed and --28-- delivered, such other Ancillary Agreements to be executed and delivered by the Buyer and the Guarantor in connection with the transactions contemplated hereby and thereby shall be, the legal, valid, and binding obligation of the Buyer or the Guarantor, as the case may be, enforceable in accordance with their terms. 4.03 Broker's or Finder's Fees. Neither the Buyer nor the Guarantor has authorized any person to act as broker, finder, or in any other similar capacity in connection with the transactions contemplated by this Agreement. 4.04 No Conflict. Neither the execution and delivery by the Buyer and the Guarantor of this Agreement and of the Ancillary Agreements to be executed and delivered by them in connection with the transactions contemplated hereby or thereby, nor the consummation by them of the transactions contemplated hereby or thereby will violate or conflict with any law applicable to the Buyer or the Guarantor, or any provision of any charter, bylaw, or other governing or organizational instrument of the Buyer or the Guarantor. 4.05 Interim Financial Statements. The interim financial statements of the Guarantor for the period ended July 31, 1997, a copy of which is attached as Schedule "5", have been prepared in accordance with US generally accepted accounting principles, consistently applied with the principles and procedures employed in prior periods. Such interim financial statements properly reflect all properties, assets and liabilities of the Guarantor and fairly present the results of operation and the financial position of the Guarantor as of the Interim Statement Date in conformity with US generally accepted accounting principles consistently applied with the principles and procedures employed in prior periods. ARTICLE V CONDUCT OF THE SOFTWARE BUSINESS PRIOR TO CLOSING 5.01 Ordinary Course of Business. The Principals and the Seller shall cause the Corporation to conduct the Software Business during the Interim Period diligently and substantially in the same manner as heretofore conducted, and not to institute any new methods of accounting or operation or engage in any transaction or activity, enter into any agreement, or make any commitment, except in the ordinary course of such business and consistent with past practice. 5.02 Preservation of Goodwill. The Principals and the Seller shall use their best efforts to cause the Corporation, during the Interim Period, to: --29-- (i) keep available the services of the present employees and agents of the Corporation and maintain existing relationships and goodwill with the suppliers, customers, distributors, partners and any others having business relations with it; (ii) preserve the possession and control of the Corporation's properties and assets and to preserve the confidentiality of any confidential or proprietary information of the Software Business; and (iii) conduct the Software Business in such a manner that on the Closing Date, the representations and warranties of the Seller and Principals contained in this Agreement shall be true, correct and complete as if such representations and warranties were made on and as of such date. 5.03 Prohibited Actions. In no event, without the prior written consent of the Buyer, shall the Seller or Principals during the Interim Period cause, permit or suffer the Corporation to: (a) Liabilities. Incur any material liability or obligation of any nature (whether accrued, absolute, contingent or otherwise), increase its indebtedness for borrowed money, or make any loan to any person, except current borrowings from banks in the ordinary course of business; (b) Liens. Permit any of the Material Assets to be subjected to any Encumbrance, except for Permitted Encumbrances. (c) Disposition of Material Assets. Waive any Claims of substantial value respecting the Material Assets, or sell, transfer, or otherwise dispose of any of the Material Assets, except in the ordinary course of business and consistent with past practice, including writing off as uncollectable any notes or accounts receivable or cancelling or waiving any material Claims or rights against third parties, other than the use of its cash reserves to fund the payment of the Special Dividend and the Special Share Redemption. (d) Licenses. Other than in the ordinary course of its licensing activities and consistent with past practice, dispose of, license, or permit to lapse any rights in any Intellectual Property. (e) Increases in Compensation. Increase the compensation of the officers, employees, or consultants of the Corporation, make any bonus or profit sharing commitment, distribution or payment of any kind, other than as contemplated by this Agreement, or grant any general increase in the rate of wages, salaries, bonuses or other remuneration of any executive or other employee, other than as contemplated by this Agreement. (f) Software Contracts. Enter into any new (or materially amend the terms of existing) Software Contracts other than in the ordinary course of business and consistent with past practice. --30-- (g) Capital Expenditures. Make any material capital expenditure or commitment therefor, other than the replacement of equipment in the ordinary course of business; (h) Accounting Changes. Make any material change in any method of accounting or auditing practice from those reflected in the Interim Financial Statements; (i) Maintain Insurance. Cancel or reduce any of its insurance coverage; or (j) Agreements. Agree, whether or not in writing, to do any of the foregoing. 5.04 Access. From the date of this Agreement to the Closing Date, the Seller shall (1) provide the Buyer with such information as the Buyer may from time to time reasonably request with respect to the Software Business and the transactions contemplated by this Agreement; (2) provide the Buyer and its officers, counsel, and other authorized representatives (including without limitation its advisors in connection with the Public Offering) access during regular business hours and upon reasonable notice to the books, records, and offices of the Corporation, as the Buyer may from time to time reasonably request; and (3) permit the Buyer to make such inspections thereof as the Buyer may reasonably request. Any investigation shall be conducted in such a manner as not to interfere unreasonably with the operation of the business of the Corporation. No investigations made by or on behalf of the Buyer, whether under this Section 5.04 or any other provision of this Agreement or any Ancillary Agreement, shall have the effect of waiving, diminishing the scope of or otherwise affecting any representation or warranty made in this Agreement. 5.05 Updating of Information. From the date of this Agreement to the Closing Date, the Seller shall deliver revised or supplementary schedules to this Agreement, containing accurate information as of the Closing Date, in order to enable the Buyer to confirm the accuracy of the Seller's representations and warranties and otherwise to give full effect to the provisions of this Agreement. Such revised or supplementary schedules shall not modify or be deemed part of this Agreement unless agreed by the Buyer in writing with reference to the specific schedules to be so treated. The foregoing obligation to furnish updated information shall apply to such Disclosure Schedule only insofar as material events or changes occur such as to make the contents of such Disclosure Schedule unreliable or misleading. 5.06 Approvals of Third Parties. The Seller and the Buyer shall make good faith efforts, and shall cooperate with one another, to secure all required Consents, and to obtain the satisfaction of the conditions specified in Articles VI and VII, as shall be required in order to enable the Seller and the Buyer to effect the transactions contemplated hereby in accordance with the terms and conditions hereof. --31-- 5.07 Filings and Authorizations. Each of the Seller and the Buyer, as promptly as practicable after the execution hereof, (i) will make, or cause to be made, all such filings and submissions under all laws applicable to it, as may be required for it to consummate the purchase and sale of the Purchased Securities in accordance with the terms of this Agreement; (ii) will use all reasonable efforts to obtain, or cause to be obtained, all material Consents from all persons and all material Authorizations from all Governmental Entities necessary or advisable to be obtained by it in order to consummate such transfer; and (iii) will use all reasonable efforts to take, or cause to be taken, all other actions necessary, proper or advisable in order for it to fulfill its obligations hereunder. The Seller and the Buyer will co-ordinate and co-operate with one another in exchanging such information and supplying such assistance as may be reasonably requested by each in connection with the foregoing. 5.08 Notice of Untrue Representation or Warranty. The Seller and the Principals shall notify the Buyer and the Guarantor, upon becoming aware that any representation or warranty of the Seller and Principals contained in this Agreement or any Ancillary Agreement is untrue or incorrect in any material respects during the Interim Period and for the purposes of this Section each representation and warranty shall be deemed to be given at and as of all times during the Interim Period. 5.09 Transfer of the Purchased Securities. The Seller shall take all necessary and reasonable steps and proceedings to permit good and marketable title to the Purchased Securities to be duly and validly transferred and assigned to the Buyer at the Time of Closing, free of all Encumbrances. ARTICLE VI CONDITIONS TO THE OBLIGATIONS OF THE SELLER AND THE PRINCIPALS The obligations of the Seller and Principals to be performed hereunder shall be subject to the satisfaction (or waiver by the Seller and Principals) at or prior to the Closing Date of each of the following conditions: 6.01 Representations and Warranties True at Closing Date. The representations and warranties of the Buyer and the Guarantor contained in this Agreement shall be true on and as of the Closing Date with the same force and effect as though made on and as of such date; the Buyer and the Guarantor shall have complied with the covenants and agreements set forth herein to be performed by it on or before the Closing Date; and the Buyer and the Guarantor shall have delivered to the Seller a certificate dated the Closing Date and signed by a duly authorized officer of each of the Buyer and the Guarantor to all such effects. --32-- 6.02 Authorization, Execution, Delivery, and Enforceability. All corporate action by the Buyer and the Guarantor required in order to authorize the transactions contemplated by this Agreement and the Ancillary Agreements in connection with the transactions contemplated hereby and thereby has been duly and validly taken; and this Agreement and such Ancillary Agreements have been duly executed and delivered by the Buyer and the Guarantor and constitute the valid and binding obligations of the Buyer and the Guarantor enforceable in accordance with their terms, except as to (1) such enforcement's being subject to bankruptcy, insolvency, reorganization, moratorium, or other laws relating to creditors' rights, or debtor's moratorium, and (2) the availability of the remedy of specific performance and other forms of equitable relief. 6.03 No Conflict. Neither the execution and delivery of this Agreement by the Buyer and the Guarantor, and the other agreements and instruments to be executed and delivered by them in connection with the transactions contemplated hereby and thereby, nor the consummation of the transactions contemplated hereby and thereby will violate the Certificate of Incorporation or Bylaws of the Buyer and the Guarantor or, contravene any statute or law, or any judgment, decree, order, regulation, or rule of any court or governmental authority pertaining to the Buyer and the Guarantor. (a) Deliveries for the Closing Date. The Buyer and the Guarantor shall have delivered or caused to be delivered to the Seller and the Principals on the Closing Date, the following in form and substance satisfactory to the Seller and the Principals, acting reasonably: (i) duly executed copies of the Ancillary Agreements required to be executed and delivered by either or both of the Buyer and the Guarantor as of the Closing Date; (ii) certified copies of (i) the charter documents and extracts from the by-laws of the Buyer and the Guarantor relating to the execution of documents; (ii) all resolutions of the shareholders, the board of directors or any duly authorized committee thereof, of each of the Buyer and the Guarantor approving the entering into of this Agreement and the Ancillary Agreements and the completion of all transactions contemplated hereunder and thereunder; and (iii) all other instruments evidencing necessary action of the Buyer and the Guarantor and of Authorizations, if any, with respect to such matters; (iii) certificates of the Secretary or an Assistant Secretary of each of the Buyer and the Guarantor certifying the names and true signatures of its officers authorized to sign this Agreement and the Ancillary Agreements to be delivered hereunder; (iv) a certificate of status, compliance, good standing or like certificate with respect to each of the Buyer and the Guarantor issued by appropriate government officials of the jurisdiction of its incorporation; --33-- (v) favourable opinions of counsel to the Buyer and the Guarantor as to the matters contemplated by this Agreement in form customary for transactions of this nature; and (vi) releases by the Corporation in favour of the Seller and the Principals in respect of all claims against them in their capacities as shareholders, officers, directors and employees of the Corporation for matters arising prior to the Closing Date, but specifically excluding any Claims that may be made by the Buyer under this Agreement or any Ancillary Agreement. If any condition, obligation or covenant of the Buyer or the Guarantor to be performed at or prior to the Time of Closing on the Closing Date shall not have been fulfilled or performed by such time, the Seller and the Principals may terminate this Agreement by notice in writing to the Buyer and the Guarantor, and in such event the Seller and the Principals shall be released from all obligations hereunder. The Buyer and the Guarantor shall only be released from their obligations hereunder if the condition or conditions for the non-performance of which the Seller and the Principals have terminated this Agreement are not reasonably capable of being performed or caused to be performed by the Buyer and the Guarantor. Notwithstanding the foregoing, the Seller and the Principals, shall be entitled to waive compliance with any of such conditions, obligations or covenants in whole or in part if they see fit to do so without prejudice to any of their rights of termination in the event of non-performance of any other condition, obligation or covenant in whole or in part. 6.04 Performance of Covenants. The Buyer and Guarantor shall have fulfilled or complied with all covenants herein contained to be performed or caused to be performed by them at or prior to the Time of Closing, and the Buyer and the Guarantor shall have delivered certificates to that effect. The receipt of such certificate and the Closing shall not be a waiver of the covenants of the Buyer and the Guarantor which are contained in this Agreement. ARTICLE VII CONDITIONS TO OBLIGATIONS OF THE BUYER AND THE GUARANTOR Each of the obligations of the Buyer and the Guarantor to be performed hereunder shall be subject to the satisfaction (or the waiver by the Buyer and the Guarantor) at or prior to the Closing Date of each of the following conditions: 7.01 Representations and Warranties True at Closing Date. The representations and warranties of the Seller and the Principals contained in this Agreement shall be true on and as of the Closing Date with the same force and effect as though made on and as of such date; the Seller and the Principals shall have complied with the covenants and agreements set forth herein to be performed by them on or before the Closing Date; and the Seller and the --34-- Principals shall have delivered to the Buyer and the Guarantor a certificate dated the Closing Date and signed by a duly authorized officer of the Seller and the Principals to all such effects. 7.02 Performance. (a) Performance of Covenants. The Seller and Principals shall have fulfilled or complied with all covenants herein contained to be performed or caused to be performed by them at or prior to the Time of Closing, and the Seller and the Principals shall have delivered certificates to that effect. The receipt of such certificate and the Closing shall not be a waiver of the covenants of the Seller and the Principals which are contained in this Agreement. (b) Consents and Authorizations. All Consents and Authorizations shall have been obtained on terms acceptable to the Buyer and the Guarantor acting reasonably, in order to permit the Closing of the sale of the Purchased Securities on the terms and conditions set out in this Agreement without adversely affecting any Material Asset, or resulting in the violation or a breach of or a default under or any termination, cancellation, amendment or acceleration of any obligation under any Material Contract. (c) Due Diligence. The Buyer and the Guarantor shall have completed their investigation into the books, records and affairs of the Corporation and such investigation shall not have disclosed any matter not previously disclosed in the Disclosure Schedule which the Buyer, acting reasonably, considers to be material to its decision to acquire the Purchased Securities. Neither any investigation of the Seller by the Buyer, nor the Disclosure Schedule hereto, nor any other document delivered to the Buyer as contemplated by this Agreement, shall have revealed any facts or circumstances that, in the good faith judgment of the Buyer, reflect in a material adverse way on the Material Assets, or the business, operations, or prospects of the Software Business. (d) Deliveries for the Closing Date. The Seller and the Principals shall have delivered or caused to be delivered to the Buyer on the Closing Date, the following in form and substance satisfactory to the Buyer and the Guarantor, acting reasonably: (i) share certificates representing the Purchased Securities duly endorsed in blank for transfer, or accompanied by irrevocable security transfer powers of attorney duly executed in blank, in either case by the holders of record thereof, together with evidence of satisfactory to the Buyer that the Buyer or its nominee(s) have been duly entered upon the books of the Corporation as the holder of the Purchased Securities; (ii) duly executed copies of the Ancillary Agreements required to be executed and delivered by the Seller and the Principals as of the Closing Date; (iii) certified copies of (i) the charter documents and extracts from the by-laws of the Seller and the Corporation relating to the execution of documents; (ii) all resolutions of the shareholders, the board of directors or any duly authorized committee thereof, of each of the Seller and the Corporation approving the --35-- entering into of this Agreement and the Ancillary Agreements and the completion of all transactions contemplated hereunder and thereunder; and (iii) all other instruments evidencing necessary action of the Seller and the Corporation and of Authorizations, if any, with respect to such matters; (iv) certificates of the Secretary or an Assistant Secretary of each of the Seller and the Corporation certifying the names and true signatures of its officers authorized to sign this Agreement and the Ancillary Agreements to be delivered hereunder; (v) a certificate of status, compliance, good standing or like certificate with respect to each of the Seller, the Predecessor Corporation, the Subsidiary and Software AG Canada, issued by appropriate government officials of the jurisdiction of its incorporation and, in the case of the Corporation of each other jurisdiction in which it carries on business as listed in the Disclosure Schedule; (vi) a favourable opinion of counsel to the Seller, the Principals and the Corporation as to the matters contemplated by this Agreement in form customary for transactions of this nature; (vii) all the originals of the books and records and the corporate records of the Corporation, the Predecessor Corporation, the Subsidiary and Software AG Canada; (viii) evidence that all necessary steps and proceedings as approved by counsel for the Buyer, acting reasonably, to permit all of the Purchased Securities to be fully and regularly transferred to the Buyer or its nominee(s) have been taken; (ix) a duly executed resignation, undated, of each director and officer of the Corporation (other than Andrew Coutts) and Software AG Canada as the Buyer may specify; (x) a duly executed release in favour of the Corporation and Software AG Canada of the Seller, the Principals and of such officers and directors of the Corporation as the Buyer may specify with respect to the period prior to the Closing Date; (xi) a duly executed resignation and release in favour of the Corporation of the auditor or accountant to become effective following the completion of the filing of the tax returns of the Corporation for the tax year ended as of the Closing Date; (xii) duly executed resolutions of the Seller, in its capacity as shareholder of the Corporation, consenting to the Amalgamation and authorizing the completion of all related transactions, and of the shareholders and directors of Software AG Canada to the transfer of the shares thereof by the Principals to the Corporation; --36-- (xiii) all necessary assurances, transfers, assignments and Consents, including all necessary Consents other than those excluded under Section 3.10, and any other instruments necessary or reasonably required effectively to transfer the Purchased Securities to the Buyer with a good title, free and clear of all Encumbrances; (xiv) evidence satisfactory to the Buyer that all Encumbrances other than Permitted Encumbrances have been discharged or released as of the Closing Date; (xv) evidence that the Amalgamation, Special Dividend and Special Share Redemption have been completed, in the manner contemplated by this Agreement or in such other manner as is acceptable to the Buyer, acting reasonably; (xvi) share certificates representing the securities of Software AG Canada duly endorsed in blank for transfer, or accompanied by irrevocable security transfer powers of attorney duly executed in blank, in either case by the holders of record thereof, together with evidence of satisfactory to the Buyer that the Corporation or its nominee(s) has been duly entered upon the books of Software AG Canada as the holder of all of such securities for nominal consideration; and (xvii) complete and unrestricted access to the facilities of the Software Business, located at 151 Savage Drive, Cambridge, Ontario, and at sites subject to the Leases. (e) Proceedings. All proceedings to be taken in connection with the transactions contemplated by this Agreement and any Ancillary Agreement shall be reasonably satisfactory in form and substance to the Buyer and the Buyer shall have received copies of all such instruments and other evidence as it may reasonably request in order to establish the consummation of such transactions and the taking of all proceedings in connection therewith. (f) No Legal Action. No action or proceeding shall be pending or threatened by any person in any jurisdiction, to enjoin, restrict or prohibit any of the transactions contemplated hereby or the right of the Corporation to conduct the Software Business after Closing on substantially the same basis as operated prior to Closing. (g) Change in Law. Since the date hereof, no law, proposed law, any change in any law, or the interpretation or enforcement of any law shall have been introduced, enacted or announced (including the introduction, enactment or announcement of any law respecting taxes or environmental matters or any change therein or in the interpretation or enforcement thereof), the effect of which will be to prevent or to increase, in any material respect (i) the cost to the Buyer of the completion of the transactions contemplated in this Agreement; or (ii) the cost of the Corporation of operating the Software Business after Closing on substantially the same basis as heretofore operated. If any condition, obligation or covenant of the Seller or the Principals to be performed at or prior to the Time of Closing on the Closing Date shall not have been fulfilled or performed by such time, the Buyer may terminate this Agreement by notice in writing to them, and in such event the --37-- Buyer shall be released from all obligations hereunder. The Seller and the Corporation shall only be released from their obligations hereunder if the condition or conditions for the non-performance of which the Buyer has terminated this Agreement are not reasonably capable of being performed or caused to be performed by them. Notwithstanding the foregoing, the Buyer shall be entitled to waive compliance with any of such conditions, obligations or covenants in whole or in part if it sees fit to do so without prejudice to any of its rights of termination in the event of non-performance of any other condition, obligation, or covenant in whole or in part. ARTICLE VIII CLOSING 8.01 Closing. The closing of the purchase and transfer of the Purchased Securities (the "Closing") shall take place at the law offices of Gowling, Strathy & Henderson, Suite 1020, 50 Queen Street North, Kitchener, Ontario, at the Time of Closing on the Closing Date. 8.02 Actions at Closing. Subject to satisfaction or waiver by the relevant Party of the conditions of Closing set forth herein, at the Time of Closing the transactions contemplated by this Agreement shall be completed. The transfer of the Purchased Securities shall be deemed to take effect as at the time of Closing on the Closing Date. 8.03 Further Assurances. At and after the Closing, without further consideration, the Buyer and the Seller shall take all such other action and shall procure or execute, acknowledge, and deliver all such further certificates, conveyance instruments, Consents, and other documents as the other party or its counsel may reasonably request to ensure more effectively the compliance of such party with its agreements, covenants, warranties, and representatives under this Agreement. 8.04 Tax Matters. (a) The Seller's Right and Responsibility for Preclosing Tax Matters. The Seller shall have the right and responsibility to direct the handling of all tax matters affecting or relating to the conduct of the Software Business prior to the Closing Date, subject to the review and reasonable approval of the Buyer including the prosecution of all administrative and judicial remedies, the settlement of all issues, and the execution of agreements, Consents, or waivers, extending the statute of limitations. In this regard, in preparing tax returns for the Corporation for the taxation year immediately preceding the taxation year in which the Special Share is redeemed, credit for foreign income taxes will be claimed against provincial corporate income taxes to the maximum extent possible before any claim for foreign tax credits to reduce federal income taxes. --38-- (b) The Buyer's Cooperation. The Buyer shall use its reasonable efforts to provide the Seller such assistance as it may reasonably request in connection with matters relating to taxes, including information with respect to the Seller's preparation of any returns of taxes, any audit or other examination by any taxing authority, any judicial or administrative proceeding relating to the Seller's liability for taxes, or any Claims arising hereunder after the Closing Date. The Buyer shall retain and provide the Seller with reasonable access during normal business hours to records or information pertaining to periods prior to the Closing Date which may be relevant to any such return, audit, examination, proceeding, or determination, and the Buyer shall retain all such books and records for so long as necessary in keeping with applicable statutes of limitations. 8.05 Post-Closing Covenants of the Buyer and Guarantor. The Buyer and the Guarantor covenant and agree with the Seller and Principals as follows: (a) They shall, in connection with any potential future completion of a Public Offering, to the extent permitted under applicable securities laws cause the Corporation to permit the employees of the Corporation to participate in any stock option plan adopted by the entity pursuing such Public Offering on the same basis as employees of such entity and its other affiliates, and, in the event no Public Offering is completed, permit Andrew Coutts and Allan Foerster to be eligible to participate in any employee equity incentive plan in place for Software AG Systems Inc. and its affiliates on the same basis as employees of the Guarantor and its affiliates. (b) They shall cause the Corporation to continue to operate the Software Business in the ordinary course following the Closing Date consistent with past practise. (c) They shall cause the Corporation to provide each employee of the Corporation who remains with the business as of the end of the 1997 fiscal year with a year end cash bonus. The total year-end cash bonus will not exceed $1.3 million. The payments of such bonus to employees of the Corporation shall be made forthwith following the completion of the fiscal year ended November 30, 1997 in accordance with the provisions of Schedule 6, provided that in the event that any such employee ceases to be an officer or employee of the Corporation the obligation of the Corporation to make such payment shall terminate and the amount otherwise payable to such employee shall be allocated among such other employees of the Corporation as are mutually agreed by the Buyer and Andrew Coutts, each acting reasonably (other than in the case of employees terminated by the Corporation without cause who shall be entitled to a pro rated portion of the amount set forth in Schedule "6" to the date of such termination and the balance of such amount shall be allocated among other employees as provided above). The payment and performance by the Corporation of its obligation to pay the employee bonuses as set forth herein shall be secured pursuant to the guarantees and security of the Guarantor, the Buyer and the Corporation forming part of the Ancillary Documents --39-- ARTICLE IX SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNITIES 9.01 Survival of Representations and Warranties. (1) The representations and warranties of the Seller and Principals contained in this Agreement or any Ancillary Agreement shall survive the Closing and, notwithstanding such or any investigation made by or on behalf of the Buyer and the Guarantor, shall continue in full force and effect for the benefit of the Buyer and the Guarantor for a period of two (2) years from the Closing Date and any Claim in respect thereof (except a Claim based on tax matters under Section 3.27, which shall continue until the expiry of the relevant limitation period, or a Claim based on a breach of Sections 3.04, 3.05 or 3.06 or on fraud, which shall have no restriction) shall be made in writing within such time period. (2) The representations and warranties of the Buyer and Guarantor contained in this Agreement or in any Ancillary Agreement shall survive the Closing and, notwithstanding such Closing or any investigation made by or on behalf of the Seller and the Principals, shall continue in full force and effect for the benefit of the Seller and the Principals for a period of two (2) years from the Closing Date and any Claim in respect thereof (except a Claim based on fraud, which shall have no restriction) shall be made in writing within such time period. 9.02 Indemnification in Favour of the Buyer and Guarantor. Subject to Section 9.05, the Seller and Principals shall jointly and severally indemnify and save the Buyer and Guarantor, and their respective shareholders, directors, officers, employees, agents and representatives, (in respect of whom the Buyer hereby acts as agent and trustee with respect thereto) harmless of and from any Claim or loss suffered by, imposed upon or asserted against the Buyer or Guarantor as a result of, in respect of, connected with or arising out of, under or pursuant to: (a) any failure of the Seller or Principals to perform or fulfil any covenant of the Seller or Principals under this Agreement or any Ancillary Agreement; (b) subject to the limitation periods set forth in Section 9.01, any breach or inaccuracy of any representation or warranty given by the Seller contained in this Agreement or in any Ancillary Agreement; and (c) any failure to obtain any material Consent or Authorization. 9.03 Indemnification in Favour of the Seller. Subject to Section 9.05, the Buyer and the Guarantor shall jointly and severally indemnify and save the Principals and the Seller and its shareholders, directors, officers, employees, agents and representatives (in respect of whom the Buyer hereby acts as agent and trustee with respect thereto) harmless of and from any Claim or loss suffered by, imposed upon or asserted against --40-- the Principals or the Seller as a result of, in respect of, connected with or arising out of, under or pursuant to: (a) any failure by the Buyer to perform and fulfil any covenant of the Buyer under this Agreement or any Ancillary Agreement; and (b) subject to the limitation period set forth in Section 9.01 hereof, any breach or inaccuracy of any representation or warranty given by the Buyer contained in this Agreement or in any Ancillary Agreement. 