<PAGE>
 
    AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 21, 1998
 
                                                       REGISTRATION NO. 333-
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
 
                      SECURITIES AND EXCHANGE COMMISSION
 
                              -------------------

                                   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                     5734                    54-1167173
  (STATE OF INCORPORATION)  (PRIMARY STANDARD INDUSTRIAL    (I.R.S. EMPLOYER  
                            CLASSIFICATION CODE NUMBER)    IDENTIFICATION NO.) 
                          
 
                          11190 SUNRISE VALLEY DRIVE
                               RESTON, VA 20191
                                (703) 860-5050
                   (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
 
                              -------------------

                               DANIEL F. GILLIS
                     PRESIDENT AND CHIEF EXECUTIVE OFFICER
                          11190 SUNRISE VALLEY DRIVE
                               RESTON, VA 20191
                                (703) 860-5050
                    (NAME AND ADDRESS OF AGENT FOR SERVICE)
 
                              -------------------

                                  COPIES TO:

          ROBERT B. OTT, ESQ.                    PETER B. TARR, ESQ.
        RICHARD E. BALTZ, ESQ.                  BRENT B. SILER, ESQ.
            ARNOLD & PORTER                       HALE AND DORR LLP
       555 TWELFTH STREET, N.W.            1455 PENNSYLVANIA AVENUE, N.W.
        WASHINGTON, D.C. 20004                    WASHINGTON, D.C.
            (202) 942-5000                         (202) 942-8400
 
                              -------------------

  APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE OF THE SECURITIES TO
THE PUBLIC: As soon as practicable after this Registration Statement becomes
effective.
 
  If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
 
  If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
 
  If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
 
  If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
 
  If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
 
                        CALCULATION OF REGISTRATION FEE
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                              PROPOSED        PROPOSED
                                AMOUNT        MAXIMUM          MAXIMUM
  TITLE OF EACH CLASS OF         TO BE     OFFERING PRICE     AGGREGATE        AMOUNT OF
SECURITIES TO BE REGISTERED  REGISTERED(1)  PER SHARE(2)  OFFERING PRICE(2) REGISTRATION FEE
--------------------------------------------------------------------------------------------
<S>                          <C>           <C>            <C>               <C>
 Common Stock $.01 par
  value per share.......       6,279,243       $27.44       $172,302,428        $50,830
</TABLE>
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
(1) Includes 819,031 shares of Common Stock issuable upon exercise of an over-
    allotment option granted to the Underwriters.
(2) Estimated solely for the purpose of calculating the registration fee
    pursuant to Rule 457 of the Securities Act of 1933.
                              -------------------
  THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
 
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
<PAGE>
 
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A         +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE   +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY  +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT        +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR   +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE      +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE    +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF  +
+ANY SUCH STATE.                                                               +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
                  SUBJECT TO COMPLETION, DATED APRIL 21, 1998
 
               [LOGO OF SOFTWARE AG SYSTEMS, INC. APPEARS HERE]
 
                                5,460,212 SHARES
 
                                  COMMON STOCK
 
                                --------------
 
  All of the 5,460,212 shares of Common Stock of Software AG Systems, Inc. (the
"Company") offered hereby 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.
 
  The Common Stock is listed on the New York Stock Exchange ("NYSE") under the
symbol "AGS." On April 20, 1998, the last reported sales price for a share of
Common Stock was $26.88.
 
                                --------------
 
   THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
                         FACTORS" BEGINNING ON PAGE 7.
 
                                --------------
 
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
 
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                 UNDERWRITING     PROCEEDS TO
                                       PRICE TO  DISCOUNTS AND      SELLING
                                        PUBLIC  COMMISSIONS (1) STOCKHOLDERS (2)
--------------------------------------------------------------------------------
<S>                                    <C>      <C>             <C>
Per Share............................   $           $                $
--------------------------------------------------------------------------------
Total (2)............................   $           $                $
</TABLE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
 
(1) The Company and the Selling Stockholders have agreed to indemnify the
    Underwriters as stated herein (the "Underwriters") against certain
    liabilities, including liabilities under the Securities Act of 1933, as
    amended (the "Securities Act"). See "Underwriting."
(2) The Selling Stockholders have granted to the Underwriters a 30-day option
    to purchase an aggregate of up to an additional 819,031 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 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      , 1998.
 
BANCAMERICA ROBERTSON STEPHENS
 
                  DONALDSON, LUFKIN & JENRETTE
                     SECURITIES CORPORATION
 
                                      SALOMON SMITH BARNEY
 
                                                         EVEREN SECURITIES, INC.
 
                  The date of this Prospectus is      , 1998.
<PAGE>
 
  [COMPANY LOGO AND GRAPHICAL SCHEMATIC, UNDER THE CAPTION "SAGA'S ENTERPRISE
  SOLUTION," DEPICTING THAT THE COMPANY'S ENTERPRISE APPLICATION INTEGRATION
PRODUCT AND SERVICE OFFERINGS ENABLE THE INTEGRATION OF MAINFRAME CLASS LEGACY
   APPLICATIONS WITH DIFFERENT SOURCES OF INFORMATION. SUB-CAPTIONS INCLUDE
     "MAINFRAME APPLICATIONS," "CLIENT/SERVER," "INTERNET/INTRANET," "DATA
                   WAREHOUSE" AND "PACKAGED APPLICATIONS."]
 
 
  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,
PLEASE SEE "UNDERWRITING."
 
                                       2
<PAGE>
 
  NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDER OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT
RELATES OR AN OFFER TO, OR SOLICITATION OF, ANY PERSON IN ANY JURISDICTION IN
WHICH SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
 
                             ---------------------
 
                               TABLE OF CONTENTS
 
<TABLE>
<CAPTION>
                                                                          PAGE
                                                                          ----
<S>                                                                       <C>
Summary..................................................................   4
Risk Factors.............................................................   7
Company Background.......................................................  15
Use of Proceeds..........................................................  16
Dividend Policy..........................................................  16
Capitalization...........................................................  17
Price Range of Common Stock..............................................  18
Selected Consolidated Financial Data.....................................  19
Management's Discussion and Analysis of Financial Condition and Results
 of Operations...........................................................  22
Business.................................................................  34
Management...............................................................  45
Certain Relationships and Transactions...................................  52
Principal and Selling Stockholders.......................................  54
Description of Capital Stock.............................................  56
Shares Eligible for Future Sale..........................................  59
Underwriting.............................................................  61
Legal Matters............................................................  63
Experts..................................................................  63
Available Information....................................................  63
Index to Consolidated Financial Statements............................... F-1
</TABLE>
 
                             ---------------------
 
  The Company's principal executive offices are located at 11190 Sunrise
Valley Drive, Reston, Virginia 20191, and its telephone number is (703) 860-
5050.
 
  ENTIRE(R), PREDICT(R), ADAPLEX+(R), ENTIRE NET-WORK(R) and ENTIRE ACCESS(R)
are registered trademarks of the Company, and iXpress(TM), EntireX DCOM(TM),
ENTIRE BROKER(TM), ENTIRE BROKER SDK(TM), ENTIRE BROKER APPC(TM), ENTIRE SAF
Gateway(TM), INSIGHT 2000SM, INSIGHT 2000 Tool Kit(TM), CONSTRUCT(TM), NATURAL
Lightstorm(TM), CONSTRUCT Spectrum(TM), CONSTRUCT Spectrum SDK(TM), ADABAS
Delta Save Facility(TM), ADABAS FASTPATH(TM), ADABAS SQL Server(TM) and ADABAS
Vista(TM) are trademarks or service marks of the Company. Trade names and
trademarks of other companies appearing in this Prospectus are the property of
their respective owners.
 
                                       3
<PAGE>
 
                                    SUMMARY
 
  The following summary is qualified in its entirety by the more detailed
information, including information set forth in "Risk Factors" and the
Consolidated Financial Statements and Notes thereto, appearing elsewhere in
this Prospectus. This Prospectus contains forward-looking statements which
involve risks and uncertainties. The Company's actual results may differ
materially from those results discussed in these forward-looking statements and
from the results historically experienced. Factors that might cause such a
difference include, but are not limited to, those discussed in "Risk Factors."
 
                                  THE COMPANY
 
  Software AG Systems, Inc. and its subsidiaries (the "Company") is an
enterprise solutions company that provides robust software products and related
professional services to large organizations with complex computing
requirements. The Company's products are used to build, enhance and integrate
mission-critical applications that require reliability, scalability and
security, such as customer billing systems, financial accounting systems and
inventory management systems. To complement its products, the Company has a
comprehensive professional services offering, including consulting, software
integration, systems implementation and large project management services. The
Company has over 24 years of experience in addressing the needs of
organizations with complex enterprise level computing environments.
 
  The Company provides enterprise development software products and related
professional services used by organizations to develop new mission-critical
applications and enterprise enablement software products and related
professional services used to extend and integrate business applications. 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 enterprise
enablement software products and professional services that allow organizations
to integrate their mission-critical applications with other applications and
extend them to the Internet and intranets. Products in this area include
ENTIRE, a family of enterprise application integration products that
facilitates the communication between application components across
heterogeneous computing environments; iXpress, a web application assembly and
deployment platform; and EntireX DCOM, a product that uses Microsoft's ActiveX
technology to integrate applications written in a variety of programming
languages. The Company also has a year 2000 program which offers an 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's professional services that complement
its products include application development and enhancement, application
reengineering, application porting, rightsizing and application integration.
 
  The Company's strategy is to further leverage its current leadership position
in software solutions for the development and integration of enterprise
applications by extending its product and professional services offerings with
a particular focus on the application integration market. Key elements of the
Company's strategy include enhancing and extending product offerings with added
features and functionality, broadening its product offerings for the enterprise
application integration market, leveraging its customer base, expanding
professional service offerings and leveraging 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 then
outstanding Common Stock of the Company (the "Recapitalization"). Prior to the
Recapitalization, the Company was a wholly owned subsidiary of Software AG, a
large German software company ("SAG"). 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
 
                                       4
<PAGE>
 
Israel (collectively, the "Territory") both existing and future products
developed or acquired by SAG. The Company is required to pay SAG 24% of the net
revenues derived from such license, which royalty rate is fixed for 20 years.
See "Company Background."
 
  The Company sells and markets its software products and professional services
through direct and indirect channels. In North America, the Company sells and
markets its products through a direct channel that includes over 120 people in
19 offices. The Company sells its products in over 20 additional countries
through six exclusive distributorships in South America, Japan and Israel. In
addition, the Company has access to the distribution channels of SAG in over 50
countries outside the Territory for the Company's products (other than those
licensed from SAG). The Company focuses on selling Enterprise License
Agreements ("ELAs"), which are typically long-term contracts of three to five
years and include the provision of software products, professional services and
maintenance support.
 
  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 year ended December 31, 1997, approximately 95%
of the Company's customers who were eligible renewed at least one of their
maintenance agreements.
 
                                  THE OFFERING
 
<TABLE>
 <S>                                                     <C>
 Common Stock Offered by the Selling Stockholders....... 5,460,212 shares
 Common Stock to be Outstanding after the Offering (1).. 29,917,453 shares
 Use of Proceeds........................................ The Company will not
                                                         receive any proceeds
                                                         from the Offering
 NYSE Symbol............................................ AGS
</TABLE>
--------
(1) Includes 386,062 shares of Common Stock that are being offered for sale by
    certain Selling Stockholders pursuant to the exercise by such Selling
    Stockholders of outstanding stock options granted under the Software AG
    Systems, Inc. 1997 Stock Option Plan (the "Option Plan"), but excludes (i)
    the remaining 4,679,585 shares of Common Stock issuable upon the exercise
    of stock options outstanding under the Option Plan as of April 17, 1998 and
    (ii) 1,791,107 additional shares of Common Stock reserved for future
    issuance under the Option Plan. As of April 17, 1998, there were (i)
    5,065,647 shares of Common Stock issuable upon the exercise of outstanding
    stock options granted under the Option Plan at a weighted average exercise
    price of $5.46 per share and (ii) 1,791,107 additional shares of Common
    Stock reserved for future issuance under the Option Plan.
 
                                       5
<PAGE>
 
                      SUMMARY CONSOLIDATED FINANCIAL DATA
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                                PREDECESSOR              COMBINED (1) PREDECESSOR
                                                    ------------------------------------ ------------ -----------
                                                                                                         THREE
                                                                                                        MONTHS
                                                                YEARS ENDED DECEMBER 31,                 ENDED
                                                    -------------------------------------------------  MAR. 31,
                                                      1993      1994     1995     1996       1997        1997
                                                    --------  -------- -------- -------- ------------ -----------
<S>                                                 <C>       <C>      <C>      <C>      <C>          <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Software license fees.....................          $ 51,672  $ 51,832 $ 52,061 $ 52,163   $ 64,137     $ 7,341
Maintenance fees..........................            57,264    65,871   65,307   69,702     72,689      17,352
Professional service fees.................            31,175    29,552   35,194   34,975     44,398       9,948
                                                    --------  -------- -------- --------   --------     -------
 Total revenues...........................           140,111   147,255  152,562  156,840    181,224      34,641
Gross profit..............................            70,149    77,429   81,239   83,869     94,984      17,127
Operating expenses before write-off.......            75,120    76,534   78,051   78,588     75,171      15,817
Write-off of acquired in-process research
 and development costs (2)................               --        --       --       --       6,051         --
Income (loss) from operations.............            (4,971)      895    3,188    5,281     13,762       1,310
Net income................................          $  6,380  $  1,382 $  3,326 $  6,209   $  6,711     $ 1,373
                                                    ========  ======== ======== ========   ========     =======
Net income per common share (3)...........          $   0.23  $   0.05 $   0.12 $   0.23   $   0.27     $  0.06
                                                    ========  ======== ======== ========   ========     =======
Net income per common share--assuming
 dilution (3).............................          $   0.22  $   0.05 $   0.11 $   0.21   $   0.25     $  0.05
                                                    ========  ======== ======== ========   ========     =======
Dividends.................................          $    --   $    600 $  1,700 $  9,000   $    --      $   --
                                                    ========  ======== ======== ========   ========     =======
<CAPTION>
                                                        SUCCESSOR
                                                    -----------------
                                                      NINE    THREE
                                                     MONTHS   MONTHS
                                                     ENDED    ENDED
                                                    DEC. 31, MAR. 31,
                                                      1997     1998
                                                    -------- --------
<S>                                                 <C>       <C>     
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Software license fees.....................          $ 56,796 $21,649
Maintenance fees..........................            55,337  19,800
Professional service fees.................            34,450  14,414
                                                    -------- --------
 Total revenues...........................           146,583  55,863
Gross profit..............................            77,857  31,635
Operating expenses before write-off.......            59,354  23,433
Write-off of acquired in-process research
 and development costs (2)................             6,051     --
Income (loss) from operations.............            12,452   8,202
Net income................................          $  5,338 $ 5,390
                                                    ======== ========
Net income per common share (3)...........          $   0.21 $  0.18
                                                    ======== ========
Net income per common share--assuming
 dilution (3).............................          $   0.20 $  0.17
                                                    ======== ========
Dividends.................................          $    --  $   --
                                                    ======== ========
</TABLE>
 
<TABLE>
<CAPTION>
                                                                       MARCH 31,
                                                                         1998
                                                                       ---------
<S>                                                                    <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............................................. $ 50,276
Working capital.......................................................   65,429
Total assets..........................................................  199,600
Total stockholders' equity............................................   95,243
</TABLE>
--------
(1) Reflects combined data for the three months ended March 31, 1997 (prior to
    the Recapitalization) and for the nine months ended December 31, 1997
    (subsequent to the Recapitalization).
(2) The write-off of acquired in-process research and development costs for the
    year ended December 31, 1997 relates to the Company's acquisition of R.D.
    Nickel and Associates, Inc. Before deducting the nonrecurring write-off for
    this combined period, income from operations was $19.8 million, net income
    was $12.8 million and basic and diluted net income per common share were
    $0.51 and $0.48, respectively.
(3) In accordance with Statement of Financial Accounting Standard No. 128
    "Earnings Per Share" ("SFAS No. 128") issued by the Financial Accounting
    Standards Board, the Company calculated and presented basic and diluted
    earnings per share for the current period. The Company also retroactively
    adopted SFAS No. 128 for all prior periods presented in calculating and
    presenting the earnings per share. Basic earnings per share is based on
    income available to common stockholders divided by the weighted average
    number of common shares outstanding. Diluted earnings per share is also
    based on income available to common stockholders divided by the sum of the
    weighted average number of common shares outstanding and all potential
    common shares which are dilutive. See Note 1 of Notes to Consolidated
    Financial Statements.
 
  Unless the context otherwise requires, the information contained in this
Prospectus assumes no exercise of the Underwriters' over-allotment option, and
all references in this Prospectus to the "Company" or "Software AG Systems,
Inc." refer to Software AG Systems, Inc., a Delaware corporation, and its
consolidated subsidiaries.
 
                                       6
<PAGE>
 
                                 RISK FACTORS
 
  This Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements and from the results
historically experienced as a result of certain factors, including those in
the following risk factors and elsewhere in this Prospectus. In addition to
the other information contained in this Prospectus, the following risk factors
should be considered carefully in evaluating the Company and its business
before purchasing shares of the Common Stock offered hereby.
 
POTENTIAL FLUCTUATIONS IN QUARTERLY PERFORMANCE; SEASONALITY OF THE BUSINESS
 
  The Company has experienced significant quarterly and other fluctuations in
revenues and results of operations, and the Company expects these fluctuations
to continue in the future. The Company believes that these fluctuations have
been primarily attributable to the budgeting and purchasing practices of its
customers, and, to a lesser extent, the Company's sales commission practices,
which are based partly on annual quotas, and other factors. The Company's
revenues and results of operations may also be affected by seasonal trends
which have resulted in higher revenues in the Company's third and fourth
quarters and lower revenues in its first and second quarters. The Company's
professional services fees tend to fluctuate due to the completion or
commencement of significant projects, the number of working days in a quarter
and the Company's ability to attract, retain and efficiently utilize
professional services personnel. The Company's future revenues and operating
results may fluctuate as a result of these and other factors, including the
demand for the Company's products and services, the timing and cost of new
product and service introductions and product enhancements by the Company or
its competitors, changes in the mix of products and services sold by the
Company and in the mix of sales by distribution channels, commencement or
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 Condition and Results
of Operations--Quarterly Results of Operations."
 
RELATIONSHIP WITH AND ROYALTY PAYMENTS TO SAG
 
  The Company has the exclusive and perpetual right to license and service in
North America, South America, Japan and Israel both existing and future
products developed or acquired by SAG and, historically, substantially
 
                                       7
<PAGE>
 
all of the Company's revenues have been generated from the licensing and
servicing of products developed or acquired by SAG. As a result, a materially
adverse change in the financial condition or a change in control of SAG could
have a material adverse effect on the business, financial condition and
results of operations of the Company. In the past, SAG has reported operating
losses. In addition, the failure of SAG to develop new products or
enhancements to existing products in a timely manner, to provide ongoing
technical support for its products or to adequately protect its proprietary
rights could have a material adverse effect on the business, financial
condition and results of operations of the Company. In the past, the Company
has experienced delays in receiving products from SAG in a timely manner. The
Cooperation Agreement also requires the Company to pay SAG 24% of the net
revenues derived during the next 20 years from the Company's licensing of
products developed or acquired by SAG. In addition, to the extent that the
Company's aggregate royalty payments to SAG fall below $21.0 million in any
calendar year through the year 2000, the Company generally is required to pay
the differential to SAG, and any such payment could have a material adverse
effect on the Company's business, financial condition and results of
operations.
 
  Because SAG has the exclusive and perpetual right to license and service in
all territories other than North America, South America, Japan and Israel both
existing and future products developed or acquired by the Company, the Company
is dependent on SAG for the distribution of these products outside of North
America, South America, Japan and Israel. Any failure by SAG to distribute
such products in a timely and effective manner could have a material adverse
effect on the Company's business, financial condition and results of
operations.
 
TECHNOLOGICAL CHANGE; DEPENDENCE ON NEW PRODUCTS AND PRODUCT ENHANCEMENTS
 
  The Company's success will depend in part on its ability to acquire and
develop product enhancements and new products that keep pace with continuing
changes in technology and evolving customer preferences, and the timely
delivery of products and product enhancements from SAG. The process of
developing new high-technology products is inherently complex and uncertain
and requires innovative designs anticipating customer demands and
technological trends. There can be no assurance that the Company will be
successful in acquiring and/or developing product enhancements or new products
to adequately address changing technologies, that it can introduce such
products or enhancements on a timely basis, that such products or enhancements
will be successful in the marketplace or that SAG will deliver new products or
product enhancements that will be successful in the marketplace in a timely
manner. The Company's failure to acquire and/or develop technological
improvements or to adapt its products to technological change may have a
material adverse effect on the Company's business, financial condition and
results of operations.
 
  The timely delivery of new products or product enhancements will depend in
part on the Company's ability to continue to develop its internal research and
development capability. The Company's ability to staff and effectively manage
any future growth in its research and development organization 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
research and development 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 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 for the year ended December 31, 1996. For the year ended December
31, 1997, the Company had revenues of $6.9 million from its year 2000 program.
Although the Company believes that the market for products and professional
services relating to the year 2000 problem will grow as the year 2000
approaches, there can be no assurance that this market will develop to the
extent anticipated by the Company. Significant expenses for sales and
marketing may be required to educate potential clients of the year 2000
problem and the need for products and professional services addressing the
problem. In addition, there can
 
                                       8
<PAGE>
 
be no assurance that potential clients will understand or acknowledge the
problem. Affected organizations may not be willing or able to allocate the
resources, financial or otherwise, to address the year 2000 problem in a
timely manner. Many organizations may attempt to resolve the problem
internally rather than by contracting with outside firms such as the Company
and value added integrators to which the Company may license its software
products. Other organizations may elect to replace their existing systems with
year 2000 compliant hardware and software, rather than incur substantial cost
in making their existing systems year 2000 compliant. In addition, there can
be no assurance that a competitor will not develop a fully automated solution
to the year 2000 problem. Due to these and other factors, development of the
market for the Company's year 2000 products and professional services is
uncertain and unpredictable.
 
  In addition, the Company anticipates that demand for products and
professional services that address the year 2000 problem will decline, perhaps
rapidly, following the year 2000. If the market for year 2000 products and
professional services fails to grow, or grows more slowly than anticipated,
the Company's business, financial condition and results of operations could be
materially adversely affected. In addition, competition for personnel
qualified to perform professional services relating to the year 2000 problem
is intense, and there can be no assurance that the Company will be able to
retain its employees who provide such professional services or be able to
attract and retain such personnel in the future.
 
 
YEAR 2000 COMPLIANCE
 
  The Company is in the process of identifying, evaluating and implementing
changes to its computer programs and systems necessary to address the year
2000 issue. The issue affects computer programs sold to customers as well as
computer programs used by the Company internally. The Cooperation Agreement
requires SAG to ensure that its products are year 2000 compliant in accordance
with a specified timetable. Although SAG has delayed the timetable set forth
in the Cooperation Agreement for certain products, SAG has subsequently
delivered most of the year 2000 compliant products set forth in the
Cooperation Agreement. As of April 21, 1998, there remain certain products,
none of which is significant to the Company, that are not year 2000 compliant,
and the Company is awaiting delivery of these products from SAG. There can be
no assurance that SAG will deliver compliant versions of the remaining
products in a timely manner. In addition, the Company has identified a few
products that are compliant but are not compatible with all of the Company's
other year 2000 compliant products. Although these delays and non-
compatibility problems have had no material impact on the Company to date, any
failure by SAG to deliver the remaining products and resolve the compatibility
issue of the products in a timely manner could have a material adverse effect
on the Company's business, financial condition and results of operations.
 
RELIANCE ON ACQUISITIONS
 
  The Company believes that its future growth will depend, in part, on its
ability to successfully identify, acquire and then develop promising
technologies and products. In addition, the Company intends to build its
product development staff in part through acquisitions. The integration of
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 any future
acquisition will be realized. The Company has limited experience in completing
acquisitions and integrating acquired technologies or products into its
operations. The Company may compete for future acquisition opportunities with
other companies that have significantly greater financial and management
resources and there can be no assurance that the Company will be successful in
identifying, acquiring and developing products and technology. Acquisitions
could also have adverse short-term 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. See
"Company Background."
 
                                       9
<PAGE>
 
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 $35.0
million for the year ended December 31, 1996 to $44.4 million for the year
ended December 31, 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 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 RIGHTS
 
  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
 
                                      10
<PAGE>
 
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 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 parties were
to discontinue making their products available to the Company or to licensees
of the Company's products on a timely basis, or to increase materially the
cost to the Company or its licensees to acquire, license or purchase such
third parties' products, or if a material problem were to arise in connection
with the ability of the Company's products to properly use or operate with
third-party hardware and/or software products, the Company's products would
have to be redesigned by the Company, or the licensor of the product to the
Company, to function with or on alternative third-party products, or the
Company or its licensees may be precluded from selling the product. There can
be no assurance that an alternative source of suitable technology would be
available or that the Company, or the licensor of the product to the Company,
would be able to develop an alternative product on a timely basis or at a
reasonable cost. The failure of the Company to license, acquire or develop
alternative technologies or products on a timely basis and at a reasonable
cost could have a material adverse effect on the Company's business, financial
condition and results of operations.
 
COMPETITION
 
  The markets for the Company's software products and professional services
are highly competitive and characterized by continual change and improvement
in technology. The Company provides products and professional services to
several markets within the computer industry and encounters a variety of
competitors within each market. 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, there are no significant barriers to entry.
 
  In the enterprise development markets, the Company's competitors with
respect to enterprise and departmental database management products include
IBM Corporation ("IBM"), Oracle Corporation ("Oracle"), Informix Corporation
("Informix"), Sybase, Inc. ("Sybase") and Microsoft Corporation ("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, Inc. In the enterprise enablement
market, the Company's products compete in both the component/object and the
message-oriented segments of the middleware market, where its competitors
include IBM and Microsoft. In the market for year 2000 products and
professional services, the Company's competitors include Formal Systems, Inc.,
Viasoft, Inc. and Electronic Data Systems Corporation. Few of the Company's
competitors compete in all of the same markets as the Company.
 
  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.
 
                                      11
<PAGE>
 
RISK ASSOCIATED WITH INTERNATIONAL SALES AND OPERATIONS
 
  The Company holds the exclusive and perpetual right to license SAG products
in North America, South America, Japan and Israel. In South America, Japan and
Israel, the Company has entered into exclusive distributorship arrangements
with local firms. There can be no assurance that such distributors will
continue to perform as they have historically and that they will not offer
products that compete with the Company's products. Additionally, the
distributorships generally may be terminated by either party at any time upon
compliance with applicable notice provisions. In the event that any of the
distributorships were terminated or expired, there can be no assurance that
the Company could find an adequate replacement, and such a termination or
expiration could have a material adverse effect on the Company's business,
financial condition and results of operations.
 
  Royalty revenues from international distributors represented 14%, 17% and
15% of the Company's total revenues in 1995, 1996 and 1997, respectively. The
Company anticipates that royalty revenues from international sales and
services will continue to account for a material portion of its total revenues
in the foreseeable future. As a result, the Company may be subject to certain
risks associated with international operations, 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 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. 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
 
                                      12
<PAGE>
 
operations. Therefore, any material liability claim could have a material
adverse effect on the Company's business, financial condition and results of
operations.
 
DEPENDENCE ON STATE, LOCAL AND OTHER GOVERNMENT CONTRACTS
 
  The Company derived 24% of its total revenues in 1996 and 30% of its total
revenues for 1997 from selling its products and professional services directly
or indirectly to state and local government agencies. In addition, the Company
derived 9% of its total revenues in 1996 and 11% of its total revenues for
1997 from selling its products and professional services directly or
indirectly to federal government agencies. Any failure to obtain a contract
award, or a delay on the part of a government agency in making the award or in
ordering products and professional services under an awarded contract, could
have a material adverse effect on the Company's business, financial condition
and results of operations. Other risks generally involved in government sales
include the larger discounts (and thus lower margins) typically involved in
government sales, the dependence of the Company on the ability of a prime
contractor, if any, to obtain the award and perform the contract, the
unpredictability of funding for various government programs, the ability of
the government agency to unilaterally terminate the contract, and the
dependence on the creditworthiness of any prime contractor (some of which are
relatively small organizations without substantial funds). The Company
anticipates that state, local and other government sales will continue to
represent a significant but fluctuating portion of its revenues in the future.
 
FIXED PRICE CONTRACTS
 
  Revenues from fixed price contracts represented approximately 8% and 12% of
the Company's total revenues for 1996 and 1997, respectively. In making
proposals for fixed price contracts, the Company relies on its estimated costs
for completing the project. These estimates reflect, among other factors,
judgments as to the efficiencies of the Company's technology and services as
applied to the project. Any increased or unexpected costs or unanticipated
delays in connection with the performance of fixed price contracts could have
a material adverse effect on the Company's business, financial condition and
results of operations. In the past, the Company has suffered material losses
on fixed price contracts.
 
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 March
31, 1998, the Company had approximately 112 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
 
  Following the Offering, the Company's officers and directors, and their
affiliates, in the aggregate, will have voting control of approximately 51.1%
of the Company's outstanding Common Stock. In particular, Thayer and its
affiliates will have voting control of approximately 38.8% of the Company's
outstanding Common Stock.
 
                                      13
<PAGE>
 
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
Third 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. The
Company has an authorized class of 25,000,000 shares of preferred stock, $0.01
par value, that the Board of Directors may issue, without stockholder
approval, 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."
 
POSSIBLE VOLATILITY OF COMMON STOCK PRICE
 
  The market price for the Common Stock 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
29,917,453 shares of Common Stock. Assuming no exercise of the Underwriters'
over-allotment option, of these shares, 14,331,603 shares will be freely
tradable without restriction in the public market. Of the remaining 15,585,850
shares, (i) 14,437,586 shares will be eligible for sale beginning May 18, 1998
upon the expiration of the lock-up agreements entered into in connection with
the IPO (11,636,574 of which will be subject to 90-day lock-up agreements
between certain stockholders and the Representatives of the Underwriters),
(ii) 375,141 shares will be eligible for sale beginning June 30, 1998 (185,666
of which will be subject to a 90-day lock-up agreement between the holder
thereof and the Representatives of the Underwriters), (iii) 137,500 shares
will be eligible for sale beginning August 22, 1998 and (iv) 51,013 shares and
108,625 shares will be eligible for sale beginning January 10, 1999 and April
11, 1999, respectively. BancAmerica Robertson Stephens may, in its sole
discretion and at any time without notice, release all or any portion of the
securities subject to the lock-up agreements. 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."
 
DIVIDENDS
 
  The Company does not anticipate paying any cash dividends on its Common
Stock in the foreseeable future. See "Dividend Policy."
 
                                      14
<PAGE>
 
                              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 then
outstanding common stock in an initial public offering. In 1988, SAG purchased
all of the outstanding stock of the Company, thereby acquiring control of the
Company.
 
  On March 31, 1997, the Company consummated the Recapitalization, pursuant to
which the senior management of the Company and Thayer acquired approximately
89% of the Company's then outstanding Common Stock. Thayer is a private equity
fund based in Washington, D.C. that targets investments in the information
technology and services industries and its investors include corporations,
pension funds and financial institutions. The Company believes that the
Recapitalization has provided several significant benefits to the Company,
such as access to growth and development capital, equity ownership incentives
for management and other key employees, and the opportunity and ability to
pursue acquisitions and internal product development.
 
  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 November 21, 1997, the Company, Thayer and an affiliate of Thayer
consummated the sale of 8,855,000 shares of Common Stock in an initial public
offering (the "IPO"). Following the IPO, Thayer and an affiliate of Thayer
owned approximately 56% of the Company's outstanding Common Stock and SAG
owned approximately 9% of the Company's then outstanding Common Stock.
 
  On September 30, 1997, the Company acquired R.D. Nickel and Associates, Inc.
("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 served as the exclusive distributor of the
Company's products in Canada since 1973. R.D. Nickel now operates as Software
AG Systems (Canada) Inc., an indirect subsidiary of the Company.
 
                                      15
<PAGE>
 
                                USE OF PROCEEDS
 
  The Company will not receive any proceeds from the sale of Common Stock by
the Selling Stockholders in the Offering.
 
                                DIVIDEND POLICY
 
  The Company did not pay any cash dividends in 1997 and does not anticipate
paying any cash dividends on its Common Stock in the foreseeable future. In
1996, while a wholly owned subsidiary of SAG, the Company paid aggregate cash
dividends to SAG of $9.0 million.
 
                                      16
<PAGE>
 
                                CAPITALIZATION
 
  The following table sets forth as of March 31, 1998, the capitalization of
the Company. This table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and Notes thereto appearing elsewhere in
this Prospectus.
 
<TABLE>
<CAPTION>
                                                                 MARCH 31, 1998
                                                                 --------------
                                                                 (IN THOUSANDS)
<S>                                                              <C>
Stockholders' equity:
Preferred Stock, $0.01 par value; 25,000,000 shares authorized;
 none issued and outstanding...................................     $   --
Common Stock, $0.01 par value; 75,000,000 shares authorized;
 29,523,149 shares issued and outstanding (1)..................         295
Additional paid-in capital.....................................      84,291
Retained earnings..............................................      10,657
                                                                    -------
  Total stockholders' equity...................................      95,243
                                                                    -------
    Total capitalization.......................................     $95,243
                                                                    =======
</TABLE>
--------
(1) Excludes (i) 8,242 shares of Common Stock issued upon the exercise of
    stock options subsequent to March 31, 1998 granted under the Option Plan
    at a weighted average exercise price of $1.47, (ii) 5,065,647 shares of
    Common Stock issuable upon the exercise of stock options outstanding as of
    April 17, 1998, granted under the Option Plan at a weighted average
    exercise price of $5.46 per share and (iii) 1,791,107 shares of Common
    Stock reserved for future issuance pursuant to the Option Plan.
 
                                      17
<PAGE>
 
                          PRICE RANGE OF COMMON STOCK
 
  The Company's Common Stock has traded on the NYSE under the symbol AGS since
November 18, 1997. The following table sets forth the high and low sales
prices, as reported on the NYSE, for the periods indicated.
 
<TABLE>
<CAPTION>
                                                                HIGH     LOW
                                                                ----     ---
     <S>                                                        <C>      <C>
     1997
     Fourth Quarter (from November 18, 1997)................... $14 1/2  $10
     1998
     First Quarter.............................................  27 1/4  11 1/8
     Second Quarter (through April 17, 1998)...................  28 1/16 25 1/2
</TABLE>
 
  On April 17, 1998, the last sale price of the Common Stock, as reported by
the NYSE, was 27 7/16 per share. As of April 13, 1998, the Company had
approximately 42 common stockholders of record.
 