9.04 Indemnification Proceedings. (1) Any Party seeking indemnification under this Article (the "indemnified party") shall forthwith notify the Party against whom a Claim for indemnification is sought hereunder (the "indemnifying party") in writing, which notice shall specify, in reasonable detail, the nature and estimated amount of the Claim provided that, in so doing, it may restrict or condition any disclosure in the interest of preserving privileges of importance in any foreseeable litigation. If a Claim by a third party is made against an indemnified party, and if the indemnified party intends to seek indemnity with respect thereto under this Article, the indemnified party shall promptly (and in any case within 15 days of such Claim being made) notify the indemnifying party of such with reasonable particulars. The indemnifying party shall have 30 days after receipt of either such notice to undertake, conduct and control, through counsel of its own choosing and at its expense, the settlement or defence thereof, and the indemnified party shall co-operate with it in connection therewith; except that with respect to settlements entered into by the indemnifying party (i) the consent of the indemnified party shall be required if the settlement provides for equitable relief against the indemnified party, which consent shall not be unreasonably withheld or delayed; and (ii) the indemnifying party shall obtain the release of the indemnified party. If the indemnifying party undertakes, conducts and controls the settlement or defence of such Claim (i) the indemnifying party shall permit the indemnified party to participate in (subject to the indemnifying party's right to conduct and control) such settlement or defence through counsel chosen by the indemnified party, provided that the fees and expenses of such counsel shall be borne by the indemnified party; and (ii) the indemnifying party shall promptly reimburse the indemnified party for the full amount of any loss resulting from any Claim and all related expenses (other than the fees and expenses of counsel as aforesaid) incurred by the indemnified party upon the final settlement or adjudication of such claims. The indemnified party shall not pay or settle any Claim so long as the indemnifying party is reasonably contesting any such Claim in good faith on a timely basis. Notwithstanding the two immediately preceding sentences, the indemnified party shall have the right to pay or settle any such Claim, provided that in such event it shall waive any right to indemnity therefor by the indemnifying party. (2) With respect to third party Claims, if the indemnifying party does not notify the indemnified party within 30 days after the receipt of the indemnified party's notice of a Claim of indemnity hereunder that it elects to undertake the defence thereof, the indemnified party shall have the right, but not the obligation, to contest, settle or compromise the Claim in the exercise of its reasonable judgement at the expense of the indemnifying party. --41-- (3) In the event of any Claim by a third party against an indemnified party, the defence of which is being undertaken and controlled by the indemnifying party, the indemnified party will use all reasonable efforts to make available to the indemnifying party those employees whose assistance, testimony or presence is necessary to assist the indemnifying party in evaluating and in defending any such Claims; provided that the indemnifying party shall be responsible for the expense associated with any employees made available by the indemnified party to the indemnifying party hereunder, which expense shall be equal to a reasonable amount to be mutually agreed upon per person per hour or per day for each day or portion thereof that such employees are assisting the indemnifying party and which expenses shall not exceed the actual cost to the indemnified party associated with such employees. (4) With respect to third party Claims, the indemnified party shall make available to the indemnifying party or its representatives on a timely basis all documents, records and other materials in the possession of the indemnified party, at the expense of the indemnifying party, reasonably required by the indemnifying party for its use in defending any Claim and shall otherwise co-operate on a timely basis with the indemnifying party in the defence of such Claim. (5) With respect to any re-assessment for income, corporate sales, excise, or other tax or other liability enforceable by Encumbrance against the property of the indemnified party, the indemnifying party's right to so contest shall only apply after the payment of such re-assessment or the provision of such security, in each case as is necessary to avoid an Encumbrance being placed on the property of the indemnified party, or the taking of such other steps as are acceptable to the indemnified party, acting reasonably. (6) In the event that the indemnified party and indemnifying party do not agree as to the amount of a Claim asserted hereunder with respect to a breach of a representation or misrepresentation under this Agreement within a period of 30 days following notification of such Claim, and the amount of such Claim (together with all other Claims in respect of which indemnification has been sought), exceeds $100,000, either of the parties shall be entitled forthwith thereafter to refer all of such Claims in dispute to arbitration before a single arbitrator in Toronto, Ontario pursuant to the provisions of the Arbitration Act (Ontario) which determination shall be final, conclusive and binding on the parties with respect to the subject matter of such Claim. The party prevailing in such proceeding shall be entitled to be reimbursed for all of its costs and expenses incurred in connection therewith by the other party in addition to such other relief as may be granted as a result of such proceeding. 9.05 Limitations. Notwithstanding anything in this Article IX to the contrary: (a) Maximum Liability. The total liability of the Seller and the Principals to the Buyer and the Guarantor for indemnification pursuant to this Article IX, exclusive of Claims based on any breach of the representations and warranties contained in Section 3.27, the covenants and agreements of the Seller contained in this Agreement, or if attended by fraud or any knowing or willful breach --42-- thereof, any other representations and warranties, shall not exceed $4,000,000; but the liability of the Seller and the Principals to the Buyer for indemnification for Claims based on tax matters under Section 3.27 and such other excluded matters shall not be limited in amount. Notwithstanding the foregoing, no Claims may be made until the aggregate of the Claims of the Buyer and the Guarantor exceed $25,000, but in such event the entire amount of such Claims may be sought. (b) Exclusive Remedy. The Parties hereto acknowledge and agree that this Article IX is the exclusive remedy of the parties hereto for damages for breach or misrepresentation of or under this Agreement. This provision is not intended to preclude any proceeding by any Party against any other Party based on a cause of action or right, including any statutory right, other than a cause of action in contract for breach of a representation, warranty or agreement contained in this Agreement provided that (i) such Claim involves an amount in excess of $250,000; (ii) such Claim must be made within a period of two years following the date hereof; and (iii) the aggregate liability of the Seller or the Principals in respect of such Claim shall not exceed the $4,000,000 limitation set forth in 9.05(a) after taking into account all Claims made for breaches of representations as of the date of such Claim. In the event of any such Claim, the Principals and the Seller shall have the benefit of (i) the provisions of this Article IX in the event of Claims as to procedural matters based on third party claims; and (ii) the arbitration provisions of Section 9.04(6). ARTICLE X CONFIDENTIALITY 10.01 Confidentiality Obligation of the Buyer Prior to Closing. Until Closing (and, if this Agreement is terminated for any reason, forever thereafter), the Buyer shall, and shall use its best efforts to cause its personnel, agents and professional advisors to, hold in strict confidence, not disclose to any person without the prior written consent of the Seller, and not use in any manner except in connection with the transactions contemplated hereby, any confidential business, financial or technical information obtained from the Seller or the Corporation in connection with the transactions contemplated hereby. This obligation shall cease to apply to the Buyer upon the occurrence of Closing. In the event that this Agreement terminates for any reason, the Buyer shall return to the Seller or destroy all materials in its possession containing any such confidential information, including all copies, extracts, adaptations, and transcriptions thereof. 10.02 Confidentiality Obligation of the Seller and Principals Following Closing. Following the occurrence of Closing, the Seller and Principals shall, and shall use their best efforts to cause their personnel, agents and professional advisors to, hold in strict confidence, not disclose to any person without the prior written consent of the Buyer, and not use in any manner whatsoever, any confidential business, financial or technical information remaining in their possession concerning the Software Business or the Material Assets. Such confidential information specifically includes all source code, system and user documentation, and other Technical Documentation pertaining to the Software Programs, including any proposed design and specifications for future products and products in development, marketing plans, and all other --43-- technical and business information concerning the Software Business. Promptly following Closing, the Seller shall surrender to the Buyer or destroy all materials remaining in their possession containing any such confidential information, including all copies, extracts, adaptations, and transcriptions thereof. 10.03 Permitted Disclosures. Notwithstanding Sections 10.01 and 10.02, either party may disclose confidential information (1) where necessary to any Governmental Entity as required by law or (2) if otherwise required by court order or decree. 10.04 Scope of Confidential Information. For purposes of this Agreement, information shall not be deemed confidential (1) if such information is available in full from public sources; (2) if such information is received from a third party not under an obligation to keep such information confidential; or (3) if the recipient can conclusively demonstrate that such information was independently developed by the recipient. ARTICLE XI MISCELLANEOUS 11.01 Parties Bound by Agreement; Successors and Assigns. The terms, conditions, and obligations of this Agreement shall inure to the benefit of and be binding upon the parties hereto and the respective successors and assigns thereof. Without the prior written consent of the other party, the Buyer may assign its rights, duties, or obligations hereunder or any part thereof to any other person, which shall thereupon become the Buyer, provided that at the time of such assignment the Buyer unconditionally and irrevocably guarantees the payment and performance of any duties or obligations so assigned. None of the rights or obligations hereunder shall be assignable or transferable by any Party without the prior written consent of the other Parties. 11.02 Time of the Essence. Time shall be of the essence of this Agreement. 11.03 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an original and all of which shall constitute the same instrument and by telecopier or other similar means of electronic reproducible transmission and if so executed shall be legal, valid and binding on the party so signing as if originally signed. --44-- 11.04 Headings. The headings of the Sections and paragraphs of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction hereof. 11.05 Expenses. The Seller and the Buyer shall each pay all costs and expenses incurred by it or on its behalf in connection with this Agreement and the transactions contemplated hereby, including fees and expenses of its own financial consultants, accounts, and counsel. 11.06 Notices. Any notice, request, instruction, or other document to be given hereunder by any party hereto to any other party hereto shall be in writing and delivered personally, or sent by telecopy, registered or certified mail, postage prepaid, if to the Seller or the Principals prior to the Closing to its attention at: 151 Savage Drive Cambridge, Ontario Attention: Robert D. Nickel Telecopier: (519) 622-1282 and, after Closing, to its attention at: R.R. # 2 Puslinch, Ontario N0B 2J0 with a copy to: Gowling, Strathy & Henderson Suite 1020 50 Queen Street North Kitchener, Ontario N2H 6M2 Attention: W. David Petras Telecopier: (519) 576-6030 --45-- if to the Buyer or the Guarantor to its attention at: 11190 Sunrise Valley Drive Reston, VA 20194 Attention: Daniel Gillis Telecopier: (703) 391-6782 with a copy to: Software AG Americas, Inc. 11190 Sunrise Valley Drive Reston, VA 20194 Attention: Legal Department Telecopier: (703) 391-6980 or at such other address for a party as shall be specified by like notice. Any notice that is delivered personally in the manner provided herein shall be deemed to have been duly given to the party to whom it is directed upon actual receipt by such party (or its agent for notices hereunder). Any notice that is delivered by telecopier or other similar form of telecommunications shall be deemed to have been duly given to the party to whom it is directed on the next business day following such transmission. Any notice that is addressed and mailed in the manner herein provided shall be conclusively presumed to have been duly given to the party to which it is addressed at the close of business, local time of the recipient, on the seventh business day after the day it is so placed in the mail. 11.07 Public Announcements. The Seller and the Buyer shall consult with each other before issuing any press releases or otherwise making any public statements with respect to this Agreement and the transactions contemplated hereby. Neither the Seller nor the Buyer shall issue any such press release or make any public statement without the agreement of the other party, except as such party's counsel advises in writing may be required by law. 11.08 Third-Party Beneficiaries. With the exception of (1) the Parties and (2) the other persons with respect to the matters inuring to their benefit under Article IX, there shall exist no right of any person to claim a beneficial interest in this Agreement or any rights arising by virtue of this Agreement. 11.09 Non-Merger. Except as otherwise expressly provided in this Agreement, the covenants, representations and warranties of the Parties contained in this Agreement and the Ancillary Agreements shall not --46-- merge on and shall survive the Closing for the periods specified in Section 9.01 and, notwithstanding such Closing, or any investigation made by or on behalf of any Party, shall continue in full force and effect. IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed on its behalf as of the date first above written [SIGNATURE ILLEGIBLE] /s/ Robert D. Nickel - --------------------------- ---------------------------------- Witness: Robert D. Nickel [SIGNATURE ILLEGIBLE] /s/ Joyce Nickel - --------------------------- ---------------------------------- Witness: Joyce Nickel SOFTWARE AG AMERICAS, INC. By:/s/ James Daly ------------------------------- James Daly Vice-President and Secretary SOFTWARE AG SYSTEMS (CANADA) INC. By:/s/ Timothy Hill ------------------------------- Timothy Hill Executive Vice-President CAELUM INVESTMENTS INC. By:/s/ Robert D. Nickel ------------------------------- Robert D. Nickel President EX-10.4 4 MEMORANDUM OF UNDERSTANDING -- GILLIS EXHIBIT 10.4 MEMORANDUM OF UNDERSTANDING Employment of Daniel F. Gillis Title: President & CEO --------------- 1. INDENT & PURPOSE ---------------- Software AG Systems, Inc. ("SAGSI") desires to continue your employment in an Executive Manager capacity. SAGSI Employs you as President and CEO, and to perform and discharge such services and duties reasonably commensurate with such position and as shall be assigned to you from time to time by the Board of Directors of SAGSI. This Memorandum is intended to outline the rights and responsibilities of SAGSI and you in the event of termination caused by either party. It is NOT intended as, nor should it be considered, an employment contract. 2. EMPLOYMENT AT WILL ------------------ SAGSI is an at will employer. Either you or SAGSI may terminate the employment -- ---- relationship at any time. 3. DESIRE OF NOTICE ---------------- Though the employment relationship is at will, each party is required to give the other ninety (90) days' written notice of intent to terminate the employment relationship, including a termination due to retirement. 4. DEFINITION OF CAUSE ------------------- For purposes of this MEMORANDUM, "cause" means: felonious illegal acts as determined by a competent court of law within the United States, as well as the breach or violation of any other signed agreements, i.e. Confidentiality Agreements, etc., and the destruction of Company property. 5. TERMINATION ----------- In the event SAGSI shall terminate your employment, other than for cause, it will pay severance benefits equal to twelve (12) months of your then-current salary, plus annual bonus ($460,000 minimum). This amount will be paid out in equal monthly increments over a year. Additionally, for the period of time to which the severance payments relate or until you find alternative employment if earlier, SAGSI will continue your health and other fringe benefits as provided under the SAGSI plan(s) made generally available to all employees, and pay you on a monthly basis, an amount equal to your car allowance. Memorandum of Understanding Page 2 Voluntary resignation will be considered "termination other than for cause" by SAGSI if the resignation is not in anticipation of a discharge for "cause" and occurs within ninety (90) days of a substantial change in title or substantial reduction in your compensation and benefits or a substantial reduction in your job. Voluntary resignation in any other circumstance will not be considered "termination other than for cause" by SAGSI, and no severance or other benefits will be due under this Section 5 in connection with such a resignation. 6. SUCCESSORS BOUND ---------------- SAGSI's rights and obligations under this Memorandum shall be binding upon its successors and assigns. 7. OTHER AGREEMENTS ---------------- Upon execution, this Memorandum of Understanding will replace and supersede any prior existing agreements between SAGSI and you relating to severance. --------- /s/ Rick Rickertsen 4/24/97 - ------------------------------ --------------------------- Rick Rickertsen Date for the Board of Directors /s/ Daniel F. Gillis 4/24/97 - ------------------------------ --------------------------- Daniel F. Gillis Date President and CEO EX-10.5 5 MEMORANDUM OF UNDERSTANDING -- MCCREERY EXHIBIT 10.5 MEMORANDUM OF UNDERSTANDING Employment of Harry K. McCreery ----------------- Tide: Chief Financial Officer ----------------------- 1. INTENT & PURPOSE - ------------------- Software AG Americas, Inc. ("SAGA") desires to continue your employment in an Executive Manager capacity. SAGA employs you as Chief Financial Officer to perform and discharge such services and duties reasonably commensurate with such position and as shall be assigned to you from time to time by the President of SAGA. This Memorandum is intended to outline the rights and responsibilities of SAGA and you in the event of termination caused by either party. It is NOT intended as, nor should it be considered, an employment contract. 2. EMPLOYMENT AT WILL - --------------------- SAGA is an at will employer. Either you or SAGA may terminate the employment ------- relationship at any time. 3. DESIRE OF NOTICE - ------------------- Though the employment relationship is at will, each party is encouraged to give the other thirty (30) days' written notice of intent to terminate the employment relationship, including a termination due to retirement. 4. DEFINITION OF CAUSE - ---------------------- For purposes of this Memorandum, "cause" means: felonious illegal acts as determined by a competent court of law within the United States, as well as the breach or violation of any other signed agreements, i.e. Confidentiality Agreements, etc., and the destruction of Company property. 5. TERMINATION - -------------- In the event SAGA shall terminate your employment, other than for cause, it will pay severance benefits (lump sum within thirty (30) days of termination) equal to twelve (12) months (inclusive of notice period) of your then-current salary. Additionally, for the period of time to which the severance payments relate or until you find alternative employment if earlier, SAGA will continue your health and other fringe benefits as provided under the SAGA plan(s) made generally available to all employees, and pay you on a monthly basis, an amount equal to your car allowance. Page 2 Voluntary resignation will be considered "termination other than for cause" by SAGA if the resignation is not in anticipation of a discharge for "cause" and occurs within ninety (90) days of a substantial change in title or substantial reduction in your compensation and benefits (other than in association with a company-wide reduction) or a substantial reduction in your job responsibilities (other than a reduction in responsibility deemed by the President to be in the best business interests of SAGA). Voluntary resignation in any other circumstance will not be considered "termination other than for cause" by SAGA, and no severance or other benefits will be due under this Section 5 in connection with such a resignation. 6. INCENTIVE BONUS - ------------------ Bonus payment will be paid at time of termination. Payment will be pro rata based on calendar year and assumes 100% corporate achievement. For illustration purposes, if an executive earns $100,000 per year with a 50% bonus opportunity and termination occurs on July 31, the bonus paid will be 100K x .50 x 100 (corporate achievement) x 7/12 (pro rata). 7. SUCCESSORS BOUND - ------------------- SAGA's rights and obligations under this Memorandum shall be binding upon its successors and assigns. 8. OTHER AGREEMENTS - ------------------- Upon execution, this Memorandum of Understanding will replace and supersede any prior existing agreements between SAGA and you relating to severance. --------- /s/ Dan Gillis 12/16/96 - ----------------------------------- ------------- Dan Gillis, President and CEO Date /s/ Harry K. McCreery Dec. 16, 1996 - ----------------------------------- ------------- Harry K. McCreery Date Chief Financial Officer EX-10.6 6 MEMORANDUM OF UNDERSTANDING -- BRIGDEN EXHIBIT 10.6 MEMORANDUM OF UNDERSTANDING Employment of Derek M. Brigden ---------------- Title: Vice President Operations and Chief Information Officer ------------------------------------------------------- 1. INTENT & PURPOSE - ------------------- Software AG Americas, Inc. ("SAGA") desires to continue your employment in an Executive Manager capacity. SAGA employs you as Vice President Operations and Chief Information Officer to perform and discharge such services and duties reasonably commensurate with such position and as shall be assigned to you from time to time by the President of SAGA. This Memorandum is intended to outline the rights and responsibilities of SAGA and you in the event of termination caused by either party. It is NOT intended as, nor should it be considered, an employment contract. 2. EMPLOYMENT AT WILL - --------------------- SAGA is an at will employer. Either you or SAGA may terminate the employment ------- relationship at any time. 3. DESIRE OF NOTICE - ------------------- Though the employment relationship is at will, each party is encouraged to give the other thirty (30) days' written notice of intent to terminate the employment relationship, including a termination due to retirement. 4. DEFINITION OF CAUSE - ---------------------- For purposes of this Memorandum, "cause" means felonious illegal acts as determined by a competent court of law within the United States, as well as the breach or violation of any other signed agreements, i.e. Confidentiality Agreements, etc., and the destruction of Company property. 5. TERMINATION - -------------- In the event SAGA shall terminate your employment, other than for cause, it will pay severance benefits (lump sum within thirty (30) days of termination) equal to twelve (12) months (inclusive of notice period) of your then-current salary. Additionally, for the period of time to which the severance payments relate or until you find alternative employment if earlier, SAGA will continue your health and other fringe benefits as provided under the SAGA plan(s) made generally available to all employees, and pay you on a monthly basis, an amount equal to your car allowance. Page 2 Voluntary resignation will be considered "termination other than for cause" by SAGA if the resignation is not in anticipation of a discharge for "cause" and occurs within ninety (90) days of a substantial change in title or substantial reduction in your compensation and benefits (other than in association with a company-wide reduction) or a substantial reduction in your job responsibilities (other than a reduction in responsibility deemed by the President to be in the best business interests of SAGA). Voluntary resignation in any other circumstance will not be considered "termination other than for cause" by SAGA, and no severance or other benefits will be due under this Section 5 in connection with such a resignation. 6. INCENTIVE BONUS - ------------------ Bonus payment will be paid at time of termination. Payment will be pro rata based on calendar year and assumes 100% corporate achievement. For illustration purposes, if an executive earns $100,000 per year with a 50% bonus opportunity and termination occurs on July 31, the bonus paid will be 100K x .50 x 100 (corporate achievement) x 7/12 (pro rata). 7. SUCCESSORS BOUND - ------------------- SAGA's rights and obligations under this Memorandum shall be binding upon its successors and assigns. 8. OTHER AGREEMENTS - ------------------- Upon execution, this Memorandum of Understanding will replace and supersede any prior existing agreements between SAGA and you relating to severance. --------- /s/ Dan Gillis 12/13/96 - ----------------------------------- -------- Dan Gillis, President and CEO Date /s/ Derek M. Brigden 12/13/96 - ---------------------------------- -------- Derek M. Brigden, VP Operations & CIO Date EX-10.7 7 MEMORANDUM OF UNDERSTANDING -- DALY EXHIBIT 10.7 MEMORANDUM OF UNDERSTANDING Employment of James H. Daly ------------- Title: Vice-President, Secretary and General Counsel ---------------------------------------------- Vice President International Operations --------------------------------------- 1. INTENT & PURPOSE - ------------------- Software AG Americas, Inc. ("SAGA") desires to continue your employment in an Executive Manager capacity. SAGA employs you as Vice-President, Secretary and General Council, and Vice-President, International Operations, to perform and discharge such services and duties reasonably commensurate with such position and as shall be assigned to you from time to time by the President of SAGA. This Memorandum is intended to outline the rights and responsibilities of SAGA and you in the event of termination caused by either party. It is NOT intended as, nor should it be considered, an employment contract. 2. EMPLOYMENT AT WILL - --------------------- SAGA is an at will employer. Either you or SAGA may terminate the employment ------- relationship at any time. 3. DESIRE OF NOTICE - ------------------- Though the employment relationship is at will, each party is encouraged to give the other thirty (30) days' written notice of intent to terminate the employment relationship, including a termination due to retirement. 4. DEFINITION OF CAUSE - ---------------------- For purposes of this Memorandum, "cause" means: felonious illegal acts as determined by a competent court of law within the United States, as well as the breach or violation of any other signed agreements, i.e. Confidentiality Agreements, etc., and the destruction of Company property. 5. TERMINATION - -------------- In the event SAGA shall terminate your employment, other than for cause, it will pay severance benefits (lump sum within thirty (30) days of termination) equal to twelve (12) months (inclusive of notice period) of your then-current salary. Additionally, for the period of time to which the severance payments relate or until you find alternative employment if earlier, SAGA will continue your health and other fringe benefits as provided under the SAGA plan(s) made generally available to all employees, and pay you on a monthly basis, an amount equal to your car allowance. Page 2 Voluntary resignation will be considered "termination other than for cause" by SAGA if the resignation is not in anticipation of a discharge for "cause" and occurs within ninety (90) days of a substantial change in title or substantial reduction in your compensation and benefits (other than in association with a company-wide reduction) or a substantial reduction in your job responsibilities (other than a reduction in responsibility deemed by the President to be in the best business interests of SAGA). Voluntary resignation in any other circumstance will not be considered "`termination other than for cause'" by SAGA, and no severance or other benefits will be due under this Section 5 in connection with such a resignation. 6. INCENTIVE BONUS - ------------------ Bonus payment will be paid at time of termination. Payment will be pro rata based on calendar year and assumes 100% corporate achievement. For illustration purposes, if an executive earns $100,000 per year with a 50% bonus opportunity and termination occurs on July 31, the bonus paid will be 100K x .50 x 100 (corporate achievement) x 7/12 (pro rata). 7. SUCCESSORS BOUND - ------------------- SAGA's rights and obligations under this Memorandum shall be binding upon its successors and assigns. 8. OTHER AGREEMENTS - ------------------- Upon execution, this Memorandum of Understanding will replace and supersede any prior existing agreements between SAGA and you relating to severance. --------- /s/ Dan Gillis 12/13/96 - ----------------------------- -------- Dan Gillis, President and CEO Date /s/ James H. Daly 12/18/96 _____________________________ -------- James H. Daly Date Vice-President, Secretary and General Counsel Vice-President International Operations EX-10.8 8 MEMORANDUM OF UNDERSTANDING -- GORLEY EXHIBIT 10.8 MEMORANDUM OF UNDERSTANDING Employment of Thomas Gorley ------------- Title: Vice President, Professional Services 1. INTENT & PURPOSE - ------------------- Software AG of North America, Inc. ("SAGNA") desires to continue your employment in an Executive Manager capacity. SAGNA employs you as Vice President, Professional Services to perform and discharge such services and duties reasonably commensurate with such position and as shall be assigned to you from time to time by the President of SAGNA. This Memorandum is intended to outline the rights and responsibilities of SAGNA and you in the event of termination caused by either party. It is NOT intended as, nor should it be considered, an employment contract. 2. EMPLOYMENT AT WILL - --------------------- SAGNA is an at will employer. Either you or SAGNA may terminate the employment ------- relationship at any time. 3. DESIRE OF NOTICE - ------------------- Though the employment relationship is at will, each party is encouraged to give the other thirty (30) days written notice of intent to terminate the employment relationship, including a termination due to retirement. 4. DEFINITION OF CAUSE - ---------------------- For purposes of this Memorandum, "cause" means: 1) Misconduct or conduct by you which is illegal, dishonest, or involves moral turpitude; 2) Conduct which jeopardizes SAGNA's right or ability to operate its business; 3) The breach or violation of any other signed agreements, i.e. Confidentiality Agreements, etc.; or 4) The destruction of Company property or business. 5. TERMINATION - -------------- In the event SAGNA shall terminate your employment, other than for cause, it will pay severance benefits (lump sum within thirty (30) days of termination) equal to twelve (12) months of your then-current salary. Additionally, for the period of time to which the severance payments relate or until you find alternative employment if earlier, SAGNA will continue your health and other fringe benefits as provided under the SAGNA plan(s) made generally available to all employees, and pay you on a monthly basis, an amount equal to your car allowance. Page 2 Voluntary resignation will be considered "termination other than for cause" by SAGNA if the resignation is not in anticipation of a discharge for "cause" and occurs within ninety (90) days of a substantial change in title or substantial reduction in your compensation and benefits (other than in association with a company-wide reduction) or a substantial reduction in your job responsibilities (other than a reduction in responsibility deemed by the President to be in the best business interests of SAGNA.) Voluntary resignation in any other circumstance will not be considered "termination other than for cause" by SAGNA, and no severance or other benefits will be due under this Section 5 in connection with such a resignation. 6. SUCCESSORS BOUND - ------------------- SAGNA's rights and obligations under this Memorandum shall be binding upon its successors and assigns.. 7. OTHER AGREEMENTS - ------------------- Upon execution, this Memorandum of Understanding will replace and supersede any prior existing agreements between SAGNA and you relating to severance. --------- /s/ Dan Gillis 8/22/96 - --------------------------------------- ------------------- Dan Gillis, President and CEO Date /s/ Thomas Gorley 8/16/96 - --------------------------------------- ------------------- Thomas Gorley, VP Professional Services Date EX-10.9 9 1997 STOCK OPTION PLAN EXHIBIT 10.9 SOFTWARE AG SYSTEMS, INC. 1997 STOCK OPTION PLAN 1. Definitions ----------- In this Plan, except where the context otherwise indicates, the following definitions apply: 1.1. "Affiliate" means parent or subsidiary corporations of the Company, as defined in Sections 424(e) and (f) of the Code (but substituting "the Company" for "employer corporation"), including parents or subsidiaries of the Company which become such after adoption of the Plan. 1.2. "Agreement" means a written agreement granting an Option that is executed by the Company and the Optionee. 1.3. "Board" means the Board of Directors of the Company. 1.4. "Code" means the Internal Revenue Code of 1986, as amended. 1.5. "Committee" means the committee of the Board appointed by the Board to administer the Plan. Unless otherwise determined by the Board, the Compensation Committee of the Board shall be the Committee. 1.6. "Common Stock" means the common stock, par value $.01 per share, of the Company. 1.7. "Company" means Software AG Systems, Inc., a Delaware corporation. 1.8. "Date of Exercise" means the date on which the Company receives notice of the exercise of an Option in accordance with the terms of Article 7. 1.9. "Date of Grant" means the date on which an Option is granted under the Plan. 1.10. "Director" means a member of the Board of Directors of the Company or any Affiliate. 1.11. "Eligible Individual" means (i) any Employee or Director or (ii) any consultant or advisor to the Company or an Affiliate who renders bona fide -2- services to the Company or an Affiliate other than services in connection with the offer or sale of securities in a capital raising transaction. 1.12. "Employee" means any employee of the Company or an Affiliate or any person who has been hired to be an employee of the Company or an Affiliate. 1.13. "Fair Market Value" means the fair market value of a Share as determined by the Committee pursuant to a reasonable method adopted in good faith for such purpose. 1.14. "Incentive Stock Option" means an Option granted under the Plan that qualifies as an incentive stock option under Section 422 of the Code and that the Company designates as such in the Agreement granting the Option. 1.15. "Nonstatutory Stock Option" means an Option granted under the Plan that is not an Incentive Stock Option. 1.16. "Option" means an option to purchase Shares granted under the Plan. 1.17. "Option Period" means the period during which an Option may be exercised. 1.18. "Option Price" means the price per Share at which an Option may be exercised. The Option Price shall be determined by the Committee, provided, however, that, in the case of Incentive Stock Options the Option Price shall not be less than the Fair Market Value as of the Date of Grant. Notwithstanding the foregoing, in the case of an Incentive Stock Option granted to an Optionee who (applying the rules of Section 424(d) of the Code) owns stock possessing more than ten percent of the total combined voting power of all classes of stock of the Company or an Affiliate (a "Ten-Percent Stockholder"), the Option Price shall not be less than one hundred and ten percent (110%) of the Fair Market Value on the Date of Grant. The Option Price of any Option shall be subject to adjustment to the extent provided in Article 9 hereof. 1.19. "Optionee" means an Eligible Individual to whom an Option has been granted. 1.20. "Plan" means the Software AG Systems, Inc. 1997 Stock Option Plan. -3- 1.21. "Share" means a share of Common Stock. 2. Purpose ------- The Plan is intended to assist the Company and its Affiliates in attracting and retaining Eligible Individuals of outstanding ability and to promote the identification of their interests with those of the stockholders of the Company. 3. Administration -------------- The Committee shall administer the Plan and shall have plenary authority, in its discretion, to award Options to Eligible Individuals, subject to the provisions of the Plan. The Committee shall have plenary authority and discretion, subject to the provisions of the Plan, to determine the terms (which terms need not be identical) of all Options including, but not limited to, which Eligible Individuals shall be granted Options, the time or times at which Options are granted, the Option Price, the number of Shares subject to an Option, whether an Option shall be an Incentive Stock Option or a Nonstatutory Stock Option, any provisions relating to vesting, any circumstances in which Options terminate or Shares may be repurchased by the Company, the period during which Options may be exercised and any other restrictions on Options. In making these determinations, the Committee may take into account the nature of the services rendered by the Optionees, their present and potential contributions to the success of the Company and its Affiliates, and such other factors as the Committee in its discretion shall deem relevant. Subject to the provisions of the Plan, the Committee shall have plenary authority to construe and interpret the Plan and the Agreements, to prescribe, amend and rescind rules and regulations relating to the Plan and to make all other determinations deemed necessary or advisable for the administration of the Plan, including, but not limited to, any determination to accelerate the vesting of outstanding Options. The determinations of the Committee on the matters referred to in this Article 3 shall be binding and final. -4- 4. Eligibility ----------- Options may be granted only to Eligible Individuals, provided, however, that only Employees shall be eligible to receive Incentive Stock Options. 5. Stock Subject to the Plan ------------------------- 5.1. Subject to adjustment as provided in Article 9, the maximum number of Shares that may be issued under the Plan is 25,000 Shares. 5.2. If an Option expires or terminates for any reason without having been fully exercised, the unissued Shares which had been subject to such Option shall become available for the grant of additional Options. 6. Options ------- 6.1. Options granted under the Plan shall be either Incentive Stock Options or Nonstatutory Stock Options, as designated by the Committee. Each Option granted under the Plan shall be clearly identified either as an Incentive Stock Option or a Nonstatutory Stock Option and shall be evidenced by an Agreement that specifies the terms and conditions of the grant. Options granted to Eligible Individuals shall be subject to the terms and conditions set forth in this Article 6 and such other terms and conditions not inconsistent with this Plan as the Committee may specify. All Incentive Stock Options shall comply with the provisions of the Code governing incentive stock options and with all other applicable rules and regulations. 6.2. The Option Period for Options granted to Eligible Individuals shall be determined by the Committee and specifically set forth in the Agreement, provided, however, that an Option shall not be exercisable after ten years (five years in the case of an Incentive Stock Option granted to a Ten-Percent Stockholder) from its Date of Grant. 7. Exercise of Options ------------------- 7.1. An Option may, subject to the terms of the applicable Agreement under which it is granted, be exercised in whole or in part by the delivery to the Company of written notice of the exercise, in such form -5- as the Committee may prescribe, accompanied by full payment of the Option Price for the Shares with respect to which the Option is exercised as provided in Section 7.2 hereof. 7.2. Payment of the aggregate Option Price for the Shares with respect to which an Option is being exercised shall be made in cash; provided, however, that the Committee, in its sole discretion, may provide in an Agreement that part or all of such payment may be made by the Optionee in one or more of the following manners: (a) by delivery (including constructive delivery) to the Company of Shares valued at Fair Market Value on Date of Exercise; (b) by delivery on a form prescribed by the Committee of a properly executed exercise notice and irrevocable instructions to a registered securities broker approved by the Committee to sell Shares and promptly deliver cash to the Company; (c) by delivery of a promissory note as provided in Section 7.3 hereof; or (d) by surrender to the Company of an Option (or a portion thereof) that has become exercisable and the receipt from the Company upon such surrender, without any payment to the Company (other than required tax withholding amounts), of (x) that number of Shares (equal to the highest whole number of Shares) having an aggregate Fair Market Value as of the date of surrender equal to that number of Shares subject to the Option (or portion thereof) being surrendered multiplied by an amount equal to the excess of (i) the Fair Market Value on the date of surrender over (ii) the Option Price, plus (y) an amount of cash equal to the Fair Market Value of any fractional Share to which the Optionee would be entitled but for the parenthetical in clause (x) above relating to whole number of Shares. 7.3. To the extent provided in an Option Agreement and permitted by applicable law, the Committee may accept as payment of the Option Price a promissory note executed by the Optionee evidencing his or her obligation to make future cash payment thereof; provided, however, that in no event may the Committee accept a promissory note for an amount in excess of the difference between the aggregate Option Price and the par value of the Shares. Promissory notes made pursuant to this Section 7.3 shall be payable upon such terms as may be determined by the Committee, shall be secured by a pledge of the Shares received upon exercise of the Option and shall bear interest at a rate fixed by the Committee. -6- 8. Restrictions on Transfer ------------------------ Except as set forth in an Agreement, Options shall not be transferable other than by will or the laws of descent and distribution, and an Option may be exercised during the Optionee's lifetime only by the Optionee or, in the event of his or her legal disability, by his or her legal representative. The Shares acquired pursuant to the Plan shall be subject to such restrictions and agreements regarding sale, assignment, encumbrances, or other transfers or dispositions thereof (i) as are in effect among the stockholders of the Company at the time such Shares are acquired, (ii) as the Committee shall deem appropriate and (iii) as are required by applicable law. 9. Capital Adjustments ------------------- In the event of any change in the outstanding Common Stock by reason of any stock dividend, split-up (or reverse stock split), recapitalization, reclassification, reorganization, reincorporation, combination or exchange of shares, merger, consolidation, liquidation or similar change in corporate structure, the Committee may, in its discretion, provide for a substitution for or adjustment in (i) the number and class of Shares subject to outstanding Options, (ii) the Option Price of outstanding Options, and (iii) the aggregate number and class of Shares that may be issued under the Plan. 10. Termination or Amendment ------------------------ The Board may amend, alter, suspend or terminate the Plan in any respect at any time; provided, however, that after the Plan has been approved by the stockholders of the Company, no amendment, alteration, suspension or termination of the Plan shall be made by the Board without approval of (i) the Company's stockholders to the extent stockholder approval is required by applicable law or regulations and (ii) each affected Optionee if such amendment, alteration, suspension or termination would adversely affect his or her rights or obligations under any Option granted prior to the date of such amendment, alteration, suspension or termination. No Option may be granted nor any Shares issued under the Plan during any suspension or after termination of the Plan. -7- 11. Modification, Extension and Renewal of Options; Substituted Options ------------------------------------------------------------------- 11.1. Subject to the terms and conditions of the Plan, the Committee may modify, extend or renew the terms of any outstanding Options, or accept the surrender of outstanding Options granted under the Plan or options and stock appreciation rights granted under any other plan of the Company or an Affiliate (to the extent not theretofore exercised) and authorize the granting of new Options in substitution therefor (to the extent not theretofore exercised). Any such substituted Options may specify a lower exercise price than the surrendered options and stock appreciation rights, a longer term than the surrendered options and stock appreciation rights, or have any other provisions that are authorized by the Plan. Notwithstanding the foregoing, however, no modification of an Option shall, without the consent of the Optionee, alter or impair any of the Optionee's rights or obligations under such Option. 11.2. Anything contained herein to the contrary notwithstanding, Options may, at the discretion of the Committee, be granted under the Plan in substitution for stock appreciation rights and options to purchase shares of capital stock of another corporation which is merged into, consolidated with, or all or a substantial portion of the property or stock of which is acquired by, the Company or one of its Affiliates. The terms and conditions of the substitute Options so granted may vary from the terms and conditions set forth in this Plan to such extent as the Committee may deem appropriate in order to conform, in whole or part, to the provisions of the options and stock appreciation rights in substitution for which they are granted. 12. Effectiveness of the Plan ------------------------- The Plan and any amendment thereto shall be effective on the date on which it is adopted by the Board, provided that any such adoption requiring stockholder approval is subject to approval by vote of the stockholders of the Company within 12 months after such adoption by the Board. Options may be granted prior to stockholder approval of the Plan, and the date on which any such Option is granted shall be the Date of Grant for all purposes provided that (a) each such Option shall be subject to stockholder approval of the Plan, (b) no Option may be exercised prior to such -8- stockholder approval, and (c) any such Option shall be void ab initio if such stockholder approval is not obtained. 13. Withholding ----------- The Company's obligation to deliver Shares or pay any amount pursuant to the terms of any Option shall be subject to the satisfaction of applicable federal, state and local tax withholding requirements. To the extent provided in the applicable Agreement and in accordance with rules prescribed by the Committee, an Optionee may satisfy any such withholding tax obligation by any of the following means or by a combination of such means: (i) tendering a cash payment, (ii) authorizing the Company to withhold Shares otherwise issuable to the Optionee, or (iii) delivering to the Company already owned and unencumbered Shares. 14. Term of the Plan ---------------- Unless sooner terminated by the Board pursuant to Section 10, the Plan shall terminate on April 11, 2007, and no Options may be granted after such date. The termination of the Plan shall not affect the validity of any Option outstanding on the date of termination. 15. Indemnification of Committee ---------------------------- In addition to such other rights of indemnification as they may have as Directors or as members of the Committee, the members of the Committee shall be indemnified by the Company against the reasonable expenses, including attorneys' fees, actually and reasonably incurred in connection with the defense of any action, suit or proceeding, or in connection with any appeal therein, to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Plan or any Option granted hereunder, and against all amounts reasonably paid by them in settlement thereof or paid by them in satisfaction of a judgment in any such action, suit or proceeding, if such members acted in good faith and in a manner which they believed to be in, and not opposed to, the best interests of the Company. -9- 16. General Provisions ------------------ 16.1. The establishment of the Plan shall not confer upon any Eligible Individual any legal or equitable right against the Company, any Affiliate or the Committee, except as expressly provided in the Plan. 16.2. The Plan does not constitute inducement or consideration for the employment or service of any Eligible Individual, nor is it a contract between the Company or any Affiliate and any Eligible Individual. Participation in the Plan shall not give an Eligible Individual any right to be retained in the service of the Company or any Affiliate. 16.3. Neither the adoption of this Plan nor its submission to the stockholders, shall be taken to impose any limitations on the powers of the Company or its Affiliates to issue, grant, or assume options, warrants, rights, or restricted stock, otherwise than under this Plan, or to adopt other stock option or restricted stock plans or to impose any requirement of stockholder approval upon the same. 16.4. The interests of any Eligible Individual under the Plan are not subject to the claims of creditors and may not, in any way, be assigned, alienated or encumbered except as provided in an Agreement. 16.5. The Plan shall be governed, construed and administered in accordance with the laws of the State of Delaware and it is the intention of the Company that Incentive Stock Options granted under the Plan qualify as such under Section 422 of the Code. 16.6. The Committee may require each person acquiring Shares pursuant to Options hereunder to represent to and agree with the Company in writing that such person is acquiring the Shares without a view to distribution thereof. The certificates for such Shares may include any legend which the Committee deems appropriate to reflect any restrictions on transfer. All certificates for Shares issued pursuant to the Plan shall be subject to such stock transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations and other requirements of the Securities and Exchange Commission, any stock exchange or interdealer quotation system upon which the Common Stock is then listed or quoted, and any applicable federal or state securities laws. The Committee may -10- place a legend or legends on any such certificates to make appropriate reference to such restrictions. The certificates for Shares acquired pursuant to an Option may also include any legend which the Committee deems appropriate to reflect restrictions contained in this Plan or in the applicable Agreement or to comply with the Delaware General Corporation Law. 16.7. The Company shall not be required to issue any certificate or certificates for Shares upon the exercise of Options, or record any person as a holder of record of such Shares, without obtaining, to the complete satisfaction of the Committee, the approval of all regulatory bodies deemed necessary by the Committee, and without complying to the Committee's complete satisfaction, with all rules and regulations, under federal, state or local law deemed applicable by the Committee. EX-10.10 10 MANAGEMENT AND CONSULTING AGREEMENT EXHIBIT 10.10 EXECUTION COPY MANAGEMENT AND CONSULTING AGREEMENT TC MANAGEMENT L.L.C. April 1, 1997 Software AG Americas, Inc. 11190 Sunrise Valley Drive Reston, VA 20191-5424 Re: Management Services ------------------- Gentlemen: This letter will confirm the agreement between TC Management L.L.C., a Delaware limited liability company ("Thayer"), and Software AG Americas, Inc., a Virginia corporation (the "Company"), pursuant to which Thayer will render to the Company certain management and consulting services in connection with the operation and conduct of the Company's business. Thayer shall commence providing these services as of the date of this letter agreement (this "Agreement"). Thayer and the Company shall agree on the specific type and extent of services to be provided pursuant to this Agreement. As consideration for the management and consulting services to be provided to it by Thayer, the Company shall pay Thayer a quarterly fee of $75,000 payable on the first business day of each calendar quarter, with the first such payment to be made on the date hereof. Such fee shall be prorated for any partial calendar quarter during which Thayer performs services hereunder. Thayer shall also be entitled to receive (or be reimbursed for) its reasonable out-of-pocket expenses incurred in connection with its services performed hereunder, upon submission of appropriate receipts and documentation in support thereof. The doing of any act or the failure to do any act by Thayer or any of its officers, directors, employees, partners, members or affiliates, or any person who Software AG Americas, Inc. Page 2 controls any of the foregoing, the effect of which may or does cause or result in loss or damage to the Company or its affiliates, shall not subject Thayer, or any of such persons or entities, to any liability to the Company, its affiliates or any of their respective officers, directors, shareholders, employees or affiliates, or to any other person whatsoever, except to the extent such loss or damage is found in a final, non-appealable judgment by a court of competent jurisdiction to have resulted from the willful misconduct of Thayer. In addition to its agreements and obligations under this Agreement, the Company agrees to indemnify and hold harmless Thayer and its affiliates (including its and their respective officers, directors, stockholders, partners, members, employees, affiliates and agents) (each indemnitee is referred to herein as an "Indemnified Person") from and against any and all claims, liabilities, losses and damages (or actions in respect thereof), in any way related to or arising out of the performance by such Indemnified Person of services under this Agreement, and to reimburse each Indemnified Person for reasonable legal and other expenses incurred by it in connection with or relating to investigating, preparing to defend, or defending any actions, claims or other proceedings (including any investigation or inquiry) arising in any manner out of or in connection with such Indemnified Person's performance or non-performance under this Agreement (whether or not such Indemnified Person is a named party in such proceedings); provided, however, that the Company shall --------- ------- not be responsible under this paragraph for any claims, liabilities, losses, damages or expenses to the extent that they are finally judicially determined to result from actions taken by such Indemnified Person that constitute willful misconduct. Thayer shall perform the services described herein until Thayer delivers a written letter of resignation to the Company, which Thayer may do in its sole discretion, at any time, and for any reason or no reason. This Agreement shall be binding upon and inure to the benefit of the parties hereto, their legal representatives, successors and assigns. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the Software AG Americas, Inc. Page 3 Commonwealth of Virginia applicable to agreements made and entirely to be performed within such jurisdiction. If the foregoing is acceptable to you, please sign this letter in the space provided below and return it to the undersigned. Very truly yours, TC MANAGEMENT L.L.C. By: /s/ Rick Rickertsen ------------------------ An Authorized Representative ACCEPTED AND AGREED TO: SOFTWARE AG AMERICAS, INC. By: /s/ Daniel Gillis ------------------------ Daniel Gillis President and Chief Executive Officer EX-10.11 11 DEFERRED COMPENSATION AGREEMENT -- GILLIS EXHIBIT 10.11 DEFERRED COMPENSATION AGREEMENT ------------------------------- THIS DEFERRED COMPENSATION AGREEMENT ("Agreement") is made and entered into as of the 1st day of July, 1995 (the "Effective Date"), by and between Software AG Americas, Inc., a Virginia corporation (the "Company"), and Daniel Gillis, ("Executive"). WITNESSETH: WHEREAS, Executive is currently employed by the Company in the capacity of President & Chief Executive Officer, and has experience and knowledge of considerable value to the Company; and WHEREAS, the Company wishes to offer an inducement to Executive to remain in its employ by providing him with a supplemental compensation arrangement for services which he has rendered or will render; and WHEREAS, Executive desires to continue in the employ of the Company in order to earn certain deferred compensation benefits contingent on the satisfaction of the provisions and conditions set forth herein; and WHEREAS, the Company agrees to make such contingent deferred compensation benefits available to Executive; and WHEREAS, the Company and Executive desire to record in this Agreement the terms and conditions for the earning and payment of such contingent deferred compensation benefits. NOW, THEREFORE, in consideration of the foregoing premises, and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and Executive hereby agree as follows: 1. Scope of this Agreement. The Company hereby continues to employ -------- -------------- Executive in the capacity of President & Chief Executive Officer, and Executive hereby agrees to such continued employment. The parties acknowledge that this Agreement does not generally include terms and conditions of the employment of Executive by the Company but is intended only to address Executive's right to certain deferred compensation benefits, as specified herein. The Company's obligation to pay to Executive deferred compensation hereunder is independent of, and unrelated to, any employment agreement or any other agreement, contract or understandings which may exist between the Company and Executive, and any amounts payable to Executive hereunder shall be in addition to, and not in substitution for, any salary, bonus, other compensation, benefits or other amounts otherwise paid or provided by the Company to Executive. 2. Deferred Compensation Account. The Company shall establish on its books ----------------------------- a separate deferred compensation account (the "Account") which shall reflect the amount of the Company's contingent liability to pay deferred compensation to Executive in accordance with the terms of this Agreement. Amounts shall be periodically credited to the Account as follows: (a) The balance of the Account shall initially be zero (0). (b) Effective as of July 31, 1995 the Company shall credit the Account with the amount of Forty-One Thousand Eight Hundred Thirty-Eight Dollars ($41,838.00). Effective as of March 31, 1996 and on each March 31 occurring thereafter during Executive's term of active employment with the Company, the Company shall credit the Account with an additional Forty-One Thousand Eight Hundred Thirty-Eight Dollars ($41,838.00.00). In the event that Executive's employment with the Company is terminated as of a date other than April 1 due to death, incurrence of Permanent Disability (as defined in Section 3(b)) or retirement on or after attaining age sixty (60), the Account will be credited as of the date of termination of employment by an amount determined by multiplying Forty-One Thousand Eight Hundred Thirty-Eight ($41,838.00). by a fraction, the numerator of which is the number of days elapsed between the most recent March 3 1 and the date of termination of employment (or, if earlier, the date on which Executive attains age sixty (60)) and the denominator of which is 365. If Executives employment with the Company is terminated for any other reason as of a date other than April 1, no additional credit will be made to the Account. In addition, if Executive performs services for the Company subsequent to the attainment of age sixty (60), a final credit will be made to Executive's Account under this Paragraph (b), computed under the methodology described above as if Executive had terminated employment on his sixtieth (60th) birthday. No subsequent adjustments will be made to Executive's Account under this Paragraph (b) with respect to any continued employment beyond Executive's sixtieth (60th) birthday. (c) Effective as of September 30, 1995 (adjusted by 50% for the half year of 1995 only) and on each September 30 occurring thereafter during Executive's term of active employment with the Company, the Company shall credit the Account with an amount equal to Executive's Adjusted Estimated Bonus. The Adjusted Estimated Bonus as of each September 30 shall be equal to the product of (i) fifty percent (50%) of the bonus which the Company estimates will be paid to Executive with respect to the then-current calendar year, computed by the Company after considering all relevant facts and circumstances including specified management goals, multiplied by (ii) a factor of .53. In the event that Executive's employment with the Company is terminated as of a date other than October 1, due to death, incurrence of Permanent Disability (as defined in Section 3(b)) or retirement on or after attaining age sixty (60), the Account shall be credited as of the date of termination of employment by an amount equal to the Adjusted Estimated Bonus, as defined above, multiplied by a fraction, the numerator of which is the number of days elapsed between the most recent September 30 and the date of termination of employment (or, if earlier, the date on which Executive attains age 60) and the denominator of which is 365. If Executive's employment with the Company is terminated for any other reason as of a date other than October 1, no additional credit will be made to the Account. In addition, if Executive performs services for the Company subsequent to the attainment of age sixty (60), a final credit will be made to Executive's Account under this Paragraph (c), computed under the methodology described above as if Executive had terminated employment on his sixtieth (60) birthday. No subsequent adjustments will be made to Executive's Account under this Paragraph (c) with respect to any continued employment beyond Executive's sixtieth (60th) birthday. (d) Effective as of December 31, 1995, and on each December 31 (adjusted by 50% for the half year of 1995 only), occurring thereafter during the Executive's term of active employment with the Company, the Company shall credit the Account with an amount equal to the difference between (i) .53 times the bonus actually paid to the Executive in respect of the then-current calendar year and (ii) the amount of the Adjusted Estimated Bonus credited to the Account as of the immediately preceding September 30 pursuant to the provisions of Paragraph (c) above. In the event that Executive's employment with the Company is terminated as of a date other than January 1 due to death, incurrence of Permanent Disability (as defined in Section 3(b)) or retirement on or after attaining age sixty (60), the Account will be credited as of the date of termination of employment by an amount equal to the product of (i) the difference between .53 times Executive's actual bonus paid in respect of the then-current year less the Adjusted Estimated Bonus credited to the Executive's Account as of the immediately preceding September 30 pursuant to the provisions of Paragraph (c), above, multiplied by (ii) a fraction, the numerator of which is the number of days elapsed between the most recent December 31 and the date of termination of employment (or, if earlier, the date on which Executive attains age sixty (60)) and the denominator of which is 365. If the Executive's employment is terminated for any other reason as of a date other than January 1, no additional credit will be made to the Account. In addition, if Executive performs services for the Company subsequent to the attainment of age sixty (60), a final credit will be made to Executive's Account under this Paragraph (d), computed under the methodology described above as if Executive had terminated employment on his sixtieth (60th) birthday. No subsequent adjustments will be made to Executive's Account under this Paragraph (d) with respect to any continued employment beyond Executive's sixtieth (60th) birthday. (e) The Account balance shall be credited as of September 30 and March 31 of each year during which the Account has a positive balance by an interest factor equal to three percent 3% of the then-existing Account balance. As such, the rate of return to be applied pursuant to this Paragraph (e) is six percent (6%) per year, compounded semi-annually. 3. Entitlement to Deferred Compensation Benefits. --------------------------------------------- (a) In the event that Executive terminates employment for any reason other than Permanent Disability, death, termination for "cause", as defined below, or a voluntary quit, Executive shall have the right, commencing on or about the date of termination of employment, to receive Deferred Compensation Benefits, as defined in Section 5, below. It is intended and expected that Executive give at least sixty (60) days notice prior to the date upon which such termination becomes effective. Executive's entitlement to receipt of benefits pursuant to this Agreement shall be conditioned upon Executive's compliance with all terms and provisions of this Agreement. (b) If Executive shall become Permanently Disabled, he shall become entitled, as of the date on which the Company determines that Executive is Permanently Disabled, to receive Deferred Compensation Benefits in accordance with Section 5 hereof. For purposes of this Agreement, the term "Permanently Disabled" means unable, by reason of any physical or mental illness, injury or incapacity of permanent or indefinite duration, to perform substantially full- time services to the Company in the capacity and at the level theretofore employed, except that Executive shall not be deemed to be Permanently Disabled unless and until such illness, injury or incapacity has continued unabated for at least six (6) consecutive months. Executive agrees, as a condition of his receipt of benefits hereunder, to undergo such physical examinations and tests as any physician selected by the Company may reasonably request to ascertain whether he is Permanently Disabled. 4. Vesting. Executive's rights to receive deferred compensation hereunder ------- shall be automatically forfeited except to the extent that he has become vested in a designated percentage of the Account balance on or before the date of his retirement or termination of employment in accordance with the following rules. In the event that Executive's employment is terminated for "cause", as defined below, or in the event Executive voluntarily quits his employment, Executive will forfeit entitlement to any and all benefits hereunder. Subject to the provisions of Section 10, below, the vesting schedule is as follows and is based upon total continuous employment performed by the Executive from his initial date of hire. A. Termination due to the Permanent Disability of Executive - Vesting 100% B. Termination for any reason other than Permanent Disability, death, termination for "cause" or a voluntary quit, Vesting will be based on the number of full years of continuous employment from Executive's initial date of hire as follows: Less than 1 Year 0% Vested ---------------------------------------------------- 1 Year 20% Vested ---------------------------------------------------- 2 Years 40% Vested ---------------------------------------------------- 3 Years 60% Vested ---------------------------------------------------- 4 Years 80% Vested ---------------------------------------------------- 5 or More Years 100% Vested ----------------------------------------------------