                                      18
<PAGE>
 
                     SELECTED CONSOLIDATED FINANCIAL DATA
 
  The consolidated statement of operations data set forth below for each of
the years ended December 31, 1995, 1996 and 1997 and the consolidated balance
sheet data as of December 31, 1996 and 1997 have been derived from the
Company's consolidated financial statements, which statements have been
audited by KPMG Peat Marwick LLP, independent certified public accountants,
and are included elsewhere in this Prospectus. The consolidated statement of
operations data for the year ended December 31, 1994 and the consolidated
balance sheet data at December 31, 1994 and 1995 have been 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 year ended December 31, 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 March 31, 1998 and for the three months ended
March 31, 1998 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 three months ended March 31, 1998 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."
 
                                      19
<PAGE>
 
<TABLE>
<CAPTION>
                                      PREDECESSOR              COMBINED (1) PREDECESSOR     SUCCESSOR
                          ------------------------------------ ------------ ----------- -----------------
                                                                               THREE      NINE    THREE
                                                                              MONTHS     MONTHS   MONTHS
                                      YEARS ENDED DECEMBER 31,                 ENDED     ENDED    ENDED
                          -------------------------------------------------  MAR. 31,   DEC. 31, MAR. 31,
                            1993      1994     1995     1996       1997        1997       1997     1998
                          --------  -------- -------- -------- ------------ ----------- -------- --------
                                              (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                       <C>       <C>      <C>      <C>      <C>          <C>         <C>      <C>
CONSOLIDATED STATEMENT OF
 OPERATIONS DATA:
Revenues:
 Software license fees..  $ 51,672  $ 51,832 $ 52,061 $ 52,163   $ 64,137    $  7,341   $ 56,796 $21,649
 Maintenance fees.......    57,264    65,871   65,307   69,702     72,689      17,352     55,337  19,800
 Professional service
  fees..................    31,175    29,552   35,194   34,975     44,398       9,948     34,450  14,414
                          --------  -------- -------- --------   --------    --------   -------- -------
 Total revenues.........   140,111   147,255  152,562  156,840    181,224      34,641    146,583  55,863
                          --------  -------- -------- --------   --------    --------   -------- -------
Cost of revenues:
 Software license.......    14,331    13,513   15,244   14,120     19,909       2,098     17,811   5,670
 Maintenance............    29,796    29,823   23,488   25,885     28,764       6,205     22,559   7,057
 Professional services..    25,835    26,490   32,591   32,966     37,567       9,211     28,356  11,501
                          --------  -------- -------- --------   --------    --------   -------- -------
 Total cost of reve-
  nues..................    69,962    69,826   71,323   72,971     86,240      17,514     68,726  24,228
                          --------  -------- -------- --------   --------    --------   -------- -------
Gross profit............    70,149    77,429   81,239   83,869     94,984      17,127     77,857  31,635
                          --------  -------- -------- --------   --------    --------   -------- -------
Operating expenses:
 Software product devel-
  opment................     3,045       900      900    1,372      1,093         --       1,093     755
 Sales and marketing....    43,439    50,422   52,512   48,677     38,320       7,317     31,003  11,873
 Administrative and gen-
  eral..................    28,636    25,212   24,639   28,539     35,758       8,500     27,258  10,805
 Write-off of acquired
  in-process research
  and development costs
  (2)...................       --        --       --       --       6,051         --       6,051     --
                          --------  -------- -------- --------   --------    --------   -------- -------
 Total operating ex-
  penses................    75,120    76,534   78,051   78,588     81,222      15,817     65,405  23,433
                          --------  -------- -------- --------   --------    --------   -------- -------
Income (loss) from oper-
 ations.................    (4,971)      895    3,188    5,281     13,762       1,310     12,452   8,202
Other income and ex-
 pense, net.............     7,599     1,882    2,449    5,230      1,995         978      1,017     906
                          --------  -------- -------- --------   --------    --------   -------- -------
Income before cumulative
 effect of change in
 accounting principle
 and income taxes.......     2,628     2,777    5,637   10,511     15,757       2,288     13,469   9,108
Cumulative effect of
 change in accounting
 principle..............     5,070       --       --       --         --          --         --      --
Income tax provision....     1,318     1,395    2,311    4,302      9,046         915      8,131   3,718
                          --------  -------- -------- --------   --------    --------   -------- -------
Net income..............  $  6,380  $  1,382 $  3,326 $  6,209   $  6,711    $  1,373   $  5,338 $ 5,390
                          ========  ======== ======== ========   ========    ========   ======== =======
Net income per common
 share (3):
 Income from continuing
  operations............  $   0.05  $   0.05 $   0.12 $   0.23   $   0.27    $   0.06   $   0.21 $  0.18
 Cumulative effect of
  change in accounting
  principle.............      0.18       --       --       --         --          --         --      --
                          --------  -------- -------- --------   --------    --------   -------- -------
                          $   0.23  $   0.05 $   0.12 $   0.23   $   0.27    $   0.06   $   0.21 $  0.18
                          ========  ======== ======== ========   ========    ========   ======== =======
Net income per common
 share--assuming
 dilution (3):
 Income from continuing
  operations............  $   0.05  $   0.05 $   0.11 $   0.21   $   0.25    $   0.05   $   0.20 $  0.17
 Cumulative effect of
  change in accounting
  principle.............      0.17       --       --       --         --          --         --      --
                          --------  -------- -------- --------   --------    --------   -------- -------
                          $   0.22  $   0.05 $   0.11 $   0.21   $   0.25    $   0.05   $   0.20 $  0.17
                          ========  ======== ======== ========   ========    ========   ======== =======
Dividends...............  $    --   $    600 $  1,700 $  9,000   $    --     $    --    $    --  $   --
                          ========  ======== ======== ========   ========    ========   ======== =======
</TABLE>
 
                                       20
<PAGE>
 
<TABLE>
<CAPTION>
                                    PREDECESSOR                 SUCCESSOR
                         ---------------------------------- ------------------
                                        DECEMBER 31,
                         ------------------------------------------- MARCH 31,
                          1993    1994     1995      1996     1997     1998
                         ------- ------- --------  -------- -------- ---------
                                            (IN THOUSANDS)
<S>                      <C>     <C>     <C>       <C>      <C>      <C>
CONSOLIDATED BALANCE
 SHEET DATA:
Working capital (defi-
 cit)................... $ 6,355 $ 5,167 $ (2,465) $ 30,421 $ 62,052 $ 65,429
Total assets............  74,175  86,466  125,612   158,088  196,126  199,600
Long-term debt, less
 current maturities.....   3,212     431      --        --       --       --
Total stockholders' eq-
 uity...................  30,190  30,972   32,599    29,808   89,818 $ 95,243
</TABLE>
--------
(1) Reflects combined data for the three months ended March 31, 1997 (prior to
    the Recapitalization) and for the nine months ended December 31, 1997
    (subsequent to the Recapitalization).
(2) The write-off of acquired in-process research and development costs for
    the year ended December 31, 1997 relates to the Company's acquisition of
    R.D. Nickel. Before deducting the nonrecurring write-off for this combined
    period, income from operations was $19.8 million, net income was $12.8
    million and basic and diluted net income per common share were $0.51 and
    $0.48, respectively.
(3) In accordance with Statement of Financial Accounting Standard No. 128
    "Earnings Per Share" ("SFAS No. 128") issued by the Financial Accounting
    Standards Board, the Company calculated and presented basic and diluted
    earnings per share for the current period. The Company also retroactively
    adopted SFAS No. 128 for all prior periods presented in calculating and
    presenting the earnings per share. Basic earnings per share is based on
    income available to common stockholders divided by the weighted average
    number of common shares outstanding. Diluted earnings per share is also
    based on income available to common stockholders divided by the sum of the
    weighted average number of common shares outstanding and all potential
    common shares which are dilutive. See Note 1 of Notes to Consolidated
    Financial Statements.
 
                                      21
<PAGE>
 
                     MANAGEMENT'S DISCUSSION AND ANALYSIS
               OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
  The following discussion contains forward-looking statements which involve
risks and uncertainties. The Company's actual results may differ significantly
from the results discussed in the forward-looking statements. Factors that
might cause such a difference include, but are not limited to, those discussed
in "Risk Factors."
 
OVERVIEW
 
  The Company is an enterprise solutions company that provides robust software
products and related professional services to large organizations with complex
computing requirements. The Company's revenues are primarily derived from
license fees for the use of software products, fees for maintenance related to
those products and fees for professional services. Since 1973, the Company has
primarily licensed and serviced SAG products in the United States and other
countries through a series of licensing agreements with SAG. In 1981, the
Company sold approximately 30% of its outstanding Common Stock in an initial
public offering. In 1988, SAG purchased all of the outstanding Common Stock of
the Company, thereby acquiring control of the Company.
 
  Immediately prior to the consummation of the Recapitalization, the Company
entered into a perpetual (unless otherwise terminated by the written agreement
of the parties) Cooperation Agreement with SAG that terminated and superseded
the license agreement dated January 1, 1995. As consideration for the
Cooperation Agreement, the Company paid SAG approximately $22.6 million. Under
the Cooperation Agreement, each of the Company and SAG are required to pay the
other royalties of 24% of net revenues from sales of licenses of, and
technical services on, each other's products for the initial 20 years of the
perpetual term of the agreement. For calendar years 1997 through 2000, the
Company will be required to pay SAG minimum annual royalties of $21.0 million,
provided that SAG's worldwide product and technical services revenues for each
of those years are at least equal to SAG's 1996 worldwide revenues. In the
event of a decrease in SAG's worldwide revenues, the minimum annual royalty
requirement will be reduced proportionately.
 
  Pursuant to the Recapitalization, the determination of fair value allocated
to the identifiable assets and liabilities of the Company has been made by
management based on the nature of the assets and liabilities acquired, and
general economic factors. Based on this allocation, the fair value of the
Company's Cooperation Agreement has been recorded at $23.5 million, based on
an independent appraisal. The amortization period for the Cooperation
Agreement is ten years. The fair value of the Company's remaining assets and
liabilities has been presumed to be equal to the book value as of the date of
the acquisition. Based on allocation of the purchase price to the net assets
and liabilities, an excess of purchase price over net assets acquired
(goodwill) of $6.4 million was recorded. Such goodwill is being amortized on a
straight-line basis over 10 years.
 
  Prior to the Recapitalization, the Company's management team was constrained
by SAG in its ability to develop new products, license third-party software,
retain capital for expansion and make acquisitions of companies, products or
technologies. The Company's relatively low software product development
expenditures resulted, in part, from these constraints. Management has
undertaken several strategic initiatives since the Recapitalization to
increase revenue growth and profitability, including building a product
development organization, developing a product and professional services
offering that addresses the year 2000 problem and acquiring R.D. Nickel.
 
  On September 30, 1997, the Company acquired 100% of the issued and
outstanding shares of the common stock of R.D. Nickel. The transaction was
accounted for using the purchase method of accounting for a business
combination. The aggregate purchase price of Cdn$14.0 million (US$10.1
million) was funded through a cash payment of Cdn$7.0 million (US$5.1 million)
and a note payable of Cdn$7.0 million (US$5.1 million). The note payable was
repaid in November 1997 with the proceeds from the IPO. In connection with the
acquisition, the Company recorded a $6.1 million non-recurring charge against
earnings for in-process research and development costs. The remaining excess
purchase price of $5.0 million represents goodwill, and has been recorded as
other
 
                                      22
<PAGE>
 
intangible assets. The related amortization period for the goodwill is ten
years. At March 31, 1998, accumulated amortization of the goodwill was
approximately $250,000. At September 30, 1997, the net assets acquired have
been reported in the Company's consolidated financial statements. As of
October 1, 1997, the operating results of R.D. Nickel have been consolidated
with the Company's operating results.
 
  Software license fees are generated through the licensing of enterprise
development and enterprise enablement products. Enterprise development
products include ADABAS, a high-performance data management system, and
NATURAL, a 4GL programming language. Enterprise enablement software products
include ENTIRE, a family of middleware products, and INSIGHT 2000 Tool Kit, a
software product that addresses the year 2000 problem.
 
  The Company also provides maintenance and support services to its customers.
Such maintenance services are typically provided in accordance with annual
agreements, with maintenance fees charged as a percentage of current software
license fees. Maintenance fees are recognized ratably over the term of the
agreement.
 
  The Company markets and sells its software products and services, as well as
third-party products, through direct and indirect channels in the Territory.
In North America, a direct sales and support structure is utilized through the
Company's wholly owned subsidiaries. In the remainder of the Territory,
exclusive distributors sell the Company's products and provide maintenance
support and pay the Company a royalty on the revenues derived therefrom. The
Company has historically generated the majority of its revenues from sales
within the United States. Royalty revenues from international distributors
represented 14%, 17% and 15% of the Company's total revenues in 1995, 1996 and
1997, respectively.
 
  The Company also generates revenues through the provision of professional
services associated with the implementation and deployment of the Company's
enterprise development and enterprise enablement products and through
educational services. The Company recognizes revenue from professional
services as such services are performed. The Company's professional services
offerings include consulting, software integration, system implementation,
large project management and year 2000 analysis and remediation. These
services are delivered on either a time and materials basis or a fixed price
basis.
 
  The Company offers its products and professional services to certain
customers under Enterprise License Agreements ("ELAs"). ELAs are typically
long-term contracts of three to five years which include software products,
professional services and maintenance support. Revenues from software licenses
sold as part of an ELA are recognized as revenue when such products are
shipped. Revenue from professional services and maintenance support are
recognized as provided. As of March 31, 1998, 133 of the Company's customers
had entered into ELAs with the Company.
 
                                      23
<PAGE>
 
RESULTS OF OPERATIONS
 
  The following table sets forth certain financial data for the periods
indicated expressed as a percentage of total revenues.
 
<TABLE>
<CAPTION>
                                PREDECESSOR           COMBINED (1) PREDECESSOR     SUCCESSOR
                          --------------------------  ------------ ----------- -----------------
                                                                      THREE      NINE    THREE
                                                          YEAR       MONTHS     MONTHS   MONTHS
                                                         ENDED        ENDED     ENDED    ENDED
                          YEAR ENDED DECEMBER 31,       DEC. 31,    MAR. 31,   DEC. 31, MAR. 31,
                          --------------------------  ------------ ----------- -------- --------
                          1993   1994   1995   1996       1997        1997       1997     1998
                          -----  -----  -----  -----  ------------ ----------- -------- --------
<S>                       <C>    <C>    <C>    <C>    <C>          <C>         <C>      <C>
Revenues:
 Software license fees..   36.9%  35.2%  34.1%  33.3%     35.4%        21.2%     38.7%    38.8%
 Maintenance fees.......   40.9   44.7   42.8   44.4      40.1         50.1      37.8     35.4
 Professional service
  fees..................   22.2   20.1   23.1   22.3      24.5         28.7      23.5     25.8
                          -----  -----  -----  -----     -----        -----     -----    -----
 Total revenues.........  100.0  100.0  100.0  100.0     100.0        100.0     100.0    100.0
                          -----  -----  -----  -----     -----        -----     -----    -----
Cost of revenues:
 Software license.......   10.2    9.2   10.0    9.0      11.0          6.1      12.2     10.2
 Maintenance............   21.3   20.3   15.4   16.5      15.9         17.9      15.4     12.6
 Professional services..   18.4   18.0   21.4   21.0      20.7         26.6      19.3     20.6
                          -----  -----  -----  -----     -----        -----     -----    -----
 Total cost of reve-
  nues..................   49.9   47.5   46.8   46.5      47.6         50.6      46.9     43.4
                          -----  -----  -----  -----     -----        -----     -----    -----
Gross profit............   50.1   52.5   53.2   53.5      52.4         49.4      53.1     56.6
                          -----  -----  -----  -----     -----        -----     -----    -----
Operating expenses:
 Software product
  development...........    2.2    0.6    0.6    0.9       0.6          --        0.7      1.3
 Sales and marketing....   31.0   34.2   34.4   31.0      21.1         21.1      21.2     21.3
 Administrative and
  general...............   20.4   17.1   16.2   18.2      19.7         24.5      18.6     19.3
 Write-off of acquired
  in-process research
  and development costs
  (2)...................    --     --     --     --        3.4          --        4.1      --
                          -----  -----  -----  -----     -----        -----     -----    -----
 Total operating
  expenses..............   53.6   51.9   51.2   50.1      44.8         45.6      44.6     41.9
                          -----  -----  -----  -----     -----        -----     -----    -----
Income (loss) from
 operations.............   (3.5)   0.6    2.0    3.4       7.6          3.8       8.5     14.7
Other income and
 expense, net...........    5.4    1.3    1.6    3.3       1.1          2.8       0.7      1.6
                          -----  -----  -----  -----     -----        -----     -----    -----
Income before cumulative
 effect of change in
 accounting principle
 and income taxes.......    1.9    1.9    3.6    6.7       8.7          6.6       9.2     16.3
Cumulative effect of
 change in accounting
 principle..............    3.6    --     --     --        --           --        --
Income tax provision ...    0.9    0.9    1.5    2.6       5.0          2.6       5.6      6.7
                          -----  -----  -----  -----     -----        -----     -----    -----
Net income .............    4.6%   1.0%   2.1%   4.1%      3.7%         4.0%      3.6%     9.6%
                          =====  =====  =====  =====     =====        =====     =====    =====
</TABLE>
 
  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:
 
<TABLE>
<CAPTION>
                               PREDECESSOR           COMBINED (1) PREDECESSOR     SUCCESSOR
                         --------------------------  ------------ ----------- -----------------
                                                                     THREE      NINE    THREE
                                                         YEAR       MONTHS     MONTHS   MONTHS
                         YEAR ENDED DECEMBER 31,        ENDED        ENDED     ENDED    ENDED
                         --------------------------    DEC. 31,    MAR. 31,   DEC. 31, MAR. 31,
                         1993   1994   1995   1996       1997        1997       1997     1998
                         -----  -----  -----  -----  ------------ ----------- -------- --------
<S>                      <C>    <C>    <C>    <C>    <C>          <C>         <C>      <C>
Software license........  27.7%  26.1%  29.3%  27.1%     31.0%       28.6%      31.4%    26.2%
Maintenance.............  52.0   45.3   36.0   37.1      39.6        35.8       40.8     35.6
Professional services...  82.9   89.6   92.6   94.3      84.6        92.6       82.3     79.8
</TABLE>
--------
(1) Reflects combined data for the three months ended March 31, 1997 (prior to
    the Recapitalization) and for the nine months ended December 31, 1997
    (subsequent to the Recapitalization).
(2) The write-off of acquired in-process research and development costs for
    the year ended December 31, 1997 relates to the Company's acquisition of
    R.D. Nickel. Before deducting the nonrecurring write-off for this period,
    income from operations as a percentage of total revenues was 10.9% and net
    income as a percentage of total revenues was 7.0%.
 
                                      24
<PAGE>
 
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
 
 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 $55.9 million and
$34.6 million for the three months ended March 31, 1998 and 1997,
respectively, representing an increase of 61%.
 
  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 $21.6 million and
$7.3 million for the three months ended March 31, 1998 and 1997, respectively,
representing an increase of 195%. This increase was primarily attributable to
the reorganization of the direct sales force at the beginning of 1997. As a
result of this reorganization, the Company has experienced increased
acceptance of ELAs by its customer base. For the three months ended March 31,
1998, the Company entered into 13 ELAs, compared to 4 ELAs for the three
months ended March 31, 1997.
 
  Maintenance Fees. The Company's maintenance fees are derived primarily from
providing technical support to customers which have licensed the Company's
enterprise development and enterprise enablement products. Maintenance is
available in various levels of support and priced as a percentage of the
software license fees. The most commonly contracted level is priced at 18% of
the applicable license fee at the time of renewal. Software customers are not
required to renew their maintenance agreements and renewals can be expected
only if the customer continues to use the licensed product. Maintenance fees
were $19.8 million and $17.4 million for the three months ended March 31, 1998
and 1997, respectively, representing an increase of 14%. This increase was
primarily attributable to the effect of price increases, combined with an
increase in the maintenance base from the sale of new software licenses.
 
  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 $14.4 million and $9.9 million for the three months ended March 31, 1998
and 1997, respectively, representing an increase of 45%. This increase was
primarily attributable to the Company's year 2000 program, which began in 1997
and contributed $4.6 million of professional services fees for the three
months ended March 31, 1998 compared to $0.8 million for the three months
ended March 31, 1997.
 
 Cost of Revenues
 
  Software License. Software license costs consist primarily of royalties paid
to third parties. Software license costs were $5.7 million and $2.1 million
for the three months ended March 31, 1998 and 1997, respectively, representing
26% and 29% of software license fees for each respective period. The increase
in dollar amount was primarily due to an increase in sales volume. The
percentage decrease was primarily due to a shift in product mix since royalty
rates on third-party products range 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 $7.1 million and $6.2 million for the three
months ended March 31, 1998 and 1997, respectively, representing 36% of
maintenance fees for each respective period. The increase in dollar amount was
primarily attributable to the increase in sales of software licenses.
 
  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 and project review.
Professional services costs were $11.5 million and $9.2 million for the three
months ended March 31, 1998 and 1997, respectively, representing 80% and 93%
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.
 
                                      25
<PAGE>
 
 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 $0.8 million for
the three months ended March 31, 1998 representing 3% of software license
fees. There were no software product development expenses for the three months
ended March 31, 1997. Prior to the Recapitalization, the Company's ability to
invest in software product development was constrained. The Company expects
software product development expenses to increase in the future as a
percentage of software license fees.
 
  Sales and Marketing. Sales and marketing expenses consist primarily of
employee salaries, benefits, commissions, marketing programs, public
relations, trade shows, seminars, advertising and related communications and
associated overhead costs. Sales and marketing expenses were $11.9 million and
$7.3 million for the three months ended 1998 and 1997, respectively,
representing 21% of total revenues for both respective periods. The increase
in dollar amount was primarily due to several new marketing programs
implemented in 1998.
 
  Administrative and General. Administrative and general expenses include
employee salaries and benefits for administration, executive, finance, legal,
human resources, data center, distribution and internal systems personnel and
associated overhead costs, as well as bad debt, accounting and legal expenses.
Administrative and general expenses were $10.8 million and $8.5 million for
the three months ended March 31, 1998 and 1997, respectively, representing 19%
and 25% of total revenues for each respective period. The increased dollar
amount was primarily attributable to increases in personnel related expenses
and infrastructure required to support an independent company, amortization
expenses relating to the goodwill resulting from the Recapitalization on March
31, 1997 and the R.D. Nickel acquisition on September 1997, as well as the
amortization of the Cooperation Agreement and the write-off of certain
investments.
 
 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 net of expenses was $0.9 million and
$1.0 million for the three months ended March 31, 1998 and 1997, respectively.
This slight decrease was primarily attributable to the interest income
recorded in 1997 on $30.0 million in loans made to SAG which was offset
against payables due SAG in March 1997 prior to the Recapitalization. This
decrease was offset by the increase in the interest income from investments in
1998 compared to 1997.
 
  Income Tax Provision. The income tax provision was $3.7 million and $0.9
million for the three months ended March 31, 1998 and 1997, respectively,
resulting in effective tax rates of 40.8% and 40.0%, respectively.
 
YEARS ENDED DECEMBER 31, 1997 AND 1996
 
 Revenues
 
  Total Revenues. The Company's total revenues were $181.2 million and $156.8
million in 1997 and 1996, respectively, representing an increase of 16%.
 
  Software License Fees. Software license fees were $64.1 million and $52.2
million in 1997 and 1996, respectively, representing an increase of 23%. This
increase was primarily attributable to the reorganization of the direct sales
force at the beginning of 1997. As a result of this reorganization, the
Company has experienced increased acceptance of ELAs by its customer base. In
1997, the Company entered into 47 ELAs, compared to 30 ELAs in 1996. The
increase in revenue was also impacted by the acquisition of R.D. Nickel which
added $1.9 million of software license fees since the acquisition in September
1997.
 
                                      26
<PAGE>
 
  Maintenance Fees. Maintenance fees were $72.7 million and $69.7 million in
1997 and 1996, respectively, representing an increase of 4%. This increase was
primarily attributable to the effect of price increases, combined with an
increase in the maintenance base from the sale of new software licenses and
inclusion of the maintenance fees of $1.7 million attributable to the R.D.
Nickel acquisition in September 1997.
 
  Professional Services Fees. Professional services fees were $44.4 million
and $35.0 million in 1997 and 1996, respectively, representing an increase of
27%. This increase was primarily attributable to the Company's year 2000
program, which began in 1997 and contributed $6.6 million of professional
services fees in 1997.
 
 Cost of Revenues
 
  Software License. Software license costs were $19.9 million and $14.1
million in 1997 and 1996, respectively, representing 31% and 27% of software
license fees for each respective period. The increase in dollar amount was due
primarily to an increase in sales volume. The percentage increase was
primarily due to a shift in product mix since royalty rates on third-party
products vary from 24% to 40%.
 
  Maintenance. Maintenance costs were $28.8 million and $25.9 million in 1997
and 1996, respectively, representing 40% and 37% of maintenance fees for each
respective period. This increase was primarily attributable to the hiring of
additional staff to support new enterprise enablement products.
 
  Professional Services. Professional services costs were $37.6 million and
$33.0 million in 1997 and 1996, respectively, representing 85% and 94% of
professional services fees for each respective period. The improvement in
margin was primarily attributable to improved performance on fixed price
contracts combined with improved utilization of resources. Both of these
improvements were derived from process changes initiated in late 1995 that
included enhanced infrastructure and tools for project management, improved
estimating and bidding processes and expanded quality control procedures.
 
 Operating Expenses
 
  Software Product Development. Software product development costs were $1.1
million and $1.4 million in 1997 and 1996, respectively, representing 2% and
3% of software license fees for each respective period. This decrease was the
result of a sale, with transfer of the applicable software product development
costs, of one of the Company's products in 1996 to a third party. This
decrease was partially offset by the product development costs of $138,000
attributable to the acquisition of R.D. Nickel. Prior to the Recapitalization,
the Company's ability to invest in software product development was
constrained. The Company expects software product development expenses to
increase in the future as a percentage of software license fees.
 
  Sales and Marketing. Sales and marketing expenses were $38.3 million and
$48.7 million in 1997 and 1996, respectively, representing 21% and 31% of
total revenues for each respective period. This decrease was primarily
attributable to reductions in the direct sales force and related support
personnel, combined with reductions in marketing staff and programs. These
reductions, which were undertaken to reduce the Company's cost of sales
relative to software license fees and were part of an overall cost reduction
program, began in 1995 and were substantially implemented by June 1997. The
overall decrease in the sales and marketing expenses was slightly offset by
the sales and marketing expenses of $343,000 attributable the acquisition of
R.D. Nickel.
 
  Administrative and General. Administrative and general expenses were $35.8
million and $28.5 million in 1997 and 1996, respectively, representing 20% and
18% of total revenues for each respective period. The increased dollar amount
was primarily attributable to increases in personnel related expenses and
infrastructure required to support an independent company and the inclusion of
administrative and general expenses of $672,000 since the acquisition of R.D.
Nickel.
 
  Write-off of Acquired In-Process Research and Development Costs. The write-
off of acquired in-process research and development costs was attributable to
certain of the products acquired in the acquisition of R. D. Nickel. See Note
4 of Notes to Consolidated Financial Statements.
 
                                      27
<PAGE>
 
 Other
 
  Other Income and Expense, Net. Interest and investment income and expense,
net, was $2.0 million and $5.2 million in 1997 and 1996, respectively. This
decrease was primarily attributable to the interest income recorded in 1996 on
$30.0 million in loans made to SAG combined with income received for the sale
of the rights to one of the Company's products in 1996. The loans to SAG were
offset against payables due SAG in March 1997 prior to the Recapitalization.
 
  Income Tax Provision. The income tax provision was $9.0 million and $4.3
million in 1997 and 1996, respectively, resulting in effective tax rates of
41.5% (exclusive of the write-off of acquired in-process research and
development costs), and 40.9%, respectively. This increase in rate was
primarily attributable to the non-deductible expenses incurred as a result of
the Recapitalization.
 
YEARS ENDED DECEMBER 31, 1996 AND 1995
 
 Revenues
 
  Total Revenues. The Company's total revenues were $156.8 million and $152.6
million in 1996 and 1995, respectively, representing an increase of 3%.
 
  Software License Fees. Software license fees were $52.2 million in 1996 and
$52.1 million in 1995, or 33% and 34% of total revenues for each respective
period.
 
  Maintenance Fees. Maintenance fees were $69.7 million in 1996 and $65.3
million in 1995, representing an increase of 7%. This increase was due
primarily to the effect of price increases combined with an increase in the
maintenance base from the sale of additional software licenses.
 
  Professional Services Fees. Professional services fees were $35.0 million in
1996 and $35.2 million in 1995, or 22% and 23% of total revenues for each
respective period. This minimal decline from 1995 to 1996 was the result of
actions taken in the latter part of 1995 to temporarily curb growth in the
professional services operation so that the Company could build a stronger
infrastructure and control process to support the rapid growth anticipated
from the year 2000 program. These actions were largely accomplished and
accounted for in the first half of 1996.
 
 Cost of Revenues
 
  Software License. Software license costs were $14.1 million in 1996 and
$15.2 million in 1995, representing 27% and 29% of software license fees for
each respective period. This decrease was primarily attributable to lower
third-party royalty rates associated with a slight shift in product mix.
 
  Maintenance. Maintenance costs were $25.9 million in 1996 and $23.5 million
in 1995, representing 37% and 36% of maintenance fees for each respective
period. The increase from 1995 to 1996 was primarily attributable to royalties
related to additional maintenance fees combined with a change in product mix.
 
  Professional Services. Professional services costs were $33.0 million in
1996 and $32.6 million in 1995, representing 94% and 93% of professional
services fees in each respective period. This increase was primarily
attributable to an increase in spending for infrastructure to support the
anticipated growth in the Year 2000 Program, partially offset by improved
margins on new projects.
 
 Operating Expenses
 
  Software Product Development. Software product development expenses were
$1.4 million in 1996 and $0.9 million in 1995, representing 3% and 2% of
software license fees, respectively. This increase was primarily attributable
to the employment of additional staff to develop and enhance the Company's
products.
 
                                      28
<PAGE>
 
  Sales and Marketing. Sales and marketing expenses were $48.7 million in 1996
and $52.5 million in 1995, representing 31% and 34% of total revenues,
respectively. This decrease in expenses was primarily attributable to
reductions made in 1995 to the direct sales force and to the direct support
personnel. As discussed previously, these reductions commenced in 1995 and
were substantially implemented by June 1997. The net effect of this reduction
during 1996 was to reduce the direct selling and support personnel from 131 at
December 31, 1995, to 98 at December 31, 1996, a net reduction of 25%.
 
  Administrative and General. Administrative and general expenses were $28.5
million in 1996 and $24.6 million in 1995, representing 18% and 16% of total
revenues, respectively. This increase was primarily attributable to
investments in computer equipment necessary to support anticipated growth of
the year 2000 program and severance payments made to the Company's former
chief executive officer.
 
 Other
 
  Other Income and Expense, Net. Other income and expense, net, was $5.2
million in 1996 and $2.4 million in 1995. The increase was attributable to
interest received on $30.0 million in loans made to SAG in three stages over
1995 and 1996, combined with income received for the sale of the rights to one
of the Company's products.
 
  Income Tax Provision. The income tax provision was $4.3 million and $2.3
million in 1996 and 1995, respectively, resulting in effective tax rates of
40.9% and 41.0%, respectively.
 
                                      29
<PAGE>
 
QUARTERLY RESULTS OF OPERATIONS
 
  The following table sets forth certain unaudited quarterly statement of
operations data for each of the nine most recent quarters. In the opinion of
management, this information has been prepared on the same basis as the
audited financial statements, and all necessary adjustments, consisting only
of normal recurring adjustments, have been included in the amounts stated
below to present fairly the unaudited quarterly results when read in
conjunction with the audited Consolidated Financial Statements and Notes
thereto. The operating results for any quarters are not necessarily indicative
of results for any future periods.
 
<TABLE>
<CAPTION>
                                           PREDECESSOR                                 SUCCESSOR
                          ----------------------------------------------- -------------------------------------
                                                            QUARTER ENDED
                          -------------------------------------------------------------------------------------
                          MAR. 31,  JUNE 30,  SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,  MAR. 31,
                            1996      1996      1996      1996     1997     1997     1997      1997      1998
                          --------  --------  --------- -------- -------- -------- --------- --------  --------
                                                            (IN THOUSANDS)
<S>                       <C>       <C>       <C>       <C>      <C>      <C>      <C>       <C>       <C>
Revenues:
 Software license fees..  $ 6,609   $12,369    $12,785  $20,400  $ 7,341  $14,254   $18,458  $24,084   $21,649
 Maintenance fees.......   17,171    17,225     17,382   17,924   17,352   18,394    17,542   19,401    19,800
 Professional service
  fees..................    8,506     7,515     10,959    7,995    9,948   10,299    10,729   13,422    14,414
                          -------   -------    -------  -------  -------  -------   -------  -------   -------
 Total revenues.........   32,286    37,109     41,126   46,319   34,641   42,947    46,729   56,907    55,863
                          -------   -------    -------  -------  -------  -------   -------  -------   -------
Cost of revenues:
 Software license.......    1,758     3,291      3,494    5,577    2,098    4,074     6,428    7,309     5,670
 Maintenance............    6,614     6,376      6,273    6,622    6,205    6,577     8,062    7,920     7,057
 Professional services..    8,480     7,291     10,083    7,112    9,211    9,451     8,491   10,414    11,501
                          -------   -------    -------  -------  -------  -------   -------  -------   -------
 Total cost of
  revenues..............   16,852    16,958     19,850   19,311   17,514   20,102    22,981   25,643    24,228
                          -------   -------    -------  -------  -------  -------   -------  -------   -------
Gross profit............   15,434    20,151     21,276   27,008   17,127   22,845    23,748   31,264    31,635
                          -------   -------    -------  -------  -------  -------   -------  -------   -------
Operating expenses:
 Software product
  development...........      410       591        371      --       --       283       312      498       755
 Sales and marketing....    8,576    12,851      9,712   17,538    7,317   11,477     9,060   10,466    11,873
 Administrative and
  general...............    7,349     8,784      7,339    5,067    8,500    8,932     9,317    9,009    10,805
 Write-off of acquired
  in-process research
  and development
  costs (1).............      --        --         --       --       --       --      6,051      --        --
                          -------   -------    -------  -------  -------  -------   -------  -------   -------
 Total operating
  expenses..............   16,335    22,226     17,422   22,605   15,817   20,692    24,740   19,973    23,433
                          -------   -------    -------  -------  -------  -------   -------  -------   -------
Income (loss) from
 operations.............     (901)   (2,075)     3,854    4,403    1,310    2,153      (992)  11,291     8,202
Other income and
 expense, net...........      592     1,048        533    3,057      978    1,597      (221)    (359)      906
                          -------   -------    -------  -------  -------  -------   -------  -------   -------
Income (loss) before
 income taxes...........     (309)   (1,027)     4,387    7,460    2,288    3,750    (1,213)  10,932     9,108
Income tax provision
 (benefit)..............      (97)     (404)     1,642    3,161      915    1,599     2,014    4,518     3,718
                          -------   -------    -------  -------  -------  -------   -------  -------   -------
Net income (loss).......  $  (212)  $  (623)   $ 2,745  $ 4,299  $ 1,373  $ 2,151   $(3,227) $ 6,414   $ 5,390
                          =======   =======    =======  =======  =======  =======   =======  =======   =======
</TABLE>
--------
(1) The write-off of acquired in-process research and development costs for
    the quarter ended September 30, 1997 relates to the Company's acquisition
    of R.D. Nickel. Before deducting the nonrecurring write-off for this
    period, income from operations was approximately $5.1 million and net
    income was approximately $2.8 million.
 