For purposes of this Agreement, "cause" means: 1) Misconduct or conduct by Executive which is illegal, dishonest, or involves moral turpitude; 2) Conduct which jeopardizes the Company's right or ability to operate its business; 3) The breach or violation of any other signed agreements, i.e. Confidentiality Agreements, etc.; or 4) The destruction of Company property or business. 5. Payment of Deferred Compensation Benefits. Provided that the vesting ----------------------------------------- requirements specified in Section 4 above are (or become) satisfied in whole or in part as of the date of Executive's termination of employment, the Executive shall, as of the termination of his employment (the "Entitlement Date"), become entitled to receive from the Company payments of deferred compensation as set forth below ("Deferred Compensation Benefits"). Prior to the Entitlement Date, Executive shall have the option (1) to direct the Company to pay to him his Deferred Compensation Benefits as a lump-sum payment effective as of the Entitlement Date; (2) to direct the Company to purchase and assign an annuity to him, effective as of the Entitlement Date or (3) to direct the Company to make specified payments to him in installments over a fifteen (15) year period commencing on the Entitlement Date. This election as to the form of Deferred Compensation Benefits shall be made by Executive in a written notice to the Company signed by Executive ("Election Notice") no less than ninety (90) days prior to the Entitlement Date. If Executive fails to make an election at least ninety (90) days prior to the Entitlement Date, the Company shall pay the Deferred Compensation Benefits in the form of a lump-sum distribution. The forms in which Deferred Compensation Benefits may be paid are described in greater detail as follows: (a) If Executive elects to receive a lump-sum payment or if Executive otherwise fails to file an Election Notice on a timely basis, the Company shall pay to Executive, in immediately-available funds, no later than thirty (30) days after Entitlement Date, an amount equal to the total Account Balance, determined as of the Entitlement Date, plus interest thereon through the Entitlement Date, at the rate set forth in Section 2 hereof ("Final Account Balance"). (b) If Executive elects in a timely manner to have the Company purchase an annuity contract and to transfer such annuity contract to Executive, the Company shall, within thirty (30) days after the date of the Election Notice, assign and transfer to Executive a fully-paid annuity policy pursuant to which an insurance company or other financial institution will make annuity payments directly to Executive on the same dates as specified in subparagraph (c) below. (c) If Executive elects in a timely manner to have the Company pay Deferred Compensation directly to Executive in annual installments, the Company shall compute the amount of each annual installment based on amortization, over a fifteen (15) year period, of the Final Account Balance, with interest thereon at six percent (6%) per year, compounded annually, with the first annual installment payment to be paid within thirty (30) days of the Entitlement Date. 6. Death of Executive. ------------------- (a) If Executive should die while still in the employ of the Company, the Company shall pay to the "Beneficiary" in lieu of any other payments hereunder, a death benefit equal to the amount in the Executive's deferred compensation account at the time of death ("Death Benefit"). The Death Benefit shall be paid to the Beneficiary, in immediately-available funds, on the first day of the second month commencing after the date of death of Executive. For purposes of this Agreement, the "Beneficiary" of the Executive is the person or persons whose name or names and address or addresses, are set forth on Exhibit A attached hereto and in effect on the date of Executive's death. Executive retains the right to change his Beneficiary at any time by providing the Company with his written, signed notice advising the Company of the name or names and address or addresses of the person or persons who shall be the Beneficiary after the date of such notice. Upon receipt of any such notice, the Company shall cause Exhibit A attached hereto to be changed to reflect the name or names and address or addresses of the new Beneficiary. In the event that Executive fails to designate a beneficiary or in the event the designated beneficiary fails to survive Executive, Executive's Beneficiary shall be deemed to be his estate. (b) If Executive shall die after becoming entitled to receive Deferred Compensation Benefits pursuant to Section 5 hereof but before all of the Deferred Compensation Benefits have been paid to him, his Beneficiary shall not receive any Death Benefit under Section 6(a), above, but shall become entitled to receive all Deferred Compensation Benefits that were not paid to Executive prior to his death. 7. No Employment Obligation. This Agreement does not, in any manner, ------------------------ commit or obligate the Company to continue to employ Executive, nor does it commit to obligate Executive to continue in the employ of the Company. Accordingly, the Company shall have the right, at any time, to terminate its employment of the Executive for any reason, subject to the provisions of any employment agreement or other contract between the Company and Executive. 8. Unfunded Obligation. The rights of Executive and his Beneficiary ------------------- to receive Deferred Compensation Benefits or a Death Benefit hereunder shall be solely those of an unsecured creditor of the Company. Neither Executive nor his Beneficiary shall have any right with respect to any insurance policy, annuity contract or any other asset which may be acquired or held by the Company in connection with the contingent liabilities assumed by the Company hereunder. Any such insurance policy, annuity contract or other asset shall not be deemed to be held under any trust for the benefit of Executive or his beneficiaries or to be held in any way as collateral security for the fulfillment of the obligations of the Company under this Agreement, but shall be, and remain, a general, unpledged, unrestricted asset of the Company, which the Company may modify or cancel at any time. 9. Nonassignability. Except to the extent that Executive may designate ---------------- his Beneficiary pursuant to Section 6 hereof to receive payments hereunder after the date of his death, neither the Beneficiary nor Executive shall have the right to commute, sell, assign, pledge, hypothecate or otherwise transfer or encumber the right to receive any payments hereunder, which payments and the right thereto are expressly declared to be nonassignable and nontransferable. 10. Sale, Merger or Consolidation. In the event the Company receives ----------------------------- an offer to sell substantially all of its operating assets to another entity or in the event of a proposed merger, consolidation or other business transfer, the Company shall diligently pursue an attempt to cause the succeeding or continuing corporation or other organization to expressly assume all of the obligations and liabilities of the Company under this Agreement. In the event that the Company is not able to cause such an assumption of obligations under this Agreement, this Agreement shall be terminated. Upon termination, the Executive will be entitled to receive a lump-sum distribution of the portion of his Account in which he has then attained vested status under the schedule set forth in Section 4B, based upon his years of continuous employment earned through the effective date of such merger, consolidation or acquisition. Such payment shall be made within thirty (30) days of the consummation of such merger, consolidation or acquisition. 11. Miscellaneous. ------------- (a) This Agreement shall be governed by, and interpreted in accordance with, the laws of the Commonwealth of Virginia, without giving effect to the principles of conflicts of laws. (b) Where text requires, words in the singular shall be deemed to include the plural and vice-versa, and words of any gender shall be deemed to include all genders. (c) Any headings preceding the text of the several sections of this Agreement are inserted solely for convenience of reference and shall not constitute a part of this Agreement nor shall they affect its meaning, construction or effect. (d) For purposes of this Agreement, employment of Executive by the Company shall include not only employment of Executive by Software AG Americas, Inc., but also employment of Executive by any subsidiary, parent or other affiliate of Software AG Americas, Inc. (e) All notices pertaining to this Agreement shall be either hand- delivered or sent by certified mail, return receipt requested, with first class postage prepaid as follows: (i) if to the Company, to Software AG Americas, Inc., 11190 Sunrise Valley Drive, Reston, Virginia 22091, Attention: Chief Financial Officer; or (ii) to such other address as either of the parties shall designate by written notice to the other from time to time pursuant to this Section. Time periods contained in any notice shall commence on the date of hand delivery or mailing, as the case may be. Any notice which is required to be given within a stated period of time shall be considered timely if either hand delivered or postmarked on or before midnight of the last day of such period. (f) This Agreement is binding upon, and inures to the benefit of, the parties hereto and their heirs, executors, personal and legal representatives, successors and permitted assigns. (g) This Agreement may be modified, amended, altered or revoked only by mutual consent of the parties or by the Company within ninety (90) days of either (i) a meaningful Company-wide reduction in compensation and/or benefits, or (ii) following a meaningful reduction in force. However, no such modification, amendment, alteration or revocation shall adversely affect Executive's entitlements hereunder to the component of Executive's Account (as determined on the date of the adoption of such modification, amendment, alteration or revocation) in which Executive is then vested under the schedule set forth in Section 4.B. In addition, in the event of the adoption of any modification, amendment, alteration or revocation which would otherwise reduce or eliminate the amount of future additions to Executive's Account, Executive's rights upon termination of employment to the balance of the Account in existence on the date of the adoption of such modification, amendment, alteration or revocation shall be based upon the vesting schedule set forth in Section 4.B computed by reference to Executive's full period of employment through the date of such termination of employment (including employment subsequent to the date of the modification, amendment, alteration or revocation of this Agreement). IN WITNESS WHEREOF, the Company, by its duly-authorized officers, has caused this Agreement to be executed and sealed, and Executive has by his hand signed and sealed this Agreement, all as of the day and year first set forth above. ATTEST: THE COMPANY: Software AG Americas, Inc. /s/ Harry McCreery By: /s/ Daniel Gillis - --------------------------- --------------------------- Harry McCreery, Chief Financial Officer Daniel Gillis, President & CEO WITNESS: EXECUTIVE: /s/ William P.Cripe /s/ James H. Daly - --------------------------- ------------------------------ William P. Cripe, Vice President James H. Daly, General Counsel AMENDMENT AGREEMENT THIS AMENDMENT AGREEMENT is made as of March 27, 1997, by and between Software AG Americas, Inc., a Virginia corporation (the "Company"), and Daniel F. Gillis ("Executive"). W I T N E S S E T H : - - - - - - - - - - WHEREAS, Executive and the Company have previously entered into a Deferred Compensation Agreement, dated as of July 1, 1995 (the "Agreement"), which, subject to the terms of the Agreement, allows Executive to earn certain contingent deferred compensation benefits; and WHEREAS, Executive and the Company desire to amend the Agreement to (a) terminate the crediting of additional contingent deferred compensation benefits as of December 31, 1998, and (b) vest previously earned deferred compensation benefits as of such date, subject to the terms and conditions set forth herein and in the Agreement; NOW, THEREFORE, the Agreement is hereby amended to add a new section 12 to read as follows: 12. Freeze of Benefits as of December 31. 1998. If Executive is an ------------------------------------------ active employee of the Company as of December 31, 1998: (a) solely for purposes of Section 2 of this Agreement, he shall be treated as if he attained age sixty (60) as of such date, such that he shall be entitled to such credits to his Account for employment through December 31, 1998 as provided for in Section 2, but no additional credits shall be made to his Account with respect to employment after such date, except for the crediting of interest pursuant to Section 2(e) of this Agreement; and (b) he shall be deemed, as of such date, to have completed five (5) or more years of service for purposes of Section 4 of this Agreement. -2- IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. SOFTWARE AG AMERICAS, INC. By: /s/ Harry McCreery ----------------------------- Harry McCreery Vice President and Chief Financial Officer EXECUTIVE: /s/ Daniel F. Gillis ----------------------------- Daniel F. Gillis EX-10.12 12 DEFERRED COMPENSATION AGREEMENT -- DALY EXHIBIT 10.12 DEFERRED COMPENSATION AGREEMENT ------------------------------- THIS DEFERRED COMPENSATION AGREEMENT ("Agreement") is made and entered into as of the 1St day of January, 1993 (the "Effective Date"), by and between Software AG Americas, Inc., a Virginia corporation (the "Company"), and James H. Daly, ("Executive"). WITNESSETH: WHEREAS, Executive is currently employed by the Company in the capacity of Vice President, General Counsel and Vice President, International Operations, and has experience and knowledge of considerable value to the Company; and WHEREAS, the Company wishes to offer an inducement to Executive to remain in its employ by providing him with a supplemental compensation arrangement for services which he has rendered or will render; and WHEREAS, Executive desires to continue in the employ of the Company in order to earn certain deferred compensation benefits contingent on the satisfaction of the provisions and conditions set forth herein; and WHEREAS, the Company agrees to make such contingent deferred compensation benefits available to Executive; and WHEREAS, the Company and Executive desire to record in this Agreement the terms and conditions for the earning and payment of such contingent deferred compensation benefits. NOW, THEREFORE, in consideration of the foregoing premises, and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and Executive hereby agree as follows: 1. Scope of this Agreement. The Company hereby continues to employ ----------------------- Executive in the capacity of Vice President, General Counsel and Vice President, International Operations, and Executive hereby agrees to such continued employment. The parties acknowledge that this Agreement does not generally include terms and conditions of the employment of Executive by the Company but is intended only to address Executive's right to certain deferred compensation benefits, as specified herein. The Company's obligation to pay to Executive deferred compensation hereunder is independent of, and unrelated to, any employment agreement or any other agreement, contract or understandings which may exist between the Company and Executive, and any amounts payable to Executive hereunder shall be in addition to, and not in substitution for, any salary, bonus, other compensation, benefits or other amounts otherwise paid or provided by the Company to Executive. 2. Deferred Compensation Account. The Company shall establish on its ----------------------------- books a separate deferred compensation account (the "Account") which shall reflect the amount of the Company's contingent liability to pay deferred compensation to Executive in accordance with the terms of this Agreement. Amounts shall be periodically credited to the Account as follows: (a) The balance of the Account shall initially be zero (0). (b) Effective as of March 31, 1993 the Company shall credit the Account with the amount of Twenty Four Thousand Dollars ($24,000.00). Effective as of March 31, 1992 and on each March 31 occurring thereafter during Executive's term of active employment with the Company, the Company shall credit the Account with an additional Twenty Four Thousand Dollars ($24,000.00). In the event that Executive's employment with the Company is terminated as of a date other than April 1 due to death, incurrence of Permanent Disability (as defined in Section 3(b)) or retirement on or after attaining age sixty (60), the Account will be credited as of the date of termination of employment by an amount determined by multiplying Twenty Four Thousand Dollars ($24,000.00) by a fraction, the numerator of which is the number of days elapsed between the most recent March 31 and the date of termination of employment (or, if earlier, the date on which Executive attains age sixty (60)) and the denominator of which is 365. If Executive's employment with the Company is terminated for any other reason as of a date other than April 1, no additional credit will be made to the Account. In addition, if Executive performs services for the Company subsequent to the attainment of age sixty (60), a final credit will be made to Executive's Account under this Paragraph (b), computed under the methodology described above as if Executive had terminated employment on his sixtieth (60th) birthday. No subsequent adjustments will be made to Executive's Account under this Paragraph (b) with respect to any continued employment beyond Executive's sixtieth (60th) birthday. (c) Effective as of September 30, 1993 and on each September 30 occurring thereafter during Executive's term of active employment with the Company, the Company shall credit the Account with an amount equal to Executive's Adjusted Estimated Bonus. The Adjusted Estimated Bonus as of each September 30 shall be equal to the product of (i) fifty percent (50%) of the bonus which the Company estimates will be paid to Executive with respect to the then-current calendar year, computed by the Company after considering all relevant facts and circumstances including specified management goals, multiplied by (ii) a factor of 1.20. In the event that Executive's employment with the Company is terminated as of a date other than October 1, due to death, incurrence of Permanent Disability (as defined in Section 3(b)) or retirement on or after attaining age sixty (60), the Account shall be credited as of the date of termination of employment by an amount equal to the Adjusted Estimated Bonus, as defined above, multiplied by a fraction, the numerator of which is the number of days elapsed between the most recent September 30 and the date of termination of employment (or, if earlier, the date on which Executive attains age 60) and the denominator of which is 365. If Executive's employment with the Company is terminated for any other reason as of a date other than October 1, no additional credit will be made to the Account. In addition, if Executive performs services for the Company subsequent to the attainment of age sixty (60), a final credit will be made to Executive's Account under this Paragraph (c), computed under the methodology described above as if Executive had terminated employment on his sixtieth (60) birthday. No subsequent adjustments will be made to Executive's Account under this Paragraph (c) with respect to any continued employment beyond Executive's sixtieth (60th) birthday. (d) Effective as of December 31, 1993, and on each December 31, occurring thereafter during the Executive's term of active employment with the Company, the Company shall credit the Account with an amount equal to the difference between (i) 1.20 times the bonus actually paid to the Executive in respect of the then-current calendar year and (ii) the amount of the Adjusted Estimated Bonus credited to the Account as of the immediately preceding September 30 pursuant to the provisions of Paragraph (c) above. In the event that Executive's employment with the Company is terminated as of a date other than January 1 due to death, incurrence of Permanent Disability (as defined in Section 3(b)) or retirement on or after attaining age sixty (60), the Account will be credited as of the date of termination of employment by an amount equal to the product of (i) the difference between 1.20 times Executive's actual bonus paid in respect of the then-current year less the Adjusted Estimated Bonus credited to the Executive's Account as of the immediately preceding September 30 pursuant to the provisions of Paragraph (c), above, multiplied by (ii) a fraction, the numerator of which is the number of days elapsed between the most recent December 31 and the date of termination of employment (or, if earlier, the date on which Executive attains age sixty (60)) and the denominator of which is 365. If the Executive's employment is terminated for any other reason as of a date other than January 1, no additional credit will be made to the Account. In addition, if Executive performs services for the Company subsequent to the attainment of age sixty (60), a final credit will be made to Executive's Account under this Paragraph (d), computed under the methodology described above as if Executive had terminated employment on his sixtieth (60th) birthday. No subsequent adjustments will be made to Executive's Account under this Paragraph (d) with respect to any continued employment beyond Executive's sixtieth (60th) birthday. (e) The Account balance shall be credited as of September 30 and March 31 of each year during which the Account has a positive balance by an interest factor equal to three percent 3% of the then-existing Account balance. As such, the rate of return to be applied pursuant to this Paragraph (e) is six percent (6%) per year, compounded semi-annually. 3. Entitlement to Deferred Compensation Benefits. --------------------------------------------- (a) In the event that Executive terminates employment for any reason other than Permanent Disability, death, termination for "cause", as defined below, or a voluntary quit, Executive shall have the right, commencing on or about the date of termination of employment, to receive Deferred Compensation Benefits, as defined in Section 5, below. It is intended and expected that Executive give at least sixty (60) days notice prior to the date upon which such termination becomes effective. Executive's entitlement to receipt of benefits pursuant to this Agreement shall be conditioned upon Executive's compliance with all terms and provisions of this Agreement. (b) If Executive shall become Permanently Disabled, he shall become entitled, as of the date on which the Company determines that Executive is Permanently Disabled, to receive Deferred Compensation Benefits in accordance with Section 5 hereof. For purposes of this Agreement, the term "Permanently Disabled" means unable, by reason of any physical or mental illness, injury or incapacity of permanent or indefinite duration, to perform substantially full- time services to the Company in the capacity and at the level theretofore employed, except that Executive shall not be deemed to be Permanently Disabled unless and until such illness, injury or incapacity has continued unabated for at least six (6) consecutive months. Executive agrees, as a condition of his receipt of benefits hereunder, to undergo such physical examinations and tests as any physician selected by the Company may reasonably request to ascertain whether he is Permanently Disabled. 4. Vesting. Executive's rights to receive deferred compensation ------- hereunder shall be automatically forfeited except to the extent that he has become vested in a designated percentage of the Account balance on or before the date of his retirement or termination of employment in accordance with the following rules. In the event that Executive's employment is terminated for "cause", as defined below, or in the event Executive voluntarily quits his employment, Executive will forfeit entitlement to any and all benefits hereunder. Subject to the provisions of Section 10, below, the vesting schedule is as follows and is based upon total continuous employment performed by the Executive from his initial date of hire. A. Termination due to the Permanent Disability of Executive - Vesting 100% B. Termination for any reason other than Permanent Disability, death, termination for "cause" or a voluntary quit. Vesting will be based on the number of full years of continuous employment from Executive's initial date of hire as follows: ------------------------------------------------------------------ Less than 1 Year 0% Vested ------------------------------------------------------------------ 1 Year 20% Vested ------------------------------------------------------------------ 2 Years 40% Vested ------------------------------------------------------------------ 3 Years 60% Vested ------------------------------------------------------------------ 4 Years 80% Vested ------------------------------------------------------------------ 5 or More Years 100% Vested ------------------------------------------------------------------
For purposes of this Agreement, "cause" means: 1) Misconduct or conduct by Executive which is illegal, dishonest, or involves moral turpitude; 2) Conduct which jeopardizes the Company's right or ability to operate its business; 3) The breach or violation of any other signed agreements, i.e. Confidentiality Agreements, etc.; or 4) The destruction of Company property or business. 5. Payment of Deferred Compensation Benefits. Provided that the vesting ----------------------------------------- requirements specified in Section 4 above are (or become) satisfied in whole or in part as of the date of Executive's termination of employment, the Executive shall, as of the termination of his employment (the "Entitlement Date"), become entitled to receive from the Company payments of deferred compensation as set forth below ("Deferred Compensation Benefits"). Prior to the Entitlement Date, Executive shall have the option (1) to direct the Company to pay to him his Deferred Compensation Benefits as a lump-sum payment effective as of the Entitlement Date; (2) to direct the Company to purchase and assign an annuity to him, effective as of the Entitlement Date or (3) to direct the Company to make specified payments to him in installments over a fifteen (15) year period commencing on the Entitlement Date. This election as to the form of Deferred Compensation Benefits shall be made by Executive in a written notice to the Company signed by Executive ("Election Notice") no less than ninety (90) days prior to the Entitlement Date. If Executive fails to make an election at least ninety (90) days prior to the Entitlement Date, the Company shall pay the Deferred Compensation Benefits in the form of a lump-sum distribution. The forms in which Deferred Compensation Benefits may be paid are described in greater detail as follows: (a) If Executive elects to receive a lump-sum payment or if Executive otherwise fails to file an Election Notice on a timely basis, the Company shall pay to Executive, in immediately-available funds, no later than thirty (30) days after Entitlement Date, an amount equal to the total Account Balance, determined as of the Entitlement Date, plus interest thereon through the Entitlement Date, at the rate set forth in Section 2 hereof ("Final Account Balance"). (b) If Executive elects in a timely manner to have the Company purchase an annuity contract and to transfer such annuity contract to Executive, the Company shall, within thirty (30) days after the date of the Election Notice, assign and transfer to Executive a fully-paid annuity policy pursuant to which an insurance company or other financial institution will make annuity payments directly to Executive on the same dates as specified in subparagraph (c) below. (c) If Executive elects in a timely manner to have the Company pay Deferred Compensation directly to Executive in annual installments, the Company shall compute the amount of each annual installment based on amortization, over a fifteen (15) year period, of the Final Account Balance, with interest thereon at six percent (6%) per year, compounded annually, with the first annual installment payment to be paid within thirty (30) days of the Entitlement Date. 6. Death of Executive. ------------------ (a) If Executive should die while still in the employ of the Company, the Company shall pay to the "Beneficiary" in lieu of any other payments hereunder, a death benefit equal to the amount in the Executive's deferred compensation account at the time of death ("Death Benefit"). The Death Benefit shall be paid to the Beneficiary, in immediately-available funds, on the first day of the second month commencing after the date of death of Executive. For purposes of this Agreement, the "Beneficiary" of the Executive is the person or persons whose name or names and address or addresses, are set forth on Exhibit A attached hereto and in effect on the date of Executive's death. Executive retains the right to change his Beneficiary at any time by providing the Company with his written, signed notice advising the Company of the name or names and address or addresses of the person or persons who shall be the Beneficiary after the date of such notice. Upon receipt of any such notice, the Company shall cause Exhibit A attached hereto to be changed to reflect the name or names and address or addresses of the new Beneficiary. In the event that Executive fails to designate a beneficiary or in the event the designated beneficiary fails to survive Executive, Executive's Beneficiary shall be deemed to be his estate. (b) If Executive shall die after becoming entitled to receive Deferred Compensation Benefits pursuant to Section 5 hereof but before all of the Deferred Compensation Benefits have been paid to him, his Beneficiary shall not receive any Death Benefit under Section 6(a), above, but shall become entitled to receive all Deferred Compensation Benefits that were not paid to Executive prior to his death. 7. No Employment Obligation. This Agreement does not, in any manner, ------------------------ commit or obligate the Company to continue to employ Executive, nor does it commit to obligate Executive to continue in the employ of the Company. Accordingly, the Company shall have the right, at any time, to terminate its employment of the Executive for any reason, subject to the provisions of any employment agreement or other contract between the Company and Executive. 8. Unfunded Obligation. The rights of Executive and his Beneficiary ------------------- to receive Deferred Compensation Benefits or a Death Benefit hereunder shall be solely those of an unsecured creditor of the Company. Neither Executive nor his Beneficiary shall have any right with respect to any insurance policy, annuity contract or any other asset which may be acquired or held by the Company in connection with the contingent liabilities assumed by the Company hereunder. Any such insurance policy, annuity contract or other asset shall not be deemed to be held under any trust for the benefit of Executive or his beneficiaries or to be held in any way as collateral security for the fulfillment of the obligations of the Company under this Agreement, but shall be, and remain, a general, unpledged, unrestricted asset of the Company, which the Company may modify or cancel at any time. 9. Nonassignability. Except to the extent that Executive may ---------------- designate his Beneficiary pursuant to Section 6 hereof to receive payments hereunder after the date of his death, neither the Beneficiary nor Executive shall have the right to commute, sell, assign, pledge, hypothecate or otherwise transfer or encumber the right to receive any payments hereunder, which payments and the right thereto are expressly declared to be nonassignable and nontransferable. 10. Sale, Merger or Consolidation. In the event the Company receives ----------------------------- an offer to sell substantially all of its operating assets to another entity or in the event of a proposed merger, consolidation or other business transfer, the Company shall diligently pursue an attempt to cause the succeeding or continuing corporation or other organization to expressly assume all of the obligations and liabilities of the Company under this Agreement. In the event that the Company is not able to cause such an assumption of obligations under this Agreement, this Agreement shall be terminated. Upon termination, the Executive will be entitled to receive a lump-sum distribution of the portion of his Account in which he has then attained vested status under the schedule set forth in Section 4B, based upon his years of continuous employment earned through the effective date of such merger, consolidation or acquisition. Such payment shall be made within thirty (30) days of the consummation of such merger, consolidation or acquisition. 11. Miscellaneous. ------------- (a) This Agreement shall be governed by, and interpreted in accordance with, the laws of the Commonwealth of Virginia, without giving effect to the principles of conflicts of laws. (b) Where text requires, words in the singular shall be deemed to include the plural and vice-versa, and words of any gender shall be deemed to include all genders. (c) Any headings preceding the text of the several sections of this Agreement are inserted solely for convenience of reference and shall not constitute a part of this Agreement nor shall they affect its meaning, construction or effect. (d) For purposes of this Agreement, employment of Executive by the Company shall include not only employment of Executive by Software AG Americas, Inc., but also employment of Executive by any subsidiary, parent or other affiliate of Software AG Americas, Inc. (e) All notices pertaining to this Agreement shall be either hand- delivered or sent by certified mail, return receipt requested, with first class postage prepaid as follows: (i) if to the Company, to Software AG Americas, Inc., 11190 Sunrise Valley Drive, Reston, Virginia 22091, Attention: Chief Financial Officer; or (ii) to such other address as either of the parties shall designate by written notice to the other from time to time pursuant to this Section. Time periods contained in any notice shall commence on the date of hand delivery or mailing, as the case may be. Any notice which is required to be given within a stated period of time shall be considered timely if either hand delivered or postmarked on or before midnight of the last day of such period. (f) This Agreement is binding upon, and inures to the benefit of, the parties hereto and their heirs, executors, personal and legal representatives, successors and permitted assigns. (g) This Agreement may be modified, amended, altered or revoked only by mutual consent of the parties or by the Company within ninety (90) days of either (i) a meaningful Company-wide reduction in compensation and/or benefits, or (ii) following a meaningful reduction in force. However, no such modification, amendment, alteration or revocation shall adversely affect Executive's entitlements hereunder to the component of Executive's Account (as determined on the date of the adoption of such modification, amendment, alteration or revocation) in which Executive is then vested under the schedule set forth in Section 4.B. In addition, in the event of the adoption of any modification, amendment, alteration or revocation which would otherwise reduce or eliminate the amount of future additions to Executive's Account, Executive's rights upon termination of employment to the balance of the Account in existence on the date of the adoption of such modification, amendment, alteration or revocation shall be based upon the vesting schedule set forth in Section 4.B computed by reference to Executive's full period of employment through the date of such termination of employment (including employment subsequent to the date of the modification, amendment, alteration or revocation of this Agreement). IN WITNESS WHEREOF, the Company, by its duly-authorized officers, has caused this Agreement to be executed and sealed, and Executive has by his hand signed and sealed this Agreement, all as of the day and year first set forth above. ATTEST: THE COMPANY: Software AG Americas, Inc. /s/ Harry McCreery By: /s/ Daniel Gillis - --------------------------------------- ------------------------------------- Harry McCreery, Chief Financial Officer Daniel Gillis, President & CEO WITNESS: EXECUTIVE: /s/ William P. Cripe, Vice President James H. Daly - --------------------------------------- ------------------------------------- William P. Cripe, Vice President James H. Daly, General Counsel 2/5/97 AMENDMENT AGREEMENT THIS AMENDMENT AGREEMENT is made as of March 27, 1997, by and between Software AG Americas, Inc., a Virginia corporation (the "Company"), and James Da1y ("Executive"). W I T N E S S E T H : - - - - - - - - - - WHEREAS, Executive and the Company have previously entered into a Deferred Compensation Agreement, dated as of January 1, 1993 (the "Agreement"), which, subject to the terms of the Agreement, allows Executive to earn certain contingent deferred compensation benefits; and WHEREAS, Executive and the Company desire to amend the Agreement to (a) terminate the crediting of additional contingent deferred compensation benefits as of December 31, 1998, and (b) vest previously earned deferred compensation benefits as of such date, subject to the terms and conditions set forth herein and in the Agreement; NOW, THEREFORE, the Agreement is hereby amended to add a new section 12 to read as follows: 12. Freeze of Benefits as of December 31, 1998. If Executive is an ------------------------------------------ active employee of the Company as of December 31, 1998: (a) solely for purposes of Section 2 of this Agreement, he shall be treated as if he attained age sixty (60) as of such date, such that he shall be entitled to such credits to his Account for employment through December 31, 1998 as Provided for in Section 2, but no additional credits shall be made to his Account with respect to employment after such date, except for the crediting of interest pursuant to Section 2(e) of this Agreement; and (b) he shall be deemed, as of such date, to have completed five (5) or more years of service for purposes of Section 4 of this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. SOFTWARE AG AMERICAS, INC. By: /s/ Daniel F. Gillis ----------------------------------- Daniel F. Gillis President and Chief Executive Officer EXECUTIVE: /s/ James Daly --------------------------------------- James Daly EX-10.13 13 DEFERRED COMPENSATION AGREEMENT -- MCCREERY EXHIBIT 10.13 DEFERRED COMPENSATION AGREEMENT ------------------------------- THIS DEFERRED COMPENSATION AGREEMENT ("Agreement") is made and entered into as of the 1st day of January, 1991 (the "Effective Date"), by and between Software AG Americas, Inc., a Virginia corporation (the "Company"), and Harry K. McCreery, ("Executive"). WITNESSETH: WHEREAS, Executive is currently employed by the Company in the capacity of Chief Financial Officer, and has experience and knowledge of considerable value to the Company; and WHEREAS, the Company wishes to offer an inducement to Executive to remain in its employ by providing him with a supplemental compensation arrangement for services which he has rendered or will render; and WHEREAS, Executive desires to continue in the employ of the Company in order to earn certain deferred compensation benefits contingent on the satisfaction of the provisions and conditions set forth herein; and WHEREAS, the Company agrees to make such contingent deferred compensation benefits available to Executive; and WHEREAS, the Company and Executive desire to record in this Agreement the terms and conditions for the earning and payment of such contingent deferred compensation benefits. NOW, THEREFORE, in consideration of the foregoing premises, and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and Executive hereby agree as follows: 1. Scope of this Agreement. The Company hereby continues to employ ----------------------- Executive in the capacity of Chief Financial Officer, and Executive hereby agrees to such continued employment. The parties acknowledge that this Agreement does not generally include terms and conditions of the employment of Executive by the Company but is intended only to address Executive's right to certain deferred compensation benefits, as specified herein. The Company's obligation to pay to Executive deferred compensation hereunder is independent of, and unrelated to, any employment agreement or any other agreement, contract or understandings which may exist between the Company and Executive, and any amounts payable to Executive hereunder shall be in addition to, and not in substitution for, any salary, bonus, other compensation, benefits or other amounts otherwise paid or provided by the Company to Executive. 2. Deferred Compensation Account. The Company shall establish on its books ----------------------------- a separate deferred compensation account (the "Account") which shall reflect the amount of the Company's contingent liability to pay deferred compensation to Executive in accordance with the terms of this Agreement. Amounts shall be periodically credited to the Account as follows: (a) The balance of the Account shall initially be zero (0). (b) Effective as of March 31, 1991 the Company shall credit the Account with the amount of Forty-Six Thousand Dollars ($46,000.00). Effective as of March 31, 1992 and on each March 31 occurring thereafter during Executive's term of active employment with the Company, the Company shall credit the Account with an additional Forty-Six Thousand Dollars ($46,000.00). In the event that Executive's employment with the Company is terminated as of a date other than April 1 due to death, incurrence of Permanent Disability (as defined in Section 3(b)) or retirement on or after attaining age sixty (60), the Account will be credited as of the date of termination of employment by an amount determined by multiplying Forty-Six Thousand Dollars ($46,000.00) by a fraction, the numerator of which is the number of days elapsed between the most recent March 31 and the date of termination of employment (or, if earlier, the date on which Executive attains age sixty (60)) and the denominator of which is 365. If Executive's employment with the Company is terminated for any other reason as of a date other than April 1, no additional credit will be made to the Account. In addition, if Executive performs services for the Company subsequent to the attainment of age sixty (60), a final credit will be made to Executive's Account under this Paragraph (b), computed under the methodology described above as if Executive had terminated employment on his sixtieth (60th) birthday. No subsequent adjustments will be made to Executive's Account under this Paragraph (b) with respect to any continued employment beyond Executive's sixtieth (60th) birthday. (c) Effective as of September 30, 1991 and on each September 30 occurring thereafter during Executive's term of active employment with the Company, the Company shall credit the Account with an amount equal to Executive's Adjusted Estimated Bonus. The Adjusted Estimated Bonus as of each September 30 shall be equal to the product of (i) fifty percent (50%) of the bonus which the Company estimates will be paid to Executive with respect to the then-current calendar year, computed by the Company after considering all relevant facts and circumstances including specified management goals, multiplied by (ii) a factor of 1.00. In the event that Executive's employment with the Company is terminated as of a date other than October 1, due to death, incurrence of Permanent Disability (as defined in Section 3(b)) or retirement on or after attaining age sixty (60), the Account shall be credited as of the date of termination of employment by an amount equal to the Adjusted Estimated Bonus, as defined above, multiplied by a fraction, the numerator of which is the number of days elapsed between the most recent September 30 and the date of termination of employment (or, if earlier, the date on which Executive attains age 60) and the denominator of which is 365. If Executive's employment with the Company is terminated for any other reason as of a date other than October 1, no additional credit will be made to the Account. In addition, if Executive performs services for the Company subsequent to the attainment of age sixty (60), a final credit will be made to Executive's Account under this Paragraph (c), computed under the methodology described above as if Executive had terminated employment on his sixtieth (60) birthday. No subsequent adjustments will be made to Executive's Account under this Paragraph (c) with respect to any continued employment beyond Executive's sixtieth (60th) birthday. (d) Effective as of December 31, 1991, and on each December 31, occurring thereafter during the Executive's term of active employment with the Company, the Company shall credit the Account with an amount equal to the difference between (i) 1.00 times the bonus actually paid to the Executive in respect of the then-current calendar year and (ii) the amount of the Adjusted Estimated Bonus credited to the Account as of the immediately preceding September 30 pursuant to the provisions of Paragraph (c) above. In the event that Executive's employment with the Company is terminated as of a date other than January 1 due to death, incurrence of Permanent Disability (as defined in Section 3(b)) or retirement on or after attaining age sixty (60), the Account will be credited as of the date of termination of employment by an amount equal to the product of (i) the difference between 1.00 times Executive's actual bonus paid in respect of the then-current year less the Adjusted Estimated Bonus credited to the Executive's Account as of the immediately preceding September 30 pursuant to the provisions of Paragraph (c), above, multiplied by (ii) a fraction, the numerator of which is the number of days elapsed between the most recent December 31 and the date of termination of employment (or, if earlier, the date on which Executive attains age sixty (60)) and the denominator of which is 365. If the Executive's employment is terminated for any other reason as of a date other than January 1, no additional credit will be made to the Account. In addition, if Executive performs services for the Company subsequent to the attainment of age sixty (60), a final credit will be made to Executive's Account under this Paragraph (d), computed under the methodology described above as if Executive had terminated employment on his sixtieth (60th) birthday. No subsequent adjustments will be made to Executive's Account under this Paragraph (d) with respect to any continued employment beyond Executive's sixtieth (60th) birthday. (e) The Account balance shall be credited as of September 30 and March 31 of each year during which the Account has a positive balance by an interest factor equal to three percent 3% of the then-existing Account balance. As such, the rate of return to be applied pursuant to this Paragraph (e) is six percent (6%) per year, compounded semi-annually. 3. Entitlement to Deferred Compensation Benefits. --------------------------------------------- (a) In the event that Executive terminates employment for any reason other than Permanent Disability, death, termination for "cause", as defined below, or a voluntary quit, Executive shall have the right, commencing on or about the date of termination of employment, to receive Deferred Compensation Benefits, as defined in Section 5, below. It is intended and expected that Executive give at least sixty (60) days notice prior to the date upon which such termination becomes effective. Executive's entitlement to receipt of benefits pursuant to this Agreement shall be conditioned upon Executive's compliance with all terms and provisions of this Agreement. (b) If Executive shall become Permanently Disabled, he shall become entitled, as of the date on which the Company determines that Executive is Permanently Disabled, to receive Deferred Compensation Benefits in accordance with Section 5 hereof. For purposes of this Agreement, the term "Permanently Disabled" means unable, by reason of any physical or mental illness, injury or incapacity of permanent or indefinite duration, to perform substantially full- time services to the Company in the capacity and at the level theretofore employed, except that Executive shall not be deemed to be Permanently Disabled unless and until such illness, injury or incapacity has continued unabated for at least six (6) consecutive months. Executive agrees, as a condition of his receipt of benefits hereunder, to undergo such physical examinations and tests as any physician selected by the Company may reasonably request to ascertain whether he is Permanently Disabled. 4. Vesting. Executive's rights to receive deferred compensation hereunder ------- shall be automatically forfeited except to the extent that he has become vested in a designated percentage of the Account balance on or before the date of his retirement or termination of employment in accordance with the following rules. In the event that Executive's employment is terminated for "cause", as defined below, or in the event Executive voluntarily quits his employment, Executive will forfeit entitlement to any and all benefits hereunder. Subject to the provisions of Section 10, below, the vesting schedule is as follows and is based upon total continuous employment performed by the Executive from his initial date of hire. A. Termination due to the Permanent Disability of Executive - Vesting 100% B. Termination for any reason other than Permanent Disability, death, termination for "cause" or a voluntary quit, Vesting will be based on the number of full years of continuous employment from Executive's initial date of hire as follows: ------------------------------------------------------ Less than 1 Year 0% Vested ------------------------------------------------------ 1 Year 20% Vested ------------------------------------------------------ 2 Years 40% Vested ------------------------------------------------------ 3 Years 60% Vested ------------------------------------------------------ 4 Years 80% Vested ------------------------------------------------------ 5 or More Years 100% Vested ------------------------------------------------------
For purposes of this Agreement, "cause" means: 1) Misconduct or conduct by Executive which is illegal, dishonest, or involves moral turpitude; 2) Conduct which jeopardizes the Company's right or ability to operate its business; 3) The breach or violation of any other signed agreements, i.e. Confidentiality Agreements, etc.; or 4) The destruction of Company property or business. 5. Payment of Deferred Compensation Benefits. Provided that the vesting ----------------------------------------- requirements specified in Section 4 above are (or become) satisfied in whole or in part as of the date of Executive's termination of employment, the Executive shall, as of the termination of his employment (the "Entitlement Date"), become entitled to receive from the Company payments of deferred compensation as set forth below ("Deferred Compensation Benefits"). Prior to the Entitlement Date, Executive shall have the option (1) to direct the Company to pay to him his Deferred Compensation Benefits as a lump-sum payment effective as of the Entitlement Date; (2) to direct the Company to purchase and assign an annuity to him, effective as of the Entitlement Date or (3) to direct the Company to make specified payments to him in installments over a fifteen (15) year period commencing on the Entitlement Date. This election as to the form of Deferred Compensation Benefits shall be made by Executive in a written notice to the Company signed by Executive ("Election Notice") no less than ninety (90) days prior to the Entitlement Date. If Executive fails to make an election at least ninety (90) days prior to the Entitlement Date, the Company shall pay the Deferred Compensation Benefits in the form of a lump-sum distribution. The forms in which Deferred Compensation Benefits may be paid are described in greater detail as follows: (a) If Executive elects to receive a lump-sum payment or if Executive otherwise fails to file an Election Notice on a timely basis, the Company shall pay to Executive, in immediately-available funds, no later than thirty (30) days after Entitlement Date, an amount equal to the total Account Balance, determined as of the Entitlement Date, plus interest thereon through the Entitlement Date, at the rate set forth in Section 2 hereof ("Final Account Balance"). (b) If Executive elects in a timely manner to have the Company purchase an annuity contract and to transfer such annuity contract to Executive, the Company shall, within thirty (30) days after the date of the Election Notice, assign and transfer to Executive a fully-paid annuity policy pursuant to which an insurance company or other financial institution will make annuity payments directly to Executive on the same dates as specified in subparagraph (c) below. (c) If Executive elects in a timely manner to have the Company pay Deferred Compensation directly to Executive in annual installments, the Company shall compute the amount of each annual installment based on amortization, over a fifteen (15) year period, of the Final Account Balance, with interest thereon at six percent (6%) per year, compounded annually, with the first annual installment payment to be paid within thirty (30) days of the Entitlement Date. 6. Death of Executive. ------------------ (a) If Executive should die while still in the employ of the Company, the Company shall pay to the "Beneficiary" in lieu of any other payments hereunder, a death benefit equal to the amount in the Executive's deferred compensation account at the time of death ("Death Benefit"). The Death Benefit shall be paid to the Beneficiary, in immediately-available funds, on the first day of the second month commencing after the date of death of Executive. For purposes of this Agreement, the "Beneficiary" of the Executive is the person or persons whose name or names and address or addresses, are set forth on Exhibit A attached hereto and in effect on the date of Executive's death. Executive retains the right to change his Beneficiary at any time by providing the Company with his written, signed notice advising the Company of the name or names and address or addresses of the person or persons who shall be the Beneficiary after the date of such notice. Upon receipt of any such notice, the Company shall cause Exhibit A attached hereto to be changed to reflect the name or names and address or addresses of the new Beneficiary. In the event that Executive fails to designate a beneficiary or in the event the designated beneficiary fails to survive Executive, Executive's Beneficiary shall be deemed to be his estate. (b) If Executive shall die after becoming entitled to receive Deferred Compensation Benefits pursuant to Section 5 hereof but before all of the Deferred Compensation Benefits have been paid to him, his Beneficiary shall not receive any Death Benefit under Section 6(a), above, but shall become entitled to receive all Deferred Compensation Benefits that were not paid to Executive prior to his death. 7. No Employment Obligation. This Agreement does not, in any manner, ------------------------ commit or obligate the Company to continue to employ Executive, nor does it commit to obligate Executive to continue in the employ of the Company. Accordingly, the Company shall have the right, at any time, to terminate its employment of the Executive for any reason, subject to the provisions of any employment agreement or other contract between the Company and Executive. 8. Unfunded Obligation. The rights of Executive and his Beneficiary ------------------- to receive Deferred Compensation Benefits or a Death Benefit hereunder shall be solely those of an unsecured creditor of the Company. Neither Executive nor his Beneficiary shall have any right with respect to any insurance policy, annuity contract or any other asset which may be acquired or held by the Company in connection with the contingent liabilities assumed by the Company hereunder. Any such insurance policy, annuity contract or other asset shall not be deemed to be held under any trust for the benefit of Executive or his beneficiaries or to be held in any way as collateral security for the fulfillment of the obligations of the Company under this Agreement, but shall be, and remain, a general, unpledged, unrestricted asset of the Company, which the Company may modify or cancel at any time. 9. Nonassignability. Except to the extent that Executive may ---------------- designate his Beneficiary pursuant to Section 6 hereof to receive payments hereunder after the date of his death, neither the Beneficiary nor Executive shall have the right to commute, sell, assign, pledge, hypothecate or otherwise transfer or encumber the right to receive any payments hereunder, which payments and the right thereto are expressly declared to be nonassignable and nontransferable. 10. Sale Merger or Consolidation. In the event the Company receives ----------------------------- an offer to sell substantially all of its operating assets to another entity or in the event of a proposed merger, consolidation or other business transfer, the Company shall diligently pursue an attempt to cause the succeeding or continuing corporation or other organization to expressly assume all of the obligations and liabilities of the Company under this Agreement. In the event that the Company is not able to cause such an assumption of obligations under this Agreement, this Agreement shall be terminated. Upon termination, the Executive will be entitled to receive a lump- sum distribution of the portion of his Account in which he has then attained vested status under the schedule set forth in Section 4B, based upon his years of continuous employment earned through the effective date of such merger, consolidation or acquisition. Such payment shall be made within thirty (30) days of the consummation of such merger, consolidation or acquisition. 11. Miscellaneous. ------------- (a) This Agreement shall be governed by, and interpreted in accordance with, the laws of the Commonwealth of Virginia, without giving effect to the principles of conflicts of laws. (b) Where text requires, words in the singular shall be deemed to include the plural and vice-versa, and words of any gender shall be deemed to include all genders. (c) Any headings preceding the text of the several sections of this Agreement are inserted solely for convenience of reference and shall not constitute a part of this Agreement nor shall they affect its meaning, construction or effect. (d) For purposes of this Agreement, employment of Executive by the Company shall include not only employment of Executive by Software AG Americas, Inc., but also employment of Executive by any subsidiary, parent or other affiliate of Software AG Americas, Inc. (e) All notices pertaining to this Agreement shall be either hand- delivered or sent by certified mail, return receipt requested, with first class postage prepaid as follows: (i) if to the Company, to Software AG Americas, Inc., 11190 Sunrise Valley Drive, Reston, Virginia 22091, Attention: Chief Financial Officer; or (ii) to such other address as either of the parties shall designate by written notice to the other from time to time pursuant to this Section. Time periods contained in any notice shall commence on the date of hand delivery or mailing, as the case may be. Any notice which is required to be given within a stated period of time shall be considered timely if either hand delivered or postmarked on or before midnight of the last day of such period. (f) This Agreement is binding upon, and inures to the benefit of, the parties hereto and their heirs, executors, personal and legal representatives, successors and permitted assigns. (g) This Agreement may be modified, amended, altered or revoked only by mutual consent of the parties or by the Company within ninety (90) days of either (i) a meaningful Company-wide reduction in compensation and/or benefits, or (ii) following a meaningful reduction in force. However, no such modification, amendment, alteration or revocation shall adversely affect Executive's entitlements hereunder to the component of Executive's Account (as determined on the date of the adoption of such modification, amendment, alteration or revocation) in which Executive is then vested under the schedule set forth in Section 4.B. In addition, in the event of the adoption of any modification, amendment, alteration or revocation which would otherwise reduce or eliminate the amount of future additions to Executive's Account, Executive's rights upon termination of employment to the balance of the Account in existence on the date of the adoption of such modification, amendment, alteration or revocation shall be based upon the vesting schedule set forth in Section 4.B computed by reference to Executive's full period of employment through the date of such termination of employment (including employment subsequent to the date of the modification, amendment, alteration or revocation of this Agreement). IN WITNESS WHEREOF, the Company, by its duly-authorized officers, has caused this Agreement to be executed and sealed, and Executive has by his hand signed and sealed this Agreement, all as of the day and year first set forth above. ATTEST: THE COMPANY: Software AG Americas, Inc. /s/ James H. Daly By: /s/ Daniel Gillis - -------------------------------- -------------------------------- James H. Daly, Secretary Daniel Gillis, President & CEO WITNESS: EXECUTIVE: /s/ William P. Cripe /s/ Harry K. McCreery - -------------------------------- ----------------------------------- William P. Cripe, Vice President Harry K. McCreery AMENDMENT AGREEMENT THIS AMENDMENT AGREEMENT is made as of March 27, 1997, by and between Software AG Americas, Inc., a Virginia corporation (the "Company"), and Harry McCreery ("Executive"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, Executive and the Company have previously entered into a Deferred Compensation Agreement, dated as of January 1, 1991 (the "Agreement"), which, subject to the terms of the Agreement, allows Executive to earn certain contingent deferred compensation benefits; and WHEREAS, Executive and the Company desire to amend the Agreement to (a) terminate the crediting of additional contingent deferred compensation benefits as of December 31, 1998, and (b) vest previously earned deferred compensation benefits as of such date, subject to the terms and conditions set forth herein and in the Agreement; NOW, THEREFORE, the Agreement is hereby amended to add a new section 12 to read as follows: 12. Freeze of Benefits as of December 31, 1998. If Executive is an ------------------------------------------ active employee of the Company as of December 31, 1998: (a) solely for purposes of Section 2 of this Agreement, he shall be treated as if he attained age sixty (60) as of such date, such that he shall be entitled to such credits to his Account for employment through December 31, 1998 as provided for in Section 2, but no additional credits shall be made to his Account with respect to employment after such date, except for the crediting of interest pursuant to Section 2(e) of this Agreement; and (b) he shall be deemed, as of such date, to have completed five (5) or more years of service for purposes of Section 4 of this Agreement. IN WITNESS WHEREOF the parties have executed this Agreement as of the day and year first above written. SOFTWARE AG AMERICAS, INC. By: /s/ Daniel F. Gillis -------------------------------- Daniel F. Gillis President and Chief Executive Officer EXECUTIVE: /s/ Harry McCreery ----------------------------------- Harry McCreery EX-10.14 14 ADMINISTRATIVE SERVICES AGREEMENT EXHIBIT 10.14 ADMINISTRATIVE SERVICES AGREEMENT --------------------------------- This Administrative Services Agreement ("Agreement") is made as of March 31, 1997 (the "Effective Date") by and between Software AG ("SAG"), a German corporation, with its principal place of business in Darmstadt, Germany, and Software AG Americas, Inc. ("SAGA"), a Virginia corporation, with its principal place of business in Reston, Virginia, USA. WHEREAS, prior to the Effective Date, SAGA has been an indirect wholly- owned subsidiary of SAG; and WHEREAS, prior to the Effective Date, pursuant to a Products and Research & Development Operations Transfer Agreement between SAG and Software AG of North America, Inc. (currently named SAGA) dated December 5, 1993 (the "Prior Agreement"), certain individuals on the payroll of SAGA have performed computer software development and other services for SAG under the management of SAG, and SAG has reimbursed SAGA for all of its costs associated with such employees and such development and other services; and WHEREAS, the parties desire to clarify certain aspects of such relationship; NOW THEREFORE, in consideration of the mutual promises contained herein and intending to be legally bound hereby, the parties agree as follows: 1. Termination of Prior Agreement ------------------------------ 1.1. All ongoing rights and obligations of the parties under the Prior Agreement are hereby terminated and superseded by this Agreement; provided that any rights or obligations of the parties with respect to performance that has been rendered, or that was to have been rendered, under the Prior Agreement prior to the Effective Date shall be governed by the terms of the Prior Agreement. 2. Administrative Services to Be Provided -------------------------------------- 2.1. SAGA shall provide the following administrative services to SAG: 2.1.1. On behalf of SAG, SAGA shall maintain on SAGA's payroll and provide SAGA's standard employee benefits to the individuals identified in Exhibit A and any additional individuals subsequently agreed upon by the parties and whose names are added to Exhibit A - 2 - (collectively, the "Designated Employees"), until the earlier of the date on which any such individual assumes a position within SAGA that does not involve performing computer software development or other services for SAG under the management of SAG or the date on which the employment of any such individual by SAGA is terminated, either at the request of SAG or, if deemed necessary by SAGA, at SAGA's initiative, after which date such an individual no longer shall be considered a Designated Employee and such an individual's name shall be deleted from Exhibit A. 2.1.2. SAGA shall provide human resources services for Designated Employees, including services relating to the recruitment of Designated Employees, consistent with the human resources services provided for other SAGA employees. 2.1.3. SAGA shall provide Designated Employees working space in a SAGA facility consistent with the working space provided to other SAGA employees. If SAG wishes to make any material change in the working space provided as of the Effective Date or subsequently agreed to by the parties, SAG shall notify SAGA of such proposed change, and the parties shall discuss, and may agree to, the change. SAGA shall use reasonable efforts to accommodate within 90 days reasonable working space changes proposed by SAG, to the extent consistent with the availability of space, lease provisions, applicable laws and regulations, safety and security concerns, and other applicable constraints. All costs incurred by SAGA as the result of any change in working space requirements initiated by SAG shall be paid by SAG. Except as provided in Article 5, SAGA shall not be responsible for the safekeeping of property of SAG or of Designated Employees stored at SAGA's facility. 2.1.4. SAGA shall provide Designated Employees access to applicable SAGA facilities and use of computer systems and networks, telephones and office equipment to an extent consistent with policies and practices adopted by SAGA from time to time. 2.1.5. SAGA specifically shall not be responsible for the direct or indirect management of Designated Employees or for the performance of Designated Employees. SAGA makes no representations or warranties with respect to, and shall have no liability for, the qualifications, training or performance of Designated Employees. The relationship of SAGA to SAG under this Agreement is - 3 - solely that of an administrative services provider within the capacity and normal policies and practices of SAGA. 2.2. SAG shall be solely responsible for (i) selection of Designated Employees and determination of the compensation of Designated Employees, provided that such compensation shall be consistent with policies and practices adopted by SAGA from time to time, (ii) day-to-day and long-term management of the Designated Employees, and (iii) all actions of the Designated Employees. As part of such responsibility, SAG diligently shall supervise the Designated Employees. SAG shall comply with, and shall cause the Designated Employees to comply with, (a) all safety, security, computer access and other policies and practices applicable to SAGA employees and others working in SAGA's facility that may be adopted by SAGA from time to time, and (b) all applicable laws and regulations. To the extent that SAG fails to cause such compliance, SAGA may, without limiting any remedies against SAG that SAGA may have at law or in equity, take appropriate disciplinary action against Designated Employees, including but not limited to termination of Designated Employees, in which case SAG shall pay all costs incurred by SAGA as the result of the discipline. SAG shall appoint one or more of the Designated Employees as a "SAG Supervisor," each of whom shall be identified as a "SAG Supervisor" in Exhibit A and who shall be responsible for the management of the Designated Employees. SAG shall cause a SAG Supervisor to be accessible to SAGA at reasonable times and without unreasonable delay as the principal point of contact between the parties for matters relating to this Agreement. Each SAG Supervisor shall have the authority, on behalf of SAG, to take any action or enter into any agreement related to the Designated Employees or the administrative services to be provided under this Agreement. Such authority shall include decisions, on behalf of SAG, relating to the hiring, compensation and termination of Designated Employees. 