                                      30
<PAGE>
 
  The following table sets forth certain unaudited consolidated quarterly
statement of operations data expressed as a percentage of total revenues for
each of the nine most recent quarters.
 
<TABLE>
<CAPTION>
                                           PREDECESSOR                                 SUCCESSOR
                          ----------------------------------------------- ------------------------------------
                                                            QUARTER ENDED
                          ------------------------------------------------------------------------------------
                          MAR. 31,  JUNE 30,  SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
                            1996      1996      1996      1996     1997     1997     1997      1997     1998
                          --------  --------  --------- -------- -------- -------- --------- -------- --------
<S>                       <C>       <C>       <C>       <C>      <C>      <C>      <C>       <C>      <C>
Revenues:
 Software license fees..    20.5%     33.3%      31.1%    44.0%    21.2%    33.2%     39.5%    42.3%    38.8%
 Maintenance fees.......    53.2      46.4       42.3     38.7     50.1     42.8      37.5     34.1     35.4
 Professional service
  fees..................    26.3      20.3       26.6     17.3     28.7     24.0      23.0     23.6     25.8
                           -----     -----      -----    -----    -----    -----     -----    -----    -----
 Total revenues.........   100.0     100.0      100.0    100.0    100.0    100.0     100.0    100.0    100.0
                           -----     -----      -----    -----    -----    -----     -----    -----    -----
Cost of revenue:
 Software license.......     5.4       8.9        8.5     12.0      6.1      9.5      13.8     12.8     10.2
 Maintenance............    20.5      17.2       15.3     14.3     17.9     15.3      17.3     13.9     12.6
 Professional service...    26.3      19.6       24.5     15.4     26.6     22.0      18.2     18.3     20.6
                           -----     -----      -----    -----    -----    -----     -----    -----    -----
 Total cost of reve-
  nues..................    52.2      45.7       48.3     41.7     50.6     46.8      49.3     45.0     43.4
                           -----     -----      -----    -----    -----    -----     -----    -----    -----
Gross profit............    47.8      54.3       51.7     58.3     49.4     53.2      50.7     55.0     56.6
                           -----     -----      -----    -----    -----    -----     -----    -----    -----
Operating expenses:
 Software product devel-
  opment................     1.3       1.6        0.9      --       --       0.7       0.7      0.9      1.3
 Sales and marketing....    26.6      34.6       23.6     37.9     21.1     26.7      19.4     18.4     21.3
 Administrative and gen-
  eral..................    22.8      23.7       17.8     10.9     24.5     20.8      19.9     15.8     19.3
 Write-off of acquired
  in-process research
  and development
  costs (1).............     --        --         --       --       --       --       12.9      --       --
                           -----     -----      -----    -----    -----    -----     -----    -----    -----
 Total operating ex-
  penses................    50.7      59.9       42.3     48.8     45.6     48.2      52.9     35.1     41.9
                           -----     -----      -----    -----    -----    -----     -----    -----    -----
Income (loss) from oper-
 ations.................    (2.9)     (5.6)       9.4      9.5      3.8      5.0      (2.2)    19.8     14.7
Other income and ex-
 pense, net.............     1.8       2.8        1.3      6.6      2.8      3.7      (0.5)    (0.6)     1.6
                           -----     -----      -----    -----    -----    -----     -----    -----    -----
Income (loss) before in-
 come taxes.............    (1.1)     (2.8)      10.7     16.1      6.6      8.7      (2.7)    19.2     16.3
Income tax provision
 (benefit)..............    (0.3)     (1.1)       4.0      6.8      2.6      3.7       4.3      7.9      6.7
                           -----     -----      -----    -----    -----    -----     -----    -----    -----
Net income (loss).......    (0.8)%    (1.7)%      6.7%     9.3%     4.0%     5.0%     (7.0)%   11.3%     9.6%
                           =====     =====      =====    =====    =====    =====     =====    =====    =====
</TABLE>
--------
(1) The write-off of acquired in-process research and development costs for
    the quarter ended September 30, 1997 relates to the Company's acquisition
    of R.D. Nickel. Before deducting the nonrecurring write-off for this
    period, income from operations as a percentage of total revenues was 10.8%
    and net income as a percentage of total revenues was 6.0%.
 
  As a result of the Recapitalization on March 31, 1997, the Company is no
longer a wholly owned subsidiary of SAG. Management has undertaken several
strategic initiatives since the Recapitalization to increase revenue growth
and profitability including building a product development organization,
developing product and professional services offerings that address the year
2000 problem and acquiring R.D. Nickel. The revenue and profit improvements in
1997 from the first quarter to the second, third and fourth quarters may be
partially attributable to these changes, but there can be no assurance that
this trend will continue in future quarters. Due in part to these initiatives,
the Company expects that product development costs as a percentage of software
license fees will increase and that administrative and general expenses as a
percentage of total revenues will decrease.
 
  The Company's results of operations have historically fluctuated on a
quarterly basis and 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
 
                                      31
<PAGE>
 
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.
 
  Although past results may not be indicative of future results, maintenance
fees generally have not fluctuated on a quarterly basis to the same degree as
software license fees due to the large percentage of maintenance fees
generated from renewals of annual maintenance contracts which are recognized
ratably over the contract period.
 
  Revenues from professional services are influenced by the number of
personnel providing such services, the utilization rates of such personnel and
the number of billable days in a quarter. Other factors being equal, a quarter
ending December 31 will generally reflect lower professional services fees
than other quarters due to the relatively large number of holidays falling in
that quarter. In addition, the completion or commencement of significant
professional services projects may affect the revenues from professional
services in a particular quarter.
 
  Software license costs have varied from period to period and can be expected
to fluctuate in the future primarily due to shifts in product mix since
royalty rates on third party products vary from 24% to 40%.
 
  Historically, sales and marketing expenses have varied from quarter to
quarter in absolute dollar terms and as a percentage of revenues, as a result
of the size and timing of marketing programs. A significant portion of
marketing program costs are variable in nature and subject to management
discretion as to their timing and amount.
 
  The Company's quarterly operating results may continue to fluctuate due to
numerous factors, including the demand for the Company's products and
services, the timing and cost of new product and service introductions and
product enhancements by the Company or its competitors, changes in the mix of
products and services sold by the Company and in the mix of sales by
distribution channels, commencement or conclusion of significant service
contracts, timing of any acquisitions and associated costs, the size, timing
and terms of customer orders, including delays in significant orders, changes
in pricing policies by the Company or its competitors, the timing of
collection of accounts receivable, changes in foreign currency exchange rates,
competitive conditions in the industry and general economic conditions. The
Company's expenses are generally fixed and do not vary significantly in the
short term with revenues. As a result, operating and net income in a given
quarter may be disproportionately affected by a reduction in revenues.
 
LIQUIDITY AND CAPITAL RESOURCES
 
  Since 1988, when the Company became a wholly owned subsidiary of SAG, the
Company has financed its operations principally through cash flow from
operating activities. In order to meet its short term cash needs and to pay
dividends to SAG, 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. Net cash
provided by operating activities was $1.4 million and $1.5 million (excluding
$8.9 million of proceeds from the sales of accounts receivable) for the three
months ended March 31, 1998 and 1997, respectively, and $13.3 million, $37.5
million and $29.6 million for the years ended December 31, 1997, 1996 and
1995, respectively.
 
  Investing activities used net cash of $1.5 million and $0.2 million for the
three months ended March 31, 1998 and 1997, respectively, primarily to fund
capital expenditures needed to support expansion of the Company's business.
Investing activities used net cash of $33.2 million, $4.3 million and $23.8
million for the years ended December 31, 1997, 1996 and 1995, respectively,
primarily to fund capital expenditures needed to support expansion of the
Company's business, to provide loans to SAG, as consideration for the
Cooperation Agreement from SAG and to fund the acquisition of R.D. Nickel.
 
  Financing activities used net cash of $0.1 million for the three months
ended March 31, 1998, primarily due to additional payments made for costs
incurred in connection with the IPO. There were no financing activities for
the three months ended March 31, 1997.
 
 
                                      32
<PAGE>
 
  Financing activities provided net cash of $44.6 million for the year ended
December 31, 1997, primarily from the proceeds from the sale of Common Stock
from the IPO. During 1996 and 1995, financing activities used net cash of $9.0
million and $4.8 million, respectively, primarily for the repayment of long
term obligations and the payment of dividends.
 
  The Company has no long term debt, and as of March 31, 1998 and December 31,
1997, had $50.3 million and $50.4 million in cash and cash equivalents,
respectively. The Company currently has relationships with two third parties
whereby the Company may sell long term receivable contracts. These
transactions are treated as sales by the Company as the economic interest in
the contract is transferred to the buyer. As of March 31, 1998 and December
31, 1997, the Company remained contingently liable under the recourse
provisions associated with these sales in the amount of $42.8 million and
$47.9 million, respectively. The Company's accounts receivable days sales
outstanding at December 31, 1997 was 62.
 
  The Company's international distributors report to and pay the Company 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
since that time. With the acquisition of R.D. Nickel, the Company began direct
sales in Canada effective October 1, 1997. Revenues from this source were
approximately 7% of total revenues since the acquisition. The Company,
therefore, has not to date engaged in foreign currency hedging transactions.
The Company may enter into hedging transactions in the future.
 
  The Company traditionally leases all major equipment, and has no investment
in inventory or facilities other than leasehold improvements.
 
  The Company believes that its existing cash balances, funds generated from
operations and funds received from the sale of receivables, if any, will be
sufficient to finance the Company's operations for at least the next twelve
months. Although operating activities may provide cash in certain periods, to
the extent the Company grows in the future, its operating and investing
activities may use such cash. There can be no assurances that any necessary
additional financing will be available to the Company on commercially
reasonable terms. The Company had no material capital commitments or planned
expenditures as of March 31, 1998.
 
                                      33
<PAGE>
 
                                   BUSINESS
 
  The Company is an enterprise solutions company that provides robust software
products and related professional services to large organizations with complex
computing requirements. The Company's products are used to build and enhance
mission-critical applications that require reliability, scalability and
security, such as customer billing systems, financial accounting systems and
inventory management systems. To complement its products, the Company has a
comprehensive professional services offering, including consulting, software
integration, systems implementation and large project management services. The
Company has over 24 years of experience in addressing the needs of
organizations with complex enterprise level computing environments.
 
  The Company provides enterprise development software products and related
professional services used by organizations to develop new mission-critical
applications and enterprise enablement software products and related
professional services used to extend and integrate business applications. 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 enterprise
enablement software products and professional services that allow
organizations to integrate their mission-critical applications with other
applications and extend them to the Internet and intranets. Products in this
area include ENTIRE, a family of enterprise application integration products
that facilitates the communication between application components across
heterogeneous computing environments; iXpress, a web application assembly and
deployment platform; and EntireX DCOM, a product that uses Microsoft's ActiveX
technology to integrate applications written in a variety of programming
languages. The Company also has a year 2000 program which offers an 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's professional services that complement
its products include application development and enhancement, application
reengineering, application porting, rightsizing and application integration.
 
  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,
scalability, 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.
 
 
                                      34
<PAGE>
 
  Organizations must continually build, modify and maintain their information
systems in order to respond to competitive pressures, regulatory changes and
technological advances. For example, many organizations have initiated
significant modifications of their information systems to address the
increasing demands of management for more information for decision making and
the needs of customers and suppliers for greater access to information.
Organizations are constantly updating their information systems to exploit
advances in database management, communication and software technologies and
to maximize the return on their investments in existing systems. In addition,
the size and complexity of the year 2000 problem, a problem expected in the
year 2000 when applications with two-digit entries in the date code field will
need to accept four-digit entries to distinguish twenty-first century dates
from twentieth century dates, has created significant demand for technology
and professional services that address that problem.
 
  The need to continually adapt and integrate 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 addition, IT organizations are increasingly
seeking to eliminate "islands of automation" by integrating business
applications across the enterprise and with external business partners. In
many cases, IT organizations lack the resources and expertise required to
cost-effectively implement, integrate 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, scalability and interoperability of legacy systems while
leveraging the speed, cost effectiveness and flexibility of new technologies
in an integrated manner. 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, expand and integrate 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, integration and enhancement of mission-critical enterprise
applications. The Company's products are used to build, maintain and integrate
business applications that require reliability, scalability 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. The
Company's enterprise enablement products allow customers to integrate their
legacy systems, providing application-to-application interoperability and the
means to share information within and beyond the enterprise.
 
  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
 
                                      35
<PAGE>
 
resides. For example, the Company's software products and professional
services expertise in building mission-critical applications enable its
customers to realize the benefits of enterprise class applications such as
customer billing systems, financial accounting systems and inventory
management systems. Moreover, the Company's enterprise enablement products
allow its customers to integrate new applications with existing applications
across the enterprise.
 
  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 and improved business process coordination. 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 scalability 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 and to provide enterprise level
application integration. The Company's extensive experience in enterprise
software and related professional services enables it to address customers'
mission-critical computing needs.
 
COMPANY STRATEGY
 
  The Company's strategy is to further leverage its current leadership
position in software solutions for the development and integration of
enterprise applications for large organizations by extending its product and
professional services offerings with a particular focus on the enterprise
application integration market. Key elements of the Company's strategy include
enhancing and extending product offerings with added features and
functionality, broadening its product offerings for the enterprise application
integration market, leveraging its customer base, expanding professional
service offerings and leveraging distribution channels.
 
  Enhance and Extend Product Offerings. The Company intends to enhance and
extend its product offerings with a primary focus on enterprise application
integration products. The Company believes that significant opportunity exists
for software solutions which enable the integration of mainframe legacy
applications with commercial Enterprise Resource Planning ("ERP") systems,
internally developed applications and other client/server and
Internet/intranet based applications. The Company will continue to extend
Microsoft's ActiveX and DCOM technologies into large enterprise computing
environments enabling its customers to achieve enterprise-wide application
integration. The Company intends to broaden its product offerings through
internal product development, additional licensed products from third parties
and through acquisitions.
 
  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 customer's IT budget substantially exceeds the annual amount that the
customer spends with the Company. The Company believes it can expand its share
of its customers' IT budgets through increased and improved product and
professional services offerings.
 
  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
 
                                      36
<PAGE>
 
Company's strategy is to expand its key professional services offerings, which
are centered around application development and integration, 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.
 
  Leverage Distribution Channels. The Company directly and indirectly sells
its products in over 20 countries throughout the Territory through exclusive
distributors. Under its 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 and integrate business applications. Typically,
the Company's solutions focus either on building and deploying new mission-
critical applications or enhancing and extending existing business-critical
systems through enterprise application integration. 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.
 
 
                    [ENTERPRISE MARKET CHART APPEARS HERE] 
 

 
                                      37
<PAGE>
 
  The following table summarizes the Company's product offerings by category,
indicating the year the product was introduced, the shipment date of the
product's current version, and the platforms supported by the product.
 
<TABLE>
<CAPTION>
                                  YEAR OF    CURRENT PLATFORMS
  PRODUCTS (1)                  INTRODUCTION VERSION SUPPORTED
 
  <S>                           <C>          <C>     <C>
                     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                          1997       3/98   WIN/NT
    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       2/98    UNIX
    ENTIRE BROKER SDK               1997       1/98   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
--------------------------------------------------------------
  Year 2000 Product
    INSIGHT 2000 Tool Kit           1997       2/98     WIN
--------------------------------------------------------------
</TABLE>
--------
(1) CONSTRUCT, CONSTRUCT Spectrum, CONSTRUCT Spectrum SDK and INSIGHT 2000
    Tool Kit are products owned by the Company. iXpress is a product which the
    Company has the right to license pursuant to an agreement with a third
    party 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.
 
                                      38
<PAGE>
 
 Enterprise Development Products and Professional Services
 
  The Company provides a family of enterprise development software products
and related professional services that allow its customers to develop and
deploy enterprise solutions that are integrated with existing data and
applications.
 
  . NATURAL, the Company's 4GL programming language for the enterprise
    environment, is designed to increase productivity in application software
    design, development and deployment. NATURAL supports Rapid Application
    Development to RDBMS environments with applications that are portable,
    scaleable and interoperable across multiple computing platforms.
 
  . Add-on products for the NATURAL environment include: NATURAL LightStorm,
    for repository-based development environments; CONSTRUCT, for model-based
    Rapid Application Development; and CONSTRUCT Spectrum, for automated
    development of distributed components.
 
  The Company's family of data management solutions delivers access to data
and are designed to ensure the reliability, integrity, and security of such
data throughout an organization's computing environment.
 
  . ADABAS, the Company's flagship high-performance database management
    product, is designed to handle large volumes of changing data requiring
    high levels of availability. It provides multi-data model support, multi-
    platform support, comprehensive SQL support, and a variety of extended
    capabilities that take advantage of technological advances in both
    hardware and software.
 
  . Add-on products for the ADABAS environment include: ADABAS SQL Server, an
    SQL interface to ADABAS data; ADABAS ADAPLEX+, a technology that
    distributes and presents a single view of multiple databases; ADABAS
    FASTPATH, which optimizes database and application performance; and
    ADABAS Delta Save Facility, a product for reducing backup time and
    database recovery processing.
 
  .  Core Product Services. These professional services focus on the
    deployment and use of the Company's database management and application
    development products, including application development and enhancement,
    application reengineering, application porting and rightsizing.
 
 Enterprise Enablement Products and Professional Services
 
  The Company's ENTIRE application integration 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 product that links mainframe applications and components to
    ActiveX- and Java-enabled desktops; and ENTIRE SAF Gateway, a central
    security administration environment. The Company also offers ENTIRE
    BROKER APPC, a product that links Advanced Program-to-Program
    Communication and IBM's MQSeries-enabled mainframe applications to
    ActiveX- and Java-enabled desktops; ENTIRE BROKER SDK, a set of software
    products for building and deploying distributed applications; and EntireX
    DCOM, a product that allows applications or pieces of applications to
    work together transparently on Windows, UNIX and MVS/VSE mainframe
    platforms.
 
  . iXpress is an Internet-enablement technology that combines component
    technology, such as Java and ActiveX, with enterprise systems, allowing
    organizations to deliver and manage business-critical information
    solutions via the Web.
 
  . Integration Services. The Company offers its customers a variety of
    application integration professional services, such as integrating an
    organization's Internet site with an order entry system; integrating
    multiple sources of data, applications and services from multiple
    platforms; enabling secure access for suppliers to specific data and
    applications; and distributing application components across the network.
 
  . INSIGHT 2000 Tool Kit is a product that allows developers to analyze and
    remediate NATURAL code by providing a picture of how much code needs to
    be fixed and helping project managers break year 2000 projects into
    segments and develop a comprehensive work plan for executing remediation.
 
  . Year 2000 Services. The Company's year 2000 professional services
    offerings include analysis, remediation, testing and reimplementation to
    assist customers in resolving their year 2000 problem. These
 
                                      39
<PAGE>
 
   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 Colorado, New Jersey and 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, application integration and year
2000 projects.
 
  Technology Services. The Company also provides system engineering services,
supplementary database administration services and database application and
network performance and tuning services.
 
RESEARCH AND DEVELOPMENT
 
  Prior to the Recapitalization, the Company was a wholly owned subsidiary of
SAG and the Company's research and development efforts were directed by SAG.
The Company's research and development expenses were $900,000 and $1.4 million
in 1995 and 1996, respectively.
 
  Since the Recapitalization, the Company has begun building its internal
product development group. The first product resulting from the Company's
recent internal product development efforts is the INSIGHT 2000 Tool Kit,
which was released in September 1997. The Company intends to continue
expanding its product development group through additional acquisitions and
internal hiring. The Company's research and development expenses were $1.1
million in 1997.
 
  Since the Cooperation Agreement provides the Company with an exclusive and
perpetual right to license in the Territory products developed by SAG, the
Company also expects to continue to benefit from SAG's product development
efforts. SAG's product development costs were approximately $56.0 million for
both 1996 and 1997. In September 1997, SAG released EntireX DCOM, the first
product resulting from SAG's strategic relationship with Microsoft.
 
PRODUCT MAINTENANCE AND CUSTOMER SUPPORT
 
  The Company offers a wide range of product maintenance and customer support
services. The Company believes that its future success is dependent in part on
its ability to provide high levels of customer service in order to cultivate
advocacy by the Company's installed customer base. For the year ended December
31, 1997, approximately 95% of the Company's customers who were eligible
renewed at least one of their maintenance agreements.
 
  Customers may choose from three levels of service and support offerings:
basic, extended and custom, which are differentiated by service deliverables
and access to support persons. Some of these customer support services include
support during product proof-of-concept/trial, technical support 24 hours a
day, seven days a week, customized support offerings, onsite installation and
implementation, remote analysis automated customer assistance and web-based
electronic services.
 
CUSTOMERS AND MARKETS
 
  Over 1,500 customers in the Territory have licensed the Company's products
or purchased the Company's professional services since January 1996. These
customers consist primarily of major corporations, government agencies and
educational institutions.
 
                                      40
<PAGE>
 
  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 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.
 
                                      41
<PAGE>
 
  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                          Nomura Research Institute, Ltd.
Burlington Northern Santa Fe Corporation  Norfolk Southern Corporation
Cable and Wireless, PLC                   Ryerson Tull Rykoff-Sexton, Inc.
Centers for Disease Control               S.C. Johnson & Son Inc.
Central Hudson Gas & Electric Corporation Sabre Group
City of New York                          Sprint Corporation
City of Philadelphia                      State of California
Commonwealth of Virginia                  State of Hawaii
Credit Suisse First Boston                State of Nevada
Cutler-Hammer, Inc.                       State of New Jersey
Delta Air Lines, Inc.                     State of Texas
Duke Power Company                        State of Washington
Federal Aviation Administration           Union Electric Company
Federal Bureau of Investigation           University of Arkansas
Federal Express Corp.                     University of Hawaii
KN Energy, Inc.                           University of Texas
Lehman Brothers, Inc.                     University of Toronto
                                          US Airways Group, Inc.
Morgan Stanley, Dean Witter, Discover & Co.
Nabisco Inc.                              US Patent & Trademark Office
                                          USX Corporation
 
  In 1995, 1996 and 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 in North America, South America, Japan and Israel. In North America,
the Company sells and markets its products and services through a direct
channel, consisting of 19 offices as of December 31, 1997. The Company sells
its products in over 20 additional countries through six exclusive
distributorships in South America, Japan and Israel. In addition, the Company
has access to SAG's distribution channels for the Company's products (other
than those licensed from SAG) in over 50 countries outside North America,
South America, Japan and Israel.
 
  The Company's corporate marketing organization supports the Company's sales
and professional services channels through the efforts of professionals with
expertise in product marketing and marketing communications. The Company also
has strategic marketing relationships with certain vendors of computing
products and services, including IBM, Microsoft and BDM International, Inc., a
subsidiary of TRW, Inc.
 
COMPETITION
 
  The markets for the Company's software products and professional services
are highly competitive and characterized by continual change and improvement
in technology. The Company provides products and professional services to
several markets within the computer industry and encounters a variety of
competitors within each market. 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 there are no significant barriers to entry.
 
  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,
 
                                      42
<PAGE>
 
the Company's 4GL applications programming language, NATURAL, competes with
offerings from both large and small companies, including Oracle, Microsoft,
IBM and Sterling Software, Inc. In the enterprise enablement market, the
Company's products compete in both the component/object and the message-
oriented segments of the middleware market, where its competitors include IBM
and Microsoft. In the market for year 2000 products and professional services,
the Company's competitors include Formal Systems, Inc., Viasoft, Inc. and
Electronic Data Systems Corporation. Few of the Company's competitors compete
in all of the same markets as the Company.
 
  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.
 
PROPRIETARY RIGHTS
 
  The products sold by the Company consist of products developed by SAG (e.g.,
ADABAS, NATURAL and ENTIRE), products owned by other third parties which are
distributed by the Company (e.g., iXpress) and products developed or acquired
by the Company (i.e., INSIGHT 2000 Tool Kit, CONSTRUCT, CONSTRUCT Spectrum and
CONSTRUCT Spectrum SDK). For all of these products, the Company, if not the
developer, is contractually obligated to provide appropriate security measures
to protect the proprietary materials of SAG and other third parties against
misappropriation and illegal copying.
 
  The Company treats all of the products that it distributes as proprietary
trade secrets and confidential information. It relies primarily upon a
combination of trade secret, copyright and trademark laws, its license
agreements with customers, and its internal security systems, confidentiality
procedures and employee agreements to maintain the security of its products.
The Company typically provides its products to users under nonexclusive,
nontransferable perpetual licenses which generally permit use of the licensed
software solely for internal operations on designated computers at specific
sites. Under certain circumstances, the Company makes available the source
code for its products under an escrow arrangement which restricts access to
and use of the source code. Although the Company takes steps to protect its
trade secrets and other proprietary rights, there can be no assurance that
misappropriation will not occur. In addition, the laws of some foreign
countries do not protect proprietary rights to the same extent as the laws of
the United States.
 
  The Company seeks to protect its software, documentation and other written
materials under copyright law, and to assert trademark rights in its product
names. The Company has not sought to protect its products under patent laws,
though SAG and some third parties have patented, in the United States, Japan
and/or the European Union, certain of the products which the Company
distributes.
 
  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 Rights."
 
EMPLOYEES
 
  As of March 31, 1998, the Company employed 894 people, with 408 in
professional services and consulting, 142 in sales and marketing, 183 in
customer support, 27 in research and development and 134 in general and
 
                                      43
<PAGE>
 
administrative functions. As of March 31, 1998, the Company also utilized
approximately 112 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. See "Risk Factors--Dependence on Key Personnel; Need to
Hire Additional Personnel."
 
PROPERTIES
 
  The Company's executive offices, principal marketing and data center
facility are located in approximately 170,000 square feet of space in a three
building campus that the Company leases in Reston, Virginia. The Company's
Customer Service and Support Center is located in approximately 85,000 square
feet that the Company leases in Highlands Ranch, Colorado. The Company
currently sublets approximately 18,000 and 25,000 square feet of the Reston
and Highlands Ranch locations, respectively.
 
  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.
 
  The Company leases product sales and professional services branch offices in
Irvine and Sacramento, California, Atlanta, Georgia, Chicago, Illinois,
Braintree, Massachusetts, Bloomington, Minnesota, Fort Lee, New Jersey,
Plymouth Meeting, Pennsylvania, Dallas, Texas, Bellevue, Washington and
Reston, Virginia in the United States.
 
  The Company believes that its facilities are adequate for its current needs
and that suitable space will be available as needed to accommodate the
expansion of the Company's operations.
 
LEGAL PROCEEDINGS
 
  From time to time, the Company is involved in legal proceedings and
litigation arising in the ordinary course of business. 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.
 
 
                                      44
<PAGE>
 
                                  MANAGEMENT
 
EXECUTIVE OFFICERS AND DIRECTORS
 
  The executive officers and directors of the Company, and their respective
ages as of April 13, 1998, are as follows:
 
<TABLE>
<CAPTION>
NAME                      AGE POSITION
----                      --- --------
<S>                       <C> <C>
Carl J. Rickertsen (1)..  38  Chairman of the Board
Daniel F. Gillis (2)....  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........  46  Vice President--Operations and Chief Information Officer
David S. Linthicum......  35  Vice President--Technology and Chief Technology Officer
Dr. Philip S. Dauber (1)
 (3)....................  57  Director
Dr. Erwin Konigs........  48  Director
Edward E. Lucente (3)...  58  Director
Dr. Paul G. Stern (1)...  59  Director
</TABLE>
--------
(1) Member of the Compensation Committee.
(2) Member of the Employee Stock Option Committee.
(3) 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 ("TC
Equity Partners") and TC Management LLC ("TC Management"), which are,
respectively, the sole general partner and managing agent of Thayer Equity
Investors III, L.P. ("Thayer"). Thayer is a private equity fund based in
Washington, D.C. that targets investments in the information technology and
services industries and its investors include corporations, pension funds and
financial institutions. 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 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 AG Americas, Inc., a wholly owned subsidiary of the Company
("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 served as Executive Vice President at Falcon
Microsystems Inc., a computer products reseller and systems integrator.
 
  Harry K. McCreery has served as Vice President, Treasurer and Chief
Financial Officer of the Company since April 1997. He has also 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 as Vice President, Worldwide
Marketing & Sales for Iomega Corporation, a manufacturer of computer storage
products, from July 1994 through July 1997. 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 served as Director of
Marketing & Sales, Consumer Business Division, at Gates Energy Products, a
manufacturer of consumer and commercial rechargeable battery products.
 
 
                                      45
<PAGE>
 
  Derek M. Brigden has served as Vice President--Operations and Chief
Information Officer of the Company since April 1997. He has also served as
Vice President--Operations and Chief Information Officer of Software Americas
since December 1990.
 
  David S. Linthicum has served as Vice President--Technology and Chief
Technology Officer of the Company since December 1997. Prior to joining the
Company, Mr. Linthicum served as Senior Manager in the Center of Technology
Enablement for Ernst & Young LLP from June 1997 to December 1997. From April
1995 to June 1997, Mr. Linthicum served as Senior Manager, Systems Integration
Practice at AT&T Corporation. From December 1990 to April 1995, Mr. Linthicum
served as Technical Director, Treasury Department for Mobil Oil Corporation.
 
  Dr. Philip S. Dauber has served as a director of the Company since April
1997. Dr. Dauber is an independent consultant providing services to several
companies including IQI, Inc., a telemarketing firm, where he served as acting
President from February 1997 through August 1997. Before becoming an
independent consultant, 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 Konigs 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. Konigs 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. Konigs 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 January 1998, Mr. Lucente has served as President and Chief Executive
Officer of QMS, Inc., a manufacturer of laser printers. From May 1995 to
January 1998, Mr. Lucente 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 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 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 and TC Management, 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 Bylaws, as amended (the "Bylaws"), provide for the Company's
Board to be comprised of six directors. Pursuant to the Company's Certificate
of Incorporation, as amended (the "Certificate of Incorporation"), the Board
is divided into three classes, as nearly equal in number as reasonably
possible, with terms currently expiring at the annual meeting of stockholders
of the Company to be held on May 18, 1998 (Mr. Gillis and Dr. Dauber), the
annual meeting of stockholders to be held in 1999 (Dr. Konigs and Mr. Lucente)
and the annual meeting of stockholders to be held in 2000 (Mr. Rickertsen and
Dr. Stern). 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.
 
  Executive officers of the Company are elected by the Board on an annual
basis and serve until the first meeting of the Board following the next annual
meeting of stockholders following their election and until their
 
                                      46
<PAGE>
 
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
 
  The committees of the Board are an Audit Committee, a Compensation Committee
and an Employee Stock Option Committee ("Stock Option Committee").
 
  Dr. Dauber and Mr. Lucente (Chairman) are presently the members of the Audit
Committee. The Audit Committee has certain duties relating to the year-end
audit, the Company's accounting methods and internal accounting controls and
the Company's relationship with its independent public accountants, including
making recommendations concerning the engagement of independent public
accountants, reviewing with the Company's independent public accountants the
plans and results of the audit engagement and approving professional services
provided by the Company's independent public accountants.
 
  Mr. Rickertsen (Chairman) and Drs. Stern and Dauber are presently the
members of the Compensation Committee. The Compensation Committee is
responsible for determining the compensation of the Company's Chief Executive
Officer and other executive officers and establishing policies and guidelines
regarding the compensation of other officers and employees of the Company and
its subsidiaries. The Compensation Committee is also authorized to administer
the Company's 1997 Employee Stock Option Plan ("Option Plan"), including the
power to grant stock options. The Compensation Committee will also be
authorized to administer the Company's Employee Stock Purchase Plan if the
stockholders approve such plan at the annual meeting to be held on May 18,
1998.
 
  In February 1998, the Board created the Stock Option Committee and appointed
Mr. Gillis as its sole member. The Stock Option Committee's function is to
grant stock options under the Option Plan to persons who are not (or who will
not be) at the time of such grant subject to the requirements of Section 16 of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), pursuant
to guidelines and limitations determined by the Board. The Stock Option
Committee is not authorized to grant any stock option under the Option Plan to
any person who reports directly to any member of the Stock Option Committee or
to grant any stock option under the Option Plan that covers more than 10,000
shares of Common Stock without the prior consent and approval of the
Compensation Committee. All grants of stock options made by the Stock Option
Committee will be reported to the Compensation Committee on a regular basis.
 
  The Company does not have a standing nominating committee or other committee
performing similar functions.
 
DIRECTOR COMPENSATION
 
  Except for grants of stock options under the Option Plan, the Company's
directors were not compensated during 1997 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. Except for grants of stock options that may be made under the
Option Plan, the Company has no present plans to pay such benefits or
compensation to directors. The Company reimburses directors for certain out-
of-pocket expenses incurred in connection with attendance at Board of
Directors and committee meetings.
 
  Both employee and non-employee directors are eligible to be granted stock
options pursuant to the Option Plan. Under the Option Plan, Dr. Dauber and Mr.
Lucente were each granted options on June 23, 1997 to purchase 54,450 shares
of Common Stock at an exercise price of $1.47 per share. The options vest in
equal annual installments of 25%, with the first installment vesting March 31,
1998, and each of the subsequent installments vesting on the first, second and
third anniversaries of March 31, 1998. The options will become immediately
exercisable in full upon a change in control of the Company and may be
partially accelerated in connection with the termination of the director's
service as a director of the Company. Mr. Gillis is the President and Chief
Executive Officer of the Company and is not separately compensated as a
director of
 
                                      47
<PAGE>
 
the Company. In fiscal year 1997, Mr. Gillis was granted stock options under
the Option Plan. See "--Executive Compensation."
 
EXECUTIVE COMPENSATION
 
  The following table sets forth certain information concerning compensation
paid to the Company's Chief Executive Officer and each of the four other most
highly compensated executive officers of the Company whose annual salary and
bonus compensation (determined as of December 31, 1997) exceeded $100,000
(collectively, the "Named Executive Officers" and individually, the "Named
Executive Officer") for the fiscal years ended December 31, 1996 and 1997.
 
                          SUMMARY COMPENSATION TABLE
 
<TABLE>
<CAPTION>
                                          ANNUAL COMPENSATION
                             ----------------------------------------------   SECURITIES
                                                           OTHER ANNUAL       UNDERLYING         ALL OTHER
NAME AND PRINCIPAL POSITION  YEAR SALARY ($) BONUS ($) COMPENSATION ($) (1) OPTIONS (#) (2) COMPENSATION ($) (3)
---------------------------  ---- ---------- --------- -------------------- --------------- --------------------
<S>                          <C>  <C>        <C>       <C>                  <C>             <C>
Daniel F. Gillis (4)....     1997  275,002    340,500            --            2,392,500          194,461
 President and Chief         1996  249,039    240,500         24,000                 --           179,671
 Executive Officer
Harry K. McCreery (5)...     1997  174,711    236,500            --            1,288,100          242,317
 Vice President,             1996  170,000    132,600            --                  --           235,933
 Treasurer and Chief
 Financial Officer
Derek M. Brigden (5)....     1997  153,969    100,100            --              114,125            7,500
 Vice President--            1996  150,000    101,346            --                  --             7,500
 Operations and Chief
 Information Officer
James H. Daly (5) (6)...     1997  149,938     97,500         30,000             114,125          169,427
 Vice President,             1996  142,000     92,300         20,208                 --           159,183
 Secretary and General
 Counsel
Thomas E. Gorley (5)         1997  149,808     97,500            --              114,125            7,500
 (7)....................     1996  105,769        --          63,461                 --             6,000
 Vice President--
 Professional
 Services
</TABLE>
--------
(1) Consists of sales commissions paid to the Named Executive Officer. In
    accordance with the rules of 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 each of 1996 and
    1997.
(2) All figures in this column reflect shares of Common Stock subject to
    options granted under the Option Plan.
(3) Unless otherwise indicated, consists of (i) amounts of deferred
    compensation earned and credited to deferred compensation accounts of the
    Named Executive Officer and (ii) $7,500 of contributions paid by the
    Company on behalf of the Named Executive Officer under the Company's
    401(k) Plan. See "--Deferred Compensation Agreements." The Company does
    not have any long-term incentive plans.
(4) Mr. Gillis served as President and Chief Executive Officer of the Company
    from May 6, 1996.
(5) In 1996, these individuals served as executive officers of Software
    Americas and performed policy-making functions for both Software Americas
    and the Company.
(6) Mr. Daly's employment with the Company and Software Americas terminated
    effective April 10, 1998.
(7)  Mr. Gorley's employment with the Company and Software Americas terminated
    effective January 9, 1998.
 
                                      48
<PAGE>
 
  The following table sets forth information concerning the grant of stock
options to each of the Named Executive Officers in 1997:
 
                       OPTION GRANTS IN LAST FISCAL YEAR
 
<TABLE>
<CAPTION>
                                                    INDIVIDUAL GRANTS
                         -----------------------------------------------------------------------
                                              PERCENT OF
                                             TOTAL OPTIONS
                              NUMBER OF       GRANTED TO
                             SECURITIES        EMPLOYEES   EXERCISE OR                GRANT
                             UNDERLYING        IN FISCAL   BASE PRICE  EXPIRATION  DATE PRESENT
                         OPTIONS GRANTED (1)   YEAR 1997     ($/SH)       DATE    VALUE ($) (11)
                         ------------------- ------------- ----------- ---------- --------------
<S>                      <C>                 <C>           <C>         <C>        <C>
Daniel F. Gillis........      1,430,000 (2)      28.2          1.47     06/23/04      832,541
                                357,500 (3)       7.0          9.60     08/08/04      930,860
                                605,000 (4)      11.9         12.00     09/24/04    3,235,353
Harry K. McCreery.......        770,000 (2)      15.2          1.47     06/23/04      448,291
                                192,500 (3)       3.8          9.60     08/08/04      501,232
                                325,600 (4)       6.4         12.00     09/24/04    1,741,208
James H. Daly...........         68,200 (5)       1.3          1.47     06/23/04       36,390
                                 17,050 (3)       0.3          9.60     08/08/04       67,027
                                 28,875 (6)       0.6         12.00     09/24/04      118,243
Derek M. Brigden........         68,200 (7)       1.3          1.47     06/23/04       36,390
                                 17,050 (3)       0.3          9.60     08/08/04       67,027
                                 28,875 (8)       0.6         12.00     09/24/04      118,243
Thomas E. Gorley........         68,200 (9)       1.3          1.47     06/23/04       36,390
                                 17,050 (3)       0.3          9.60     08/08/04       67,027
                                 28,875 (10)      0.6         12.00     09/24/04      118,243
</TABLE>
--------
 (1) Options will become immediately exercisable if (i) 51% of the voting
     stock of the Company is beneficially owned, directly or indirectly, by
     any person or group of person(s) (as defined in Section 13(d) and 14(d)
     of the Exchange Act) together with its affiliates, excluding employee
     benefit plans of the Company, (ii) the stockholders of the Company
     approve a merger or consolidation of the Company and another entity
     unless the merger or consolidation results in the voting securities of
     the Company outstanding immediately prior thereto continuing to represent
     at least 50% of the combined voting securities of the surviving entity
     immediately after the 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. Options may be
     partially accelerated in connection with the Named Executive Officers
     termination of employment with the Company. Each option was granted under
     the Company's 1997 Stock Option Plan and has an exercise price equal to
     the fair market value of the Common Stock on the date of grant.
 (2) Each of the indicated options granted vests as to one-third ( 1/3) of the
     securities underlying the options granted on each of the first, second
     and third anniversaries of March 31, 1997.
 (3) Each of the indicated options granted vested on August 8, 1997.
 
                                      49
<PAGE>
 
(4) Each of the indicated options granted vests as to one-third ( 1/3) of the
    securities underlying the options granted on each of the first, second and
    third anniversaries of September 24, 1997.
(5) Due to Mr. Daly's termination of employment with the Company, one-half (
    1/2) of the indicated options expired prior to vesting.
(6) Due to Mr. Daly's termination of employment with the Company, all of the
    indicated options expired prior to vesting.
(7) The indicated options granted vest as to one-fourth ( 1/4) of the
    securities underlying the options granted on each of the first, second and
    third anniversaries of June 23, 1997.
(8) The indicated options granted vest as to one-fourth ( 1/4) of the
    securities underlying the options granted on each of the first, second and
    third anniversaries of September 24, 1997.
(9) Due to Mr. Gorley's termination of employment with the Company, one-fourth
    ( 1/4) of the indicated options vested immediately prior to his
    termination on January 9, 1998 and the remaining indicated options expired
    prior to vesting.
(10) Due to Mr. Gorley's termination of employment with the Company, all of
     the indicated options expired prior to vesting.
(11) The fair market value of each option granted is estimated on the Grant
     Date using the Black-Scholes option pricing model. The Black-Scholes
     model used the following factors: risk-free rate of return of 6%;
     dividend yield of 0%; exercise term of 2 to 6 years; stock price
     volatility of 40%; and a forfeitures rate of 2.9%.
 
  No stock options were exercised during 1997. The following table sets forth
information with respect to outstanding unexercised options held by the Named
Executive Officers as of December 31, 1997:
 
                AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
                       AND FISCAL YEAR-END OPTION VALUES
 
<TABLE>
<CAPTION>
                             SECURITIES UNDERLYING         VALUE OF UNEXERCISED
                                  OPTIONS AT               IN-THE-MONEY OPTIONS
                                FISCAL YEAR-END             AT FISCAL YEAR-END
                         ----------------------------- -----------------------------
NAME                     EXERCISABLE UNEXERCISABLE (#) EXERCISABLE UNEXERCISABLE ($)
----                     ----------- ----------------- ----------- -----------------
<S>                      <C>         <C>               <C>         <C>
Daniel F. Gillis........   357,500       2,035,000      1,751,750     20,145,400
Harry K. McCreery.......   192,500       1,095,600        943,250     10,847,100
Derek M. Brigden........    17,050          97,075         83,545        960,834
James H. Daly (1).......    17,050          97,075         83,545        960,834
Thomas E. Gorley (2)....    17,050          97,075         83,545        960,834
</TABLE>
--------
(1) Mr. Daly's employment with the Company terminated effective April 10,
    1998.
(2) Mr. Gorley's employment with the Company terminated effective January 9,
    1998.
 
DEFERRED COMPENSATION AGREEMENTS
 
  The Company has entered into deferred compensation agreements with Messrs.
Gillis, McCreery and Daly (the "Deferred Compensation Agreements"). Pursuant
to these agreements, each of Messrs. Gillis, McCreery and Daly annually
receive 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 60%
vested and will vest in full as of December 31, 1998. Except under certain
circumstances, upon termination of employment, each of Messrs. Gillis,
McCreery and Daly is entitled to receive from the Company payments totaling
the vested portion of his deferred compensation account.
 
                                      50
<PAGE>
 
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, Gorley and Daly has entered into a
memorandum of understanding with the Company with respect to the termination
of his employment on terms and conditions substantially similar to Mr. Gillis'
memorandum of understanding with the Company, provided, however, that (i) the
severance benefit due each such executive officer upon termination under his
respective memorandum of understanding is equal to twelve months of his then-
current salary plus a pro-rated bonus payment, and (ii) no severance or other
benefits are due under these agreements if the executive officer resigns
within ninety days of a substantial reduction in his compensation and benefits
related to a Company wide reduction or a substantial reduction in his job
responsibilities that is deemed to be in the best business interests of the
Company.
 
  Mr. Gorley's employment terminated effective January 9, 1998. The payments
due Mr. Gorley from the Company totaled $159,500 (included a severance payment
of $150,000, a car allowance payment of $7,200 and vacation pay of $2,300).
Mr. Gorley received a net payment from the Company of $84,500 after repayment
of a note made by Mr. Gorley to the Company in the amount of $75,000 which was
deducted from the gross amount due Mr. Gorley. Mr. Gorley paid the interest
due on the note of approximately $2,300.
 
  Mr. Daly's employment with the Company terminated effective April 10, 1998.
The payments due Mr. Daly from the Company totaled $823,897 (included a
severance payment of $150,000, an incentive bonus payment of $21,875, a
deferred compensation payment of $639,777, a car allowance payment of $9,000
and vacation and regular pay of $3,245). Mr. Daly received a net payment from
the Company of $205,503 (net of taxes) after repayment of a note made by Mr.
Daly to the Company in the amount of $350,453 plus accrued interest of $23,554
which was deducted from the gross amount due Mr. Daly.
 
  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. 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.
 
                                      51
<PAGE>
 
                    CERTAIN RELATIONSHIPS AND TRANSACTIONS
 
  On March 31, 1997, the senior management of the Company and 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 persons who constituted the senior managers of the Company
at that time: 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 then 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 DM57.0
million (US$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 then outstanding Common Stock. Dr. Erwin Konigs, 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 then outstanding Common
Stock. Dr. Stern and Mr. Rickertsen, directors of the Company, are members of
TC Equity Partners, 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.
 
  Certain Managers borrowed money from the Company to purchase the Company's
Common Stock in the Recapitalization and executed promissory notes to reflect
such borrowings. Messrs. Gillis, McCreery and Daly borrowed $250,000, $250,000
and $182,605, respectively, from the Company under individual promissory
notes, each of which is dated March 24, 1997, and Messrs. McCreery and Daly
borrowed $363,000 and $120,740, respectively, from the Company under
individual promissory notes, each of which is dated August 9, 1996. Each of
the promissory notes accrues interest at the rate of 6% per annum and is due
and payable upon termination of its maker's employment with the Company. None
of the promissory notes require periodic interest or principal payments. As of
December 31, 1997, the amount outstanding under each promissory note equaled
the entire amount borrowed plus accrued interest.
 
  In connection with the Recapitalization, on March 31, 1997, the Company
borrowed $5,000,000 from Thayer under a short-term note agreement for working
capital requirements. This note accrued interest at a simple rate equal to 10%
per annum and was repaid on April 11, 1997. In addition, the Company paid to
TC Management a financial advisory fee of $840,000 in consideration for
investment banking and advisory services provided by TC Management in
connection with the Recapitalization, and reimbursed TC Management for its
out-of-pocket expenses in connection with the Recapitalization. On April 1,
1997, the Company also agreed to pay on a quarterly basis an annual fee of
$300,000 to TC Management for management and consulting services to be
provided by TC Management to the Company in connection with the operation and
conduct of the Company's business. In fiscal year 1997, the Company paid a
total of $225,000 of such fees plus out-of-pocket expenses and as of March 20,
1998, the Company has paid $75,000 of such fees plus out-of-pocket expenses
for services in fiscal year 1998. TC Management is the managing agent of and
provides management services to Thayer. Dr. Stern and Mr. Rickertsen,
directors of the Company, are members of TC Management. In connection with the
Recapitalization, the Company also paid a one-time advisory fee of $250,000 to
MLC Group, Inc., a wholly owned operating subsidiary of MLC Holdings, Inc. Mr.
Rickertsen, a director of the Company, is a director of MLC Holdings, Inc.
 
  Prior to the Recapitalization, the Company licensed and serviced SAG
products pursuant to a license agreement entered into by SAG and the Company
on January 1, 1995 (the "License Agreement"). The License Agreement gave the
Company the exclusive right to license and service SAG products in North
America, South America, Japan and Israel (the "Territory"), and gave SAG the
exclusive right to license and service the Company's products in all other
areas. Immediately prior to the Recapitalization, the Company and SAG entered
into a cooperation agreement dated March 31, 1997 (the "Cooperation
Agreement"), which terminated and
 
                                      52
<PAGE>
 
superseded the License Agreement. The Cooperation Agreement generally (i)
provides the Company the exclusive and perpetual right to license and service
in the Territory both existing and future products developed or acquired by
SAG and (ii) provides SAG the exclusive and perpetual right to license and
service outside the Territory both existing and future products developed or
acquired by the Company. Each of the Company and SAG must pay the other 24% of
the net revenues derived from such licenses. Except in certain circumstances,
the Company's minimum annual royalty payment to SAG through the year 2000 must
at least equal $21 million. This 24% royalty rate is fixed for 20 years. In
1995, 1996 and 1997, the Company's royalty payments to SAG were approximately
$23.9 million, $26.1 million and $29.3 million, respectively. In the same
periods, SAG's royalty payments to the Company were approximately $0.3
million, $0.3 million and $0.6 million, respectively. As consideration for the
Cooperation Agreement, the Company paid SAG DM38.0 million (approximately
US$22.6 million) on March 31, 1997.
 
  On December 5, 1993, the Company and SAG entered into a Products and
Research & Development Operations Transfer Agreement (the "R&D Agreement")
which required the Company to provide certain services relating to certain SAG
employees who utilized the Company's facilities. In connection with the
Recapitalization, on March 31, 1997, the Company entered into an
Administrative Services Agreement (the "ASA") with SAG, terminating the R&D
Agreement and requiring that the Company provide services similar to those
required under the R&D Agreement. SAG is required under the ASA to reimburse
the Company for its costs incurred in connection with the ASA and to pay the
Company $500,000 per year during the years 1997, 1998 and 1999 for the use of
certain machinery leased by the Company. In 1995, 1996 and 1997, the payments
to the Company under the R&D Agreement and the ASA were approximately $8.8
million, $15.9 million and $10.8 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. Except as described above, all of these transactions that were
material terminated in connection with the Recapitalization.
 
  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 "Subscription Agreement"). 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 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.
 
                                      53
<PAGE>
 
                      PRINCIPAL AND SELLING STOCKHOLDERS
 
  The following table sets forth certain information known to the Company
regarding beneficial ownership of the Company's Common Stock as of April 13,
1998 and as adjusted to reflect the sale of the shares pursuant to this
offering, by (i) each person who is known by the Company to own beneficially
more than 5% of the outstanding shares of Common Stock, (ii) each director and
Named Executive Officer of the Company, (iii) all directors and executive
officers of the Company as a group and (iv) each Selling Stockholder. Except
as otherwise indicated below, to the knowledge of the Company, each person
listed below has sole voting power and investment power with respect to the
shares beneficially owned by such person, subject to community property laws
where applicable.
 
<TABLE>
<CAPTION>
                                  SHARES           SHARES TO BE       SHARES
                            BENEFICIALLY OWNED       SOLD IN    BENEFICIALLY OWNED
                          PRIOR TO OFFERING (2)    OFFERING (3) AFTER OFFERING (2)
                          ------------------------------------- ------------------
NAME AND ADDRESS (1)         NUMBER      PERCENT                  NUMBER   PERCENT
--------------------      ------------- -----------             ---------- -------
<S>                       <C>           <C>        <C>          <C>        <C>
Thayer Equity Investors
 III, L.P...............     16,551,559     56.0%   5,000,000   11,511,559  38.6%
 1455 Pennsylvania
 Avenue, N.W.
 Washington, DC 20004
Software AG.............      2,750,000      9.3           --    2,750,000   9.2
 Uhlandstrasse 12, 64297
 Darmstadt, Germany
TC Co-Investors, LLC....         89,866       *        27,150       62,716    *
 1455 Pennsylvania
 Avenue, N.W.
 Washington, DC 20004
Daniel F. Gillis (4)....      1,048,317      3.5      200,000      848,317   2.8
Harry K. McCreery (5)...        653,217      2.2      150,000      503,217   1.7
James H. Daly (6).......        159,775       *            --      159,775    *
Derek M. Brigden (7)....        102,025       *        19,700       82,325    *
Thomas E. Gorley (7)....        136,125       *            --      136,125    *
Carl J. Rickertsen (8)..     16,649,425     56.4    5,027,150   11,622,275  38.8
Dr. Philip S. Dauber
 (9)....................         81,538       *            --       81,538    *
Dr. Erwin Konigs (10)...      2,852,025      9.7       25,000    2,827,025   9.4
Edward E. Lucente (11)..         13,613       *            --       13,613    *
Dr. Paul G. Stern (8)...     16,641,425     56.4    5,027,150   11,614,275  38.8
Gary Hayes (12).........        103,838       *        16,362       87,476    *
Volker Dawedeit (13)....         67,925       *        22,000       45,925    *
All directors and
 executive officers as a
 group (10 persons)
 (14)...................     21,538,210     69.8    5,421,850   16,116,360  52.2
</TABLE>
--------
 *  Less than 1% of the outstanding Common Stock.
 (1) The business address for Messrs. Gillis, McCreery, Brigden and Hayes 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 Mr. Dawedeit and Dr. Konigs is c/o Software AG, Uhlandstrasse
     12, 64297 Darmstadt, Germany. The business address for Mr. Lucente is 1
     Magnum Pass, Mobile, Alabama 36618.
 (2) The number of shares of Common Stock outstanding prior to this offering
     includes (i) 29,531,391 shares of Common Stock outstanding as of April
     13, 1998 and (ii) with respect to each person, the shares of Common Stock
     issuable by the Company pursuant to options held by such persons which
     may be exercised within 60 days following April 13, 1998 ("Presently
     Exercisable Options"). The number of shares of
 
                                      54
<PAGE>
 
    Common Stock deemed outstanding after this offering includes an additional
    386,062 shares that are being offered for sale by certain Selling
    Stockholders pursuant to the exercise by such Selling Stockholders of
    Presently Exercisable Options prior to the consummation of 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
     819,031 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., 814,606 shares; and TC Co-Investors, LLC 4,425
     shares.
 (4) Includes 834,167 shares subject to Presently Exercisable Options.
 (5) Includes 449,167 shares subject to Presently Exercisable Options.
 (6) Includes 51,150 shares subject to Presently Exercisable Options.
 (7) Includes 34,100 shares subject to Presently Exercisable Options.
 (8) Includes 16,551,559 shares held of record by Thayer and 89,866 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, a Delaware limited liability company. 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. 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. Frederic V. Malek, Dr. Paul G. Stern and Carl
     J. Rickertsen are the members of TC Management and the principal members
     of TC Equity Partners. 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.
 (9) Includes (i) 67,925 shares held of record by PSERD Trust, of which Dr.
     Dauber is a trustee, and (ii) 13,613 shares subject to Presently
     Exercisable Options. 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.
(10) 2,750,000 of the reported shares are held of record by SAG. Dr. Konigs, 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. Konigs
     disclaims beneficial ownership of all shares held of record by SAG.
(11) Includes 13,613 shares subject to Presently Exercisable Options.
(12) Includes 16,362 shares subject to Presently Exercisable Options. Mr. Hayes
     has served as Controller and a Vice President of the Company since April
     1997 and as a Vice President and Controller of Software Americas since May
     1995.
(13) Mr. Dawedeit has served as the Chief Financial Officer and a director of
     SAG since January 1997.
(14) Includes (i) 16,551,559 shares held of record by Thayer, (ii) 2,750,000
     shares held of record by SAG, (iii) 89,866 shares held of record by TC Co-
     Investors, (iv) 67,925 shares held of record by PSERD Trust, and (v)
     1,344,660 shares subject to Presently Exercisable Options (369,700 of
     which are being offered for sale in this offering by Messrs. Gillis,
     McCreery and Brigden). See footnotes (2) through (13). Does not include
     102,025 shares beneficially owned by Mr. Gorley or 34,100 shares subject
     to Presently Exercisable Options granted to Mr. Gorley, whose employment
     with the Company terminated on January 9, 1998. Also does not include
     159,775 shares beneficially owned by Mr. Daly or 51,150 shares subject to
     Presently Exercisable Options granted to Mr. Daly, whose employment with
     the Company terminated effective April 10, 1998.
 
                                       55
<PAGE>
 
                         DESCRIPTION OF CAPITAL STOCK
 
  The authorized capital stock of the Company consists of 75,000,000 shares of
Common Stock, $0.01 par value per share, and 25,000,000 shares of preferred
stock, $0.01 par value per share (the "Preferred Stock"). As of April 13,
1998, there were 29,531,391 shares of Common Stock outstanding held of record
by 42 stockholders and no shares of Preferred Stock outstanding.
 
  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
 
  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 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.
 
                                      56
<PAGE>
 
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.
 
  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.
 
 
                                      57
<PAGE>
 
  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. Subject to applicable law, notice of
stockholder nominations for submission at, or stockholder proposals for
business to be conducted at, an annual meeting of stockholders must be
received by the Company not less than 120 days nor more than 150 days prior to
the date of the release of the Corporation's proxy statement to stockholders
in connection with the previous year's annual meeting of stockholders, or not
later than 10 days following the day on which notice of the date of a special
meeting was given if the notice or proposal 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.
 
                                      58
<PAGE>
 
                        SHARES ELIGIBLE FOR FUTURE SALE
 
  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 the offering, the Company will have outstanding
29,917,453 shares of Common Stock. Assuming no exercise of the Underwriters'
over-allotment option, of these shares, 14,331,603 shares are freely tradable
in the public market without restriction or further registration under the
Securities Act of 1933, as amended (the "Securities Act"), except for any
shares held by "affiliates" of the Company, as that term is defined under the
Securities Act and the regulations promulgated thereunder (an "Affiliate").
The remaining 15,585,850 shares of Common Stock (the "Restricted Shares") held
by existing stockholders were sold by the Company in reliance on exemptions
from the registration requirements of the Securities Act and are "restricted
securities" within the meaning of Rule 144.
 
  Of the Restricted Shares, (i) 14,437,586 shares will be eligible for sale
beginning May 18, 1998 upon the expiration of the lockup agreements entered
into in connection with the IPO (11,636,574 of which will be subject to 90-day
lock-up agreements between certain stockholders and the Representatives of the
Underwriters), (ii) 375,141 shares will be eligible for sale beginning June
30, 1998 (185,666 of which will be subject to a 90-day lock-up agreement
between the holder thereof and the Representatives of the Underwriters), (iii)
137,500 shares will be eligible for sale beginning August 22, 1998 and (iv)
51,013 shares and 108,625 shares will be eligible for sale beginning January
10, 1999 and April 11, 1999, respectively.
 
  The holders of 12,298,225 Restricted Shares have agreed with the
Representatives that, until 90 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, one of the managing underwriters. BancAmerica Robertson Stephens
may, in its sole discretion and at any time without notice, release all or any
portion of the securities subject to the lockup-agreements.
 
  In general, under Rule 144 as currently in effect, 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 (approximately 299,174 shares)
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 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.
 
                                      59
<PAGE>
 
  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."
 
  On January 22, 1998, the Company filed a registration statement on Form S-8
under the Securities Act in order to register all 6,875,000 shares of Common
Stock reserved for issuance under the Company's Option Plan. In addition, on
April 2, 1998, the Company filed a registration statement on Form S-8 under
the Securities Act in order to register 1,500,000 shares of Common Stock for
issuance under the Company's Employee Stock Purchase 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.
 
                                      60
<PAGE>
 
                                 UNDERWRITING
 
  The Underwriters named below, acting through their representatives,
BancAmerica Robertson Stephens, Donaldson, Lufkin & Jenrette Securities
Corporation, Smith Barney Inc. and EVEREN Securities, Inc. (the
"Representatives"), have severally agreed, subject to the terms and conditions
of the Underwriting Agreement, to purchase from 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.
 
<TABLE>
<CAPTION>
                                                                        NUMBER
     UNDERWRITER                                                       OF SHARES
     -----------                                                       ---------
     <S>                                                               <C>
     BancAmerica Robertson Stephens...................................
     Donaldson, Lufkin & Jenrette Securities Corporation..............
     Smith Barney Inc.................................................
     EVEREN Securities, Inc...........................................
 
 
 
                                                                       ---------
         Total........................................................ 5,460,212
                                                                       =========
</TABLE>
 
  The Selling Stockholders have been advised by the Representatives that the
Underwriters propose to offer the shares of Common Stock to the public at the
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
completion of this offering, the public offering price, concession and
reallowance to dealers may be reduced by the Representatives. No such
reduction shall change the amount of proceeds to be received by the Selling
Stockholders as set forth on the cover page of this Prospectus.
 
  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 819,031 shares of Common Stock at
the same price per share as the Selling Stockholders receive for the 5,460,212
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 5,460,212 shares offered
hereby. If purchased, such additional shares will be sold by the Underwriters
on the same terms as those on which the 5,460,212 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.
 
  Pursuant to the terms of lock-up agreements, assuming no exercise of the
Underwriters' over-allotment option, the holders of 12,310,825 shares of the
Company's Common Stock (including the Selling Stockholders and after giving
effect to the sale of shares by such holders in this offering), have agreed,
for a period of up to 90 days from the effective date of the Registration
Statement of which this Prospectus is a part, that, subject to certain
exceptions, they will not contract to sell or otherwise dispose of any shares
of Common Stock, any options or warrants to purchase shares of Common Stock or
any securities convertible into, or exchangeable for,
 
                                      61
<PAGE>
 
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. However, BancAmerica Robertson Stephens may,
in its sole discretion, and at any time or from time to time, without notice,
release all or any portion of the securities subject to lock-up agreements.
All of the shares of Common Stock subject to the lock-up agreements will be
eligible for sale in the public market upon the expiration of the lock-up
agreements subject to Rule 144.
 
  In addition, the Company has agreed that, until 90 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
issuance of Common Stock upon the exercise of outstanding options or the
Company's grant of options and issuance of stock under the existing employee
stock option or stock purchase plans. See "Shares Eligible for Future Sale."
 
  The Representatives have advised 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.
 
                                      62
<PAGE>
 
                                 LEGAL MATTERS
 
  The validity of the shares of Common Stock offered hereby will be passed
upon for the Company and the Selling Stockholders by Arnold & Porter,
Washington, D.C. Certain legal matters in connection with this offering will
be passed upon for the Underwriters by Hale and Dorr LLP, Washington, D.C.
 
                                    EXPERTS
 
  The consolidated financial statements and schedule of the Company as of
December 31, 1996 and 1997, and for each of the years in the three-year period
ended December 31, 1997 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.
 
                             AVAILABLE INFORMATION
 
  The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, and, in accordance therewith, files reports, proxy
statements and other information with the Securities and Exchange Commission
(the "Commission"). Such reports, proxy statements and other information can
be inspected and copied at the Public Reference Section maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and
the following regional offices of the Commission: 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor,
New York, New York 10048. Copies of such material also can be obtained by mail
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, upon receipt of the fees prescribed by the rules and
regulations of the Commission. Such material also may be accessed
electronically through of the Commission's Web site on the Internet at
"http://www.sec.gov". The Company's Common Stock is listed on the New York
Stock Exchange and reports, proxy statements and other information concerning
the Company can be inspected at the offices of the New York Stock Exchange, 20
Broad Street, New York, New York 10005.
 
  The Company has filed with the Commission a Registration Statement on Form
S-1 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act with respect to the shares
of Common Stock offered pursuant to this Prospectus. This Prospectus does not
contain all of the information, exhibits and undertakings contained in the
Registration Statement, to which reference is hereby made. For further
information concerning the Company and the shares of Common Stock offered
hereby, reference is made to the Registration Statement, which may be examined
without charge at, or copies obtained upon payment of prescribed fees from,
the Commission and its regional offices at the locations listed above. Any
statements contained herein concerning the provisions of any document are not
necessarily complete, and, in such instance, reference is made to the copy of
such document filed as an exhibit to the Registration Statement or otherwise
filed with the Commission. Each such statement is qualified in its entirety by
such reference.
 
                                      63
<PAGE>
 
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
<TABLE>
<S>                                                                       <C>
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997............. F-3
Consolidated Statements of Operations for each of the years in the two-
 year period ended December 31, 1996 and the three-month and nine-month
 periods ended March 31, 1997 and December 31, 1997, respectively........ F-5
Consolidated Statements of Stockholders' Equity for each of the years in
 the two-year period ended December 31, 1996 and the three-month and
 nine-month periods ended March 31, 1997 and December 31, 1997,
 respectively............................................................ F-6
Consolidated Statements of Cash Flows for each of the years in the two-
 year period ended December 31, 1996 and the three-month and nine-month
 periods ended March 31, 1997 and December 31, 1997, respectively........ F-7
Notes to Consolidated Financial Statements............................... F-8
Unaudited Condensed Consolidated Balance Sheet as of March 31, 1998...... F-23
Unaudited Condensed Consolidated Statements of Operations for the three-
 month periods ended March 31, 1997 and 1998............................. F-24
Unaudited Condensed Consolidated Statements of Cash Flows for the three-
 month periods ended March 31, 1997 and 1998............................. F-25
Notes to Unaudited Condensed Consolidated Financial Statements........... F-26
</TABLE>
 
                                      F-1
<PAGE>
 
                         INDEPENDENT AUDITORS' REPORT
 
Board of Directors
Software AG Systems, Inc.:
 
  We have audited the accompanying consolidated balance sheets of Software AG
Systems, Inc. and subsidiaries (Successor) as of December 31, 1997, and of
Software AG Systems, Inc. and subsidiaries (a wholly owned subsidiary of
Software AG, a German software company) (Predecessor) as of December 31, 1996,
and the related consolidated statements of operations, stockholders' equity
and cash flows for the periods from April 1, 1997 to December 31, 1997
(Successor periods), and from January 1, 1997 to March 31, 1997 and for each
of the years in the two-year period ended December 31, 1996 (Predecessor
periods). 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 aforementioned Successor consolidated financial
statements present fairly, in all material respects, the financial position of
Software AG Systems, Inc. and subsidiaries as of December 31, 1997 and the
results of their operations and their cash flows for the Successor period, in
conformity with generally accepted accounting principles. Further, in our
opinion, the aforementioned Predecessor consolidated financial statements
present fairly, in all material respects, the financial position of Software
AG Systems, Inc. and subsidiaries (a wholly owned subsidiary of Software AG, a
German software company) as of December 31, 1996, and the results of their
operations and their cash flows for the Predecessor periods, in conformity
with generally accepted accounting principles.
 
  As discussed in Note 2 to the consolidated financial statements, effective
April 1, 1997, Software AG Systems, Inc. consummated a Recapitalization under
which a majority of the Company's common stock changed control. The change in
control of the Company's common stock was accounted for as a purchase business
combination. As a result of the Recapitalization, the consolidated financial
information for the periods after the Recapitalization is presented on a
different cost basis than that for the periods before the Recapitalization
and, therefore, is not comparable.
 
                                                      /s/ KPMG Peat Marwick LLP
 
Washington, D.C.
February 6, 1998
 
                                      F-2
<PAGE>
 
                   SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                          PREDECESSOR SUCCESSOR
                                                          ----------- ---------
                                                           DEC. 31,   DEC. 31,
                                                             1996       1997
                                                          ----------- ---------
                                                             (IN THOUSANDS)
<S>                                                       <C>         <C>
Assets
Current:
  Cash and cash equivalents.............................   $ 25,773   $ 50,429
  Accounts receivable:
    Invoiced and currently due..........................     35,369     40,212
    Advanced billings on maintenance....................     14,593     10,287
    Unbilled services...................................      6,029     10,384
    Installment.........................................     15,300     24,434
    Other...............................................      1,059      2,858
    Less: allowance for doubtful accounts...............     (4,980)    (9,301)
                                                           --------   --------
      Total accounts receivable.........................     67,370     78,874
  Notes receivable, SAG.................................     30,000        --
  Current portion of deferred income taxes..............      3,412      6,217
  Prepaid expenses......................................      3,298      1,371
  Other current assets..................................      2,686      2,663
                                                           --------   --------
      Total current assets..............................    132,539    139,554
Cooperation agreement, net of accumulated amortization..        --      21,737
Installment accounts receivable, net of current
 portion................................................     10,955      8,932
Property, equipment and leasehold improvements, net of
 accumulated depreciation and amortization..............      8,923     10,077
Goodwill, net of accumulated amortization...............        589     11,286
Deferred income taxes...................................      1,469      2,848
Other assets............................................      3,613      1,692
                                                           --------   --------
      Total assets......................................   $158,088   $196,126
                                                           ========   ========
</TABLE>
 
 
          See accompanying notes to consolidated financial statements.
 