2.3. Should SAG no longer require the services of any Designated Employee, SAG shall so notify SAGA in writing. Upon receipt of such notice, SAGA may in its discretion offer the Designated Employee another position within SAGA. If SAGA elects not to offer such a position, or if the Designated Employee rejects such an offer, SAGA may terminate such Designated Employee in accordance with policies and practices adopted by SAGA from time to time. SAG shall comply with such policies and practices. If a Designated Employee's employment with SAGA is terminated, then SAG shall pay all costs of such termination, including but not limited to severance payments and payments for accrued leave. - 4 - 3. Payment ------- 3.1. SAG shall reimburse SAGA for all costs incurred by SAGA as a result of SAGA's selection, hiring, failing to hire, employment or termination of Designated Employees or otherwise related to the performance of SAGA's obligations under this Agreement, except for the cost of the CMOS machine currently installed in SAGA's Reston Data Center (which is the subject of Section 3.2). The basis of this reimbursement is described in Exhibit B. 3.2. During the years 1997, 1998 and 1999, SAG shall pay SAGA $500,000 per year, on a monthly basis, for the CMOS machine currently installed in SAGA's Reston Data Center. SAG shall be obligated to make such payments through 1999 notwithstanding any expiration or termination of this Agreement prior to January 1, 2000. 3.3. Within 15 days after the end of each calendar month, SAGA will submit invoices to SAG setting forth the amounts payable under this Agreement with respect to such month. SAG shall pay all such invoiced amounts within 30 days after the date of the invoice. Any late payment hereunder shall accrue interest at a rate equal to the currency-related FIBOR rate available on the due date of such payment, plus three percent. At any time, SAGA may offset any amount owed by SAG to SAGA under this Agreement by making a corresponding reduction in any amount owed by SAGA to SAG under any other agreement or arrangement. SAGA shall promptly notify SAG of any such offset. 3.4. During the term of this Agreement and for one year thereafter, SAG shall have the right, one time during each calendar year, at its expense and upon reasonable notice, to examine or have examined by its authorized representative, SAGA's relevant books and records relating to the immediately preceding calendar year solely in order to verify the accuracy of any invoices furnished hereunder. 4. Proprietary Rights ------------------ 4.1. Any computer software, data or other items furnished to Designated Employees by SAGA, in which SAGA and not SAG owns the proprietary rights, shall remain the sole property of SAGA, and to the extent such computer software, data or other items are disclosed to SAG, SAG shall hold such computer software, data or other items in confidence in accordance with Article 5. Subject to the foregoing, SAG shall own all of the proprietary rights arising from the work of the Designated Employees, and SAGA shall hold all computer software, data or - 5 - other items developed by Designated Employees in confidence in accordance with Article 5. 4.2. Any computer software developed by Designated Employees shall be a "SAG Product" for purposes of the Cooperation Agreement between the parties dated March 31, 1997. 5. Confidentiality --------------- 5.1. For the purpose of this Article 5, the term "Confidential Information" means any information used in or relating to the business of one party or its affiliates (collectively, the "Disclosing Party"), including, but not limited to, the Disclosing Party's product plans, technical materials and financial and customer information, that the Disclosing Party maintains in confidence, and all tangible embodiments of such information, that is received by the other party or its affiliates (the "Receiving Party"), or to which the Receiving Party has access, in any form; provided that "Confidential Information" does not include any information that the Receiving Party can demonstrate (i) is or becomes publicly known through no fault of the Receiving Party; (ii) is developed independently by the Receiving Party; or (iii) is rightfully obtained by the Receiving Party from a third party not obligated to preserve its confidentiality who did not receive the material or information directly or indirectly from the Disclosing Party. 5.2. A Receiving Party (i) shall not use the Disclosing Party's Confidential Information for any purpose other than in accordance with this Agreement and other agreements between the parties and (ii) shall not disclose Confidential Information to any person or entity, other than any of its employees, agents and independent contractors who have a need to know such Confidential Information and who are subject to a nondisclosure obligation comparable in scope to this Article 5. 5.3. Notwithstanding Section 5.2, a Receiving Party may disclose Confidential Information to the extent required by a court or other governmental authority, provided that (i) the Receiving Party gives the Disclosing Party reasonable notice of the disclosure, (ii) the Receiving Party uses reasonable efforts to resist disclosing the Confidential Information, and (iii) upon request of the Disclosing Party, the Receiving Party cooperates with the Disclosing Party to obtain a protective order regarding, or otherwise limit, the disclosure. 5.4. The parties acknowledge that either party's breach of Section 5.2 would cause the other party irreparable injury for which it would not have an adequate remedy at law. In the event of such a breach, the non-breaching party shall be - 6 - entitled to injunctive relief in addition to any other remedies it may have at law or in equity, without having to prove any actual damages sustained. 6. Indemnity --------- 6.1. Subject to Section 6.2, SAG shall defend, indemnify and hold harmless SAGA, its affiliates, and their respective directors, officers, agents and employees from and against all claims, liabilities, suits, losses, damages and expenses, including costs and reasonable attorneys' fees ("Claims") relating to or resulting from (i) SAG'S breach of this Agreement, (ii) the negligence of SAG or of Designated Employees, (iii) allegations that SAGA has failed to supervise Designated Employees, (iv) infringements of patents, copyrights or other proprietary rights by Designated Employees, (v) failure of SAG or of Designated Employees to comply with applicable laws and regulations, (vi) any other actions or inactions of Designated Employees, and (vii) SAGA'S selection, hiring, failing to hire, employment or termination of Designated Employees. 6.2. The foregoing indemnity is subject to the following conditions: 6.2.1. An indemnified person or entity promptly shall notify SAG in writing of any Claim (provided that the failure of an indemnified person or entity to provide prompt notice shall not relieve SAG of its obligations under this Article 6, except to the extent that SAG is actually prejudiced by such failure); and 6.2.2. SAG shall have the right, if it so chooses, to control and direct, at its expense and through counsel of its choosing, the investigation and defense of any third party Claim, but may compromise or settle the same only with the consent of the indemnified person or entity, which consent shall not be unreasonably withheld. The indemnified person or entity shall cooperate fully with SAG in the defense of any such Claim. 6.3. Upon receipt of a notice of a Claim for indemnification, SAG shall promptly pay to the indemnified person or entity the amount of such Claim in accordance with and subject to the provisions of this Article 6, provided, however, that no such payment shall be due during any period in which SAG is contesting in good faith either its obligation to make such indemnification or the amount of the Claim that is payable. - 7 - 7. Term and Termination -------------------- 7.1. The initial term of this Agreement shall commence on the Effective Date and continue until December 31, 1998 unless this Agreement is terminated in accordance with Section 7.2. Thereafter, this Agreement automatically shall be extended for subsequent one-year renewal terms unless (i) either party gives the other party written notice of non-renewal at least 90 days prior to the end of the then-current initial or renewal term, or (ii) this Agreement is terminated in accordance with Section 7.2. 7.2. If either party materially breaches this Agreement and fails to remedy that breach within fifteen days after receiving written notice of that breach from the other party, the non-breaching party may terminate this Agreement immediately upon further written notice. 7.3. Upon any expiration or termination of this Agreement, SAGA may in its discretion offer one or more Designated Employees other positions within SAGA. If SAGA elects not to offer one or more Designated Employees such positions, or if one or more Designated Employees reject such offers, SAGA may terminate such Designated Employees in accordance with policies and practices adopted by SAGA from time to time, and SAG shall pay all costs of such termination. 7.4. SAG shall pay all costs arising out of the expiration of this Agreement or the termination of this Agreement by either party. 7.5. The rights and obligations of the parties under Section 2.3 and Articles 3 through 9 of this Agreement shall remain in effect after the expiration or termination of this Agreement. 8. Notices ------- All notices or other communications which are required or permitted hereunder shall be in writing and sufficient if delivered personally, by facsimile or sent by overnight express or by registered or certified mail, postage prepaid, addressed as follows: -8- If to SAG: Software AG Uhlandstrasse 12, D-64297 Darmstadt, Germany Attention: Dr. Peter Mossack Facsimile: 49-6151-921868 If to SAGA: Software AG Americas, Inc. 11190 Sunrise Valley Drive Reston, Virginia 20191-5424 Attention: Harry McCreery Facsimile: 703-391-6504 All such deliveries shall be deemed effective when received by the person entitled to such receipt or when delivery has been attempted but refused by such person. Any party may change the person or address to which such deliveries shall be made with respect to such party by delivering notice thereof to the other party hereto in accordance with this Article 8. 9. Miscellaneous ------------- 9.1. This Agreement is confidential, and neither party shall disclose it without the prior written consent of the other party to any third party, other than its attorneys, consultants, accountants, auditors and others to whom a party has a bona fide business reason for disclosing the Agreement; provided that each party may disclose this Agreement as may be required by law or to enforce the provisions hereof. 9.2. The parties shall use the English language in exchanging all documents and other information exchanged between them. 9.3. The provisions of this Agreement are severable, and the unenforceability of any provision of this Agreement shall not affect the enforceability of the remainder of this Agreement. The parties acknowledge that it is their intention that if any provision of this Agreement is determined by a court to be invalid, illegal or unenforceable as drafted, that provision should be construed in a manner designed to effectuate the purpose of that provision to the greatest extent possible under applicable law. 9.4. The rights and remedies provided in this Agreement are, to the extent permitted by law, cumulative and not - 9 - exclusive of any other right or remedy now or hereafter available at law or in equity. Neither asserting a right nor employing a remedy shall preclude the concurrent assertion of any other right or employment of any other remedy, nor shall the failure to assert, or the delay in asserting, any right or remedy constitute a waiver of that right or remedy. 9.5. The rights of the parties under this Agreement are unique, and the failure of a party to perform its obligations hereunder would irreparably harm the other party. Accordingly, the parties shall, in addition to such other remedies as may be available at law or in equity, have the right to enforce their rights hereunder by actions for specific performance to the extent permitted by law. 9.6. No party may assign any of its rights or delegate its obligations hereunder without the written consent of the other party, except that SAGA may make such an assignment and/or delegation to any affiliate of SAGA. Any purported assignment or delegation in violation of this Section 9.6 shall be void. This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors, permitted assigns and legal representatives. 9.7. This Agreement may be modified or amended only by written agreement of the parties. 9.8. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the Commonwealth of Virginia applicable to agreements made and entirely to be performed within such jurisdiction. The party bringing any action under this Agreement shall only be entitled to choose the federal or state courts in the Commonwealth of Virginia as the venue for such action, and each party consents to the jurisdiction of the court chosen in such manner for such action. 9.9. This Agreement may be executed in any number of counterparts, and each such counterpart shall be deemed to be an original instrument, but all such counterparts together shall constitute but one agreement. 9.10. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all previous agreements, written or oral, with respect to the subject matter hereof. - 10 - IN WITNESS WHEREOF, the parties hereto, intending to be legally bound hereby, have caused this Agreement to be executed as of the day and year first above written. SOFTWARE AG By:/s/ Erwin Koenigs -------------------------------- Dr. Erwin Koenigs Chairman of the Board and By:/s/ Volker Dawedeit -------------------------------- Volker Dawedeit Board Member SOFTWARE AG AMERICAS, INC. By:/s/ Daniel Gillis -------------------------------- Daniel Gillis President and Chief Executive Officer
EXHIBIT A - -------------------------------------------------------------------------------- Employee Dept. Name Location - -------------------------------------------------------------------------------- LEE, MI YEE MIDDLEWARE -LOB SEATTLE UPTON, NANCY MIDDLEWARE -LOB SEATTLE VANDOR, STEVE MIDDLEWARE -LOB SEATTLE BRADLEY, CHRIS S. DATA WAREHOUSING-LOB RESTON CONNOLLY, MARC D. DATA WAREHOUSING-LOB RESTON REID, KARL DATA WAREHOUSING-LOB RESTON BILLINGS, JOHN S. ESSE RESTON ASTIZ, PAUL R. PTG ADMINISTRATION RESTON CREAMER, MARK F. PTG ADMINISTRATION RESTON HARRIS, PETER PTG ADMINISTRATION RESTON HILL, PHILIP E. PTG ADMINISTRATION RESTON KENNA, HELEN M. PTG ADMINISTRATION RESTON LEE, MINGEN JEFF PTG ADMINISTRATION RESTON MCDOWELL, STEVEN C. PTG ADMINISTRATION RESTON MCGUIRE, STEPHEN PTG ADMINISTRATION RESTON MURPHY, GERALD W SAG SUPERVISOR RESTON WATANABE, SCOTT PTG ADMINISTRATION RESTON ADDIS, JAMES EES RESTON ALBIN, REBECCA R. EES RESTON CONRAD, MARK P. EES RESTON GOWIN, STAN EES RESTON LIVINGSTON, MICHAEL EES RESTON TIPLER, DAVID N. EES RESTON VEARY, TREVOR J. EES RESTON WIEDEMAN, GRACE EES RESTON BERNAT, MICHAEL PTG SERVICES RESTON BOVE, ANDREW PTG SERVICES RESTON DUFFY, MICHAEL PTG SERVICES RESTON FRANK, TIM PTG SERVICES RESTON KIGHT, ALONZO B. PTG SERVICES RESTON SWETT, SCOTT PTG SERVICES RESTON WALDROP, RANDALL T. PTG SERVICES RESTON COLE, RICHARD D. PTG DENVER RESTON VANAUKEN, DAVID P. PTG DENVER RESTON THOMAS, DEWAYNE PTG SPECIAL PROJECTS RESTON TORRI, KENNETH PTG SPECIAL PROJECTS RESTON VINSARICH, ANTHONY PTG SPECIAL PROJECTS RESTON BARLEY, MICHAEL A. NETWORK RESTON CHIRILA, MICHAEL NETWORK RESTON HERAS VERON, RAUL NETWORK RESTON HOU, WEN-CHUN NETWORK RESTON HUANG, DANIEL D. NETWORK RESTON KATILIE, JOHN F. NETWORK RESTON NGUYEN, SON THANH NETWORK RESTON SMITH, PAUL M. NETWORK RESTON WAGNER, GREGORY J. NETWORK RESTON EISNER, ROBERT H. ENTIRE ACCESS RESTON POHL, PHILLIP L. ENTIRE ACCESS RESTON BYRUM, DRAKE DEVELOPMENT QA RESTON CRIST, WENDY M. DEVELOPMENT QA RESTON HUNTER, JACK L. DEVELOPMENT QA RESTON KRINITZSKY, DEBORAH DEVELOPMENT QA RESTON PERRINE, DOUGLAS K. DEVELOPMENT QA RESTON NELSON, KATHELEEN EVANS DOCUMENTATION RESTON HANSEN, KURT J. PRODUCT QUALITY & RELEASE DENVER KARLIN, MARY SUE PRODUCT QUALITY & RELEASE DENVER KEE, CAROL S. PRODUCT QUALITY & RELEASE DENVER MAH, SHARON PRODUCT QUALITY & RELEASE DENVER MEHLIG, STEFAN PRODUCT QUALITY & RELEASE DENVER SHANDRO, STEVEN A. PRODUCT QUALITY & RELEASE DENVER SWANZY, JOAN E. PRODUCT QUALITY & RELEASE DENVER TOMENCHOK, WAYNE M. PRODUCT QUALITY & RELEASE DENVER GRAY, TODD R&D SEATTLE COHEN, PETER R&D SEATTLE CORDOVIL, JORGE R&D DENVER MERKEL, SHAWN R&D DENVER VAN AUKEN, DAVE R&D DENVER HORAN, LIND R&D DENVER MARCUM, KEN R&D DENVER KELSEY, DONNA R&D DENVER MCCLARD, DAN R&D DENVER WEIGEL, CHARLES R&D DENVER
EXHIBIT B Basis of Reimbursement ---------------------- SAG shall reimburse SAGA for all costs incurred by SAGA as a result of SAGA'S selection, hiring, failing to hire, employment or termination of Designated Employees or otherwise related to the performance of SAGA's obligations under this Agreement. To the extent that specific costs are identified in this Exhibit B, reimbursement therefor shall be as provided in this Exhibit B. 1. Salaries -- Salaries shall be reimbursed at the actual rate paid to each Designated Employee in the month paid. 2. Bonus -- Bonuses shall be accrued and reimbursed monthly based on an aggregate annual estimate. An adjustment to account for the difference between such estimate and the actual aggregate bonus payments shall be made in the invoice for the month during which bonuses are paid. 3. Benefits -- Benefits shall be reimbursed at SAGA'S standard rate in effect for the month. The rate will be applied to all salary, bonus or commission payments made to, or accrued on behalf of, each Designated Employee. 4. Termination -- In the case of a termination of a Designated Employee, all termination and severance costs will be paid by SAG in the month incurred. 5. Outside Labor, Contract Labor or Temporary Help -- When any such expenditures are approved by a SAG Supervisor, the actual amount incurred shall be reimbursed in the month incurred. 6. Office Supplies, Documentation, Printed Materials, Promotional Materials and Advertising -- When such items are acquired or used by Designated Employees, or media advertising is placed by Designated Employees, the actual cost thereof shall be reimbursed in the month in which such items are so acquired, used or placed. 7. Occupancy -- Occupancy shall be reimbursed as follows: 7.1. The cost of space in the Reston R&D Center shall be reimbursed at the rate of $50,000 per month for the space in use as of the Effective Date. In accordance with Section 2.1.3 of this Agreement, this space shall be expanded or contracted only by agreement of the parties, and if the parties agree to expand or contract such space, the parties shall - 2 - at that time agree to an adjustment in the applicable reimbursement rate. 7.2. All other occupancy shall be reimbursed monthly at the standard per head monthly cost calculated by SAGA for internal purposes. (1997 rate is $1,500 per person per month.) At SAG's request, SAGA shall provide SAG a written statement setting forth the basis for the calculation of such standard cost. 8. Computer, Telephone and Office Equipment Costs -- To the extent that (i) Designated Employees require specific hardware or software other than the CMOS machine that is the subject of Section 3.2 of this Agreement, and such specific hardware or software is not provided by SAG, or (ii) SAGA incurs costs providing telephone, office equipment or similar facilities to Designated Employees, the actual costs thereof shall be reimbursed in the month in which such costs are incurred. 9. Depreciation -- Depreciation shall be reimbursed, on a monthly basis, at SAGA's standard rates for all capital assets used by Designated Employees. 10. Travel, Conference and Training -- Travel, conference and training expenses incurred by Designated Employees shall be consistent with SAGA travel policies and the actual costs thereof shall be reimbursed in the month in which such costs are incurred. 11. Human Resources Services -- Costs of human resources services, including such recruiting costs as the costs of advertising, outside recruiters and applicant travel, shall be reimbursed in the month in which such costs are incurred. EX-10.15 15 REGISTRATION RIGHTS AGREEMENT EXHIBIT 10.15 REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement (this "Agreement") is made and entered into as of September 26, 1997, by and between Software AG Systems, Inc., a Delaware corporation (the "Company"), and Thayer Equity Investors III, L.P., a Delaware limited partnership, for the benefit of all holders of Registrable Shares (as defined herein). The parties hereby agree as follows: 1. Definitions. For purposes of this Agreement: ----------- (a) "Common Stock" means shares of the Company's common stock, par value $0.01 per share; (b) "Investors" means the holders of Registrable Shares on the date hereof and any person or entity that acquires any shares of Common Stock from any of such Investors after the date hereof in a transaction as a result of which such shares constitute "restricted securities" under Rule 144 under the Securities Act; (c) "IPO Event" means the consummation of an underwritten public offering pursuant to an effective registration statement under the Securities Act that is underwritten by one or more nationally-recognized investment banking firms; (d) "Majority-in-Interest" means Investors who in the aggregate hold more than 50% of the Registrable Shares as the time of determination; (e) "Register," "registered," and "registration" refer to an underwritten registration effected by preparing and filing with the Securities and Exchange Commission (the "Commission") a registration statement or similar document in compliance with the Securities Act, and the declaration or ordering by the Commission of effectiveness of such registration statement or document; (f) "Registration Expenses" means all expenses in connection with the Company's performance of or compliance with its obligations under this Agreement, including, without limitation, all (i) registration, qualification and filing fees; (ii) fees, costs and expenses of compliance with securities or blue sky laws (including reasonable fees, expenses and disbursements of counsel for the underwriters in connection with blue sky qualifications of the Registrable Shares under the laws of such jurisdictions as the managing underwriter or underwriters in a registration may designate, subject to the limitation as set forth in subsection (h) of Section 5 hereof); (iii) printing expenses; (iv) messenger, telephone and delivery expenses; - 2 - (v) fees, expenses and disbursements of counsel for the Company and of all independent certified public accountants retained by the Company (including the expenses of any special audit and "cold comfort" letters required by or incident to such performance); (vi) Securities Act liability insurance if the Company so desires; (vii) fees, expenses and disbursements of any other individuals or entities retained by the Company in connection with the registration of the Registrable Shares; (viii) fees, costs and expenses incurred in connection with the listing of the Registrable Shares on each national securities exchange or automated quotation system on which the Company has made application for the listing of its Common Stock; and (ix) internal expenses of the Company (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties and expenses of any annual audit). Registration Expenses shall not include selling commissions, discounts or other compensation paid to underwriters or other agents or brokers to effect the sale of Registrable Shares, or counsel fees and any other expenses incurred by Investors in connection with any registration that are not specified in the immediately preceding sentence; - 3 - (g) "Registrable Shares" means shares of Common Stock held by any of the Investors that cannot be sold by such Investor to the public without registration under the Securities Act, including shares that may be sold under Rule 144 if the total number of shares desired to be sold by such Investor cannot be sold by such Investor under Rule 144 in a single transaction; and (h) "Securities Act" means the Securities Act of 1933, as amended. 2. Demand Registrations. -------------------- (a) Request for Registration. If a Majority-in-Interest submits a ------------------------ written request (a "Demand Notice") to the Company subsequent to an IPO Event that the Company register Registrable Shares under and in accordance with the Securities Act (a "Demand Registration"), then the Company shall: (i) within 5 business days after receipt of such Demand Notice, give written notice of the proposed registration to all other Investors; and (ii) as soon as practicable, use reasonable diligent efforts to effect such registration as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Registrable Shares as are specified in such request, - 4 - together with all or such portion of the Registrable Shares of any Investors joining in such request as are specified in written requests received by the Company within 10 business days after the date the Company sends the written notice referred to in clause (i) above. Notwithstanding the foregoing, however, the Company shall not be obligated to take any action to effect any such registration under this Section 2 within six months immediately following the effective date of any registration statement pertaining to securities of the Company in which the Investors were given the right to register Registrable Shares pursuant to the registration rights described in Section 3 hereof and the number of Registrable Shares included in such registration was not reduced from the number of Registrable Shares requested to be included pursuant to Section 3(b). Nor shall the Company be obligated to complete more than five Demand Registrations or more than one Demand Registration on Form S-1 (or any successor form). In addition, if the Company shall furnish to the Majority-in-Interest under this Section 2 a certificate signed by the president of the Company stating that in the good faith judgment of the board of directors of the Company, it would be seriously detrimental to the - 5 - Company or its stockholders for a registration statement to be filed on or before the date filing would be required in connection with any Demand Registration and it is therefore essential to defer the filing of such registration statement, the Company shall have the right to defer such filing for a reasonable period not to exceed an additional ninety (90) days provided that such right shall not be exercised more than once with respect to a request for registration hereunder; and in any such event, the Majority-in-Interest will be entitled to withdraw their request for registration hereunder. If any such request is withdrawn as provided in the immediately preceding sentence, such registration will not be considered a permitted Demand Registration hereunder, and the Company will pay all Registration Expenses in connection with such withdrawn request for registration. (b) Underwriting. In connection with any registration under this ------------ Section 2, if so requested, the Company shall enter into an underwriting agreement with one or more underwriters selected by the Majority-in-Interest having terms and conditions customary for such agreements. 3. Company Registration. -------------------- (a) Notice of Registration. If at any time or from time to time, the ---------------------- Company shall determine to - 6 - register any of its Common Stock, whether or not for its own account, other than a registration relating to employee benefit plans or a registration relating to a Rule 145 transaction, the Company shall: (i) provide to each Investor written notice thereof at least 10 business days prior to the filing of the registration statement by the Company in connection with such registration; and (ii) include in such registration, and in any underwriting involved therein, all those Registrable Shares specified in a written request by each Investor received by the Company within 5 business days after the Company sends the written notice referred to above, subject to the provisions of Section 3(b) below. (b) Underwriting. The right of any Investor to registration pursuant ------------ to this Section 3 shall be conditioned upon the participation by such Investor in the underwriting arrangements specified by the Company in connection with such registration and the inclusion of the Registrable Shares of such Investor in such underwriting to the extent provided herein. All Investors proposing to distribute their Registrable Shares through such underwriting shall (together with the Company) enter into an underwriting agreement in - 7 - customary form with the managing underwriter selected for such underwriting by the Company and take all other actions, and deliver such opinions and certifications, as may be reasonably requested by such managing underwriter. Notwithstanding any other provision of this Section 3, if the managing underwriter determines that marketing factors require a limitation of the number of shares to be underwritten, the managing underwriter may limit the number of Registrable Shares to be included in such registration. The Company shall so advise all Investors distributing Registrable Shares through such underwriting, and there shall be excluded from such registration and underwriting, to the extent necessary to satisfy such limitation, first shares held by the Investors and, thereafter, to the extent necessary, shares which the Company wishes to register for its own account. As among the Investors as a group, the number of Registrable Shares that may be included in the registration and underwriting shall be allocated among them in proportion, as nearly as practicable, to the respective amounts of Registrable Shares required to be included (determined without regard to any requirement of a request to be included in such registration) in such registration held by all Investors at the time of filing the registration statement. To - 8 - facilitate the allocation of shares in accordance with the above provisions, the Company may round the number of shares allocated to any Investor to the nearest 100 shares. (c) Right to Terminate Registration. The Company shall have the right to ------------------------------- terminate or withdraw any registration initiated by it under this Section 3 prior to the effectiveness of such registration whether or not any Investor has elected to include Registrable Shares in such registration. 4. Expense of Registration. All Registration Expenses incurred in ----------------------- connection with the registration and other obligations of the Company pursuant to Sections 2, 3 and 5 shall be borne by Company; provided, however, that Company shall not be required to pay for expenses of any registration begun pursuant to Section 2, the request for which has been subsequently withdrawn by the Majority-in-Interest, in which case such expenses shall be borne by the Majority-in-Interest pro rata in accordance with the number of Registrable Shares initially sought to be registered, unless the Majority-in-Interest withdraw their request for registration hereunder as a result of a deferral of the filing of such registration statement at the request of - 9 - the Company, in which case, the Company will pay all Registration Expenses in connection with such registration. 