                                      F-3
<PAGE>
 
                   SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
 
                    CONSOLIDATED BALANCE SHEETS--(CONTINUED)
 
<TABLE>
<CAPTION>
                                                          PREDECESSOR SUCCESSOR
                                                          ----------- ---------
                                                           DEC. 31,   DEC. 31,
                                                             1996       1997
                                                          ----------- ---------
                                                             (IN THOUSANDS)
<S>                                                       <C>         <C>
Liabilities and Stockholders' Equity
Current:
  Accounts payable.......................................  $  6,773   $  8,545
  Accrued payroll and employee benefits..................    10,792     10,170
  Payable to SAG.........................................    33,317     10,050
  Income taxes payable...................................     3,106      1,752
  Other current liabilities..............................     5,265      4,274
  Current portion of deferred revenues, net of deferred
   royalties of $7,923,000 in 1996 and $11,245,000 in
   1997..................................................    42,865     42,711
                                                           --------   --------
      Total current liabilities..........................   102,118     77,502
Deferred revenues, net of deferred royalties of
 $7,415,000 in 1996 and $8,880,000 in 1997...............    23,472     28,806
Deferred gain............................................     2,690        --
                                                           --------   --------
      Total liabilities..................................   128,280    106,308
 
Commitments and contingencies
Stockholders' equity:
  Common stock ($0.01 par value; 55,000,000 shares
   authorized, 27,500,000 shares issued and outstanding
   in 1996; and 75,000,000 shares authorized, 32,677,500
   shares issued in 1997)................................       275        327
  Additional paid-in capital.............................    11,877     84,185
  Retained earnings......................................    17,656      5,338
  Treasury stock, at cost-no shares in 1996 and 3,162,500
   shares in 1997........................................       --         (32)
                                                           --------   --------
    Total stockholders' equity...........................    29,808     89,818
                                                           --------   --------
      Total liabilities and stockholders' equity.........  $158,088   $196,126
                                                           ========   ========
</TABLE>
 
 
          See accompanying notes to consolidated financial statements.
 
                                      F-4
<PAGE>
 
                   SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                                      PREDECESSOR                    SUCCESSOR
                          ---------------------------------------- -------------
                             YEAR         YEAR       THREE MONTHS   NINE MONTHS
                            ENDED        ENDED          ENDED          ENDED
                           DEC. 31,     DEC. 31,       MAR. 31,      DEC. 31,
                             1995         1996           1997          1997
                          ------------ ------------ -------------- -------------
                           (IN THOUSANDS, EXCEPT PER SHARE DOLLAR AMOUNTS)
<S>                       <C>          <C>          <C>            <C>
Revenues:
  Software license
   fees.................  $     52,061 $     52,163   $     7,341   $     56,796
  Maintenance fees......        65,307       69,702        17,352         55,337
  Professional services
   fees.................        35,194       34,975         9,948         34,450
                          ------------ ------------   -----------   ------------
    Total revenues......       152,562      156,840        34,641        146,583
                          ------------ ------------   -----------   ------------
Cost of revenues:
  Software license......        15,244       14,120         2,098         17,811
  Maintenance...........        23,488       25,885         6,205         22,559
  Professional
   services.............        32,591       32,966         9,211         28,356
                          ------------ ------------   -----------   ------------
    Total cost of
     revenues...........        71,323       72,971        17,514         68,726
                          ------------ ------------   -----------   ------------
Gross profit............        81,239       83,869        17,127         77,857
                          ------------ ------------   -----------   ------------
Operating expenses:
  Software product
   development..........           900        1,372           --           1,093
  Sales and marketing...        52,512       48,677         7,317         31,003
  Administrative and
   general..............        24,639       28,539         8,500         27,258
  Write-off of acquired
   in-process research
   and development
   costs................           --           --            --           6,051
                          ------------ ------------   -----------   ------------
    Total operating
     expenses...........        78,051       78,588        15,817         65,405
                          ------------ ------------   -----------   ------------
Income from operations..         3,188        5,281         1,310         12,452
Other income and ex-
 pense, net.............         2,449        5,230           978          1,017
                          ------------ ------------   -----------   ------------
Income before income
 taxes..................         5,637       10,511         2,288         13,469
Income tax provision....         2,311        4,302           915          8,131
                          ------------ ------------   -----------   ------------
Net income..............  $      3,326 $      6,209   $     1,373   $      5,338
                          ============ ============   ===========   ============
Dividends...............  $      1,700 $      9,000   $        --   $         --
                          ============ ============   ===========   ============
Net income per common
 share..................  $       0.12 $       0.23   $      0.06   $       0.21
                          ============ ============   ===========   ============
Net income per common
 share-assuming
 dilution...............  $       0.11 $       0.21   $      0.05   $       0.20
                          ============ ============   ===========   ============
Shares used in computing
 net income per common
 share:
  Net income per common
   share................        27,500       27,500        24,338         25,119
  Net income per common
   share-assuming
   dilution.............        29,056       29,056        25,894         26,685
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                      F-5
<PAGE>
 
                   SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
 
<TABLE>
<CAPTION>
                          COMMON STOCK
                         $0.01 PAR VALUE  ADDITIONAL                        TOTAL
                         ----------------  PAID-IN-  RETAINED  TREASURY STOCKHOLDERS'
                         SHARES   AMOUNT   CAPITAL   EARNINGS   STOCK      EQUITY
                         -------- ------- ---------- --------  -------- -------------
                                               (IN THOUSANDS)
<S>                      <C>      <C>     <C>        <C>       <C>      <C>
Predecessor:
  Balances at December
   31, 1994.............   27,500  $  275  $11,877   $18,821     $--       $30,973
  Net income............      --      --       --      3,326      --         3,326
  Cash dividends ($0.06
   per share)...........      --      --       --     (1,700)     --        (1,700)
                         --------  ------  -------   -------     ----      -------
  Balances at December
   31, 1995.............   27,500     275   11,877    20,447      --        32,599
  Net income............      --      --       --      6,209      --         6,209
  Cash dividends ($0.33
   per share)...........      --      --       --     (9,000)     --        (9,000)
                         --------  ------  -------   -------     ----      -------
  Balances at December
   31, 1996.............   27,500     275   11,877    17,656      --        29,808
  Net income............      --      --       --      1,373      --         1,373
                         --------  ------  -------   -------     ----      -------
  Balances at March 31,
   1997.................   27,500  $  275  $11,877   $19,029     $--       $31,181
                         ========  ======  =======   =======     ====      =======
-------------------------------------------------------------------------------------
Successor:
  Initial
   capitalization.......   27,500  $  275  $37,108   $   --      $(32)     $37,351
  Compensation expense
   on options granted...      --      --       323       --       --           323
  Net proceeds from
   initial public
   offering.............    5,178      52   46,754       --       --        46,806
  Net income............      --      --       --      5,338      --         5,338
                         --------  ------  -------   -------     ----      -------
  Balances at December
   31, 1997.............   32,678  $  327  $84,185   $ 5,338     $(32)     $89,818
                         ========  ======  =======   =======     ====      =======
</TABLE>
 
 
          See accompanying notes to consolidated financial statements.
 
                                      F-6
<PAGE>
 
                   SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                                                     PREDECESSOR                  SUCCESSOR
                                                                      ----------------------------------------- -------------
                                                                          YEAR          YEAR      THREE MONTHS   NINE MONTHS
                                                                          ENDED         ENDED         ENDED         ENDED
                                                                      DEC. 31, 1995 DEC. 31, 1996 MAR. 31, 1997 DEC. 31, 1997
                                                                      ------------- ------------- ------------- -------------
                                                                                          (IN THOUSANDS)
<S>                                                                   <C>           <C>           <C>           <C>
Cash flows from operating activities:
 Net income..........................................................   $  3,326      $  6,209       $ 1,373      $  5,338
 Adjustments to reconcile net income to net cash provided by
  operating activities:
 Depreciation and amortization.......................................      3,921         3,660           941         6,205
 Loss (gain) on sales of property and equipment......................         67           156           --             (5)
 Deferred income taxes...............................................       (408)       (1,242)          --         (4,184)
 Deferred gain.......................................................        --           (140)          (36)          --
 Net proceeds from sales of accounts receivable......................     28,852        28,448           --         24,314
 Write-off of acquired in-process research and development costs.....        --            --            --          6,051
 Write-off of short-term investment..................................        --            --            --          1,529
 Compensation expense on options granted.............................        --            --            --            323
 Change in:
 Accounts receivable, excluding net proceeds from sales..............    (47,331)      (28,674)       10,996       (43,074)
 Prepaid expenses....................................................        348        (1,698)       (3,894)        4,313
 Other current assets................................................        225        (1,870)        3,083        (2,988)
 Accounts payable....................................................       (817)        3,472           673           779
 Accrued payroll and employee benefits...............................      3,181        (2,194)       (3,632)        2,059
 Payable to SAG......................................................      8,495        16,185         6,265        (1,336)
 Other current liabilities...........................................        646         1,571          (927)         (558)
 Income taxes payable................................................      1,678         1,285        (1,711)         (399)
 Deferred revenues, net..............................................     27,435        12,285        (2,705)        4,476
                                                                        --------      --------       -------      --------
   Net cash provided by operating activities.........................     29,618        37,453        10,426         2,843
                                                                        --------      --------       -------      --------
Cash flows from investing activities:
 Additions to property, equipment and leasehold improvements.........     (1,839)       (3,740)         (208)       (4,084)
 Proceeds from sales of property and equipment.......................        200         9,044           --              2
 Notes receivable, SAG...............................................    (20,000)      (10,000)          --            --
 Purchase of Cooperation Agreement...................................        --            --            --        (22,612)
 Change in other assets, net.........................................     (2,137)          443           --            --
 Acquisition, net of cash received...................................        --            --            --         (6,325)
                                                                        --------      --------       -------      --------
   Net cash used in investing activities.............................    (23,776)       (4,253)         (208)      (33,019)
                                                                        --------      --------       -------      --------
Cash flows from financing activities:
 Payment of long-term obligations....................................     (3,124)          --            --            --
 Dividends paid......................................................     (1,700)       (9,000)          --            --
 Net proceeds from issuance of common stock..........................        --            --            --         46,806
 Repurchase of common stock..........................................        --            --            --        (33,919)
 Issuance of common stock............................................        --            --            --         31,727
                                                                        --------      --------       -------      --------
   Net cash provided by (used in) financing activities...............     (4,824)       (9,000)          --         44,614
                                                                        --------      --------       -------      --------
Net increase in cash and cash equivalents............................      1,018        24,200        10,218        14,438
Cash and cash equivalents, beginning.................................        555         1,573        25,773        35,991
                                                                        --------      --------       -------      --------
Cash and cash equivalents, ending....................................   $  1,573      $ 25,773       $35,991      $ 50,429
                                                                        ========      ========       =======      ========
Non-cash investing and financing activity:
 Deferred gain on sale leaseback of customer support facility........   $    --       $  2,830       $   --       $    --
                                                                        ========      ========       =======      ========
Supplemental disclosures:
 Interest paid.......................................................   $    350      $    103       $   --       $     14
                                                                        ========      ========       =======      ========
 Income taxes paid, net of refunds...................................   $    387      $  3,481       $ 3,026      $  7,661
--------------------------------------------------
                                                                        ========      ========       =======      ========
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                      F-7
<PAGE>
 
                  SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
(1) DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Reporting Entity and Principles of Consolidation
 
  Prior to March 31, 1997, Software AG Systems, Inc. and subsidiaries (the
"Company") was a wholly owned subsidiary of Software AG, a German software
company ("SAG"). As is more fully described in Note 2, on March 31, 1997, the
Company consummated a recapitalization agreement under which the Company
repurchased from SAG 24,750,000 shares of common stock, and certain senior
management of the Company and Thayer Equity Investors III, L.P. ("Thayer")
acquired approximately 89% of the then outstanding common stock of the Company
(the "Recapitalization").
 
  The consolidated financial statements include the accounts of Software AG
Systems, Inc. and its wholly owned subsidiaries. All inter-company balances
and transactions between the Company and its wholly owned subsidiaries have
been eliminated.
 
 Description of Operations
 
  The Company provides software products and professional services utilized by
organizations to build and enhance enterprise-level applications. The
Company's products are used for mission-critical applications that require
reliability, scalability and security, such as customer billing systems,
financial accounting systems and inventory management. The Company's business
is focused on database management and applications development products. The
Company markets and sells its software products and services, as well as
third-party products, through direct and indirect channels in North America,
South America, Japan and Israel.
 
 Revenue Recognition
 
  The Company recognizes revenue in accordance with the provisions of the
American Institute of Certified Public Accountants Statement of Position No.
91-1, Software Revenue Recognition.
 
  Product license revenues are recognized when there is an executed license
agreement, the software and authorization code have been delivered,
collectibility from the customer is probable and there are no significant
remaining obligations to the customer.
 
  Maintenance revenues, which include unspecified when-and-if deliverable
software upgrades, user documentation and technical support for software
products, are deferred and recognized on a straight-line basis over the term
of the maintenance agreement, generally one year.
 
  Customer training revenues and revenues from time and material type
professional consulting and custom application contracts are recognized as the
services are provided and the work is performed. Revenues from long-term fixed
price professional consulting and custom application contracts are accounted
for under the percentage of completion method. When estimates of costs, on
long-term fixed price contracts, indicate a loss, such a loss is provided for
currently.
 
  Sales of enterprise license agreements, which generally bundle a combination
of products, technical services and professional consulting services, are
accounted for according to their component parts using the criteria described
above.
 
 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.
 
                                      F-8
<PAGE>
 
                  SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
 Property, Equipment and Leasehold Improvements
 
  Property, equipment and leasehold improvements are recorded at cost.
Depreciation of property and equipment is provided on a straight-line basis
over the estimated useful asset lives, generally 31.5 years for property and
three to five years for equipment. Leasehold improvements are amortized on a
straight-line basis over the lesser of the respective lease term or estimated
useful asset lives.
 
 Intangible Assets
 
  Goodwill, which represents the excess of purchase price over fair market
value of net assets acquired, and other intangible assets are amortized on a
straight-line basis over the expected periods to be benefited, generally 10
years. The Company assesses the recoverability of intangible assets by
determining whether the amortization of the assets over the remaining lives
can be recovered through undiscounted future operating cash flows. The amount
of impairment, if any, is measured based on projected discounted future
operating cash flows. The assessment of the recoverability of intangible
assets will be impacted if estimated future operating cash flows are not
achieved.
 
 Income Taxes
 
  The Company uses the asset and liability method to account for income taxes.
Under the asset and liability method, deferred income taxes are recognized for
the future tax consequences attributable to future years for differences
between the financial statement carrying amounts and the tax bases of existing
assets and liabilities. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The
effect on deferred taxes of a change in tax rates is recognized in income in
the period that includes the enactment date.
 
 Foreign Currency Translation
 
  The local currencies of the Company's foreign subsidiaries are the
functional currencies. The assets and liabilities of foreign subsidiaries are
translated into U.S. dollars at current exchange rates, and the resulting
translation gains and losses are included as an adjustment to stockholders'
equity. Revenue and expense accounts of these operations are translated at
average exchange rates prevailing during the year. Transaction gains and
losses relate to foreign currency denominated receivables recorded in the
financial statements of the Company's U.S. operations, and are reflected in
income. There were no material foreign currency adjustments.
 
                                      F-9
<PAGE>
 
                  SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
 Net Income per Common Share
 
  The Company reports earnings per share under Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128"). In
accordance with SFAS No. 128 requirements, the Company presents basic and
diluted earnings per share and has amended all previous earnings per share
calculations. Basic earnings per share is based on income available to common
stockholders divided by the weighted average number of common shares
outstanding. Diluted earnings per share is based on income available to common
stockholders divided by the sum of the weighted average number of common
shares outstanding and all potential common shares which are dilutive. The
following information is a reconciliation of the amounts used in these
calculations:
 
<TABLE>
<CAPTION>
                                           PREDECESSOR                  SUCCESSOR
                            ----------------------------------------- -------------
                                YEAR          YEAR      THREE MONTHS   NINE MONTHS
                                ENDED         ENDED         ENDED         ENDED
                            DEC. 31, 1995 DEC. 31, 1996 MAR. 31, 1997 DEC. 31, 1997
                            ------------- ------------- ------------- -------------
                              (IN THOUSANDS, EXCEPT FOR PER SHARE DOLLAR AMOUNTS)
   <S>                      <C>           <C>           <C>           <C>
   Numerator:
    Net income.............    $3,326        $6,209        $1,373        $5,338
                               ======        ======        ======        ======
   Denominator:
    Basic:
     Weighted average
      shares outstanding...    27,500        27,500        24,338        25,119
    Effect of dilutive
     securities:
     Stock options.........     1,556         1,556         1,556         1,566
                               ------        ------        ------        ------
    Diluted:
     Weighted average
      shares outstanding--
      assuming dilution....    29,056        29,056        25,894        26,685
                               ======        ======        ======        ======
   EPS:
    Net income per common
     share.................    $ 0.12        $ 0.23        $ 0.06        $ 0.21
    Net income per common
     share--assuming
     dilution..............      0.11          0.21          0.05          0.20
</TABLE>
 
 Stock Option Plan
 
  The Company accounts for issuance of stock options in accordance with
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("SFAS No. 123"). SFAS No. 123 permits entities to
recognize as expense over the vesting period the fair value of all stock-based
awards on the date of grant. Alternatively, SFAS No. 123 also allows entities
to continue to apply the provisions of Accounting Principles Board Opinion No.
25 ("APB No. 25") and provide pro forma net income and pro forma earnings per
share disclosures for employee stock option grants made in 1997 and future
years as if the fair-value based method defined in SFAS No. 123 had been
applied. Under APB No. 25, compensation expense would be recorded on the date
of the grant only if the current market price of the underlying stock exceeded
the exercise price. The Company has elected to continue to apply the
provisions of APB No. 25 and provide the pro forma disclosure provisions of
SFAS No. 123.
 
 Financial Statement Presentation
 
  The historical financial information set forth in these consolidated
financial statements for the periods ended, or as of the dates prior to March
31, 1997 reflect the results of operations of the Company prior to the
Recapitalization when the Company was a wholly owned subsidiary of SAG and is
captioned as "Predecessor". The historical financial information subsequent to
March 31, 1997 reflects the consolidated financial position and results of
operations subsequent to the Recapitalization and is captioned as "Successor".
 
                                     F-10
<PAGE>
 
                  SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
 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.
 
 Reclassifications
 
  Certain amounts in 1996 and 1995 have been reclassified to conform to the
fiscal 1997 presentation.
 
(2) RECAPITALIZATION OF THE COMPANY
 
  On March 31, 1997, the Company consummated the Recapitalization under which
the Company repurchased from its former parent, SAG, 24,750,000 shares of
common stock and sold 21,450,000 shares of common stock to Thayer and certain
of the Company's senior managers. As a result of this change in control, the
acquisition by Thayer and such managers was accounted for as a purchase
business combination, and as such the fair value of the Company's assets and
liabilities was recorded as of April 1, 1997.
 
  Prior to the consummation of the Recapitalization, the Company entered into
a perpetual (unless otherwise terminated by the written agreement of the
parties) cooperation agreement ("Cooperation Agreement") with SAG that
terminated and superseded the license agreement dated January 1, 1995. As
consideration for the Cooperation Agreement, the Company paid SAG
approximately $22,600,000. Under the Cooperation Agreement, each of the
Company and SAG are required to pay the other royalties of 24% of net revenues
from sales of licenses of, and technical services on, each other's products
for the initial 20 years of the perpetual term of the agreement. For calendar
years 1997 through 2000, the Company is required to pay SAG minimum annual
royalties of $21,000,000, provided that SAG's worldwide product and technical
services revenues for each of those years are at least equal to SAG's 1996
worldwide revenues. In the event of a decrease in SAG's worldwide revenues,
the minimum annual royalty requirement will be reduced proportionately.
 
  Pursuant to the Recapitalization, Thayer and certain of the Company's senior
managers acquired approximately an 89% interest in the Company for
approximately $31,500,000. The determination of fair value allocated to the
identifiable assets and liabilities of the Company has been made by management
based on the nature of the assets and liabilities acquired, and general
economic factors. Based on this allocation, the fair value of the Company's
Cooperation Agreement has been recorded at $23,500,000, based on an
independent appraisal. The amortization period for the Cooperation Agreement
is ten years. The fair value of the Company's remaining assets and liabilities
has been presumed to be equal to the book value as of the date of the
acquisition. Based on allocation of the purchase price to the net assets and
liabilities, an excess of purchase price over net assets acquired (goodwill)
of $6,402,000 was recorded. Such goodwill is being amortized on a straight-
line basis over ten years. At December 31, 1997, accumulated amortization on
the Cooperation Agreement and the goodwill was $1,763,000 and $480,000,
respectively.
 
(3) INITIAL PUBLIC OFFERING
 
  In September 1997, the Company's Board of Directors authorized the Company
to file a Registration Statement on Form S-1 with the Securities and Exchange
Commission permitting the Company to sell shares of its common stock to the
public. The Company's Board of Directors also approved a 275-for-1 stock split
which became effective on November 17, 1997. Common share and per share data
in these consolidated financial statements have been retroactively adjusted to
reflect such stock split. Additionally, the Company's Certificate of
Incorporation was amended and restated to authorize an additional 20,000,000
shares of $0.01 par value common stock and an additional 11,250,000 shares of
$0.01 par value preferred stock, for a total of 75,000,000 authorized
 
                                     F-11
<PAGE>
 
                  SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
shares of common stock and 25,000,000 authorized shares of $0.01 par value
preferred stock. The Company had previously authorized 13,750,000 shares of
$0.01 par value preferred stock on March 14, 1997.
 
  On November 21, 1997, 7,700,000 shares of the Company's common stock was
sold to the public at $10 per share, of which 3,100,000 shares were sold by
certain stockholders of the Company, and 4,600,000 shares were sold by the
Company ("IPO"). On December 17, 1997, the Company and certain stockholders
combined sold 1,155,000 shares of common stock at $10 per share to cover the
over-allotment option exercised by the underwriters. The aggregate proceeds,
net of underwriting discounts and commissions, to the Company and certain
stockholders from these transactions were $48,151,000 and $34,201,000,
respectively.
 
(4) ACQUISITION
 
  On September 30, 1997, the Company acquired 100% of the issued and
outstanding shares of the common stock of R.D. Nickel and Associates, Inc.
("R.D. Nickel"). R.D. Nickel is a software company that has a family of
application development products and that has been the exclusive distributor
of SAG's products in Canada since 1973. The transaction was accounted for
using the purchase method of accounting for a business combination. The
aggregate purchase price of Cdn$14,000,000 (US$10,130,000) was funded through
a cash payment of Cdn$7,000,000 (US$5,065,000) and a note payable of
Cdn$7,000,000 (US$5,065,000). The note payable was paid in November 1997 with
the proceeds from the IPO.
 
  In connection with the transaction, the Company recorded a $6,051,000 non-
recurring charge against earnings for in-process research and development
costs. The remaining excess purchase price of $4,960,000 represents goodwill.
The related amortization period for the goodwill is ten years.
 
  As of October 1, 1997, the operating results of R.D. Nickel have been
consolidated with the Company's operating results.
 
  The R.D. Nickel acquisition was not determined to be significant to the
operations or financial position of the Company; accordingly, the pro forma
financial information has not been presented.
 
(5) CONCENTRATIONS OF CREDIT RISK AND FAIR VALUES OF FINANCIAL INSTRUMENTS
 
 Concentrations of Credit Risk
 
  Financial instruments that potentially subject the Company to credit risk
include accounts receivable, cash and cash equivalents. Management believes
that credit risk related to the Company's accounts receivable is limited due
to a large number of customers in differing industries and geographic areas.
The Company does not require collateral for accounts receivable. Historically,
the Company has not experienced significant losses on accounts receivable
except in isolated situations. The Company maintains depository relationships
with several banks. At times, the Company's cash deposits may exceed federally
insured limits. Periodically, the Company invests excess cash in low risk,
highly liquid repurchase agreements and other instruments through high credit
quality financial institutions. The Company has not experienced any losses in
its depository accounts or short-term investments and management believes that
the Company is not exposed to any significant credit risks.
 
 Fair Value of Financial Instruments
 
  The carrying amounts of cash, accounts receivable, accounts payable, payable
to SAG, and amounts included in other current assets and current liabilities
that meet the definition of a financial instrument, approximate fair value
because of the short-term nature of these amounts.
 
  The carrying amount of installment accounts receivable, net of related
deferred revenues approximates the fair value.
 
                                     F-12
<PAGE>
 
                  SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
(6) ACCOUNTS RECEIVABLE
 
  Total current and non-current accounts receivable (including installment)
consist of the following:
 
<TABLE>
<CAPTION>
                                                           PREDECESSOR SUCCESSOR
                                                           ----------- ---------
                                                            DEC. 31,   DEC. 31,
                                                              1996       1997
                                                           ----------- ---------
                                                              (IN THOUSANDS)
   <S>                                                     <C>         <C>
   Domestic...............................................   $73,924    $83,659
   International..........................................     9,381     13,448
   Less: allowance for doubtful accounts..................    (4,980)    (9,301)
                                                             -------    -------
                                                             $78,325    $87,806
                                                             =======    =======
</TABLE>
 
 Installment Accounts Receivable
 
  Installment accounts receivable represent unbilled receivables from
enterprise license agreements and other long-term and short-term contracts
with deferred invoicing terms.
 
  Installment accounts receivable include:
 
<TABLE>
<CAPTION>
                                                           PREDECESSOR SUCCESSOR
                                                           ----------- ---------
                                                            DEC. 31,   DEC. 31,
                                                              1996       1997
                                                           ----------- ---------
                                                              (IN THOUSANDS)
   <S>                                                     <C>         <C>
   Gross installment accounts receivable..................   $27,258    $35,172
   Less: unearned interest................................     1,003      1,806
                                                             -------    -------
                                                              26,255     33,366
   Less: current portion..................................    15,300     24,434
                                                             -------    -------
                                                             $10,955    $ 8,932
                                                             =======    =======
</TABLE>
 
  The effective interest rate on the installment accounts receivable, net of
related deferred revenues, at December 31, 1996 and 1997 was approximately 9%.
 
  At December 31, 1997, installment accounts receivable are scheduled to be
invoiced as follows:
 
<TABLE>
<CAPTION>
   YEARS ENDING DECEMBER 31,                                          AMOUNT
   -------------------------                                      --------------
                                                                  (IN THOUSANDS)
   <S>                                                            <C>
   1998..........................................................    $25,894
   1999..........................................................      6,535
   2000..........................................................      1,558
   2001..........................................................      1,185
                                                                     -------
                                                                     $35,172
                                                                     =======
</TABLE>
 
  In 1996 and 1997, the Company sold installment accounts receivable relating
to certain enterprise license agreements and other long-term contracts to
unrelated financing companies, receiving net proceeds of $28,448,000 and
$24,314,000, respectively. The installment accounts receivable sold include
those relating to product and license fees, technical services, and
professional consulting services. Under the terms of the agreements with the
financing companies, the Company continues to service the receivables sold,
including invoicing and collection, and makes payments to the financing
companies under pre-determined amortization schedules based on the scheduled
invoicing dates of the receivables sold. The amortization schedules provide
rates of return to the financing companies ranging from 8.5% to 8.9%.
 
                                     F-13
<PAGE>
 
                  SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The agreements allow for substitution of contracts for early terminations
and require the Company to repurchase contracts that cease to meet eligibility
requirements, such as those contracts that become 90 days past due. At
December 31, 1996 and 1997, the Company remained contingently liable under the
recourse provisions for $44,801,000 and $47,927,000, respectively. The
Company's allowance for doubtful accounts is maintained at a level that
management believes is sufficient to cover potential losses under the recourse
provisions on receivables sold.
 
  Under the terms of the agreements, the Company is required to maintain
specified amounts of net worth and cash availability, and a debt to equity
ratio that does not exceed a specified amount. If the Company fails to
maintain these specified amounts, the financing companies may assume the
servicing rights on receivables sold.
 
 Unbilled Services
 
  Unbilled services relate primarily to long-term professional consulting
services and custom application contracts accounted for using the percentage
of completion method. Billings on these contracts generally are tied to
achieving specific milestones.
 
  Unbilled services include:
 
<TABLE>
<CAPTION>
                                                           PREDECESSOR SUCCESSOR
                                                           ----------- ---------
                                                            DEC. 31,   DEC. 31,
                                                              1996       1997
                                                           ----------- ---------
                                                              (IN THOUSANDS)
   <S>                                                     <C>         <C>
   Unbilled work in process...............................   $6,775     $ 9,524
   Retainage..............................................    1,474       1,761
                                                             ------     -------
                                                              8,249      11,285
   Less: advance billings and prepayments.................    2,220         901
                                                             ------     -------
                                                             $6,029     $10,384
                                                             ======     =======
</TABLE>
 
(7) PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
 
<TABLE>
<CAPTION>
                                                           PREDECESSOR SUCCESSOR
                                                           ----------- ---------
                                                            DEC. 31,   DEC. 31,
                                                              1996       1997
                                                           ----------- ---------
                                                              (IN THOUSANDS)
   <S>                                                     <C>         <C>
   Computer equipment.....................................   $18,138    $22,524
   Leasehold improvements.................................     9,021      9,188
   Furniture and other equipment..........................     7,713      8,162
                                                             -------    -------
                                                              34,872     39,874
   Less: accumulated depreciation and amortization........    25,949     29,797
                                                             -------    -------
                                                             $ 8,923    $10,077
                                                             =======    =======
</TABLE>
 
  Depreciation and amortization for 1995, 1996, three months ended March 31,
1997 and nine months ended December 31, 1997, was $3,733,000, $3,473,000,
$896,000 and $2,952,000, respectively.
 
(8) SALE OF CUSTOMER SUPPORT FACILITY
 
  In 1996, the Company recorded a sale-leaseback transaction for its customer
support facility. In connection with the sale, the Company realized a gain of
$2,830,000, which was being recognized on a straight-line basis over the term
of the related operating lease. In connection with the Recapitalization of the
Company (Note 2) in March 1997, no value was recorded in the financial
statements for this deferred gain.
 
                                     F-14
<PAGE>
 
                  SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
(9) TRANSACTIONS WITH RELATED PARTY
 
 Royalties
 
  In 1994, the Company licensed and serviced SAG products under a pre-existing
license agreement pursuant to which the Company was required to make payments
to SAG based on a specified percentage of the net sales amount for licenses
of, and technical services on, SAG's products. Effective January 1, 1995, the
Company and SAG entered into a new license agreement whereby the Company was
required to pay royalties of 24% of such net sales amounts. For 1995, 1996 and
for the three months ended March 31, 1997, royalty expense related to SAG's
products was $23,887,000, $26,058,000 and $5,683,000, respectively.
 
  Under the license agreement, SAG pays royalties to the Company on sales of
the Company's products under the same terms. For 1995, 1996 and for the three
months ended March 31, 1997, royalty revenues related to the Company's
products were $295,000, $294,000 and $339,000, respectively.
 
  In connection with the Recapitalization (Note 2), the Company entered into
the Cooperation Agreement under which the Company paid $23,595,000 of
royalties to SAG and SAG paid royalties of $300,000 to the Company for the
nine months ended December 31, 1997.
 
 Cost Reimbursements
 
  As an accommodation to SAG, the Company houses certain of SAG's product
development and quality assurance personnel. SAG reimburses the Company for
the costs incurred related to such product development and quality assurance
activities. All intellectual property resulting from this work is the sole
property of SAG. The reimbursements from SAG are netted against costs incurred
and included in software product development costs in the statement of
operations. Reimbursements for 1995, 1996, for the three months ended March
31, 1997 and for the nine months ended December 31, 1997 were $8,767,000,
$15,931,000, $3,416,000 and $7,406,000, respectively.
 
 Notes Receivable/Payable
 
  In 1995, the Company loaned $20,000,000 to SAG, which originally was
scheduled to be repaid in 2000. In 1996, the Company loaned an additional
$10,000,000 to SAG, which originally was scheduled to be repaid in 2001.
Interest at 6.5% and 7%, respectively, was payable quarterly on the 1995 and
1996 loans. In March 1997, the Company and SAG agreed to offset the entire
balance of the notes receivable from SAG as of December 31, 1996 against the
payable to SAG. Interest earned for 1995, 1996 and for the three months ended
March 31, 1997 was $280,000, $1,590,000 and $333,000, respectively.
 
  The payable to SAG of $33,317,000 and $10,050,000 at December 31, 1996 and
1997, respectively, includes royalties due under the previous license
agreement and under the Cooperation Agreement on sales of both product
licenses and technical services, as well as net amounts due on other
transactions between the Company and SAG. These amounts are non-interest
bearing.
 
  In 1995, SAG loaned $2,500,000 to the Company, which was repaid during the
year. Interest expense on this note was $119,000, computed at 8%.
 
 Dividends
 
  In 1995 and 1996, the Company paid dividends of $1,700,000 and $9,000,000,
respectively, to SAG, which at the time owned 100% of the outstanding common
stock of the Company. No dividends were paid during 1997 to SAG, and there are
no plans for future dividend payments.
 
                                     F-15
<PAGE>
 
                  SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
(10) INCOME TAXES
 
  Income tax expense consisted of:
 
<TABLE>
<CAPTION>
                                                                                                PREDECESSOR           SUCCESSOR
                                                                                         ---------------------------  ---------
                                                                                                             THREE      NINE
                                                                                           YEAR     YEAR     MONTHS    MONTHS
                                                                                          ENDED    ENDED     ENDED      ENDED
                                                                                         DEC. 31, DEC. 31,  MAR. 31,  DEC. 31,
                                                                                           1995     1996      1997      1997
                                                                                         -------- --------  --------  ---------
                                                                                                    (IN THOUSANDS)
   <S>                                                                                   <C>      <C>       <C>       <C>
   Current expense:
     Federal............................................................................  $1,744  $ 4,167   $ 1,196    $ 6,226
     State..............................................................................     274      586       258      1,551
     Foreign............................................................................     701      791       604      3,395
                                                                                          ------  -------   -------    -------
                                                                                           2,719    5,544     2,058     11,172
                                                                                          ------  -------   -------    -------
   Deferred benefit:
     Federal............................................................................    (265)  (1,136)     (959)    (2,560)
     State..............................................................................    (143)    (106)     (184)      (481)
                                                                                          ------  -------   -------    -------
                                                                                            (408)  (1,242)   (1,143)    (3,041)
                                                                                          ------  -------   -------    -------
                                                                                          $2,311  $ 4,302   $   915    $ 8,131
                                                                                          ======  =======   =======    =======
</TABLE>
 
  Income tax expense for 1995, 1996, three months ended March 31, 1997 and
nine months ended December 31, 1997, differed from the amounts computed by
applying the U.S. federal income tax rate of 34%, 34%, 35% and 35%,
respectively, to pretax income as a result of the following:
 
<TABLE>
<CAPTION>
                                                                                                PREDECESSOR         SUCCESSOR
                                                                                         -------------------------- ---------
                                                                                                            THREE     NINE
                                                                                           YEAR     YEAR    MONTHS   MONTHS
                                                                                          ENDED    ENDED    ENDED     ENDED
                                                                                         DEC. 31, DEC. 31, MAR. 31, DEC. 31,
                                                                                           1995     1996     1997     1997
                                                                                         -------- -------- -------- ---------
                                                                                                    (IN THOUSANDS)
   <S>                                                                                   <C>      <C>      <C>      <C>
   Computed "expected" tax expense......................................................  $1,917   $3,573    $801    $4,714
   Increase (reduction) in income taxes resulting from:
     State income taxes, net of federal benefit.........................................      86      314      48       696
     Expenses, principally meals and entertainment, not deductible......................     277      224       6       209
     Amortization and write-off of intangibles..........................................     --       --       49     2,439
     Other, net.........................................................................      31      191      11        73
                                                                                          ------   ------    ----    ------
                                                                                          $2,311   $4,302    $915    $8,131
                                                                                          ======   ======    ====    ======
</TABLE>
 
                                     F-16
<PAGE>
 
                  SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The tax effects of temporary differences that give rise to significant
portions of deferred income tax assets and liabilities consist of:
 
<TABLE>
<CAPTION>
                                                          PREDECESSOR SUCCESSOR
                                                          ----------- ---------
                                                           DEC. 31,   DEC. 31,
                                                             1996       1997
                                                          ----------- ---------
                                                             (IN THOUSANDS)
   <S>                                                    <C>         <C>
   Deferred tax assets arising from deductible temporary
    differences:
     Accrued compensation costs and other expenses......    $1,533     $2,679
     Allowance for doubtful accounts....................     1,879      3,617
     Depreciation and amortization......................       917      1,473
     Deferred gain--installment method..................     1,022      1,000
     Investments........................................       --         642
                                                            ------     ------
                                                             5,351      9,411
   Deferred tax liabilities arising from taxable
    temporary differences:
     Leases of product licenses.........................       470        346
                                                            ------     ------
   Net deferred income taxes............................     4,881      9,065
   Less: current portion, deferred tax assets...........     3,412      6,217
                                                            ------     ------
   Non-current portion, deferred tax assets.............    $1,469     $2,848
                                                            ======     ======
</TABLE>
 
  In assessing the realization of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Based upon the
level of historical taxable income and projections for future taxable income
over the periods for which the deferred tax assets are deductible, management
believes that it is more likely than not that the Company will realize the
benefits of these deductible differences. The amount of the deferred tax asset
considered realizable, however, could be reduced in the near term if estimates
of future taxable income are reduced.
 