5. Registration Procedures. If and whenever the Company is required by ----------------------- the provisions of this Agreement to effect the registration of Registrable Shares, the Company shall: (a) promptly prepare and file with the Commission a registration statement with respect to such Registrable Shares, and use its reasonable diligent efforts to cause such registration statement to become effective as promptly as practicable and remain effective thereafter as provided herein, provided that prior to filing a registration statement or prospectus or any amendments or supplements thereto, including documents incorporated by reference after the initial filing of any registration statement, the Company will furnish to each of the Investors whose Registrable Shares are covered by such registration statement, their counsel and the underwriters copies of all such documents proposed to be filed sufficiently in advance of filing to provide them with a reasonable opportunity to review such documents and comment thereon; (b) prepare and file with the Commission such amendments (including post-effective amendments) - 10 - and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective and current and to comply with the provisions of the Securities Act with respect to the sale or other disposition of all Registrable Shares covered by such registration statement, including such amendments (including post- effective amendments) and supplements as may be necessary to reflect the intended method of disposition by the prospective seller or sellers of such Registrable Shares, but (except for a shelf registration) for no longer than 120 days subsequent to the effective date of such registration statement; (c) provide customary indemnity and contribution arrangements to any qualified independent underwriter or qualified independent pricer as defined in Schedule E of the Bylaws of the National Association of Securities Dealers, Inc. (a "Qualified Independent Underwriter/Pricer"), if requested by such Qualified Independent Underwriter/Pricer, on such reasonable terms as such Qualified Independent Underwriter/Pricer customarily requires; (d) subject to receiving reasonable assurances of confidentiality, for a reasonable period after the filing of such registration statement, and - 11 - throughout each period during which the Company is required to keep a registration effective, make available for inspection by the selling holders of Registrable Shares being offered, and any underwriters, and their respective counsel, such financial and other information and books and records of the Company, and cause the officers, directors, employees, counsel and independent certified public accountants of the Company to respond to such inquiries as shall be reasonably necessary, in the judgment of such counsel, to conduct a reasonable investigation within the meaning of Section 11 of the Securities Act; (e) promptly notify the selling holders of Registrable Shares and any underwriters and confirm such advice in writing, (i) when such registration statement or the prospectus included therein or any prospectus amendment or supplement or post-effective amendment has been filed, and, with respect to such registration statement or any post-effective amendment, when the same has become effective, (ii) of any comments by the Commission, by the National Association of Securities Dealers Inc. ("NASD"), and by the Blue Sky or securities commissioner or regulator of any state with respect thereto or any request by any such entity for amendments or supplements to such registration statement or - 12 - prospectus or for additional information, (iii) of the issuance by the Commission of any stop order suspending the effectiveness of such registration statement or the initiation or threatening of any proceedings for that purpose, (iv) if at any time the representations and warranties of the Company cease to be true and correct in all material respects, (v) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Registrable Shares for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose, or (vi) at any time when a prospectus is required to be delivered under the Securities Act, that such registration statement, prospectus, prospectus amendment or supplement or post-effective amendment, or any document incorporated by reference in any of the foregoing, contains an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they are made, not misleading; (f) furnish to each selling holder of Registrable Shares being offered, and any underwriters, prospectuses or amendments or supplements thereto, in - 13 - such quantities as they may reasonably request and as soon as practicable, that update previous prospectuses or amendments or supplements thereto; (g) in the case of a registration under Section 3 hereof, permit selling holders of Registrable Shares to rely on any representations and warranties made to any underwriter of the Company or any opinion of counsel or "cold comfort" letter delivered to any such underwriter, and indemnify each such holder to the same extent that it indemnities any such underwriter; (h) use reasonable diligent efforts to (i) register or qualify the Registrable Shares to be included in a registration statement hereunder under such other securities laws or blue sky laws of such jurisdictions within the United States of America as any selling holder of such Registrable Shares or any underwriter of the securities being sold shall reasonably request, (ii) keep such registrations or qualifications in effect for so long as the registration statement remains in effect and (ii) take any and all such actions as may be reasonably necessary or advisable to enable such holder or underwriter to consummate the disposition in such jurisdictions of such Registrable Shares owned by such holder; provided, however, that the Company shall not be required -------- ------- for any such purpose to - 14 - (x) qualify generally to do business as a foreign corporation in any jurisdiction wherein it would not otherwise be required to qualify but for the requirements of this Section 5(h), (y) subject itself to taxation in any such jurisdiction or (z) consent to general service of process in any such jurisdiction; (i) cause all such Registrable Shares to be listed or accepted for quotation on each securities exchange or automated quotation system on which the Company's Common Stock then trades; and (j) otherwise use reasonable diligent efforts to comply with all applicable provisions of the Securities Act, and rules and regulations of the Commission, and make available to its security holders, as soon as reasonably practicable, an earning statement covering a period of at least twelve months which shall satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder. 6. Indemnification. In the event any of the Registrable Shares are --------------- included in a registration statement under this Agreement: (a) the Company will indemnify each Investor who participates in such registration, each of its officers and directors and partners and such Investor's separate legal counsel and independent - 15 - accountants, and each person controlling such Investor within the meaning of Section 15 of the Securities Act, and each underwriter, if any, and each person who controls any underwriter within the meaning of Section 15 of the Securities Act, against all expenses, claims, losses, damages or liabilities (or actions in respect thereof), including any of the foregoing incurred in settlement of any litigation, commenced or threatened, arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any registration statement, prospectus, offering circular or other document, or any amendment or supplement thereto, incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading, or any violation by the Company of any rule or regulation promulgated under the Securities Act applicable to the Company in connection with any such registration, qualification or compliance, and the Company will reimburse each such Investor, each of its officers and directors and partners and such Investor's separate legal counsel and independent accountants and - 16 - each person controlling such Investor, each such underwriter and each person who controls any such underwriter, for any legal and any other expenses reasonably incurred in connection with investigating, preparing or defending any such claim, loss, damage, liability or action, provided that the Company will not be liable in any such case to the extent that any such claim, loss, damage, liability or expense arises out of or is based on any untrue statement or omission or alleged untrue statement or omission, made in reliance upon and in conformity with written information furnished to the Company by an instrument duly executed by such Investor or underwriter and stated to be specially for use therein. (b) Each Investor will, if Registrable Shares held by such Investor are included in the securities as to which such registration, qualification or compliance is being effected, indemnify the Company, each of its directors and officers and its legal counsel and independent accountants, each underwriter, if any, of the Company's securities covered by such a registration statement, each person who controls the Company or such underwriter within the meaning of Section 15 of the Securities Act, and each other such Investor, each of its officers and directors and each - 17 - person controlling such Investor within the meaning of Section 15 of the Securities Act, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, offering circular or other document, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statement therein not misleading, and will reimburse the Company, such Investors, such directors, officers, persons, underwriters or control persons for any legal or any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular or other document in reliance upon and in conformity with written information furnished to the Company by an instrument duly executed by such Investor and stated to be specifically for use therein. (c) Each party entitled to indemnification under this Section 6 (the "Indemnified Party") shall - 18 - give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought provided that failure to give such prompt notice shall not relieve the Indemnifying Party of its obligations hereunder unless it is materially prejudiced thereby, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or litigation, shall be approved by the Indemnified Party (whose approval shall not unreasonably be withheld). Such Indemnified Party shall have the right to employ separate counsel in any such action and to participate in the defense thereof, but the fees and expenses of such counsel shall be that of such Indemnified Party unless (i) the Indemnifying Party has agreed to pay such fees and expenses or (ii) the Indemnifying Party shall have failed to assume the defense of such action or proceeding and employ counsel reasonably satisfactory to such Indemnified Party in any such action or proceeding or (iii) the named parties to any such action or proceeding (including any impleaded parties) include both such Indemnified Party and the Indemnifying Party - 19 - and such Indemnified Party shall have been advised by counsel that there may be one or more legal defenses available to such Indemnified Party which are different from or additional to those available to the Indemnifying Party (in which case, if such Indemnified Party notifies the Indemnifying Party in writing of an election to employ separate counsel at the expense of the Indemnifying Party, the Indemnifying Party shall not have the right to assume the defense of such action or proceeding on behalf of such Indemnified Party, it being understood, however, that the Indemnifying Party then shall have the right to employ separate counsel at its own expense and to participate in the defense thereof, and shall not, in connection with any one such action or proceeding or separate but substantially similar or related actions or proceedings in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the reasonable fees and expenses of more than one separate firm of attorneys at any time for all Indemnified Parties, which firm shall be designated in writing by a majority of the Indemnified Parties who are eligible to select such counsel). No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any - 20 - judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. No Indemnified Party may consent to entry of any judgment or enter into any settlement without the prior written consent of the Indemnifying Party. (d) If the indemnification provided for in this Section 6 is held by a court of competent jurisdiction to be unavailable to an Indemnified Party with respect to any loss, liability, claim, damage or expense referred to herein, then the Indemnifying Party, in lieu of indemnifying the Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party with respect to such loss, liability, claim, damage or expenses in the proportion that is appropriate to reflect the relative fault of the Indemnifying Party and the Indemnified Party in connection with the statements or omissions that resulted in such loss, liability, claim, damage, or expense, as well as any other relevant equitable considerations. The relative fault of the Indemnifying Party and the Indemnified Party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of material fact or the - 21 - omission to state a material fact relates to information supplied by the Indemnifying Party or by the Indemnified Party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. 7. Information by Investors. Investors whose Registrable Shares are ------------------------ included in any registration shall furnish to the Company such information regarding themselves and the distribution proposed by them as the Company may request in writing and as shall be required in connection with any registration, qualification or compliance referred to in this Agreement. 8. Rule 144 Reporting. With a view to making available the benefits of ------------------ certain rules and regulations of the Commission which may at any time permit the sale of the Registrable Shares to the public without registration, after such time as a public market exists for the Common Shares and until five years from the date thereof, the Company shall use reasonably diligent efforts to: (a) Make and keep public information available, as those terms are understood and defined in Rule 144 under the Securities Act, beginning 90 days after (i) an IPO Event, or (ii) the Company registers a class of securities under Section 12 of the Securities Exchange Act of 1934, as amended; or - 22 - (b) File with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Securities Exchange Act of 1934, as amended (at any time after it has become subject to such reporting requirements); (c) Furnish to any Investor promptly upon request a written statement as to its compliance with the reporting requirements of Rule 144 (at any time after 90 days after an IPO Event), and of the Securities Act and the Securities Exchange Act of 1934 (at any time after it has become subject to such reporting requirements), a copy of the most recent annual or quarterly report of the Company, and such other reports and documents of the Company and other information in the possession of or reasonably obtainable by the Company as an Investor may reasonably request in availing itself of any rule or regulation of the Commission allowing an Investor to sell Registrable Shares without registration. 9. Termination of Registration Rights. No Investor shall be entitled to ---------------------------------- exercise any right provided for in this Agreement after 7 years following an IPO event. 10. Miscellaneous. ------------- (a) Amendments and Waivers. The provisions of this Agreement, ---------------------- including the provisions of this - 23 - sentence, may not be amended, modified or supplemented, and waivers or consents to depart from the provisions hereof may not be given unless the Company has obtained the written consent of a Majority-in-Interest. Notwithstanding the foregoing, a waiver or consent to departure from the provisions hereof with respect to a matter which relates exclusively to the rights of Investors whose Registrable Shares are being sold pursuant to a registration statement and which does not directly or indirectly affect the rights of other Investors may be given by the holders of majority of the Registrable Shares being sold by such holders. (b) Notices. All notices or communications which are required or ------- permitted hereunder shall be in writing and sufficient if delivered personally or sent by facsimile transmission or by reputable overnight express delivery service. Communications to an Investor shall be sent to such Investor at its address set forth in the security register or other records of the Company. Communications to the Company shall be sent as follows: Software AG Systems, Inc. 11190 Sunrise Valley Drive Reston, VA 20191 Attention: Secretary Facsimile No.: 703-391-6980 - 24 - (c) Descriptive Headings. The descriptive headings of the several -------------------- Sections of this Agreement are inserted for convenience only and do not constitute a part of this Agreement. (d) Governing Law. This Agreement shall be construed and enforced in ------------- accordance with, and the rights of the parties shall be governed by, the law of the State of New York as applied to agreements entered into and wholly performed in New York, without giving effect to the choice of law or conflicts principles thereof. (e) Entire Agreement. This Agreement contains the entire agreement ---------------- among the parties with respect to the subject matter hereof and supersedes all prior and contemporaneous arrangements or understandings with respect thereto. (f) Severability. Any provisions of this Agreement that is prohibited ------------ or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. - 25 - (g) Counterparts. This Agreement may be executed simultaneously in two ------------ or more counterparts, each of which shall be deemed as original, and it shall not be necessity in making proof of this Agreement to produce or account for more than one such counterpart. (h) Successors and Assigns; Third Party Beneficiaries. All the terms ------------------------------------------------- and provisions of this Agreement shall be binding upon, shall inure to the benefit of and shall be enforceable by the respective successors and the permitted assigns of the parties hereto. In addition, the terms and provisions of this Agreement shall also inure to the benefit of and be enforceable by the Investors who are not signatories to this Agreement, each of whom is an intended third party beneficiary hereof, provided however that each such Investor who registers Registrable Shares pursuant to the terms of this Agreement shall be conclusively deemed to have agreed to be bound by and to perform all of the terms and provisions of this Agreement. - 26 - IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. SOFTWARE AG SYSTEMS, INC. By: /s/ Harry K. McCreery ---------------------------------- Harry K. McCreery Vice President, Treasurer and Chief Financial Officer THAYER EQUITY INVESTORS III, L.P. By: TC Equity Partners, LLC, its General Partner By: /s/ Rick Rickertsen ------------------------------ Rick Rickertsen - 27 - EX-10.16 16 SUBSCRIPTION AGREEMENT Exhibit 10.16 EXECUTION COPY SUBSCRIPTION AGREEMENT ---------------------- THIS SUBSCRIPTION AGREEMENT dated as of August 22, 1997 (the "Agreement") by and between Software AG Systems, Inc., a Delaware corporation, (the "Company") and Timothy L. Hill (the "Purchaser"). WHEREAS, the Purchaser has been elected Vice President, Marketing of the Company; and WHEREAS, the Company and the Purchaser desire to enter into an agreement pursuant to which the Purchaser will purchase from the Company, and the Company will sell to the Purchaser, 500 shares (the "Shares") of the Company's common stock; NOW, THEREFORE, intending to be legally bound hereby, the parties hereto agree as follows: ARTICLE 1. PURCHASE AND SALE OF THE SHARES 1.1 Purchase and Sale of the Shares. Upon execution of this Agreement: ------------------------------- (a) The Purchaser will purchase from the Company, and the Company will issue and sell to the Purchaser, the Shares for an aggregate purchase price of $202,095 (the "Purchase Price"); (b) The Company will deliver to the Purchaser a certificate representing the Shares; and (c) The Purchaser will deliver to the Company a cashier's or certified check or wire transfer of funds in the amount of the Purchase Price. 1.2 Purchaser Representations and Warranties. ---------------------------------------- In connection with the purchase and sale of the Shares hereunder, the Purchaser represents and warrants to the Company that: (a) The Purchaser is acquiring the Shares for his own account for investment purposes only and not with a view to, or intention of, making a distribution thereof within the meaning of the Securities Act of 1933, as amended (the "Act"), or any applicable state securities laws, and the Shares will not be transferred or disposed of in contravention of the Act or any applicable state securities laws. (b) The Purchaser is aware that the Shares have not been registered under the Act or any state or other jurisdiction's securities laws, and that the Shares must be held indefinitely unless the sale or other transfer thereof is subsequently registered or exemptions from such registration requirements are available. The Purchaser is further aware that the Company is under no obligation to register the Shares under the Act or any state or other jurisdiction's securities laws or to assist the Purchaser is complying with any exemption from such registration requirements. (c) The Purchaser acknowledges that investment in the Shares involves substantial risks, including the risk of total loss of his investment in the Shares. The Purchaser (i) is able to bear the economic risk of his investment in the Shares for an indefinite period of time; (ii) has adequate means, other than the Shares or funds invested therein, of providing for his current and foreseeable needs; (iii) has no foreseeable need to sell or otherwise dispose of any of the Shares; and (iv) has sufficient net worth to sustain a loss of his entire investment in the Shares in the event such loss should occur. (d) The Purchaser acknowledges that (i) all documents, books and records requested by the Purchaser pertaining to the Company or the Shares have been made available for inspection by the Purchaser and his agents and representatives and (ii) the Purchaser and his agents and representatives have had a reasonable opportunity to ask questions of and receive answers from the Company or persons acting on behalf of the Company, concerning all matters relevant to the Purchaser's decision to purchase Shares. (e) The Purchaser is an "accredited investor," as such term is defined in Rule 501 under the Act. The Purchaser and his agents and representatives have such knowledge and experience in financial and business matters as to enable them to utilize the information made available to them in connection with the transactions contemplated hereby to evaluate the merits and risks of an investment in the Shares and to make an informed decision with respect thereto, and such an evaluation and informed decision have been made. - 2 - (f) The Purchaser has the legal capacity and authority to enter into and perform all of his obligations under this Agreement. This Agreement constitutes the legal, valid and binding obligation of the Purchaser, enforceable against the Purchaser in accordance with its terms. The execution, delivery and performance of this Agreement does not and will not conflict with, violate, cause a breach of or constitute a default under (i) any agreement, contract or other instrument or obligation to which the Purchaser is a party or by which the Purchaser is bound or (ii) any judgment, order, decree, statute, rule or regulation to which the Purchaser is subject. ARTICLE 2. REPURCHASE RIGHT AND NO RAID 2.1 Company's Repurchase Right. -------------------------- (a) The Purchaser covenants and agrees that, except with the prior written consent of the Company, he will not transfer, sell or otherwise dispose of, whether directly or indirectly, any of the Shares prior to the later of (i) the second anniversary of the date hereof and (ii) the ninetieth (90th) day following the Termination Date (as defined below), and any purported disposition in violation hereof shall be null and void. If prior to the second anniversary of the date hereof the Purchaser's employment with the Company is terminated for any reason, then within sixty (60) days following the date of such termination (the "Termination Date"), the Company may elect, by delivering to the Purchaser a written notice of the Company's election, to purchase the Shares (including any securities issued in respect of the Shares upon any stock split, stock dividend, recapitalization, merger, consolidation or other similar event) for a total purchase price equal to the Purchase Price. (b) If the Company exercises its right to purchase the Shares pursuant to this Section, the Company and the Purchaser shall consummate the sale and purchase of the Shares no later than ninety (90) days after the Termination Date. (c) The Purchaser hereby acknowledges that the right of the Company to purchase the Shares in the manner described in this Section is not unreasonable under the circumstances existing as of the date hereof. - 3 - 2.2 No Raid Covenant. ---------------- (a) The Purchaser agrees that, from the date hereof until five years after the termination of the Purchaser's employment with the Company and its susidiaries, the Purchaser shall not, directly or indirectly, acting either alone or in concert with others, seek to influence any employee of the Company or any of its subsidiaries to leave or otherwise terminate such employee's employment with such entity. The Purchaser agrees that, from the date hereof until three years after the termination of the Purchaser's employment with the Company and its subsidiaries, the Purchaser shall not, directly or indirectly, solicit or assist any other person in soliciting (other than on behalf of the Company and its subsidiaries) any customers, clients or suppliers of the Company or any of its subsidiaries, provided, however, that the obligations set forth in this sentence shall not apply to the Purchaser following the termination of the Purchaser's employment if such termination is (i) by the Company and (ii) not for cause. (b) The Purchaser acknowledges that he has carefully read and considered all of the terms of this Agreement, including particularly the terms of this Section 2.2, that the Company has made a substantial investment in the Company's business and that the restrictions provided in this Section 2.2 are reasonable and necessary for the Company's protection. The Purchaser further acknowledges that damages at law will not be a measurable or adequate remedy for breach of the covenants contained in this Section, and accordingly the Purchaser consents to the entry by any court of competent jurisdiction of any order enjoining the Purchaser from violating any such covenants. The parties hereto further agree that if, in any judicial proceeding, a court should refuse to enforce any covenants set forth in this Section 2.2 because of their term or geographical scope, then such covenants shall be deemed to be modified to permit their enforcement to the maximum extent permitted by law. ARTICLE 3. GENERAL PROVISIONS 3.1 Shareholders Agreement. The Purchaser understands and agrees that, ---------------------- upon execution of this Agreement, the Purchaser becomes a party to the Shareholders Agreement dated as of April 1, 1997, by and - 4 - among the Company and certain shareholders of the Company (the "Shareholders Agreement"), a copy of which has been provided to the Purchaser. The Purchaser hereby agrees to be bound as a "Shareholder" to all the terms and conditions, including the transfer restrictions, of the Shareholders Agreement. 3.2 Legends. The Purchaser understands and agrees that, in addition to ------- any other legends required by applicable law, the certificate or certificates representing the Shares will bear legends substantially to the effect set forth below and that a stop transfer order may be placed with respect thereto. THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE SECURITIES LAW OF ANY JURISDICTION AND MAY NOT BE TRANSFERRED UNTIL (A) A REGISTRATION STATEMENT UNDER SUCH SECURITIES ACT AND SUCH APPLICABLE SECURITIES LAWS SHALL HAVE BECOME EFFECTIVE WITH REGARD THERETO OR (B) IN THE OPINION OF COUNSEL REASONABLY ACCEPTABLE TO THE COMPANY, REGISTRATION UNDER SUCH SECURITIES ACT AND SUCH APPLICABLE SECURITIES LAWS IS NOT REQUIRED IN CONNECTION WITH SUCH PROPOSED TRANSFER. THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE TRANSFER RESTRICTIONS AND OTHER TERMS OF A SHAREHOLDERS AGREEMENT DATED AS OF APRIL 1, 1997, AMONG SOFTWARE AG SYSTEMS, INC. AND CERTAIN SHAREHOLDERS THEREOF AND MAY NOT BE TRANSFERRED EXCEPT IN ACCORDANCE WITH SUCH AGREEMENT. A COPY OF SUCH AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICE OF SOFTWARE AG SYSTEMS, INC. AND WILL BE FURNISHED UPON REQUEST TO THE HOLDER OF RECORD OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE. THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE TRANSFER RESTRICTIONS AND OTHER TERMS OF A SUBSCRIPTION AGREEMENT DATED AS OF AUGUST 22, 1997, BETWEEN SOFTWARE AG SYSTEMS, INC. AND THE REGISTERED HOLDER HEREOF AND MAY NOT BE TRANSFERRED EXCEPT IN ACCORDANCE WITH SUCH AGREEMENT. A COPY OF SUCH AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICE OF SOFTWARE AG SYSTEMS, INC. AND WILL BE FURNISHED UPON REQUEST TO THE REGISTERED HOLDER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE. -5- 3.3 Survival. The representations, warranties and covenants contained in -------- this Agreement shall survive the purchase and sale of the Shares pursuant to this Agreement. 3.4 Amendment. This Agreement may be amended, or any provision hereof --------- may be waived, at any time by an agreement in writing of the parties hereto. 3.5 Entire Agreement; Successors. This Agreement contains the entire ---------------------------- agreement among the parties hereto with respect to the transactions contemplated hereunder and supersedes all prior arrangements or understandings with respect thereto, written or oral, other than documents referred to herein. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and permitted assigns. 3.6 No Assignment. No party hereto may assign any of his or its rights ------------- or obligations under this Agreement to any other person. 3.7 Notices. All notices or other communications which are required or ------- permitted hereunder shall be in writing and sufficient if delivered personally, by facsimile or sent by overnight express or by registered or certified mail, postage prepaid, addressed as follows: If to the Company: Software AG Systems, Inc. 11190 Sunrise Valley Drive Reston, VA 20191 Attn: Chief Financial Officer Facsimile: (703) 391-6504 If to the Purchaser, to the address set forth beneath the signature of the Purchaser on the signature page hereof. All such deliveries shall be deemed effective when received by the person entitled to such receipt or when delivery has been attempted but refused by such person. Any party may change the person or address to which such deliveries shall be made with respect to such -6- party by delivering notice thereof to the other party hereto in accordance with this Section. 3.8 Captions. The captions contained in this Agreement are for --------- reference purposes only and are not part of this Agreement. 3.9 Counterparts. This Agreement may be executed in any number of ------------- counterparts, and each such counterpart shall be deemed to be an original instrument, but all such counterparts together shall constitute but one agreement. 3.10 Governing Law and Venue. The validity, interpretation, ------------------------ construction and performance of this Agreement shall be governed by the laws of the Commonwealth of Virginia applicable to agreements made and entirely to be performed within such jurisdiction. The party bringing any action under this Agreement shall only be entitled to choose the federal or state courts in the Commonwealth of Virginia as the venue for such action, and each party consents to the jurisdiction of the court chosen in such manner for such action. 3.11 Further Assurances. Subject to the terms and conditions herein ------------------- provided, each of the parties hereto shall use reasonable efforts to take, or cause to be taken, such action, to execute and deliver, or cause to be executed and delivered, such additional documents and instruments and to do, or cause to be done, all things necessary, proper or advisable under the provisions of this Agreement and under applicable law to consummate and make effective the transactions contemplated by this Agreement. -7- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first above written. SOFTWARE AG SYSTEMS, INC. By: /s/ Daniel Gillis ------------------------ Daniel Gillis Chief Executive Officer /s/ Timothy L. Hill - ---------------------------- Timothy L. Hill Address: 10705 Falls Pointe Drive Great Falls, VA 22066 -8- EXECUTION COPY AMENDMENT AGREEMENT THIS AMENDMENT AGREEMENT is made as of October 13, 1997, by and between Software AG Systems, Inc., a Delaware corporation (the "Company") and Timothy L. Hill (the "Purchaser"). WHEREAS, the Purchaser and the Company have previously entered into a Subscription Agreement, dated as of August 22, 1997 (the "Agreement"), pursuant to which, the Company may elect to purchase the Shares (as defined in the Agreement) from the Purchaser for a total purchase price equal to the Purchase Price (as defined in the Agreement) if the Purchaser's employment with the Company is terminated for any reason prior to August 22, 1999 (the "Repurchase Right"); and WHEREAS, the Purchaser and the Company desire to amend the Agreement to terminate the Repurchase Right upon a change of control of the Company; NOW, THEREFORE, Section 2.1 of the Agreement is hereby amended to read in full as follows: 2.1 Company's Repurchase Right. The Purchaser covenants and agrees that, -------------------------- except with the prior written consent of the Company, he will not transfer, sell or otherwise dispose of, whether directly or indirectly, any of the Shares prior to the later of (i) August 17, 1999 or (ii) the ninetieth (90th) day following the Termination Date (as defined below), and any purported disposition in violation hereof shall be null and void. If prior to the earlier of (y) August 17, 1999 or (z) a Change of Control of the Company, the Purchaser's employment with the Company is terminated voluntarily by Purchaser or by the Company for cause, then within sixty (60) days following the date of such termination (the "Termination Date"), the Company may elect, by delivering to the Purchaser a written notice of the Company's election, to purchase the Shares (including any securities issued in respect of the Shares upon any stock split, stock dividend, recapitalization, merger, consolidation or other similar event) for a total purchase price equal to the Purchase Price. For purposes of this Section 2.1, the term "Change of Control" means the occurrence of any of the following events after the date hereof: (i) any person or group of persons (as defined in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) together with its affiliates, excluding affiliates of Thayer Equity Investors III, L.P., a Delaware limited partnership, and employee benefit plans of the Company, becomes, directly or indirectly, the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of securities of the Company representing 51% or more of the combined voting power of the Company's then outstanding securities; (ii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation or entity regardless of which entity is the survivor, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or being converted into voting securities of the surviving entity) at least 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; or (iii) the stockholders of the Company approve a plan of complete liquidation or winding-up of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. -- end of page -- [signatures appear on the following page] - 2 - IN WITNESS WHEREOF, the parties have executed this Amendment Agreement as of the day and year first above written. SOFTWARE AG SYSTEMS, INC. By:/s/ Daniel F. Gillis --------------------------- Daniel F. Gillis President and Chief Executive Officer PURCHASER /s/ Timothy L. Hill --------------------------- Timothy L. Hill - 3 - EX-10.17 17 SHAREHOLDERS AGREEMENT EXHIBIT 10.17 SHAREHOLDERS AGREEMENT This SHAREHOLDERS AGREEMENT (this "Agreement") is made and entered into as of April 1, 1997, by and among Software AG Systems, Inc., a Delaware corporation (the "Company"), Thayer Equity Investors III, L.P., a Delaware limited partnership ("Thayer"), and certain other shareholders of the Company listed on Exhibit A hereto (individually, a "Manager" and collectively, the "Managers"). WITNESSETH: WHEREAS, pursuant to a Recapitalization Agreement dated as of March 18, 1997, by and among the Company, Thayer, the Managers and Software AG, a German corporation, Thayer and the Managers purchased from the Company, as of March 31, 1997, 78,000 shares of the Company's common stock, par value .01 per share (the "Common Stock"); and WHEREAS, in connection with such purchase of Common Stock, the Company, Thayer and the Managers have determined that it is in their respective best interests to enter into, and perform under, this Agreement; NOW, THEREFORE, in consideration of the foregoing and the covenants set forth herein and intending to be legally bound hereby, the parties hereto agree as follows: ARTICLE 1. DEFINITIONS For purposes of this Agreement, in addition to terms defined elsewhere herein, the following terms when used herein shall have the following meanings: 1.1 "Affiliate," with respect to a party, shall mean (i) any corporation or other entity or person that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, such party or (ii) a general or limited partner of such party. 1.2 "Board" shall mean the Board of Directors of the Company. 1.3 "Equity Securities" shall mean (i) any securities of the Company having voting rights with respect to the election of the Board not contingent upon default, including, but not limited to, shares of Common Stock, (ii) any securities evidencing any equity ownership interest - 2 - in the Company, and (iii) any securities convertible into or exercisable or exchangeable for any of the foregoing securities. 1.4 "Family Members," with respect to an individual, shall mean such individual's spouse, parents, siblings and children. 