(11) RETIREMENT PLANS
 
  The Company has a retirement plan covering substantially all of its
employees. This plan meets the requirements of Section 401(k) of the Internal
Revenue Code. The Company matches employee contributions and may make
additional contributions based on the Company's profitability. For 1995, 1996,
three months ended March 31, 1997 and nine months ended December 31, 1997, the
Company's matching (and total) contributions were $1,789,000, $1,854,000,
$696,000 and $1,190,000, respectively.
 
  The Company also has entered into deferred compensation agreements with
certain key executives. Under these agreements, the executives are credited
with annual pre-determined amounts and amounts based on bonuses received, and
earn interest on the deferred amounts. Total deferrals, which are included in
accrued payroll and employee benefits, were $1,504,000 and $1,068,000 at
December 31, 1996 and 1997, respectively, net of loans of $558,000 and
$1,164,000, respectively. The expense for these agreements was $653,000,
$1,218,000, $150,000 and $160,000 for 1995, 1996, three months ended March 31,
1997 and nine months ended December 31, 1997, respectively. To assist in the
funding of these agreements the Company has purchased corporate-owned life
insurance on certain of these executives. The cash surrender value of these
policies, which is included in other assets, was $668,000 and $764,000 at
December 31, 1996 and 1997, respectively.
 
                                     F-17
<PAGE>
 
                  SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
(12) STOCK OPTION PLAN
 
  The Company adopted the Software AG Systems, Inc. 1997 Stock Option Plan
(the "Option Plan") on April 29, 1997. The Option Plan permits a maximum of
6,875,000 shares of common stock to be issued pursuant to grants of stock
options. Unless sooner terminated by the Company's Board of Directors, the
Option Plan will terminate on April 11, 2007. Pursuant to the Option Plan, the
exercise price per share shall not be less than the fair market value of each
share at the date of grant. All options issued generally have vesting periods
of zero to four years from the grant date and expire after the seventh
anniversary from the date of grant. At December 31, 1997, 1,831,775 shares
were available for grant under the Option Plan.
 
  Following is a summary of activity under the Option Plan for the year ended
December 31, 1997:
 
<TABLE>
<CAPTION>
                                                              PRICE PER SHARE
                                                            --------------------
                                                                        WEIGHTED
                                                   SHARES      RANGE    AVERAGE
                                                  --------- ----------- --------
   <S>                                            <C>       <C>         <C>
   Granted....................................... 5,069,900 $1.47-12.00  $4.66
   Exercised.....................................       --          --     --
   Terminated/Forfeited..........................    26,675   1.47-9.60   2.90
                                                  --------- -----------  -----
   Balance, December 31, 1997.................... 5,043,225 $1.47-12.00  $5.02
                                                  ========= ===========  =====
</TABLE>
 
  The following table summarizes information about the Option Plan at December
31, 1997:
 
<TABLE>
<CAPTION>
                  OPTIONS OUTSTANDING                    OPTIONS EXERCISABLE
         ------------------------------------------    ---------------------------
                          WEIGHTED-
                           AVERAGE       WEIGHTED-                     WEIGHTED-
                          REMAINING       AVERAGE                       AVERAGE
           NUMBER        CONTRACTUAL     EXERCISE        SHARES        EXERCISE
         OUTSTANDING     LIFE (YRS)        PRICE       EXERCISABLE       PRICE
         -----------     -----------     ---------     -----------     ---------
         <S>             <C>             <C>           <C>             <C>
          3,142,975         6.26          $ 1.47           1,100         $1.47
            744,975         6.61            9.60         592,625          9.60
            152,900         6.85           10.00             --            --
          1,002,375         6.73           12.00             --            --
          ---------         ----          ------         -------         -----
          5,043,225         6.42          $ 5.02         593,725         $9.58
          =========         ====          ======         =======         =====
</TABLE>
 
  In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123") was issued. SFAS
No. 123 is effective for fiscal years beginning after December 15, 1995. SFAS
No. 123 encourages companies to adopt the fair value method for compensation
expenses recognition related to employee stock options. Existing accounting
requirements of Accounting Principles Board Opinion No. 25 ("APB No. 25") use
the intrinsic value method in determining compensation expense which
represents the excess of the market price of the stock over the exercise price
on the measurement date. The Company has elected to remain under APB No. 25
rules for stock options, under which no compensation cost has been recognized,
and is required to provide pro forma disclosure of the net income and earnings
per share that would have been had the Company adopted the new fair value
method for recognition purposes. The following information is presented as if
the Company had adopted SFAS No. 123 and restated its results for the nine
months ended December 31, 1997 (in thousands, except per share data):
 
<TABLE>
   <S>                                                                   <C>
   Net income--as reported.............................................. $5,338
   Net income--pro forma................................................ $4,741
   Earnings per share--as reported...................................... $ 0.21
   Earnings per share (assuming dilution)--as reported.................. $ 0.20
   Earnings per share--pro forma........................................ $ 0.19
   Earnings per share (assuming dilution)--pro forma.................... $ 0.18
</TABLE>
 
                                     F-18
<PAGE>
 
                  SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  For the above information, the fair value of each option grant was estimated
on the date of grant using the Black-Scholes option pricing model with the
following assumptions used for grants in 1997: dividend yield of zero percent;
risk-free interest rate of 6%; expected volatility of 40%; expected lives
ranging from two to six years; and a forfeitures rate of 2.9%. The weighted
average fair value of options granted during the nine months ended December
31, 1997 was $1.97 per option.
 
  The full impact of calculating cost for stock options under SFAS No. 123 is
not reflected in the pro forma net income amounts presented above because
compensation cost is reflected over the options vesting period of four years.
 
(13) OPERATING LEASE COMMITMENTS
 
  The Company leases office space and equipment under operating lease
agreements that expire at various dates through 2015.
 
  Future minimum rent payments under operating leases, net of aggregate rents
of $5,116,000 expected to be received from subleasing of a portion of the
customer support facility and another facility, at December 31, 1997, are:
 
<TABLE>
<CAPTION>
   YEARS ENDING DECEMBER 31,                     FACILITIES EQUIPMENT  TOTAL
   -------------------------                     ---------- --------- -------
                                                        (IN THOUSANDS)
   <S>                                           <C>        <C>       <C>
   1998.........................................  $ 4,901    $2,002   $ 6,903
   1999.........................................    5,596     1,592     7,188
   2000.........................................    5,585       527     6,112
   2001.........................................    5,311        41     5,352
   2002.........................................    4,776        11     4,787
   Thereafter...................................   23,111       --     23,111
                                                  -------    ------   -------
                                                  $49,280    $4,173   $53,453
                                                  =======    ======   =======
</TABLE>
 
  Facility rent expense for 1995, 1996, three months ended March 31, 1997 and
nine months ended December 31, 1997, was $6,105,000, $7,002,000 $1,722,000 and
$5,179,000, respectively. Rent expense includes the current year effect of
determinable scheduled rent increases and initial rent abatement periods
contained in certain of the Company's facility lease agreements.
 
  Equipment lease expense for 1995, 1996, three months ended March 31, 1997
and nine months ended December 31, 1997, was $l,532,000, $1,678,000 $339,000
and $1,018,000, respectively.
 
  The Company's operating lease agreement for its customer support facility
requires the Company to maintain minimum amounts of net worth and retained
earnings. If the minimum amounts are not maintained, the Company will be
required to post a $500,000 irrevocable letter of credit for each $2,000,000
shortfall, to be applied by the lessor in the event of default under the
lease.
 
                                     F-19
<PAGE>
 
                  SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
(14) GEOGRAPHIC INFORMATION
 
  Net revenue, operating income, and identifiable assets by geographic area
were as follows:
 
<TABLE>
<CAPTION>
                                                                                           PREDECESSOR         SUCCESSOR
                                                                                    -------------------------- ---------
                                                                                                       THREE     NINE
                                                                                      YEAR     YEAR    MONTHS   MONTHS
                                                                                     ENDED    ENDED    ENDED     ENDED
                                                                                    DEC. 31, DEC. 31, MAR. 31, DEC. 31,
                                                                                      1995     1996     1997     1997
                                                                                    -------- -------- -------- ---------
                                                                                                 (IN THOUSANDS)
   <S>                                                                              <C>      <C>      <C>      <C>    
   Revenue
     U.S. operations............................................................... $130,997 $129,879 $ 30,424 $116,378
     Canadian operations...........................................................      --       --       --     3,861
     Mexican operations............................................................      --       --       --     4,507
     Other operations..............................................................   21,565   26,961    4,217   23,329
     Intercompany elimination......................................................      --       --       --    (1,492)
                                                                                    -------- -------- -------- --------
       Total revenue............................................................... $152,562 $156,840 $ 34,641 $146,583
                                                                                    ======== ======== ======== ========
   Income (loss) from operations
     U.S. operations............................................................... $  3,188 $  5,281 $  1,310 $ 18,732
     Canadian operations...........................................................      --       --       --    (5,129)
     Mexican operations............................................................      --       --       --    (1,151)
     Other operations..............................................................      --       --       --       --
                                                                                    -------- -------- -------- --------
       Total operating income...................................................... $  3,188 $  5,281 $  1,310 $ 12,452
                                                                                    ======== ======== ======== ========
   Identifiable assets
     U.S. operations............................................................... $125,612 $158,088 $127,749 $187,892
     Canadian operations...........................................................      --       --       --     9,143
     Mexican operations............................................................      --       --       --     1,538
     Other operations..............................................................      --       --       --       --
     Intercompany elimination......................................................      --       --       --    (2,447)
                                                                                    -------- -------- -------- --------
       Total identifiable assets................................................... $125,612 $158,088 $127,749 $196,126
                                                                                    ======== ======== ======== ========
</TABLE>
 
  Canadian operations include one subsidiary, R.D. Nickel, which was acquired
in September 1997. Mexican operations include one subsidiary located in
Mexico. The Company's Mexican operations commenced in 1996 and operated as a
branch office until it became a wholly owned subsidiary in May 1997. Other
operations include royalty revenue from international distributors.
 
  Royalty revenues from international distributors are as follows:
 
<TABLE>
<CAPTION>
                                                                                                PREDECESSOR         SUCCESSOR
                                                                                         -------------------------- ---------
                                                                                                            THREE     NINE
                                                                                           YEAR     YEAR    MONTHS   MONTHS
                                                                                          ENDED    ENDED    ENDED     ENDED
                                                                                         DEC. 31, DEC. 31, MAR. 31, DEC. 31,
                                                                                           1995     1996     1997     1997
                                                                                         -------- -------- -------- ---------
                                                                                                    (IN THOUSANDS)
   <S>                                                                                   <C>      <C>      <C>      <C>
   Japan................................................................................ $ 8,607  $ 9,207   $  971   $10,481
   Brazil...............................................................................   5,931    7,000    1,500     7,500
   Canada...............................................................................   3,981    4,640      805     2,026
   Other................................................................................   3,046    6,114      941     3,322
                                                                                         -------  -------   ------   -------
     Total royalty revenues from international distributors............................. $21,565  $26,961   $4,217   $23,329
                                                                                         =======  =======   ======   =======
</TABLE>
 
                                     F-20
<PAGE>
 
                  SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  Royalty revenues from international distributors included in software
license fees and maintenance fees on the consolidated statements of operations
were approximately $13,316,000 and $8,249,000, respectively, in 1995,
$16,982,000 and $9,979,000, respectively, in 1996, $2,331,000 and $1,886,000,
respectively, for the three months ended March 31, 1997, and $16,105,000 and
$7,224,000, respectively, for the nine months ended December 31, 1997.
Royalties from Canada includes royalties received from R.D. Nickel prior to
the acquisition in September 1997.
 
  Sales and transfers between geographic areas are accounted for at prices
which the Company believes are arm's length, and in accordance with the rules
and regulations of the respective governing tax authorities.
 
(15) OTHER INCOME AND EXPENSE, NET
 
  Other income and expense, net, on the consolidated statements of operations
primarily includes interest income of $1,406,000 in 1995; interest income of
$2,914,000 and gain on sale of other assets of $1,000,000 in 1996; interest
income of $779,000 for the three months ended March 31, 1997; and interest
income of $728,000 for the nine months ended December 31, 1997.
 
(16) CONTINGENCIES
 
  The Company is involved in various claims and legal proceedings of a nature
considered normal to its business, primarily relating to product and contract
performance issues, and employee termination matters. While it is not feasible
to predict or determine the final outcome of these proceedings, management
does not believe that they will have a material adverse effect on the
Company's financial position or results of operations.
 
(17) NEW ACCOUNTING STANDARDS
 
  In June 1997, the Financial Accounting Standard Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 130, "Reporting
Comprehensive Income," which is effective for annual and interim periods
beginning after December 15, 1997. This statement established standards for
the reporting and display of comprehensive income and its components in the
financial statements. Upon its adoption the Company will be required to
reclassify previously reported annual and interim financial statements.
 
  In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"), which is effective for
annual periods ending after December 15, 1997. SFAS No. 131 established
standards for the way public business enterprises are to report information
about operating segments in interim financial reports issued to stockholders.
It also establishes standards for related disclosures about products and
services, geographic areas and major customers.
 
  On October 27, 1997, the AICPA Accounting Standards Executive Committee
issued Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2")
which supersedes statement of Position 91-1, "Software Revenue Recognition".
SOP 97-2 focuses on when and in what amounts revenue should be recognized for
licensing, selling, leasing or otherwise marketing computer software, and is
effective for transactions entered into in fiscal years beginning after
December 15, 1997.
 
  The Company does not expect that the adoption of these new accounting
standards will have a material effect on the Company's financial position or
results of operation.
 
                                     F-21
<PAGE>
 
                  SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
(18) QUARTERLY FINANCIAL DATA (UNAUDITED)
 
  Summarized financial data by quarters is as follows:
 
<TABLE>
<CAPTION>
                                                  PREDECESSOR
                                    --------------------------------------------
                                               THREE MONTHS ENDED
                                    --------------------------------------------
                                    MAR. 31,    JUNE 30,    SEPT. 30,  DEC. 31,
                                      1996        1996         1996      1996
                                    ---------   ---------   ---------- ---------
                                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
   <S>                              <C>         <C>         <C>        <C>
   Revenue......................... $  32,286   $  37,109    $  41,126 $  46,319
   Gross profit.................... $  15,434   $  20,151    $  21,276 $  27,008
   Net income (loss)............... $    (212)  $    (623)   $   2,745 $   4,299
   Net income (loss) per share..... $   (0.01)  $   (0.02)   $    0.10 $    0.16
   Net income (loss) per share-
    assuming dilution.............. $   (0.01)  $   (0.02)   $    0.09 $    0.15
</TABLE>
 
<TABLE>
<CAPTION>
                                       PREDECESSOR          SUCCESSOR
                                       ----------- ---------------------------
                                                 THREE MONTHS ENDED
                                       ---------------------------------------
                                        MAR. 31,   JUNE 30, SEPT. 30, DEC. 31,
                                          1997       1997     1997      1997
                                       ----------- -------- --------- --------
                                        (IN THOUSANDS, EXCEPT PER SHARE DATA)
   <S>                                 <C>         <C>      <C>       <C>
   Revenue............................   $34,641   $42,947   $46,729  $56,907
   Gross profit.......................   $17,127   $22,845   $23,748  $31,264
   Net income (loss)..................   $ 1,373   $ 2,151   $(3,227) $ 6,414
   Net income (loss) per share........   $  0.06   $  0.09   $ (0.13) $  0.24
   Net income (loss) per share-
    assuming dilution.................   $  0.05   $  0.08   $ (0.13) $  0.23
</TABLE>
 
(19) SUBSEQUENT EVENTS
 
  On February 19, 1998, the Company's Board of Directors approved a qualified
employee stock purchase plan ("ESPP") and authorized the issuance of 1,500,000
shares of common stock for purchase pursuant to the ESPP. The ESPP is to
commence on June 1, 1998. Under the terms of the ESPP, employees may
contribute, through payroll deduction, up to 15% of eligible compensation to
purchase stock with the limitation of $25,000 annually in fair market value of
the stock. Employees may elect to withdraw from the ESPP at any time during
the two six months offering periods which are December to May and June to
November and have their contribution for the period returned to them. Also,
employees may elect to change the rate of contribution only once during the
offering periods. The price at which employees may purchase shares is 85% of
the lower of the fair market value of the stock at the beginning or end of the
six months offering period. The ESPP is qualified under Section 423 of the
Internal Revenue Code of 1986, as amended. The ESPP is subject to stockholder
approval which will be voted at the annual stockholders' meeting to be held on
May 18, 1998.
 
                                     F-22
<PAGE>
 
                   SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
 
                 UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
 
<TABLE>
<CAPTION>
                                                                  MARCH 31,
                                                                     1998
                                                                --------------
                                                                (IN THOUSANDS)
<S>                                                             <C>
Assets
Current:
  Cash and cash equivalents....................................    $ 50,276
  Accounts receivable:
    Invoiced and currently due.................................      27,816
    Advanced billings on maintenance...........................       7,281
    Unbilled services..........................................      13,894
    Installment................................................      33,574
    Other......................................................       5,466
    Less: allowance for doubtful accounts......................      (9,383)
                                                                   --------
      Total accounts receivable................................      78,648
  Current portion of deferred income taxes.....................       6,217
  Other current assets.........................................       6,022
                                                                   --------
      Total current assets.....................................     141,163
Cooperation agreement, net of accumulated amortization.........      21,150
Installment accounts receivable, net of current portion........      12,273
Property, equipment and leasehold improvements, net of
 accumulated depreciation and amortization.....................      10,415
Deferred income taxes..........................................       2,848
Goodwill, net of accumulated amortization......................      10,988
Other assets...................................................         763
                                                                   --------
      Total assets.............................................    $199,600
                                                                   ========
Liabilities and Stockholders' Equity
Current:
  Accounts payable.............................................    $  8,419
  Accrued payroll and employee benefits........................       7,234
  Payable to SAG...............................................       8,591
  Income taxes payable.........................................       3,337
  Other current liabilities....................................       5,219
  Current portion of deferred revenues, net of deferred
   royalties...................................................      42,934
                                                                   --------
      Total current liabilities................................      75,734
Deferred revenues, net of deferred royalties...................      28,623
                                                                   --------
      Total liabilities........................................     104,357
Stockholders' equity...........................................      95,243
                                                                   --------
      Total liabilities and stockholders' equity...............    $199,600
                                                                   ========
</TABLE>
 
      See accompanying notes to unaudited condensed consolidated financial
                                  statements.
 
                                      F-23
<PAGE>
 
                   SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
 
           UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                              PREDECESSOR   SUCCESSOR
                              ------------ ------------
                              THREE MONTHS THREE MONTHS
                                 ENDED        ENDED
                               MARCH 31,    MARCH 31,
                                  1997         1998
                              ------------ ------------
                              (IN THOUSANDS, EXCEPT PER
                                SHARE DOLLAR AMOUNTS)
<S>                           <C>          <C>
Revenues:
  Software license fees.....    $ 7,341      $21,649
  Maintenance fees..........     17,352       19,800
  Professional services
   fees.....................      9,948       14,414
                                -------      -------
    Total revenues..........     34,641       55,863
                                -------      -------
Cost of revenues:
  Software license..........      2,098        5,670
  Maintenance...............      6,205        7,057
  Professional services.....      9,211       11,501
                                -------      -------
    Total cost of revenues..     17,514       24,228
                                -------      -------
Gross profit................     17,127       31,635
                                -------      -------
Operating expenses:
  Software product
   development..............        --           755
  Sales and marketing.......      7,317       11,873
  Administrative and
   general..................      8,500       10,805
                                -------      -------
    Total operating
     expenses...............     15,817       23,433
                                -------      -------
Income from operations......      1,310        8,202
Other income and expense,
 net........................        978          906
                                -------      -------
Income before income taxes..      2,288        9,108
Income tax provision........        915        3,718
                                -------      -------
Net income..................    $ 1,373      $ 5,390
                                =======      =======
Net income per common
 share......................    $  0.06      $  0.18
                                =======      =======
Net income per common share-
 assuming dilution..........    $  0.05      $  0.17
                                =======      =======
Shares used in computing net
 income per common share:
  Net income per common
   share....................     24,338       29,517
  Net income per common
   share-assuming dilution..     25,894       31,491
</TABLE>
 
      See accompanying notes to unaudited condensed consolidated financial
                                  statements.
 
                                      F-24
<PAGE>
 
                   SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
 
           UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                                                                      PREDECESSOR   SUCCESSOR
                                                                                                      ------------ ------------
                                                                                                      THREE MONTHS THREE MONTHS
                                                                                                         ENDED        ENDED
                                                                                                       MARCH 31,    MARCH 31,
                                                                                                          1997         1998
                                                                                                      ------------ ------------
                                                                                                           (IN THOUSANDS)
<S>                                                                                                   <C>          <C>
Cash flows from operating activities:
  Net income ........................................................................................   $ 1,373      $ 5,390
  Adjustments to reconcile net income to net cash provided by operating activities:
    Depreciation and amortization....................................................................       941        2,070
    Gain on sales of property and equipment..........................................................       --           (22)
    Deferred gain....................................................................................       (36)         --
    Write-off of investment..........................................................................       --           848
    Compensation expense on options granted..........................................................       --           194
    Changes in operating accounts....................................................................     8,148       (7,044)
                                                                                                        -------      -------
      Net cash provided by operating activities......................................................    10,426        1,436
                                                                                                        -------      -------
Cash flows from investing activities:
  Additions to property, equipment and leasehold improvements........................................      (208)      (1,523)
  Proceeds from sales of property and equipment......................................................       --            22
                                                                                                        -------      -------
      Net cash used in investing activities..........................................................      (208)      (1,501)
                                                                                                        -------      -------
Cash flows from financing activities:
  Proceeds from stock options exercised..............................................................       --            12
  Adjustments to expenses relating to initial public offering........................................       --          (100)
                                                                                                        -------      -------
      Net cash used in financing activities..........................................................       --           (88)
                                                                                                        -------      -------
Net increase (decrease) in cash and cash equivalents.................................................    10,218         (153)
Cash and cash equivalents, beginning.................................................................    25,773       50,429
                                                                                                        -------      -------
Cash and cash equivalents, ending....................................................................   $35,991      $50,276
--------------------------------------------------
                                                                                                        =======      =======
</TABLE>
 
 
      See accompanying notes to unaudited condensed consolidated financial
                                  statements.
 
                                      F-25
<PAGE>
 
                  SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
 
         NOTES TO UNAUDITED CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS
 
(1) BASIS OF PRESENTATION
 
  The condensed consolidated financial statements included herein have been
prepared by management, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. These condensed consolidated financial
statements should be read in conjunction with the financial statements and
notes thereto for the year ended December 31, 1997 contained elsewhere in this
Prospectus.
 
  In the opinion of management, the accompanying balance sheets and related
statements of operations and cash flows include all adjustments (consisting
only of normal recurring items) necessary for their fair presentation in
conformity with generally accepted accounting principles. The results for the
three months ended March 31, 1998 are not necessarily indicative of the
results expected for the full year.
 
  Prior to March 31, 1997, Software AG Systems, Inc. and subsidiaries (the
"Company") was a wholly owned subsidiary of Software AG, a German software
company ("SAG"). On March 31, 1997, the Company consummated a recapitalization
agreement under which the Company repurchased from SAG 24,750,000 shares of
common stock, and certain senior management of the Company and Thayer Equity
Investors III, L.P. ("Thayer") acquired approximately 89% of the then
outstanding common stock of the Company (the "Recapitalization"). The
Company's results of operations for the three months ended March 31, 1997 are
based on operations which occurred prior to the Recapitalization and are not
comparable with the results of operations for the three months ended March 31,
1998.
 
(2) ACCOUNTING POLICIES
 
 Revenue Recognition
 
  On January 1, 1998, the Company adopted Statement of Position 97-2,
"Software Revenue Recognition" ("SOP 97-2") which superseded Statement of
Position 91-1, "Software Revenue Recognition." SOP 97-2 focuses on when and in
what amounts revenue should be recognized for licensing, selling, leasing, or
otherwise marketing computer software. The adoption of SOP 97-2 did not have a
material impact on the Company's revenue recognition policies.
 
  Software license revenues for an arrangement to deliver software that does
not require significant production, modification or customization of software
is recognized when there is an executed license agreement, the software and
authorization code have been delivered, the fee is fixed or determinable and
collectibility is probable.
 
  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, generally bundle a combination of
products, technical services and professional consulting services. In
accordance with SOP 97-2, these elements are unbundled for revenue recognition
purposes, and are accounted for according to their component parts using the
criteria described above.
 
                                     F-26
<PAGE>
 
                  SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
 
                         NOTES TO UNAUDITED CONDENSED
                CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
 Net Income per Common Share
 
  The Company reports earnings per share under Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128"). In
accordance with SFAS No. 128 requirements, the Company presents basic and
diluted earnings per share. Basic earnings per share is based on income
available to common stockholders divided by the weighted average number of
common shares outstanding. Diluted earnings per share is based on income
available to common stockholders divided by the sum of the weighted average
number of common shares outstanding and all potential common shares which are
dilutive. The following information is a reconciliation of the amounts used in
these calculations:
 
<TABLE>
<CAPTION>
                                                         PREDECESSOR SUCCESSOR
                                                         ----------- ---------
                                                            THREE      THREE
                                                           MONTHS     MONTHS
                                                            ENDED      ENDED
                                                          MAR. 31,   MAR. 31,
                                                            1997       1998
                                                         ----------- ---------
                                                         (IN THOUSANDS, EXCEPT
                                                           PER SHARE DOLLAR
                                                               AMOUNTS)
   <S>                                                   <C>         <C>
   Numerator:
     Net income.........................................   $1,373     $5,390
                                                           ======     ======
   Denominator:
    Basic:
     Weighted average shares outstanding................   24,338     29,517
    Effect of dilutive securities:
     Stock options......................................    1,556      1,974
                                                           ------     ------
    Diluted:
     Weighted average shares outstanding-assuming
      dilution..........................................   25,894     31,491
                                                           ======     ======
   EPS:
     Net income per common share........................   $ 0.06     $ 0.18
     Net income per common share-assuming dilution......     0.05       0.17
</TABLE>
 
                                     F-27
<PAGE>
 
[OUTSIDE BACK COVER]
 
  Pictures of a woman talking on the telephone, a man standing atop a diving
tower, two men conversing, birds flying and a ferris wheel, with the following
text:
 
  SAGA--a leading enterprise solutions company invested in our customers'
success. We enable the linking of valuable information from the enterprise to
the Microsoft desktop, allowing people to make better informed business
decisions, respond more quickly to customers' needs and be more flexible to
changing market demands.
 
                          SAGA. FREE YOUR INFORMATION
<PAGE>
 
                                    PART II
 
                    INFORMATION NOT REQUIRED IN PROSPECTUS
 
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
 
  The following are the estimated expenses in connection with the issuance and
distribution of the securities being registered, all of which will be paid by
the Company.
 
<TABLE>
   <S>                                                                  <C>
   SEC registration fee................................................ $50,830
   NASD filing fee..................................................... $17,730
   Blue Sky fees and expenses.......................................... $10,000
   Printing and engraving expenses.....................................       *
   Legal fees and expenses.............................................       *
   Accounting fees and expenses........................................       *
   Transfer agent and registrar fees...................................       *
   Miscellaneous.......................................................       *
                                                                        -------
     Total............................................................. $     *
                                                                        =======
</TABLE>
--------
*  To be completed by amendment.
 
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 Third 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 SAG and on February 25, 1997, the Company became a direct wholly
owned subsidiary of SAG and SAG became the owner of the one then outstanding
share of the Company's common stock, par value $1.00 per share. On March 14,
1997, the Company issued a stock dividend to SAG resulting in 100,000
outstanding shares of common stock.
 
  On March 31, 1997, the senior management of the Company and Thayer acquired
approximately 89% of the then outstanding Common Stock of the Company in the
Recapitalization pursuant to an agreement among the Company, SAG, Thayer and
the following officers of the Company: Daniel F. Gillis, Harry K. McCreery,
 
                                     II-1
<PAGE>
 
Gary Hayes, James H. Daly, Derek M. Brigden and Thomas E. Gorley
(collectively, such individuals are referred to as the "Managers"). In
connection therewith, (i) 24,750,000 shares of Common Stock were repurchased
by the Company from SAG for an aggregate purchase price of DM 57.0 million
(approximately US$33.9 million), (ii) 20,678,350 shares of Common Stock were
issued and sold to Thayer for an aggregate purchase price of approximately
$30.4 million and (iii) an aggregate of 771,650 shares of Common Stock were
issued and sold to the Managers for an aggregate purchase price of
approximately $1.1 million. Of the Common Stock purchased by the Managers,
Messrs. Gillis and McCreery each purchased 204,050 shares and Messrs. Hayes,
Daly, Brigden and Gorley purchased 84,975, 108,625, 67,925 and 102,025 shares,
respectively. In consideration for the shares, each of Messrs. Gillis,
McCreery and Daly gave the Company a promissory note in an amount sufficient
to cover the purchase price of the shares. In consideration for the shares,
each of Messrs. Hayes, Brigden and Gorley paid the Company approximately
$74,900, $51,000, and $75,000 in cash, respectively, and gave the Company a
promissory note in an amount sufficient to cover the balance of the purchase
price of the shares. In addition, on August 22, 1997 the Company entered into
a subscription agreement with Timothy L. Hill, the Company's Vice President--
Marketing, pursuant to which the Company issued and sold to Mr. Hill 137,500
shares of Common Stock for an aggregate purchase price of $202,095. As of
December 31, 1997, the Company has also granted options to purchase an
aggregate of 5,069,900 shares of Common Stock under the Company's 1997 Stock
Option Plan at a weighted average exercise price equal to $4.66 per share. All
such options and shares of Common Stock were issued in private placements
exempt from registration under Section 4(2) of the Securities Act, or Rule 701
thereunder. 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.
 
  Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Securities Act") may be permitted to directors,
officers and controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
 
  The undersigned registrant hereby undertakes that:
 
  (1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 479(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
 
  (2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
 
                                     II-2
<PAGE>
 
                                  SIGNATURES
 
  PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT HAS DULY
CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN RESTON, VIRGINIA ON APRIL 21, 1998.
 
                                          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 REGISTRATION
STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED
ON APRIL 21, 1998.
 
                                                   /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 KONIGS
                                                         DIRECTOR
 
                                                             *
                                          By: _________________________________
                                                     EDWARD E. LUCENTE
                                                         DIRECTOR
 
                                                             *
                                          By: _________________________________
                                                     DR. PAUL G. STERN
                                                         DIRECTOR
 
       /s/ Harry K. McCreery
*By: ______________________________
         HARRY K. MCCREERY
         ATTORNEY-IN-FACT
 
                                     II-3
<PAGE>
 
                        ACCOUNTANTS' REPORT ON SCHEDULE
 
Board of Directors
Software AG Systems, Inc.
 
  The audits referred to in our report dated February 6, 1998, included the
related financial statement schedule for the periods from April 1, 1997 to
December 31, 1997, and from January 1, 1997 to March 31, 1997 and for each of
the years in the two-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, presents fairly in all
material respects the information set forth therein.
 
                                                      /s/ KPMG Peat Marwick llp
 
Washington, D.C.
February 6, 1998
 
                                      S-1
<PAGE>
 
                                  SCHEDULE II
 
                       VALUATION AND QUALIFYING ACCOUNTS
 
<TABLE>
<CAPTION>
                                              ADDITIONS
                                   BALANCE AT CHARGED TO              BALANCE
                                   BEGINNING   COST AND  DEDUCTIONS    AT END
DESCRIPTION                        OF PERIOD   EXPENSES  WRITE-OFFS  OF PERIOD
-----------                        ---------- ---------- ----------  ----------
<S>                                <C>        <C>        <C>         <C>
PREDECESSOR:
1/1/95-12/31/95
  Allowance for Doubtful Ac-
   counts......................... $4,069,591 $2,331,608 $1,635,681  $4,765,518
1/1/96-12/31/96
  Allowance for Doubtful Ac-
   counts.........................  4,765,518  1,298,361  1,083,575   4,980,304
1/1/97-3/31/97
  Allowance for Doubtful Ac-
   counts.........................  4,980,304    204,406   (138,274)  5,322,984
-------------------------------------------------------------------------------
SUCCESSOR:
4/1/97-12/31/97
  Allowance for Doubtful Ac-
   counts......................... $5,322,984 $4,964,967 $  987,355  $9,300,596
</TABLE>
 
                                      S-2
<PAGE>
 
                               INDEX TO EXHIBITS
 
<TABLE>
<CAPTION>
 EXHIBIT
   NO.
 -------
 <S>      <C>
    ****1 Form of Underwriting Agreement
    * 3.1 Second Amended and Restated Certificate of Incorporation of the
          Registrant
 **** 3.2 Third 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), as amended
   *10.15 Registration Rights Agreement between Software AG Systems, Inc. and
          Thayer Equity Investors III, L.P. (dated as of September 26, 1997)
   *10.16 Subscription Agreement between Timothy L. Hill and Software AG
          Systems, Inc. (dated as of August 22, 1997), as amended
   *10.17 Shareholders Agreement among Software AG Systems, Inc., Thayer Equity
          Investors III, L.P. and certain shareholders of Software AG Systems,
          Inc. (dated as of April 1, 1997)
   *10.18 Promissory Note made by Daniel F. Gillis (effective date March 24,
          1997)
   *10.19 Promissory Note made by Harry K. McCreery (effective date March 24,
          1997)
   *10.20 Promissory Note made by James H. Daly (effective date March 24, 1997)
   *10.21 Promissory Note made by Harry K. McCreery (effective date August 9,
          1996)
   *10.22 Promissory Note made by James H. Daly (effective date August 9, 1996)
   ****11 Computations of Earnings per Share
   ****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 Powers of Attorney
</TABLE>
    * Previously filed as an exhibit to the Company's Registration Statement
      on Form S-1 (File No. 333-36567) and incorporated herein by reference.
   ** Previously filed as an exhibit to the Company's Registration Statement
      on Form S-8 (File No. 333-44687) and incorporated herein by reference.
  *** To be filed by amendment.
 **** Filed herewith.
[{"type": "S-1", "sequence": "1", "description": "FORM S-1", "secsgml_size_bytes": 384586}]
{"company-data": {"conformed-name": "SOFTWARE AG SYSTEMS INC", "cik": "0000352683", "assigned-sic": "7372", "irs-number": "541167173", "state-of-incorporation": "DE", "fiscal-year-end": "0531"}, "filing-values": {"form-type": "S-1", "act": "33", "file-number": "333-50645", "film-number": "98598271"}, "business-address": {"street1": "11190 SUNRISE VALLEY DR", "city": "RESTON", "state": "VA", "zip": "20191", "phone": "7038605050"}, "mail-address": {"street1": "11190 SUNRISE VALLEY DR", "city": "RESTON", "state": "VA", "zip": "20191"}}
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 21, 1998
 
                                                       REGISTRATION NO. 333-
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
 
                      SECURITIES AND EXCHANGE COMMISSION
 
                              -------------------

                                   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                     5734                    54-1167173
  (STATE OF INCORPORATION)  (PRIMARY STANDARD INDUSTRIAL    (I.R.S. EMPLOYER  
                            CLASSIFICATION CODE NUMBER)    IDENTIFICATION NO.) 
                          
 
                          11190 SUNRISE VALLEY DRIVE
                               RESTON, VA 20191
                                (703) 860-5050
                   (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
 
                              -------------------

                               DANIEL F. GILLIS
                     PRESIDENT AND CHIEF EXECUTIVE OFFICER
                          11190 SUNRISE VALLEY DRIVE
                               RESTON, VA 20191
                                (703) 860-5050
                    (NAME AND ADDRESS OF AGENT FOR SERVICE)
 
                              -------------------

                                  COPIES TO:

          ROBERT B. OTT, ESQ.                    PETER B. TARR, ESQ.
        RICHARD E. BALTZ, ESQ.                  BRENT B. SILER, ESQ.
            ARNOLD & PORTER                       HALE AND DORR LLP
       555 TWELFTH STREET, N.W.            1455 PENNSYLVANIA AVENUE, N.W.
        WASHINGTON, D.C. 20004                    WASHINGTON, D.C.
            (202) 942-5000                         (202) 942-8400
 
                              -------------------

  APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE OF THE SECURITIES TO
THE PUBLIC: As soon as practicable after this Registration Statement becomes
effective.
 
  If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
 
  If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
 
  If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
 
  If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
 
  If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
 
                        CALCULATION OF REGISTRATION FEE
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
PROPOSED        PROPOSED
                                AMOUNT        MAXIMUM          MAXIMUM
  TITLE OF EACH CLASS OF         TO BE     OFFERING PRICE     AGGREGATE        AMOUNT OF
SECURITIES TO BE REGISTERED  REGISTERED(1)  PER SHARE(2)  OFFERING PRICE(2) REGISTRATION FEE
--------------------------------------------------------------------------------------------
Common Stock $.01 par
  value per share.......       6,279,243       $27.44       $172,302,428        $50,830
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
(1) Includes 819,031 shares of Common Stock issuable upon exercise of an over-
    allotment option granted to the Underwriters.
(2) Estimated solely for the purpose of calculating the registration fee
    pursuant to Rule 457 of the Securities Act of 1933.
                              -------------------
  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 APRIL 21, 1998
 
               [LOGO OF SOFTWARE AG SYSTEMS, INC. APPEARS HERE]
 
                                5,460,212 SHARES
 
                                  COMMON STOCK
 
                                --------------
 
  All of the 5,460,212 shares of Common Stock of Software AG Systems, Inc. (the
"Company") offered hereby 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.
 
  The Common Stock is listed on the New York Stock Exchange ("NYSE") under the
symbol "AGS." On April 20, 1998, the last reported sales price for a share of
Common Stock was $26.88.
 
                                --------------
 
   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
                                       PRICE TO  DISCOUNTS AND      SELLING
                                        PUBLIC  COMMISSIONS (1) STOCKHOLDERS (2)
--------------------------------------------------------------------------------
Per Share............................   $           $                $
--------------------------------------------------------------------------------
Total (2)............................   $           $                $
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
 
(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) The Selling Stockholders have granted to the Underwriters a 30-day option
    to purchase an aggregate of up to an additional 819,031 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 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      , 1998.
 
BANCAMERICA ROBERTSON STEPHENS
 
                  DONALDSON, LUFKIN & JENRETTE
                     SECURITIES CORPORATION
 
                                      SALOMON SMITH BARNEY
 
                                                         EVEREN SECURITIES, INC.
 
                  The date of this Prospectus is      , 1998.
[COMPANY LOGO AND GRAPHICAL SCHEMATIC, UNDER THE CAPTION "SAGA'S ENTERPRISE
  SOLUTION," DEPICTING THAT THE COMPANY'S ENTERPRISE APPLICATION INTEGRATION
PRODUCT AND SERVICE OFFERINGS ENABLE THE INTEGRATION OF MAINFRAME CLASS LEGACY
   APPLICATIONS WITH DIFFERENT SOURCES OF INFORMATION. SUB-CAPTIONS INCLUDE
     "MAINFRAME APPLICATIONS," "CLIENT/SERVER," "INTERNET/INTRANET," "DATA
                   WAREHOUSE" AND "PACKAGED APPLICATIONS."]
 
 
  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,
PLEASE 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.
 
                             ---------------------
 
                               TABLE OF CONTENTS
PAGE
                                                                          ----
Summary..................................................................   4
Risk Factors.............................................................   7
Company Background.......................................................  15
Use of Proceeds..........................................................  16
Dividend Policy..........................................................  16
Capitalization...........................................................  17
Price Range of Common Stock..............................................  18
Selected Consolidated Financial Data.....................................  19
Management's Discussion and Analysis of Financial Condition and Results
 of Operations...........................................................  22
Business.................................................................  34
Management...............................................................  45
Certain Relationships and Transactions...................................  52
Principal and Selling Stockholders.......................................  54
Description of Capital Stock.............................................  56
Shares Eligible for Future Sale..........................................  59
Underwriting.............................................................  61
Legal Matters............................................................  63
Experts..................................................................  63
Available Information....................................................  63
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.
 
  ENTIRE(R), PREDICT(R), ADAPLEX+(R), ENTIRE NET-WORK(R) and ENTIRE ACCESS(R)
are registered trademarks of the Company, and iXpress(TM), EntireX DCOM(TM),
ENTIRE BROKER(TM), ENTIRE BROKER SDK(TM), ENTIRE BROKER APPC(TM), ENTIRE SAF
Gateway(TM), INSIGHT 2000SM, INSIGHT 2000 Tool Kit(TM), CONSTRUCT(TM), NATURAL
Lightstorm(TM), CONSTRUCT Spectrum(TM), CONSTRUCT Spectrum SDK(TM), ADABAS
Delta Save Facility(TM), ADABAS FASTPATH(TM), ADABAS SQL Server(TM) and 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. and its subsidiaries (the "Company") is an
enterprise solutions company that provides robust software products and related
professional services to large organizations with complex computing
requirements. The Company's products are used to build, enhance and integrate
mission-critical applications that require reliability, scalability and
security, such as customer billing systems, financial accounting systems and
inventory management systems. To complement its products, the Company has a
comprehensive professional services offering, including consulting, software
integration, systems implementation and large project management services. The
Company has over 24 years of experience in addressing the needs of
organizations with complex enterprise level computing environments.
 
  The Company provides enterprise development software products and related
professional services used by organizations to develop new mission-critical
applications and enterprise enablement software products and related
professional services used to extend and integrate business applications. 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 enterprise
enablement software products and professional services that allow organizations
to integrate their mission-critical applications with other applications and
extend them to the Internet and intranets. Products in this area include
ENTIRE, a family of enterprise application integration products that
facilitates the communication between application components across
heterogeneous computing environments; iXpress, a web application assembly and
deployment platform; and EntireX DCOM, a product that uses Microsoft's ActiveX
technology to integrate applications written in a variety of programming
languages. The Company also has a year 2000 program which offers an 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's professional services that complement
its products include application development and enhancement, application
reengineering, application porting, rightsizing and application integration.
 
  The Company's strategy is to further leverage its current leadership position
in software solutions for the development and integration of enterprise
applications by extending its product and professional services offerings with
a particular focus on the application integration market. Key elements of the
Company's strategy include enhancing and extending product offerings with added
features and functionality, broadening its product offerings for the enterprise
application integration market, leveraging its customer base, expanding
professional service offerings and leveraging 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 then
outstanding Common Stock of the Company (the "Recapitalization"). Prior to the
Recapitalization, the Company was a wholly owned subsidiary of Software AG, a
large German software company ("SAG"). 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
 
                                       4
Israel (collectively, the "Territory") both existing and future products
developed or acquired by SAG. The Company is required to pay SAG 24% of the net
revenues derived from such license, which royalty rate is fixed for 20 years.
See "Company Background."
 
  The Company sells and markets its software products and professional services
through direct and indirect channels. In North America, the Company sells and
markets its products through a direct channel that includes over 120 people in
19 offices. The Company sells its products in over 20 additional countries
through six exclusive distributorships in South America, Japan and Israel. In
addition, the Company has access to the distribution channels of SAG in over 50
countries outside the Territory for the Company's products (other than those
licensed from SAG). The Company focuses on selling Enterprise License
Agreements ("ELAs"), which are typically long-term contracts of three to five
years and include the provision of software products, professional services and
maintenance support.
 
  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 year ended December 31, 1997, approximately 95%
of the Company's customers who were eligible renewed at least one of their
maintenance agreements.
 
                                  THE OFFERING
Common Stock Offered by the Selling Stockholders....... 5,460,212 shares
 Common Stock to be Outstanding after the Offering (1).. 29,917,453 shares
 Use of Proceeds........................................ The Company will not
                                                         receive any proceeds
                                                         from the Offering
 NYSE Symbol............................................ AGS
--------
(1) Includes 386,062 shares of Common Stock that are being offered for sale by
    certain Selling Stockholders pursuant to the exercise by such Selling
    Stockholders of outstanding stock options granted under the Software AG
    Systems, Inc. 1997 Stock Option Plan (the "Option Plan"), but excludes (i)
    the remaining 4,679,585 shares of Common Stock issuable upon the exercise
    of stock options outstanding under the Option Plan as of April 17, 1998 and
    (ii) 1,791,107 additional shares of Common Stock reserved for future
    issuance under the Option Plan. As of April 17, 1998, there were (i)
    5,065,647 shares of Common Stock issuable upon the exercise of outstanding
    stock options granted under the Option Plan at a weighted average exercise
    price of $5.46 per share and (ii) 1,791,107 additional shares of Common
    Stock reserved for future issuance under the Option Plan.
 
                                       5
SUMMARY CONSOLIDATED FINANCIAL DATA
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
PREDECESSOR              COMBINED (1) PREDECESSOR
                                                    ------------------------------------ ------------ -----------
                                                                                                         THREE
                                                                                                        MONTHS
                                                                YEARS ENDED DECEMBER 31,                 ENDED
                                                    -------------------------------------------------  MAR. 31,
                                                      1993      1994     1995     1996       1997        1997
                                                    --------  -------- -------- -------- ------------ -----------
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Software license fees.....................          $ 51,672  $ 51,832 $ 52,061 $ 52,163   $ 64,137     $ 7,341
Maintenance fees..........................            57,264    65,871   65,307   69,702     72,689      17,352
Professional service fees.................            31,175    29,552   35,194   34,975     44,398       9,948
                                                    --------  -------- -------- --------   --------     -------
 Total revenues...........................           140,111   147,255  152,562  156,840    181,224      34,641
Gross profit..............................            70,149    77,429   81,239   83,869     94,984      17,127
Operating expenses before write-off.......            75,120    76,534   78,051   78,588     75,171      15,817
Write-off of acquired in-process research
 and development costs (2)................               --        --       --       --       6,051         --
Income (loss) from operations.............            (4,971)      895    3,188    5,281     13,762       1,310
Net income................................          $  6,380  $  1,382 $  3,326 $  6,209   $  6,711     $ 1,373
                                                    ========  ======== ======== ========   ========     =======
Net income per common share (3)...........          $   0.23  $   0.05 $   0.12 $   0.23   $   0.27     $  0.06
                                                    ========  ======== ======== ========   ========     =======
Net income per common share--assuming
 dilution (3).............................          $   0.22  $   0.05 $   0.11 $   0.21   $   0.25     $  0.05
                                                    ========  ======== ======== ========   ========     =======
Dividends.................................          $    --   $    600 $  1,700 $  9,000   $    --      $   --
                                                    ========  ======== ======== ========   ========     =======
SUCCESSOR
                                                    -----------------
                                                      NINE    THREE
                                                     MONTHS   MONTHS
                                                     ENDED    ENDED
                                                    DEC. 31, MAR. 31,
                                                      1997     1998
                                                    -------- --------
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Software license fees.....................          $ 56,796 $21,649
Maintenance fees..........................            55,337  19,800
Professional service fees.................            34,450  14,414
                                                    -------- --------
 Total revenues...........................           146,583  55,863
Gross profit..............................            77,857  31,635
Operating expenses before write-off.......            59,354  23,433
Write-off of acquired in-process research
 and development costs (2)................             6,051     --
Income (loss) from operations.............            12,452   8,202
Net income................................          $  5,338 $ 5,390
                                                    ======== ========
Net income per common share (3)...........          $   0.21 $  0.18
                                                    ======== ========
Net income per common share--assuming
 dilution (3).............................          $   0.20 $  0.17
                                                    ======== ========
Dividends.................................          $    --  $   --
                                                    ======== ========
MARCH 31,
                                                                         1998
                                                                       ---------
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............................................. $ 50,276
Working capital.......................................................   65,429
Total assets..........................................................  199,600
Total stockholders' equity............................................   95,243
--------
(1) Reflects combined data for the three months ended March 31, 1997 (prior to
    the Recapitalization) and for the nine months ended December 31, 1997
    (subsequent to the Recapitalization).
(2) The write-off of acquired in-process research and development costs for the
    year ended December 31, 1997 relates to the Company's acquisition of R.D.
    Nickel and Associates, Inc. Before deducting the nonrecurring write-off for
    this combined period, income from operations was $19.8 million, net income
    was $12.8 million and basic and diluted net income per common share were
    $0.51 and $0.48, respectively.
(3) In accordance with Statement of Financial Accounting Standard No. 128
    "Earnings Per Share" ("SFAS No. 128") issued by the Financial Accounting
    Standards Board, the Company calculated and presented basic and diluted
    earnings per share for the current period. The Company also retroactively
    adopted SFAS No. 128 for all prior periods presented in calculating and
    presenting the earnings per share. Basic earnings per share is based on
    income available to common stockholders divided by the weighted average
    number of common shares outstanding. Diluted earnings per share is also
    based on income available to common stockholders divided by the sum of the
    weighted average number of common shares outstanding and all potential
    common shares which are dilutive. See Note 1 of Notes to Consolidated
    Financial Statements.
 
  Unless the context otherwise requires, the information contained in this
Prospectus assumes no exercise of the Underwriters' over-allotment option, and
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; SEASONALITY OF THE BUSINESS
 
  The Company has experienced significant quarterly and other fluctuations in
revenues and results of operations, and the Company expects these fluctuations
to continue in the future. The Company believes that these fluctuations have
been primarily attributable to the budgeting and purchasing practices of its
customers, and, to a lesser extent, the Company's sales commission practices,
which are based partly on annual quotas, and other factors. The Company's
revenues and results of operations may also be affected by seasonal trends
which have resulted in higher revenues in the Company's third and fourth
quarters and lower revenues in its first and second quarters. The Company's
professional services fees tend to fluctuate due to the completion or
commencement of significant projects, the number of working days in a quarter
and the Company's ability to attract, retain and efficiently utilize
professional services personnel. The Company's future revenues and operating
results may fluctuate as a result of these and other factors, including the
demand for the Company's products and services, the timing and cost of new
product and service introductions and product enhancements by the Company or
its competitors, changes in the mix of products and services sold by the
Company and in the mix of sales by distribution channels, commencement or
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 Condition and Results
of Operations--Quarterly Results of Operations."
 
RELATIONSHIP WITH AND ROYALTY PAYMENTS TO SAG
 
  The Company has the exclusive and perpetual right to license and service in
North America, South America, Japan and Israel both existing and future
products developed or acquired by SAG and, historically, substantially
 
                                       7
all of the Company's revenues have been generated from the licensing and
servicing of products developed or acquired by SAG. As a result, a materially
adverse change in the financial condition or a change in control of SAG could
have a material adverse effect on the business, financial condition and
results of operations of the Company. In the past, SAG has reported operating
losses. In addition, the failure of SAG to develop new products or
enhancements to existing products in a timely manner, to provide ongoing
technical support for its products or to adequately protect its proprietary
rights could have a material adverse effect on the business, financial
condition and results of operations of the Company. In the past, the Company
has experienced delays in receiving products from SAG in a timely manner. The
Cooperation Agreement also requires the Company to pay SAG 24% of the net
revenues derived during the next 20 years from the Company's licensing of
products developed or acquired by SAG. In addition, to the extent that the
Company's aggregate royalty payments to SAG fall below $21.0 million in any
calendar year through the year 2000, the Company generally is required to pay
the differential to SAG, and any such payment could have a material adverse
effect on the Company's business, financial condition and results of
operations.
 
  Because SAG has the exclusive and perpetual right to license and service in
all territories other than North America, South America, Japan and Israel both
existing and future products developed or acquired by the Company, the Company
is dependent on SAG for the distribution of these products outside of North
America, South America, Japan and Israel. Any failure by SAG to distribute
such products in a timely and effective manner could have a material adverse
effect on the Company's business, financial condition and results of
operations.
 
TECHNOLOGICAL CHANGE; DEPENDENCE ON NEW PRODUCTS AND PRODUCT ENHANCEMENTS
 
  The Company's success will depend in part on its ability to acquire and
develop product enhancements and new products that keep pace with continuing
changes in technology and evolving customer preferences, and the timely
delivery of products and product enhancements from SAG. The process of
developing new high-technology products is inherently complex and uncertain
and requires innovative designs anticipating customer demands and
technological trends. There can be no assurance that the Company will be
successful in acquiring and/or developing product enhancements or new products
to adequately address changing technologies, that it can introduce such
products or enhancements on a timely basis, that such products or enhancements
will be successful in the marketplace or that SAG will deliver new products or
product enhancements that will be successful in the marketplace in a timely
manner. The Company's failure to acquire and/or develop technological
improvements or to adapt its products to technological change may have a
material adverse effect on the Company's business, financial condition and
results of operations.
 
  The timely delivery of new products or product enhancements will depend in
part on the Company's ability to continue to develop its internal research and
development capability. The Company's ability to staff and effectively manage
any future growth in its research and development organization 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
research and development 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 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 for the year ended December 31, 1996. For the year ended December
31, 1997, the Company had revenues of $6.9 million from its year 2000 program.
Although the Company believes that the market for products and professional
services relating to the year 2000 problem will grow as the year 2000
approaches, there can be no assurance that this market will develop to the
extent anticipated by the Company. Significant expenses for sales and
marketing may be required to educate potential clients of the year 2000
problem and the need for products and professional services addressing the
problem. In addition, there can
 
                                       8
be no assurance that potential clients will understand or acknowledge the
problem. Affected organizations may not be willing or able to allocate the
resources, financial or otherwise, to address the year 2000 problem in a
timely manner. Many organizations may attempt to resolve the problem
internally rather than by contracting with outside firms such as the Company
and value added integrators to which the Company may license its software
products. Other organizations may elect to replace their existing systems with
year 2000 compliant hardware and software, rather than incur substantial cost
in making their existing systems year 2000 compliant. In addition, there can
be no assurance that a competitor will not develop a fully automated solution
to the year 2000 problem. Due to these and other factors, development of the
market for the Company's year 2000 products and professional services is
uncertain and unpredictable.
 
  In addition, the Company anticipates that demand for products and
professional services that address the year 2000 problem will decline, perhaps
rapidly, following the year 2000. If the market for year 2000 products and
professional services fails to grow, or grows more slowly than anticipated,
the Company's business, financial condition and results of operations could be
materially adversely affected. In addition, competition for personnel
qualified to perform professional services relating to the year 2000 problem
is intense, and there can be no assurance that the Company will be able to
retain its employees who provide such professional services or be able to
attract and retain such personnel in the future.
 
 
YEAR 2000 COMPLIANCE
 
  The Company is in the process of identifying, evaluating and implementing
changes to its computer programs and systems necessary to address the year
2000 issue. The issue affects computer programs sold to customers as well as
computer programs used by the Company internally. The Cooperation Agreement
requires SAG to ensure that its products are year 2000 compliant in accordance
with a specified timetable. Although SAG has delayed the timetable set forth
in the Cooperation Agreement for certain products, SAG has subsequently
delivered most of the year 2000 compliant products set forth in the
Cooperation Agreement. As of April 21, 1998, there remain certain products,
none of which is significant to the Company, that are not year 2000 compliant,
and the Company is awaiting delivery of these products from SAG. There can be
no assurance that SAG will deliver compliant versions of the remaining
products in a timely manner. In addition, the Company has identified a few
products that are compliant but are not compatible with all of the Company's
other year 2000 compliant products. Although these delays and non-
compatibility problems have had no material impact on the Company to date, any
failure by SAG to deliver the remaining products and resolve the compatibility
issue of the products in a timely manner could have a material adverse effect
on the Company's business, financial condition and results of operations.
 
RELIANCE ON ACQUISITIONS
 
  The Company believes that its future growth will depend, in part, on its
ability to successfully identify, acquire and then develop promising
technologies and products. In addition, the Company intends to build its
product development staff in part through acquisitions. The integration of
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 any future
acquisition will be realized. The Company has limited experience in completing
acquisitions and integrating acquired technologies or products into its
operations. The Company may compete for future acquisition opportunities with
other companies that have significantly greater financial and management
resources and there can be no assurance that the Company will be successful in
identifying, acquiring and developing products and technology. Acquisitions
could also have adverse short-term 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. See
"Company Background."
 
                                       9
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 $35.0
million for the year ended December 31, 1996 to $44.4 million for the year
ended December 31, 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 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 RIGHTS
 
  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
 
                                      10
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 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 parties were
to discontinue making their products available to the Company or to licensees
of the Company's products on a timely basis, or to increase materially the
cost to the Company or its licensees to acquire, license or purchase such
third parties' products, or if a material problem were to arise in connection
with the ability of the Company's products to properly use or operate with
third-party hardware and/or software products, the Company's products would
have to be redesigned by the Company, or the licensor of the product to the
Company, to function with or on alternative third-party products, or the
Company or its licensees may be precluded from selling the product. There can
be no assurance that an alternative source of suitable technology would be
available or that the Company, or the licensor of the product to the Company,
would be able to develop an alternative product on a timely basis or at a
reasonable cost. The failure of the Company to license, acquire or develop
alternative technologies or products on a timely basis and at a reasonable
cost could have a material adverse effect on the Company's business, financial
condition and results of operations.
 
COMPETITION
 
  The markets for the Company's software products and professional services
are highly competitive and characterized by continual change and improvement
in technology. The Company provides products and professional services to
several markets within the computer industry and encounters a variety of
competitors within each market. 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, there are no significant barriers to entry.
 
  In the enterprise development markets, the Company's competitors with
respect to enterprise and departmental database management products include
IBM Corporation ("IBM"), Oracle Corporation ("Oracle"), Informix Corporation
("Informix"), Sybase, Inc. ("Sybase") and Microsoft Corporation ("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, Inc. In the enterprise enablement
market, the Company's products compete in both the component/object and the
message-oriented segments of the middleware market, where its competitors
include IBM and Microsoft. In the market for year 2000 products and
professional services, the Company's competitors include Formal Systems, Inc.,
Viasoft, Inc. and Electronic Data Systems Corporation. Few of the Company's
competitors compete in all of the same markets as the Company.
 
  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.
 
                                      11
RISK ASSOCIATED WITH INTERNATIONAL SALES AND OPERATIONS
 
  The Company holds the exclusive and perpetual right to license SAG products
in North America, South America, Japan and Israel. In South America, Japan and
Israel, the Company has entered into exclusive distributorship arrangements
with local firms. There can be no assurance that such distributors will
continue to perform as they have historically and that they will not offer
products that compete with the Company's products. Additionally, the
distributorships generally may be terminated by either party at any time upon
compliance with applicable notice provisions. In the event that any of the
distributorships were terminated or expired, there can be no assurance that
the Company could find an adequate replacement, and such a termination or
expiration could have a material adverse effect on the Company's business,
financial condition and results of operations.
 
  Royalty revenues from international distributors represented 14%, 17% and
15% of the Company's total revenues in 1995, 1996 and 1997, respectively. The
Company anticipates that royalty revenues from international sales and
services will continue to account for a material portion of its total revenues
in the foreseeable future. As a result, the Company may be subject to certain
risks associated with international operations, 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 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. 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
 
                                      12
operations. Therefore, any material liability claim could have a material
adverse effect on the Company's business, financial condition and results of
operations.
 
DEPENDENCE ON STATE, LOCAL AND OTHER GOVERNMENT CONTRACTS
 
  The Company derived 24% of its total revenues in 1996 and 30% of its total
revenues for 1997 from selling its products and professional services directly
or indirectly to state and local government agencies. In addition, the Company
derived 9% of its total revenues in 1996 and 11% of its total revenues for
1997 from selling its products and professional services directly or
indirectly to federal government agencies. Any failure to obtain a contract
award, or a delay on the part of a government agency in making the award or in
ordering products and professional services under an awarded contract, could
have a material adverse effect on the Company's business, financial condition
and results of operations. Other risks generally involved in government sales
include the larger discounts (and thus lower margins) typically involved in
government sales, the dependence of the Company on the ability of a prime
contractor, if any, to obtain the award and perform the contract, the
unpredictability of funding for various government programs, the ability of
the government agency to unilaterally terminate the contract, and the
dependence on the creditworthiness of any prime contractor (some of which are
relatively small organizations without substantial funds). The Company
anticipates that state, local and other government sales will continue to
represent a significant but fluctuating portion of its revenues in the future.
 
FIXED PRICE CONTRACTS
 
  Revenues from fixed price contracts represented approximately 8% and 12% of
the Company's total revenues for 1996 and 1997, respectively. In making
proposals for fixed price contracts, the Company relies on its estimated costs
for completing the project. These estimates reflect, among other factors,
judgments as to the efficiencies of the Company's technology and services as
applied to the project. Any increased or unexpected costs or unanticipated
delays in connection with the performance of fixed price contracts could have
a material adverse effect on the Company's business, financial condition and
results of operations. In the past, the Company has suffered material losses
on fixed price contracts.
 
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 March
31, 1998, the Company had approximately 112 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
 
  Following the Offering, the Company's officers and directors, and their
affiliates, in the aggregate, will have voting control of approximately 51.1%
of the Company's outstanding Common Stock. In particular, Thayer and its
affiliates will have voting control of approximately 38.8% of the Company's
outstanding Common Stock.
 
                                      13
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
Third 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. The
Company has an authorized class of 25,000,000 shares of preferred stock, $0.01
par value, that the Board of Directors may issue, without stockholder
approval, 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."
 
POSSIBLE VOLATILITY OF COMMON STOCK PRICE
 
  The market price for the Common Stock 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
29,917,453 shares of Common Stock. Assuming no exercise of the Underwriters'
over-allotment option, of these shares, 14,331,603 shares will be freely
tradable without restriction in the public market. Of the remaining 15,585,850
shares, (i) 14,437,586 shares will be eligible for sale beginning May 18, 1998
upon the expiration of the lock-up agreements entered into in connection with
the IPO (11,636,574 of which will be subject to 90-day lock-up agreements
between certain stockholders and the Representatives of the Underwriters),
(ii) 375,141 shares will be eligible for sale beginning June 30, 1998 (185,666
of which will be subject to a 90-day lock-up agreement between the holder
thereof and the Representatives of the Underwriters), (iii) 137,500 shares
will be eligible for sale beginning August 22, 1998 and (iv) 51,013 shares and
108,625 shares will be eligible for sale beginning January 10, 1999 and April
11, 1999, respectively. BancAmerica Robertson Stephens may, in its sole
discretion and at any time without notice, release all or any portion of the
securities subject to the lock-up agreements. 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."
 
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 then
outstanding common stock in an initial public offering. In 1988, SAG purchased
all of the outstanding stock of the Company, thereby acquiring control of the
Company.
 
  On March 31, 1997, the Company consummated the Recapitalization, pursuant to
which the senior management of the Company and Thayer acquired approximately
89% of the Company's then outstanding Common Stock. Thayer is a private equity
fund based in Washington, D.C. that targets investments in the information
technology and services industries and its investors include corporations,
pension funds and financial institutions. The Company believes that the
Recapitalization has provided several significant benefits to the Company,
such as access to growth and development capital, equity ownership incentives
for management and other key employees, and the opportunity and ability to
pursue acquisitions and internal product development.
 
  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 November 21, 1997, the Company, Thayer and an affiliate of Thayer
consummated the sale of 8,855,000 shares of Common Stock in an initial public
offering (the "IPO"). Following the IPO, Thayer and an affiliate of Thayer
owned approximately 56% of the Company's outstanding Common Stock and SAG
owned approximately 9% of the Company's then outstanding Common Stock.
 
  On September 30, 1997, the Company acquired R.D. Nickel and Associates, Inc.
("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 served as the exclusive distributor of the
Company's products in Canada since 1973. R.D. Nickel now operates as Software
AG Systems (Canada) Inc., an indirect subsidiary of the Company.
 
                                      15
USE OF PROCEEDS
 
  The Company will not receive any proceeds from the sale of Common Stock by
the Selling Stockholders in the Offering.
 
                                DIVIDEND POLICY
 
  The Company did not pay any cash dividends in 1997 and does not anticipate
paying any cash dividends on its Common Stock in the foreseeable future. In
1996, while a wholly owned subsidiary of SAG, the Company paid aggregate cash
dividends to SAG of $9.0 million.
 
                                      16
CAPITALIZATION
 
  The following table sets forth as of March 31, 1998, the capitalization of
the Company. 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.
MARCH 31, 1998
                                                                 --------------
                                                                 (IN THOUSANDS)
Stockholders' equity:
Preferred Stock, $0.01 par value; 25,000,000 shares authorized;
 none issued and outstanding...................................     $   --
Common Stock, $0.01 par value; 75,000,000 shares authorized;
 29,523,149 shares issued and outstanding (1)..................         295
Additional paid-in capital.....................................      84,291
Retained earnings..............................................      10,657
                                                                    -------
  Total stockholders' equity...................................      95,243
                                                                    -------
    Total capitalization.......................................     $95,243
                                                                    =======
--------
(1) Excludes (i) 8,242 shares of Common Stock issued upon the exercise of
    stock options subsequent to March 31, 1998 granted under the Option Plan
    at a weighted average exercise price of $1.47, (ii) 5,065,647 shares of
    Common Stock issuable upon the exercise of stock options outstanding as of
    April 17, 1998, granted under the Option Plan at a weighted average
    exercise price of $5.46 per share and (iii) 1,791,107 shares of Common
    Stock reserved for future issuance pursuant to the Option Plan.
 
                                      17
PRICE RANGE OF COMMON STOCK
 
  The Company's Common Stock has traded on the NYSE under the symbol AGS since
November 18, 1997. The following table sets forth the high and low sales
prices, as reported on the NYSE, for the periods indicated.
HIGH     LOW
                                                                ----     ---
1997
     Fourth Quarter (from November 18, 1997)................... $14 1/2  $10
     1998
     First Quarter.............................................  27 1/4  11 1/8
     Second Quarter (through April 17, 1998)...................  28 1/16 25 1/2
On April 17, 1998, the last sale price of the Common Stock, as reported by
the NYSE, was 27 7/16 per share. As of April 13, 1998, the Company had
approximately 42 common stockholders of record.
 
                                      18
SELECTED CONSOLIDATED FINANCIAL DATA
 
  The consolidated statement of operations data set forth below for each of
the years ended December 31, 1995, 1996 and 1997 and the consolidated balance
sheet data as of December 31, 1996 and 1997 have been derived from the
Company's consolidated financial statements, which statements have been
audited by KPMG Peat Marwick LLP, independent certified public accountants,
and are included elsewhere in this Prospectus. The consolidated statement of
operations data for the year ended December 31, 1994 and the consolidated
balance sheet data at December 31, 1994 and 1995 have been 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 year ended December 31, 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 March 31, 1998 and for the three months ended
March 31, 1998 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 three months ended March 31, 1998 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."
 