1.5 "IPO Event" shall mean the consummation of an underwritten public offering, pursuant to an effective registration statement under the Securities Act, that is underwritten by one or more nationally--recognized investment banking firms and results in the Company receiving not less than $10,000,000 in aggregate cash proceeds from such offering. 1.6 "Permitted Transfer" shall mean a Transfer of Common Stock by a Shareholder to (i) one or more Family Members of such Shareholder or (ii) a trust solely for the benefit of one or more Family Members of such Shareholder, provided that, prior to any such Transfer, each transferee shall agree in writing, in a form satisfactory to the Company and Thayer, that such transferee shall receive and hold such Common Stock subject to the provisions of this Agreement. Any transferee receiving Common Stock pursuant to a Permitted Transfer shall be included within the definition of "Shareholder" for purposes of this Agreement. 1.7 "Pro Rata Share" shall mean the holder's pro rata share of the outstanding Equity Securities which shall be a fraction calculated by dividing (i) the number of shares of Common Stock held by the holder as of the applicable date plus the number of shares of Common Stock issuable upon conversion, exercise or exchange of all other outstanding Equity Securities held by the holder as of the applicable date, by (ii) the total number of shares of Common Stock outstanding as of such date plus the total number of shares of Common Stock issuable upon conversion, exercise or exchange of all other outstanding Equity Securities as of such date. 1.8 "Securities Act" shall mean the Securities Act of 1933, as amended. 1.9 "Shareholders" shall mean each Manager and any other entity or individual, other than Thayer, that becomes a holder of Equity Securities and agrees in writing to be bound by and comply with the terms of this Agreement. 1.10 "Transfer" shall mean any actual or proposed disposition of all or a portion of an interest (legal or equitable) by any means, direct or indirect, absolute or - 3 - conditional, voluntary or involuntary, including, but not limited to, by sale, assignment, put, transfer, pledge, hypothecation, mortgage or other encumbrance, court order, operation of law, distribution, settlement, exchange, waiver, abandonment, gift, alienation, bequest or disposal. ARTICLE 2. GENERAL TRANSFERABILITY RESTRICTIONS No Shareholder shall Transfer or cause or permit to be Transferred any Equity Securities owned or controlled by such Shareholder, except for Transfers in compliance with Articles 3, 4 and 5 of this Agreement, and any purported Transfer in violation hereof shall be null and void. ARTICLE 3. RIGHTS OF FIRST REFUSAL Before any Equity Securities owned or controlled by a Shareholder (a "Selling Shareholder") may be Transferred (other than in a Permitted Transfer or a Transfer pursuant to Article 4 or 5 hereof) prior to an IPO Event, Thayer and the Company shall be offered the following rights with respect to such Equity Securities: 3.1 Notice. The Selling Shareholder shall first deliver a written notice ------ (a "Shareholder Notice") to the Company and Thayer stating (i) that the Selling Shareholder desires to Transfer such Equity Securities, (ii) the number and type of Equity Securities proposed to be Transferred and (iii) the price and other material terms of the proposed Transfer. The Shareholder Notice shall be accompanied by a certificate of the Selling Shareholder certifying that it has received from a third party a bona fide offer to acquire such Equity Securities at such price and on such terms as are set forth in the Shareholder Notice and shall identify such third party. 3.2 Company Right. Within thirty (30) days after receipt of a ------------- Shareholder Notice (the "Company Period"), the Company may elect, by delivering to the Selling Shareholder and to Thayer a written notice (a "Company Notice") of its election, to purchase all or any part of the Equity Securities to which the Shareholder Notice refers, on the same terms and conditions specified in such Shareholder Notice (or on economically equivalent terms and conditions as determined in good faith by the Company and specified in the Company Notice). In the event that the Company does not elect to purchase any of such Equity Securities, the Company shall send a notice to such effect to the Selling --4-- Shareholder and to Thayer prior to the end of the Company Period. 3.3 Thayer Right. In the event that the Company does not elect to ------------ purchase during the Company Period all of the Equity Securities to which the Shareholder Notice refers, then Thayer may elect, by delivering to the Selling Shareholder a written notice (a "Thayer Notice") of its election within forty- five (45) days after Thayer's receipt of the Shareholder Notice (the "Thayer Period"), to acquire, on the same terms and conditions specified in the Shareholder Notice (or economically equivalent terms and conditions as determined in good faith by Thayer and specified in the Thayer Notice), any amount of such Equity Securities that the Company has not elected to purchase. 3.4 Consummation. In the event that the Company and/or Thayer elects to ------------ acquire Equity Securities pursuant to this Article 3, the Company, Thayer and the Selling Shareholder shall consummate the sale and purchase of such Equity Securities within ninety (90) days after the date that the Company and Thayer have received the Shareholder Notice. 3.5 Selling Shareholder Right. To the extent the Company and Thayer do ------------------------- not exercise their respective rights under this Article 3 within the specified time periods, the Selling Shareholder may Transfer the Equity Securities specified in its Shareholder Notice (and not purchased by the Company or Thayer) to the third party specified in such Shareholder Notice at the price and on the terms specified in such notice, provided that (i) such Transfer is consummated within one hundred twenty (120) days of the date of delivery of such Shareholder Notice and (ii) prior to the Transfer, such third party agrees in writing, in a form satisfactory to the Company and Thayer, that such third party shall receive and hold such Equity Securities subject to the provisions of this Agreement. ARTICLE 4. TAG ALONG RIGHTS Until the date of an IPO Event or, if earlier, the date when Thayer's Pro Rata Share is less than fifty-one percent (51%), Thayer shall not engage in a transaction (including a merger, consolidation or similar business combination) that involves the Transfer by Thayer to a third party of Common Stock representing greater than fifty percent (50%) of the outstanding Equity Securities (other than a "Drag Along Sale" as defined in Article 5 below and other than a Transfer to one or more Affiliates of Thayer - 5 - and/or Family Members of such Affiliates) without first offering the Shareholders the right to participate in such Transfer in the following manner: 4.1 Notice. Thayer shall first deliver a written notice (a "Transfer ------ Notice") to the Shareholders stating (i) Thayer's desire to Transfer Common Stock to a third party, (ii) the number of Common Stock shares proposed to be Transferred and (iii) the price and the other general terms of the proposed Transfer. Such notice may be provided before Thayer has identified a purchaser or purchasers for such Equity Securities. 4.2 Shareholders Right. Each Shareholder may elect, by delivering to ------------------ Thayer a written notice (a "Tag Along Notice") of its election within fifteen (15) days after receipt of the Transfer Notice (the "Tag Along Period"), to participate in Thayer's Transfer of Common Stock on the same terms and conditions specified in the Transfer Notice. The Tag Along Notice shall specify the maximum number of Common Stock shares that the Shareholder (a "Tag Along Shareholder") elects to Transfer which number shall not exceed the product (rounded down to the nearest whole number) of (i) the percentage of Thayer's Pro Rata Share that Thayer proposes to Transfer and (ii) the number of shares of Common Stock owned by the Shareholder. Thayer shall use its best efforts to interest the third party in purchasing all the Common Stock shares specified by Tag Along Shareholders in Tag Along Notices, in addition to the Common Stock that the third party may already have agreed to purchase from Thayer. If the third party refuses to purchase all of such additional available Common Stock shares, then Thayer may sell Common Stock to such third party only if Thayer and each Tag Along Shareholder shall be entitled to sell to such third party an amount of Common Stock equal to the product (rounded down to the nearest whole number) obtained by multiplying (x) the aggregate number of Common Stock shares such third party is willing to acquire by (y) a fraction, the numerator of which is the number of Common Stock shares proposed to be Transferred by the selling party in the applicable Tag Along Notice or Transfer Notice, as the case may be, and the denominator of which is the aggregate number of Common Stock shares proposed to be Transferred in such notices by Thayer and the Tag Along Shareholders. 4.3 Consummation. ------------ (a) At least ten (10) days prior to the consummation of a Transfer by Thayer described in a Transfer Notice and not before the earlier of (x) the end of the Tag Along Period and (y) the receipt by Thayer of a Tag Along --6-- Notice from each Shareholder, Thayer shall provide written notice (a "Consummation Notice") to each Tag Along Shareholder stating (i) the identity of the third party transferee, (ii) the number of shares of Common Stock that such Tag Along Shareholder will be entitled to sell to such third party pursuant to this Article 4, and (iii) the date the Transfer will be consummated. At least five (5) days prior to the date of such consummation, each Tag Along Shareholder shall deliver to Thayer for Transfer to the third party one or more certificates, properly endorsed for Transfer, which represent the number of shares of Common Stock such Tag Along Shareholder is entitled to sell as provided in the Consummation Notice. The certificate(s) delivered to Thayer by each Tag Along Shareholder shall be Transferred to the third party identified in the Consummation Notice, as part of the consummation of the Transfer of Common Stock pursuant to the terms and conditions specified in the Transfer Notice and the Consummation Notice. Upon receipt of the proceeds of the Transfer, Thayer shall promptly remit to each Tag Along Shareholder that portion of such proceeds to which such Tag Along Shareholder is entitled by reason of such Shareholder's participation in such Transfer. (b) In connection with a Transfer pursuant to this Article 4, each Tag Along Shareholder shall be required to make representations and warranties regarding the Company and the Common Stock that such Shareholder proposes to Transfer, including, but not limited to, such Shareholder's ownership of and authority to Transfer such Common Stock, the absence of any liens or other encumbrances on such stock, and the compliance of such Transfer with the federal and state securities laws and all other applicable laws and regulations. 4.4 Securities Laws. Notwithstanding anything to the contrary in this --------------- Article 4, Thayer shall have no obligation to permit a Shareholder, and no Shareholder shall have a right, to participate as a Tag Along Shareholder in a Thayer Transfer of Common Stock in the event that such Shareholder's Transfer (i) would not be exempt from all registration requirements under federal and state securities laws or (ii) would violate, or cause Thayer's Transfer to violate, any applicable federal or state laws. ARTICLE 5. DRAG ALONG RIGHTS 5.1 Drag Along Sale. In the event that, prior to an IPO Event, Thayer, --------------- in its sole discretion, determines to accept an offer from a third party to purchase all of the - 7 - Common Stock then held by Thayer and the Shareholders, then each Shareholder shall sell all shares of Common Stock held by such Shareholder pursuant to such offer (the "Drag Along Sale"). All sellers of Common Stock in such Drag Along Sale (i) shall receive the same consideration per share of Common Stock and shall be subject to the same terms and conditions of sale and (ii) shall execute such documents and take such actions as may be reasonably required by Thayer. 5.2 Drag Notice. Thayer shall provide each Shareholder with written ----------- notice (the "Drag Notice") of a Drag Along Sale at least fifteen (15) days prior to the date of consummation of such sale (the "Drag Along Sale Date"). Each Drag Notice shall set forth: (i) the identity of the third party transferee in the Drag Along Sale, (ii) the price and the other general terms of the proposed Transfer and (iii) the Drag Along Sale Date. 5.3 Form of Consideration. The provisions of this Article 5 shall apply --------------------- regardless of the form of consideration received in the Drag Along Sale, and any non--cash consideration received pursuant to the terms of the Drag Along Sale shall be allocated among the transferors of Common Stock pro rata based upon each transferor's percentage ownership of the Common Stock shares sold in the Drag Along Sale. 5.4 Consummation. ------------ (a) At least five (5) days prior to the date of consummation of a Drag Along Sale, each Shareholder shall deliver to Thayer for Transfer to the third party one or more certificates, properly endorsed for Transfer, which represent all of the shares of Common Stock held by such Shareholder. The certificate(s) delivered to Thayer by each Shareholder shall be Transferred to the third party transferee identified in the Drag Notice, as part of the consummation of the Drag Along Sale. Upon receipt of the proceeds of the Drag Along Sale, Thayer shall promptly remit to each Shareholder that portion of such proceeds to which such Shareholder is entitled by reason of such Shareholder's participation in such sale. (b) In connection with a Drag Along Sale, each Shareholder shall be required to make representations and warranties regarding the Company and the Common Stock that such Shareholder Transfers in such sale, including, but not limited to, such Shareholder's ownership of and authority to Transfer such Common Stock, the absence of any liens or other encumbrances on such stock, and the compliance of such Transfer with the federal and state securities laws and all other applicable laws and regulations. --8-- (c) At Thayer's request, each Shareholder shall convert into Common Stock, or exercise or exchange for Common Stock, some or all (as specified in Thayer's request) of the outstanding Equity Securities held by such Shareholder that are convertible into, or exercisable or exchangeable for, Common Stock prior to or upon the consummation of the Drag Along Sale. Each share of Common Stock received by a Shareholder upon any such conversion, exercise or exchange shall be Transferred, subject to the same terms and conditions applicable to all other shares of Common Stock held by the Shareholders, to the third party transferee identified in the Drag Notice, as part of the consummation of the Drag Along Sale. ARTICLE 6. NO RAID 6.1 No Raid Covenant. Each Manager agrees that, from the date hereof ---------------- until five years after the termination of such Manager's employment with the Company and its subsidiaries, such Manager shall not, directly or indirectly, acting either alone or in concert with others, seek to influence any employee of the Company or any of its subsidiaries to leave or otherwise terminate such employee's employment with such entity. Each Manager agrees that, from the date hereof until three years after the termination of such Manager's employment with the Company and its subsidiaries, such Manager shall not, directly or indirectly, solicit or assist any other person in soliciting (other than on behalf of the Company and its subsidiaries) any customers, clients or suppliers of the Company or any of its subsidiaries, provided, however, that the obligations set forth in this sentence shall not apply to a Manager following the termination of such Manager's employment if such termination is (i) by the Company and (ii) not for cause. 6.2 Acknowledgments. Each Manager acknowledges that such Manager has --------------- carefully read and considered all of the terms of this Agreement, including particularly the terms of this Article 6, that the Company has made a substantial investment in the Company's business and that the restrictions provided in this Article 6 are reasonable and necessary for the Company's protection. Each Manager further acknowledges that damages at law will not be a measurable or adequate remedy for breach of the covenants contained in this Article 6, and accordingly each Manager consents to the entry by any court of competent jurisdiction of any order enjoining such Manager from violating any such covenants. The parties hereto further agree that if, in any - 9 - judicial proceeding, a court should refuse to enforce any covenants set forth in this Article 6 because of their term or geographical scope, then such covenants shall be deemed to be modified to permit their enforcement to the maximum extent permitted by law. ARTICLE 7. TERMINATION; ADDITIONAL PARTIES 7.1 Termination. All rights and obligations set forth in this Agreement ----------- (other than in Article 6), to the extent not previously terminated, shall terminate upon an IPO Event. 7.2 Additional Parties. Without the prior written consent of Thayer, ------------------ the Company shall not issue or sell after the date hereof, any shares of Common Stock to any individual or entity without such individual or entity becoming a party to this Agreement by agreeing in writing to be bound by the terms hereof. Any such additional party shall become a Shareholder subject to and bound by all the terms and conditions of this Agreement. The Company shall promptly notify each existing party to this Agreement of the addition of each new party hereto and such notice shall include the requisite information for providing notice to such new party pursuant to Section 8.6. ARTICLE 8. MISCELLANEOUS 8.1 Legend. All certificates evidencing Equity Securities restricted by ------ this Agreement shall bear a legend indicating the existence of the restrictions imposed hereby and a stop transfer order may be placed with respect to such securities. The legend referred to in the preceding sentence shall be substantially in the following form: THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE TRANSFER RESTRICTIONS AND OTHER TERMS OF A SHAREHOLDERS AGREEMENT DATED AS OF APRIL 1, 1997, AMONG SOFTWARE AG SYSTEMS, INC. AND CERTAIN SHAREHOLDERS THEREOF AND MAY NOT BE TRANSFERRED EXCEPT IN ACCORDANCE WITH SUCH AGREEMENT. A COPY OF SUCH AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICE OF SOFTWARE AG SYSTEMS, INC. AND WILL BE FURNISHED UPON REQUEST TO THE HOLDER OF - 10 - RECORD OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE. 8.2 Amendment. Except as otherwise expressly set forth in this --------- Agreement, this Agreement may be amended or supplemented only by the written agreement of the Company, Thayer and the Managers. 8.3 No Waiver of Rights. No failure or delay on the part of any party ------------------- in the exercise of any power or right hereunder shall operate as a waiver thereof. No single or partial exercise of any right or power hereunder shall operate as a waiver of such right or power or of any other right or power. The waiver by any party of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any other or subsequent breach hereunder. Except as otherwise expressly provided herein, all rights and remedies existing under this Agreement are cumulative with, and not exclusive of, any rights or remedies otherwise available. 8.4 Entire Agreement; Successors; Third Parties. This Agreement ------------------------------------------- contains the entire agreement among the parties with respect to the transactions contemplated hereby and supersedes all prior arrangements or understandings with respect thereto, written or oral. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors, heirs, executors, administrators and permitted assigns. Except as specifically set forth herein, nothing in this Agreement, expressed or implied, is intended to confer upon any party, other than the parties hereto and their respective successors and permitted assigns, any rights, remedies, obligations or liabilities. 8.5 No Assignment. No party hereto may assign any of its rights or ------------- obligations under this Agreement to any other person, except that Thayer may assign part or all of its rights and obligations hereunder to one or more Affiliates of Thayer. 8.6 Notices. All notices or other communications which are required or ------- permitted hereunder shall be in writing and sufficient if delivered personally, by facsimile or sent by overnight express or by registered or certified mail, postage prepaid, addressed as follows: - 11 - If to the Company to: Software AG Systems, Inc. 11190 Sunrise Valley Drive Reston, VA 20191 Attention: Harry McCreery Facsimile: 703-391-6504 If to Thayer: Thayer Equity Investors III, L.P. 1455 Pennsylvania Avenue, N.W. Washington, D.C. 20004 Attention: Robert E. Michalik Facsimile: (202) 371-0391 If to any of the Managers, to the address set forth beneath the signature of such Manager on the signature page hereof. Notices and other communications to parties joining this Agreement after the date hereof shall be addressed in accordance with the information received from the Company pursuant to Section 7.2. All deliveries of notice shall be deemed effective when received by the persons entitled to such receipt or when delivery has been attempted but refused by such person or persons. Any party may change the persons or addresses to which such deliveries shall be made with respect to such party by delivering notice thereof to the other parties hereto in accordance with this Section 8.6. 8.7 Captions. The captions contained in this Agreement are for reference -------- purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 8.8 Counterparts. This Agreement may be executed in any number of ------------ counterparts, and each such counterpart shall be deemed to be an original instrument, but all such counterparts together shall constitute but one agreement. 8.9 Governing Law and Venue. The validity, interpretation, construction ----------------------- and performance of this Agreement shall be governed by the laws of the Commonwealth of Virginia applicable to agreements made and entirely to be performed within such jurisdiction. The party bringing any action under this Agreement shall only be entitled to choose the federal or state courts in the Commonwealth of Virginia as the venue for such action, and each party consents to the jurisdiction of the court chosen in such manner for such action. - 12 - 8.10 Severability. The provisions of this Agreement are severable, and ------------ the unenforceability of any provision of this Agreement shall not affect the enforceability of the remainder of this Agreement. The parties acknowledge that it is their intention that if any provision of this Agreement is determined by a court to be invalid, illegal or unenforceable as drafted, that provision should be construed in a manner designed to effectuate the purpose of that provision to the greatest extent possible under applicable law. 8.11 Specific Performance. The rights of the parties under this -------------------- Agreement are unique and the failure of a party to perform its obligations hereunder would irreparably harm the other parties hereto. Accordingly, the parties shall, in addition to such other remedies as may be available at law or in equity, have the right to enforce their rights hereunder by actions for specific performance to the extent permitted by law. 8.12 Further Assurances. Each of the parties hereto agrees to execute ------------------ all such further instruments and documents and to take all such further action as any other party may reasonably require in order to effectuate the terms and purposes of this Agreement. 8.13 Publicity. No party shall issue any press release or undertake any --------- publicity concerning this Agreement or any of the transactions contemplated hereby without the prior written consent of Thayer. - 13 - IN WITNESS WHEREOF, the parties hereto, intending to be legally bound hereby, have caused this Agreement to be executed as of the day and year first above written. SOFTWARE AG SYSTEMS, INC. By: /s/ Daniel Gillis ------------------------------ Daniel Gillis President and Chief Executive Officer THAYER EQUITY INVESTORS III, L.P. By: TC Equity Partners, L. L. C., its General Partner By: /s/ Rick Rickertsen -------------------------- Rick Rickertsen Member MANAGERS: /s/ Daniel Gillis ---------------------------------- Daniel Gillis 9513 Fox Hollow Drive Potomac, MD 20854 Facsimile: (703) 391-6782 /s/ Harry McCreery ---------------------------------- Harry McCreery 10727 Midsummer Drive Reston, VA 20191 Facsimile: (703) 391-6504 - 14 - /s/ James Daly ---------------------------------- James Daly 2606 Barnside Ct. Herndon, VA 20171 Facsimile: (703) 391-6980 /s/ Derek Brigden ---------------------------------- Derek Brigden 11317 Bright Pond Lane Reston, VA 20194 Facsimile: (703) 391-6504 /s/ Gary Hayes ---------------------------------- Gary Hayes 7924 Longridge Ct. Cabin John, MD 20818 Facsimile: (703) 39l-8111 /s/ Thomas Gorley ---------------------------------- Thomas Gorley 12801 Cross Creek Lane Oak Hill, VA 20171 Facsimile: (703) 391-6760 Exhibit A Daniel Gillis Harry McCreery Gary Hayes James Daly Derek Brigden Thomas Gorley EX-10.18 18 PROMISSORY NOTE--GORLEY EXHIBIT 10.18 PROMISSORY NOTE Fairfax County Virginia $75,000.00 March 24, 1997 FOR VALUE RECEIVED, the undersigned promise to pay to the order of Software AG Americas, Inc. ("SAGA"), the principal sum of Seventy Five Thousand & no/00 ($75,000.00) Dollars This note is made to evidence a loan to the undersigned. The effective date of the loan is March 24, 1997. The note will accrue interest at the rate of 6% per annum on the principal amount. Said principal and interest shall be payable as follows. 1. There shall be no required periodic payments of either the principal or interest for the term of this note. 2. The principal and all accrued interest shall be due and payable by the undersigned to SAGA at such time as the undersigned leaves the employment of SAGA. 3. To the extent that the undersigned has severance, vacation, deferred compensation, or other types of payment due from SAGA at the time of termination, such sums will be used to pay the principal and interest of this note, after the withholding of applicable taxes. 4. The undersigned may prepay this Note in whole or in part without penalty. Signed under seal this 14th day of March, 1997. Thomas Gorley /s/ Thomas Gorley - ----------------------------- EX-10.19 19 PROMISSORY NOTE--GILLIS Exhibit 10.19 PROMISSORY NOTE Fairfax County Virginia $250,000.00 March 24, 1997 FOR VALUE RECEIVED, the undersigned promise to pay to the order of Software AG Americas, Inc. ("SAGA"), the principal sum of TWO HUNDRED FIFTY THOUSAND & NO/00 ($250,000.00) DOLLARS This note is made to evidence a loan to the undersigned. The effective date of the loan is March 24, 1997. The note will accrue interest at the rate of 6% per annum on the principal amount. Said principal and interest shall be payable as follows. 1. There shall be no required periodic payments of either the principal or interest for the term of this note. 2. The principal and all accrued interest shall be due and payable by the undersigned to SAGA at such time as the undersigned leaves the employment of SAGA. 3. To the extent that the undersigned has severance, vacation, deferred compensation, or other types of payment due from SAGA at the time of termination, such sums will be used to pay the principal and interest of this note, after the withholding of applicable taxes. 4. The undersigned may prepay this Note in whole or in part without penalty. Signed under seal this 13th day of March , 1997. ------ --------- ---- Daniel F. Gillis /s/ Daniel F. Gillis - ------------------------ EX-10.20 20 PROMISSORY NOTE--MCCREERY (MARCH 24, 1997) Exhibit 10.20 PROMISSORY NOTE Fairfax County Virginia $250,000.00 March 24, 1997 FOR VALUE RECEIVED, the undersigned promise to pay to the order of Software AG Americas, Inc. ("SAGA"), the principal sum of TWO HUNDRED FIFTY THOUSAND & NO/00 ($250,000.00) DOLLARS This note is made to evidence a loan to the undersigned. The effective date of the loan is March 24, 1997. The note will accrue interest at the rate of 6% per annum on the principal amount. Said principal and interest shall be payable as follows. 1. There shall be no required periodic payments of either the principal or interest for the term of this note. 2. The principal and all accrued interest shall be due and payable by the undersigned to SAGA at such time as the undersigned leaves the employment of SAGA. 3. To the extent that the undersigned has severance, vacation, deferred compensation, or other types of payment due from SAGA at the time of termination, such sums will be used to pay the principal and interest of this note, after the withholding of applicable taxes. 4. The undersigned may prepay this Note in whole or in part without penalty. Signed under seal this 14th day of March , 1997. ------ --------- ---- Harry K. McCreery /s/ Harry K. McCreery - ------------------------ EX-10.21 21 PROMISSORY NOTE--DALY (MARCH 24, 1997) Exhibit 10.21 PROMISSORY NOTE Fairfax County Virginia $182,605.00 March 24, 1997 FOR VALUE RECEIVED, the undersigned promise to pay to the order of Software AG Americas, Inc. ("SAGA"), the principal sum of ONE HUNDRED EIGHTY TWO THOUSAND, SIX HUNDRED FIVE & NO/00 ($182,605.00) DOLLARS This note is made to evidence a loan to the undersigned. The effective date of the loan is March 24, 1997. The note will accrue interest at the rate of 6% per annum on the principal amount. Said principal and interest shall be payable as follows. 1. There shall be no required periodic payments of either the principal or interest for the term of this note. 2. The principal and all accrued interest shall be due and payable by the undersigned to SAGA at such time as the undersigned leaves the employment of SAGA. 3. To the extent that the undersigned has severance, vacation, deferred compensation, or other types of payment due from SAGA at the time of termination, such sums will be used to pay the principal and interest of this note, after the withholding of applicable taxes. 4. The undersigned may prepay this Note in whole or in part without penalty. Signed under seal this 13th day of March , 1997. ------ --------- ---- James H. Daly /s/ James H. Daly - ------------------------ EX-10.22 22 PROMISSORY NOTE--MCCREERY (AUGUST 9, 1996) Exhibit 10.22 PROMISSORY NOTE Fairfax County Virginia $363,000.00 August 9, 1997 FOR VALUE RECEIVED, the undersigned promise to pay to the order of Software AG Americas, Inc. ("SAGA"), the principal sum of THREE HUNDRED SIXTY THREE THOUSAND & NO/00 ($363,000.00) DOLLARS This note is made to evidence a loan to the undersigned. The effective date of the loan is August 9, 1997. The note will accrue interest at the rate of 6% per annum on the principal amount. Said principal and interest shall be payable as follows. 1. There shall be no required periodic payments of either the principal or interest for the term of this note. 2. The principal and all accrued interest shall be due and payable by the undersigned to SAGA at such time as the undersigned leaves the employment of SAGA. 3. To the extent that the undersigned has severance, vacation, deferred compensation, or other types of payment due from SAGA at the time of termination, such sums will be used to pay the principal and interest of this note, after the withholding of applicable taxes. 4. The undersigned may prepay this Note in whole or in part without penalty. Signed under seal this 9th day of August , 1997. ------ --------- ---- Harry K. McCreery /s/ Harry K. McCreery - -------------------------------- EX-10.23 23 PROMISSORY NOTE--DALY (AUGUST 9, 1996) Exhibit 10.23 PROMISSORY NOTE Fairfax County Virginia $120,740.00 August 9, 1997 FOR VALUE RECEIVED, the undersigned promise to pay to the order of Software AG Americas, Inc. ("SAGA"), the principal sum of ONE HUNDRED TWENTY THOUSAND,SEVEN HUNDRED FORTY & NO/00 ($120,740.00) DOLLARS This note is made to evidence a loan to the undersigned. The effective date of the loan is August 9, 1997. The note will accrue interest at the rate of 6% per annum on the principal amount. Said principal and interest shall be payable as follows. 1. There shall be no required periodic payments of either the principal or interest for the term of this note. 2. The principal and all accrued interest shall be due and payable by the undersigned to SAGA at such time as the undersigned leaves the employment of SAGA. 3. To the extent that the undersigned has severance, vacation, deferred compensation, or other types of payment due from SAGA at the time of termination, such sums will be used to pay the principal and interest of this note, after the withholding of applicable taxes. 4. The undersigned may prepay this Note in whole or in part without penalty. Signed under seal this 13th day of March , 1997. ------ --------- ---- James H. Daly /s/ James H. Daly - ------------------------ EX-11 24 COMPUTATION OF EARNINGS PER SHARE EXHIBIT 11 SOFTWARE AG SYSTEMS, INC. WEIGHTED AVERAGE SHARES
PREDECESSOR COMBINED PREDECESSOR SUCCESSOR ------------------------------------ --------- ----------- --------- NINE NINE THREE SIX MONTHS MONTHS MONTHS MONTHS YEARS ENDED DECEMBER 31, ENDED ENDED ENDED ENDED -------------------------- SEPT. 30, SEPT. 30, MARCH 31, SEPT. 30, 1994 1995 1996 1996 1997 1997 1997 -------- -------- -------- --------- --------- ----------- --------- (in thousands, except per share data) Weighted average common shares outstanding..... 27,500 27,500 27,500 27,500 24,338 27,500 24,338 Options issued within one year of filing of initial public offering........ 3,084 3,084 3,084 3,084 3,084 3,084 3,084 -------- -------- -------- ------- ------ ------- ------- 30,584 30,584 30,584 30,584 27,422 30,584 27,422 ======== ======== ======== ======= ====== ======= ======= CALCULATION OF NET INCOME (LOSS) PER SHARE: Net income (loss) ...... $ 1,382 $ 3,326 $ 6,209 $ 1,910 $ 297 $ 1,373 $(1,076) ======== ======== ======== ======= ====== ======= ======= Net income (loss) per share.................. $ 0.05 $ 0.11 $ 0.20 $ 0.05 $ 0.01 $ 0.04 $ (0.04) ======== ======== ======== ======= ====== ======= =======
1 EX-23.2 25 CONSENT OF KPMG PEAT MARWICK LLP Exhibit 23.2 ACCOUNTANT'S CONSENT We consent to the use of our reports included herein and to the reference to our firm under the headings "Selected Consolidated Financial Data" and "Experts" in the prospectus. /s/ KPMG Peat Marwick LLP McLean, Virginia October 15, 1997 -----END PRIVACY-ENHANCED MESSAGE-----