                                      19
PREDECESSOR              COMBINED (1) PREDECESSOR     SUCCESSOR
                          ------------------------------------ ------------ ----------- -----------------
                                                                               THREE      NINE    THREE
                                                                              MONTHS     MONTHS   MONTHS
                                      YEARS ENDED DECEMBER 31,                 ENDED     ENDED    ENDED
                          -------------------------------------------------  MAR. 31,   DEC. 31, MAR. 31,
                            1993      1994     1995     1996       1997        1997       1997     1998
                          --------  -------- -------- -------- ------------ ----------- -------- --------
                                              (IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF
 OPERATIONS DATA:
Revenues:
 Software license fees..  $ 51,672  $ 51,832 $ 52,061 $ 52,163   $ 64,137    $  7,341   $ 56,796 $21,649
 Maintenance fees.......    57,264    65,871   65,307   69,702     72,689      17,352     55,337  19,800
 Professional service
  fees..................    31,175    29,552   35,194   34,975     44,398       9,948     34,450  14,414
                          --------  -------- -------- --------   --------    --------   -------- -------
 Total revenues.........   140,111   147,255  152,562  156,840    181,224      34,641    146,583  55,863
                          --------  -------- -------- --------   --------    --------   -------- -------
Cost of revenues:
 Software license.......    14,331    13,513   15,244   14,120     19,909       2,098     17,811   5,670
 Maintenance............    29,796    29,823   23,488   25,885     28,764       6,205     22,559   7,057
 Professional services..    25,835    26,490   32,591   32,966     37,567       9,211     28,356  11,501
                          --------  -------- -------- --------   --------    --------   -------- -------
 Total cost of reve-
  nues..................    69,962    69,826   71,323   72,971     86,240      17,514     68,726  24,228
                          --------  -------- -------- --------   --------    --------   -------- -------
Gross profit............    70,149    77,429   81,239   83,869     94,984      17,127     77,857  31,635
                          --------  -------- -------- --------   --------    --------   -------- -------
Operating expenses:
 Software product devel-
  opment................     3,045       900      900    1,372      1,093         --       1,093     755
 Sales and marketing....    43,439    50,422   52,512   48,677     38,320       7,317     31,003  11,873
 Administrative and gen-
  eral..................    28,636    25,212   24,639   28,539     35,758       8,500     27,258  10,805
 Write-off of acquired
  in-process research
  and development costs
  (2)...................       --        --       --       --       6,051         --       6,051     --
                          --------  -------- -------- --------   --------    --------   -------- -------
 Total operating ex-
  penses................    75,120    76,534   78,051   78,588     81,222      15,817     65,405  23,433
                          --------  -------- -------- --------   --------    --------   -------- -------
Income (loss) from oper-
 ations.................    (4,971)      895    3,188    5,281     13,762       1,310     12,452   8,202
Other income and ex-
 pense, net.............     7,599     1,882    2,449    5,230      1,995         978      1,017     906
                          --------  -------- -------- --------   --------    --------   -------- -------
Income before cumulative
 effect of change in
 accounting principle
 and income taxes.......     2,628     2,777    5,637   10,511     15,757       2,288     13,469   9,108
Cumulative effect of
 change in accounting
 principle..............     5,070       --       --       --         --          --         --      --
Income tax provision....     1,318     1,395    2,311    4,302      9,046         915      8,131   3,718
                          --------  -------- -------- --------   --------    --------   -------- -------
Net income..............  $  6,380  $  1,382 $  3,326 $  6,209   $  6,711    $  1,373   $  5,338 $ 5,390
                          ========  ======== ======== ========   ========    ========   ======== =======
Net income per common
 share (3):
 Income from continuing
  operations............  $   0.05  $   0.05 $   0.12 $   0.23   $   0.27    $   0.06   $   0.21 $  0.18
 Cumulative effect of
  change in accounting
  principle.............      0.18       --       --       --         --          --         --      --
                          --------  -------- -------- --------   --------    --------   -------- -------
                          $   0.23  $   0.05 $   0.12 $   0.23   $   0.27    $   0.06   $   0.21 $  0.18
                          ========  ======== ======== ========   ========    ========   ======== =======
Net income per common
 share--assuming
 dilution (3):
 Income from continuing
  operations............  $   0.05  $   0.05 $   0.11 $   0.21   $   0.25    $   0.05   $   0.20 $  0.17
 Cumulative effect of
  change in accounting
  principle.............      0.17       --       --       --         --          --         --      --
                          --------  -------- -------- --------   --------    --------   -------- -------
                          $   0.22  $   0.05 $   0.11 $   0.21   $   0.25    $   0.05   $   0.20 $  0.17
                          ========  ======== ======== ========   ========    ========   ======== =======
Dividends...............  $    --   $    600 $  1,700 $  9,000   $    --     $    --    $    --  $   --
                          ========  ======== ======== ========   ========    ========   ======== =======
20
PREDECESSOR                 SUCCESSOR
                         ---------------------------------- ------------------
                                        DECEMBER 31,
                         ------------------------------------------- MARCH 31,
                          1993    1994     1995      1996     1997     1998
                         ------- ------- --------  -------- -------- ---------
                                            (IN THOUSANDS)
CONSOLIDATED BALANCE
 SHEET DATA:
Working capital (defi-
 cit)................... $ 6,355 $ 5,167 $ (2,465) $ 30,421 $ 62,052 $ 65,429
Total assets............  74,175  86,466  125,612   158,088  196,126  199,600
Long-term debt, less
 current maturities.....   3,212     431      --        --       --       --
Total stockholders' eq-
 uity...................  30,190  30,972   32,599    29,808   89,818 $ 95,243
--------
(1) Reflects combined data for the three months ended March 31, 1997 (prior to
    the Recapitalization) and for the nine months ended December 31, 1997
    (subsequent to the Recapitalization).
(2) The write-off of acquired in-process research and development costs for
    the year ended December 31, 1997 relates to the Company's acquisition of
    R.D. Nickel. Before deducting the nonrecurring write-off for this combined
    period, income from operations was $19.8 million, net income was $12.8
    million and basic and diluted net income per common share were $0.51 and
    $0.48, respectively.
(3) In accordance with Statement of Financial Accounting Standard No. 128
    "Earnings Per Share" ("SFAS No. 128") issued by the Financial Accounting
    Standards Board, the Company calculated and presented basic and diluted
    earnings per share for the current period. The Company also retroactively
    adopted SFAS No. 128 for all prior periods presented in calculating and
    presenting the earnings per share. Basic earnings per share is based on
    income available to common stockholders divided by the weighted average
    number of common shares outstanding. Diluted earnings per share is also
    based on income available to common stockholders divided by the sum of the
    weighted average number of common shares outstanding and all potential
    common shares which are dilutive. See Note 1 of Notes to Consolidated
    Financial Statements.
 
                                      21
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.
 
  Immediately prior to the consummation of the Recapitalization, the Company
entered into a perpetual (unless otherwise terminated by the written agreement
of the parties) Cooperation Agreement with SAG that terminated and superseded
the license agreement dated January 1, 1995. As consideration for the
Cooperation Agreement, the Company paid SAG approximately $22.6 million. Under
the Cooperation Agreement, each of the Company and SAG are required to pay the
other royalties of 24% of net revenues from sales of licenses of, and
technical services on, each other's products for the initial 20 years of the
perpetual term of the agreement. For calendar years 1997 through 2000, the
Company will be required to pay SAG minimum annual royalties of $21.0 million,
provided that SAG's worldwide product and technical services revenues for each
of those years are at least equal to SAG's 1996 worldwide revenues. In the
event of a decrease in SAG's worldwide revenues, the minimum annual royalty
requirement will be reduced proportionately.
 
  Pursuant to the Recapitalization, the determination of fair value allocated
to the identifiable assets and liabilities of the Company has been made by
management based on the nature of the assets and liabilities acquired, and
general economic factors. Based on this allocation, the fair value of the
Company's Cooperation Agreement has been recorded at $23.5 million, based on
an independent appraisal. The amortization period for the Cooperation
Agreement is ten years. The fair value of the Company's remaining assets and
liabilities has been presumed to be equal to the book value as of the date of
the acquisition. Based on allocation of the purchase price to the net assets
and liabilities, an excess of purchase price over net assets acquired
(goodwill) of $6.4 million was recorded. Such goodwill is being amortized on a
straight-line basis over 10 years.
 
  Prior to the Recapitalization, the Company's management team was constrained
by SAG in its ability to develop new products, license third-party software,
retain capital for expansion and make acquisitions of companies, products or
technologies. The Company's relatively low software product development
expenditures resulted, in part, from these constraints. Management has
undertaken several strategic initiatives since the Recapitalization to
increase revenue growth and profitability, including building a product
development organization, developing a product and professional services
offering that addresses the year 2000 problem and acquiring R.D. Nickel.
 
  On September 30, 1997, the Company acquired 100% of the issued and
outstanding shares of the common stock of R.D. Nickel. The transaction was
accounted for using the purchase method of accounting for a business
combination. The aggregate purchase price of Cdn$14.0 million (US$10.1
million) was funded through a cash payment of Cdn$7.0 million (US$5.1 million)
and a note payable of Cdn$7.0 million (US$5.1 million). The note payable was
repaid in November 1997 with the proceeds from the IPO. In connection with the
acquisition, the Company recorded a $6.1 million non-recurring charge against
earnings for in-process research and development costs. The remaining excess
purchase price of $5.0 million represents goodwill, and has been recorded as
other
 
                                      22
intangible assets. The related amortization period for the goodwill is ten
years. At March 31, 1998, accumulated amortization of the goodwill was
approximately $250,000. At September 30, 1997, the net assets acquired have
been reported in the Company's consolidated financial statements. As of
October 1, 1997, the operating results of R.D. Nickel have been consolidated
with the Company's operating results.
 
  Software license fees are generated through the licensing of enterprise
development and enterprise enablement products. Enterprise development
products include ADABAS, a high-performance data management system, and
NATURAL, a 4GL programming language. Enterprise enablement software products
include ENTIRE, a family of middleware products, and INSIGHT 2000 Tool Kit, a
software product that addresses the year 2000 problem.
 
  The Company also provides maintenance and support services to its customers.
Such maintenance services are typically provided in accordance with annual
agreements, with maintenance fees charged as a percentage of current software
license fees. Maintenance fees are recognized ratably over the term of the
agreement.
 
  The Company markets and sells its software products and services, as well as
third-party products, through direct and indirect channels in the Territory.
In North America, a direct sales and support structure is utilized through the
Company's wholly owned subsidiaries. In the remainder of the Territory,
exclusive distributors sell the Company's products and provide maintenance
support and pay the Company a royalty on the revenues derived therefrom. The
Company has historically generated the majority of its revenues from sales
within the United States. Royalty revenues from international distributors
represented 14%, 17% and 15% of the Company's total revenues in 1995, 1996 and
1997, respectively.
 
  The Company also generates revenues through the provision of professional
services associated with the implementation and deployment of the Company's
enterprise development and enterprise enablement products and through
educational services. The Company recognizes revenue from professional
services as such services are performed. The Company's professional services
offerings include consulting, software integration, system implementation,
large project management and year 2000 analysis and remediation. These
services are delivered on either a time and materials basis or a fixed price
basis.
 
  The Company offers its products and professional services to certain
customers under Enterprise License Agreements ("ELAs"). ELAs are typically
long-term contracts of three to five years which include software products,
professional services and maintenance support. Revenues from software licenses
sold as part of an ELA are recognized as revenue when such products are
shipped. Revenue from professional services and maintenance support are
recognized as provided. As of March 31, 1998, 133 of the Company's customers
had entered into ELAs with the Company.
 
                                      23
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) PREDECESSOR     SUCCESSOR
                          --------------------------  ------------ ----------- -----------------
                                                                      THREE      NINE    THREE
                                                          YEAR       MONTHS     MONTHS   MONTHS
                                                         ENDED        ENDED     ENDED    ENDED
                          YEAR ENDED DECEMBER 31,       DEC. 31,    MAR. 31,   DEC. 31, MAR. 31,
                          --------------------------  ------------ ----------- -------- --------
                          1993   1994   1995   1996       1997        1997       1997     1998
                          -----  -----  -----  -----  ------------ ----------- -------- --------
Revenues:
 Software license fees..   36.9%  35.2%  34.1%  33.3%     35.4%        21.2%     38.7%    38.8%
 Maintenance fees.......   40.9   44.7   42.8   44.4      40.1         50.1      37.8     35.4
 Professional service
  fees..................   22.2   20.1   23.1   22.3      24.5         28.7      23.5     25.8
                          -----  -----  -----  -----     -----        -----     -----    -----
 Total revenues.........  100.0  100.0  100.0  100.0     100.0        100.0     100.0    100.0
                          -----  -----  -----  -----     -----        -----     -----    -----
Cost of revenues:
 Software license.......   10.2    9.2   10.0    9.0      11.0          6.1      12.2     10.2
 Maintenance............   21.3   20.3   15.4   16.5      15.9         17.9      15.4     12.6
 Professional services..   18.4   18.0   21.4   21.0      20.7         26.6      19.3     20.6
                          -----  -----  -----  -----     -----        -----     -----    -----
 Total cost of reve-
  nues..................   49.9   47.5   46.8   46.5      47.6         50.6      46.9     43.4
                          -----  -----  -----  -----     -----        -----     -----    -----
Gross profit............   50.1   52.5   53.2   53.5      52.4         49.4      53.1     56.6
                          -----  -----  -----  -----     -----        -----     -----    -----
Operating expenses:
 Software product
  development...........    2.2    0.6    0.6    0.9       0.6          --        0.7      1.3
 Sales and marketing....   31.0   34.2   34.4   31.0      21.1         21.1      21.2     21.3
 Administrative and
  general...............   20.4   17.1   16.2   18.2      19.7         24.5      18.6     19.3
 Write-off of acquired
  in-process research
  and development costs
  (2)...................    --     --     --     --        3.4          --        4.1      --
                          -----  -----  -----  -----     -----        -----     -----    -----
 Total operating
  expenses..............   53.6   51.9   51.2   50.1      44.8         45.6      44.6     41.9
                          -----  -----  -----  -----     -----        -----     -----    -----
Income (loss) from
 operations.............   (3.5)   0.6    2.0    3.4       7.6          3.8       8.5     14.7
Other income and
 expense, net...........    5.4    1.3    1.6    3.3       1.1          2.8       0.7      1.6
                          -----  -----  -----  -----     -----        -----     -----    -----
Income before cumulative
 effect of change in
 accounting principle
 and income taxes.......    1.9    1.9    3.6    6.7       8.7          6.6       9.2     16.3
Cumulative effect of
 change in accounting
 principle..............    3.6    --     --     --        --           --        --
Income tax provision ...    0.9    0.9    1.5    2.6       5.0          2.6       5.6      6.7
                          -----  -----  -----  -----     -----        -----     -----    -----
Net income .............    4.6%   1.0%   2.1%   4.1%      3.7%         4.0%      3.6%     9.6%
                          =====  =====  =====  =====     =====        =====     =====    =====
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) PREDECESSOR     SUCCESSOR
                         --------------------------  ------------ ----------- -----------------
                                                                     THREE      NINE    THREE
                                                         YEAR       MONTHS     MONTHS   MONTHS
                         YEAR ENDED DECEMBER 31,        ENDED        ENDED     ENDED    ENDED
                         --------------------------    DEC. 31,    MAR. 31,   DEC. 31, MAR. 31,
                         1993   1994   1995   1996       1997        1997       1997     1998
                         -----  -----  -----  -----  ------------ ----------- -------- --------
Software license........  27.7%  26.1%  29.3%  27.1%     31.0%       28.6%      31.4%    26.2%
Maintenance.............  52.0   45.3   36.0   37.1      39.6        35.8       40.8     35.6
Professional services...  82.9   89.6   92.6   94.3      84.6        92.6       82.3     79.8
--------
(1) Reflects combined data for the three months ended March 31, 1997 (prior to
    the Recapitalization) and for the nine months ended December 31, 1997
    (subsequent to the Recapitalization).
(2) The write-off of acquired in-process research and development costs for
    the year ended December 31, 1997 relates to the Company's acquisition of
    R.D. Nickel. Before deducting the nonrecurring write-off for this period,
    income from operations as a percentage of total revenues was 10.9% and net
    income as a percentage of total revenues was 7.0%.
 
                                      24
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
 
 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 $55.9 million and
$34.6 million for the three months ended March 31, 1998 and 1997,
respectively, representing an increase of 61%.
 
  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 $21.6 million and
$7.3 million for the three months ended March 31, 1998 and 1997, respectively,
representing an increase of 195%. This increase was primarily attributable to
the reorganization of the direct sales force at the beginning of 1997. As a
result of this reorganization, the Company has experienced increased
acceptance of ELAs by its customer base. For the three months ended March 31,
1998, the Company entered into 13 ELAs, compared to 4 ELAs for the three
months ended March 31, 1997.
 
  Maintenance Fees. The Company's maintenance fees are derived primarily from
providing technical support to customers which have licensed the Company's
enterprise development and enterprise enablement products. Maintenance is
available in various levels of support and priced as a percentage of the
software license fees. The most commonly contracted level is priced at 18% of
the applicable license fee at the time of renewal. Software customers are not
required to renew their maintenance agreements and renewals can be expected
only if the customer continues to use the licensed product. Maintenance fees
were $19.8 million and $17.4 million for the three months ended March 31, 1998
and 1997, respectively, representing an increase of 14%. This increase was
primarily attributable to the effect of price increases, combined with an
increase in the maintenance base from the sale of new software licenses.
 
  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 $14.4 million and $9.9 million for the three months ended March 31, 1998
and 1997, respectively, representing an increase of 45%. This increase was
primarily attributable to the Company's year 2000 program, which began in 1997
and contributed $4.6 million of professional services fees for the three
months ended March 31, 1998 compared to $0.8 million for the three months
ended March 31, 1997.
 
 Cost of Revenues
 
  Software License. Software license costs consist primarily of royalties paid
to third parties. Software license costs were $5.7 million and $2.1 million
for the three months ended March 31, 1998 and 1997, respectively, representing
26% and 29% of software license fees for each respective period. The increase
in dollar amount was primarily due to an increase in sales volume. The
percentage decrease was primarily due to a shift in product mix since royalty
rates on third-party products range 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 $7.1 million and $6.2 million for the three
months ended March 31, 1998 and 1997, respectively, representing 36% of
maintenance fees for each respective period. The increase in dollar amount was
primarily attributable to the increase in sales of software licenses.
 
  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 and project review.
Professional services costs were $11.5 million and $9.2 million for the three
months ended March 31, 1998 and 1997, respectively, representing 80% and 93%
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.
 
                                      25
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 $0.8 million for
the three months ended March 31, 1998 representing 3% of software license
fees. There were no software product development expenses for the three months
ended March 31, 1997. Prior to the Recapitalization, the Company's ability to
invest in software product development was constrained. The Company expects
software product development expenses to increase in the future as a
percentage of software license fees.
 
  Sales and Marketing. Sales and marketing expenses consist primarily of
employee salaries, benefits, commissions, marketing programs, public
relations, trade shows, seminars, advertising and related communications and
associated overhead costs. Sales and marketing expenses were $11.9 million and
$7.3 million for the three months ended 1998 and 1997, respectively,
representing 21% of total revenues for both respective periods. The increase
in dollar amount was primarily due to several new marketing programs
implemented in 1998.
 
  Administrative and General. Administrative and general expenses include
employee salaries and benefits for administration, executive, finance, legal,
human resources, data center, distribution and internal systems personnel and
associated overhead costs, as well as bad debt, accounting and legal expenses.
Administrative and general expenses were $10.8 million and $8.5 million for
the three months ended March 31, 1998 and 1997, respectively, representing 19%
and 25% of total revenues for each respective period. The increased dollar
amount was primarily attributable to increases in personnel related expenses
and infrastructure required to support an independent company, amortization
expenses relating to the goodwill resulting from the Recapitalization on March
31, 1997 and the R.D. Nickel acquisition on September 1997, as well as the
amortization of the Cooperation Agreement and the write-off of certain
investments.
 
 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 net of expenses was $0.9 million and
$1.0 million for the three months ended March 31, 1998 and 1997, respectively.
This slight decrease was primarily attributable to the interest income
recorded in 1997 on $30.0 million in loans made to SAG which was offset
against payables due SAG in March 1997 prior to the Recapitalization. This
decrease was offset by the increase in the interest income from investments in
1998 compared to 1997.
 
  Income Tax Provision. The income tax provision was $3.7 million and $0.9
million for the three months ended March 31, 1998 and 1997, respectively,
resulting in effective tax rates of 40.8% and 40.0%, respectively.
 
YEARS ENDED DECEMBER 31, 1997 AND 1996
 
 Revenues
 
  Total Revenues. The Company's total revenues were $181.2 million and $156.8
million in 1997 and 1996, respectively, representing an increase of 16%.
 
  Software License Fees. Software license fees were $64.1 million and $52.2
million in 1997 and 1996, respectively, representing an increase of 23%. This
increase was primarily attributable to the reorganization of the direct sales
force at the beginning of 1997. As a result of this reorganization, the
Company has experienced increased acceptance of ELAs by its customer base. In
1997, the Company entered into 47 ELAs, compared to 30 ELAs in 1996. The
increase in revenue was also impacted by the acquisition of R.D. Nickel which
added $1.9 million of software license fees since the acquisition in September
1997.
 
                                      26
Maintenance Fees. Maintenance fees were $72.7 million and $69.7 million in
1997 and 1996, respectively, representing an increase of 4%. This increase was
primarily attributable to the effect of price increases, combined with an
increase in the maintenance base from the sale of new software licenses and
inclusion of the maintenance fees of $1.7 million attributable to the R.D.
Nickel acquisition in September 1997.
 
  Professional Services Fees. Professional services fees were $44.4 million
and $35.0 million in 1997 and 1996, respectively, representing an increase of
27%. This increase was primarily attributable to the Company's year 2000
program, which began in 1997 and contributed $6.6 million of professional
services fees in 1997.
 
 Cost of Revenues
 
  Software License. Software license costs were $19.9 million and $14.1
million in 1997 and 1996, respectively, representing 31% and 27% of software
license fees for each respective period. The increase in dollar amount was due
primarily to an increase in sales volume. The percentage increase was
primarily due to a shift in product mix since royalty rates on third-party
products vary from 24% to 40%.
 
  Maintenance. Maintenance costs were $28.8 million and $25.9 million in 1997
and 1996, respectively, representing 40% and 37% of maintenance fees for each
respective period. This increase was primarily attributable to the hiring of
additional staff to support new enterprise enablement products.
 
  Professional Services. Professional services costs were $37.6 million and
$33.0 million in 1997 and 1996, respectively, representing 85% and 94% of
professional services fees for each respective period. The improvement in
margin was primarily attributable to improved performance on fixed price
contracts combined with improved utilization of resources. Both of these
improvements were derived from process changes initiated in late 1995 that
included enhanced infrastructure and tools for project management, improved
estimating and bidding processes and expanded quality control procedures.
 
 Operating Expenses
 
  Software Product Development. Software product development costs were $1.1
million and $1.4 million in 1997 and 1996, respectively, representing 2% and
3% of software license fees for each respective period. This decrease was the
result of a sale, with transfer of the applicable software product development
costs, of one of the Company's products in 1996 to a third party. This
decrease was partially offset by the product development costs of $138,000
attributable to the acquisition of R.D. Nickel. Prior to the Recapitalization,
the Company's ability to invest in software product development was
constrained. The Company expects software product development expenses to
increase in the future as a percentage of software license fees.
 
  Sales and Marketing. Sales and marketing expenses were $38.3 million and
$48.7 million in 1997 and 1996, respectively, representing 21% and 31% of
total revenues for each respective period. This decrease was primarily
attributable to reductions in the direct sales force and related support
personnel, combined with reductions in marketing staff and programs. These
reductions, which were undertaken to reduce the Company's cost of sales
relative to software license fees and were part of an overall cost reduction
program, began in 1995 and were substantially implemented by June 1997. The
overall decrease in the sales and marketing expenses was slightly offset by
the sales and marketing expenses of $343,000 attributable the acquisition of
R.D. Nickel.
 
  Administrative and General. Administrative and general expenses were $35.8
million and $28.5 million in 1997 and 1996, respectively, representing 20% and
18% of total revenues for each respective period. The increased dollar amount
was primarily attributable to increases in personnel related expenses and
infrastructure required to support an independent company and the inclusion of
administrative and general expenses of $672,000 since the acquisition of R.D.
Nickel.
 
  Write-off of Acquired In-Process Research and Development Costs. The write-
off of acquired in-process research and development costs was attributable to
certain of the products acquired in the acquisition of R. D. Nickel. See Note
4 of Notes to Consolidated Financial Statements.
 
                                      27
Other
 
  Other Income and Expense, Net. Interest and investment income and expense,
net, was $2.0 million and $5.2 million in 1997 and 1996, respectively. This
decrease was primarily attributable to the interest income recorded in 1996 on
$30.0 million in loans made to SAG combined with income received for the sale
of the rights to one of the Company's products in 1996. The loans to SAG were
offset against payables due SAG in March 1997 prior to the Recapitalization.
 
  Income Tax Provision. The income tax provision was $9.0 million and $4.3
million in 1997 and 1996, respectively, resulting in effective tax rates of
41.5% (exclusive of the write-off of acquired in-process research and
development costs), and 40.9%, respectively. This increase in rate was
primarily attributable to the non-deductible expenses incurred as a result of
the Recapitalization.
 
YEARS ENDED DECEMBER 31, 1996 AND 1995
 
 Revenues
 
  Total Revenues. The Company's total revenues were $156.8 million and $152.6
million in 1996 and 1995, respectively, representing an increase of 3%.
 
  Software License Fees. Software license fees were $52.2 million in 1996 and
$52.1 million in 1995, or 33% and 34% of total revenues for each respective
period.
 
  Maintenance Fees. Maintenance fees were $69.7 million in 1996 and $65.3
million in 1995, representing an increase of 7%. This increase was due
primarily to the effect of price increases combined with an increase in the
maintenance base from the sale of additional software licenses.
 
  Professional Services Fees. Professional services fees were $35.0 million in
1996 and $35.2 million in 1995, or 22% and 23% of total revenues for each
respective period. This minimal decline from 1995 to 1996 was the result of
actions taken in the latter part of 1995 to temporarily curb growth in the
professional services operation so that the Company could build a stronger
infrastructure and control process to support the rapid growth anticipated
from the year 2000 program. These actions were largely accomplished and
accounted for in the first half of 1996.
 
 Cost of Revenues
 
  Software License. Software license costs were $14.1 million in 1996 and
$15.2 million in 1995, representing 27% and 29% of software license fees for
each respective period. This decrease was primarily attributable to lower
third-party royalty rates associated with a slight shift in product mix.
 
  Maintenance. Maintenance costs were $25.9 million in 1996 and $23.5 million
in 1995, representing 37% and 36% of maintenance fees for each respective
period. The increase from 1995 to 1996 was primarily attributable to royalties
related to additional maintenance fees combined with a change in product mix.
 
  Professional Services. Professional services costs were $33.0 million in
1996 and $32.6 million in 1995, representing 94% and 93% of professional
services fees in each respective period. This increase was primarily
attributable to an increase in spending for infrastructure to support the
anticipated growth in the Year 2000 Program, partially offset by improved
margins on new projects.
 
 Operating Expenses
 
  Software Product Development. Software product development expenses were
$1.4 million in 1996 and $0.9 million in 1995, representing 3% and 2% of
software license fees, respectively. This increase was primarily attributable
to the employment of additional staff to develop and enhance the Company's
products.
 
                                      28
Sales and Marketing. Sales and marketing expenses were $48.7 million in 1996
and $52.5 million in 1995, representing 31% and 34% of total revenues,
respectively. This decrease in expenses was primarily attributable to
reductions made in 1995 to the direct sales force and to the direct support
personnel. As discussed previously, these reductions commenced in 1995 and
were substantially implemented by June 1997. The net effect of this reduction
during 1996 was to reduce the direct selling and support personnel from 131 at
December 31, 1995, to 98 at December 31, 1996, a net reduction of 25%.
 
  Administrative and General. Administrative and general expenses were $28.5
million in 1996 and $24.6 million in 1995, representing 18% and 16% of total
revenues, respectively. This increase was primarily attributable to
investments in computer equipment necessary to support anticipated growth of
the year 2000 program and severance payments made to the Company's former
chief executive officer.
 
 Other
 
  Other Income and Expense, Net. Other income and expense, net, was $5.2
million in 1996 and $2.4 million in 1995. The increase was attributable to
interest received on $30.0 million in loans made to SAG in three stages over
1995 and 1996, combined with income received for the sale of the rights to one
of the Company's products.
 
  Income Tax Provision. The income tax provision was $4.3 million and $2.3
million in 1996 and 1995, respectively, resulting in effective tax rates of
40.9% and 41.0%, respectively.
 
                                      29
QUARTERLY RESULTS OF OPERATIONS
 
  The following table sets forth certain unaudited quarterly statement of
operations data for each of the nine most recent quarters. In the opinion of
management, this information has been prepared on the same basis as the
audited financial statements, and all necessary adjustments, consisting only
of normal recurring adjustments, have been included in the amounts stated
below to present fairly the unaudited quarterly results when read in
conjunction with the audited Consolidated Financial Statements and Notes
thereto. The operating results for any quarters are not necessarily indicative
of results for any future periods.
PREDECESSOR                                 SUCCESSOR
                          ----------------------------------------------- -------------------------------------
                                                            QUARTER ENDED
                          -------------------------------------------------------------------------------------
                          MAR. 31,  JUNE 30,  SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,  MAR. 31,
                            1996      1996      1996      1996     1997     1997     1997      1997      1998
                          --------  --------  --------- -------- -------- -------- --------- --------  --------
                                                            (IN THOUSANDS)
Revenues:
 Software license fees..  $ 6,609   $12,369    $12,785  $20,400  $ 7,341  $14,254   $18,458  $24,084   $21,649
 Maintenance fees.......   17,171    17,225     17,382   17,924   17,352   18,394    17,542   19,401    19,800
 Professional service
  fees..................    8,506     7,515     10,959    7,995    9,948   10,299    10,729   13,422    14,414
                          -------   -------    -------  -------  -------  -------   -------  -------   -------
 Total revenues.........   32,286    37,109     41,126   46,319   34,641   42,947    46,729   56,907    55,863
                          -------   -------    -------  -------  -------  -------   -------  -------   -------
Cost of revenues:
 Software license.......    1,758     3,291      3,494    5,577    2,098    4,074     6,428    7,309     5,670
 Maintenance............    6,614     6,376      6,273    6,622    6,205    6,577     8,062    7,920     7,057
 Professional services..    8,480     7,291     10,083    7,112    9,211    9,451     8,491   10,414    11,501
                          -------   -------    -------  -------  -------  -------   -------  -------   -------
 Total cost of
  revenues..............   16,852    16,958     19,850   19,311   17,514   20,102    22,981   25,643    24,228
                          -------   -------    -------  -------  -------  -------   -------  -------   -------
Gross profit............   15,434    20,151     21,276   27,008   17,127   22,845    23,748   31,264    31,635
                          -------   -------    -------  -------  -------  -------   -------  -------   -------
Operating expenses:
 Software product
  development...........      410       591        371      --       --       283       312      498       755
 Sales and marketing....    8,576    12,851      9,712   17,538    7,317   11,477     9,060   10,466    11,873
 Administrative and
  general...............    7,349     8,784      7,339    5,067    8,500    8,932     9,317    9,009    10,805
 Write-off of acquired
  in-process research
  and development
  costs (1).............      --        --         --       --       --       --      6,051      --        --
                          -------   -------    -------  -------  -------  -------   -------  -------   -------
 Total operating
  expenses..............   16,335    22,226     17,422   22,605   15,817   20,692    24,740   19,973    23,433
                          -------   -------    -------  -------  -------  -------   -------  -------   -------
Income (loss) from
 operations.............     (901)   (2,075)     3,854    4,403    1,310    2,153      (992)  11,291     8,202
Other income and
 expense, net...........      592     1,048        533    3,057      978    1,597      (221)    (359)      906
                          -------   -------    -------  -------  -------  -------   -------  -------   -------
Income (loss) before
 income taxes...........     (309)   (1,027)     4,387    7,460    2,288    3,750    (1,213)  10,932     9,108
Income tax provision
 (benefit)..............      (97)     (404)     1,642    3,161      915    1,599     2,014    4,518     3,718
                          -------   -------    -------  -------  -------  -------   -------  -------   -------
Net income (loss).......  $  (212)  $  (623)   $ 2,745  $ 4,299  $ 1,373  $ 2,151   $(3,227) $ 6,414   $ 5,390
                          =======   =======    =======  =======  =======  =======   =======  =======   =======
--------
(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.
 
                                      30
The following table sets forth certain unaudited consolidated quarterly
statement of operations data expressed as a percentage of total revenues for
each of the nine most recent quarters.
PREDECESSOR                                 SUCCESSOR
                          ----------------------------------------------- ------------------------------------
                                                            QUARTER ENDED
                          ------------------------------------------------------------------------------------
                          MAR. 31,  JUNE 30,  SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
                            1996      1996      1996      1996     1997     1997     1997      1997     1998
                          --------  --------  --------- -------- -------- -------- --------- -------- --------
Revenues:
 Software license fees..    20.5%     33.3%      31.1%    44.0%    21.2%    33.2%     39.5%    42.3%    38.8%
 Maintenance fees.......    53.2      46.4       42.3     38.7     50.1     42.8      37.5     34.1     35.4
 Professional service
  fees..................    26.3      20.3       26.6     17.3     28.7     24.0      23.0     23.6     25.8
                           -----     -----      -----    -----    -----    -----     -----    -----    -----
 Total revenues.........   100.0     100.0      100.0    100.0    100.0    100.0     100.0    100.0    100.0
                           -----     -----      -----    -----    -----    -----     -----    -----    -----
Cost of revenue:
 Software license.......     5.4       8.9        8.5     12.0      6.1      9.5      13.8     12.8     10.2
 Maintenance............    20.5      17.2       15.3     14.3     17.9     15.3      17.3     13.9     12.6
 Professional service...    26.3      19.6       24.5     15.4     26.6     22.0      18.2     18.3     20.6
                           -----     -----      -----    -----    -----    -----     -----    -----    -----
 Total cost of reve-
  nues..................    52.2      45.7       48.3     41.7     50.6     46.8      49.3     45.0     43.4
                           -----     -----      -----    -----    -----    -----     -----    -----    -----
Gross profit............    47.8      54.3       51.7     58.3     49.4     53.2      50.7     55.0     56.6
                           -----     -----      -----    -----    -----    -----     -----    -----    -----
Operating expenses:
 Software product devel-
  opment................     1.3       1.6        0.9      --       --       0.7       0.7      0.9      1.3
 Sales and marketing....    26.6      34.6       23.6     37.9     21.1     26.7      19.4     18.4     21.3
 Administrative and gen-
  eral..................    22.8      23.7       17.8     10.9     24.5     20.8      19.9     15.8     19.3
 Write-off of acquired
  in-process research
  and development
  costs (1).............     --        --         --       --       --       --       12.9      --       --
                           -----     -----      -----    -----    -----    -----     -----    -----    -----
 Total operating ex-
  penses................    50.7      59.9       42.3     48.8     45.6     48.2      52.9     35.1     41.9
                           -----     -----      -----    -----    -----    -----     -----    -----    -----
Income (loss) from oper-
 ations.................    (2.9)     (5.6)       9.4      9.5      3.8      5.0      (2.2)    19.8     14.7
Other income and ex-
 pense, net.............     1.8       2.8        1.3      6.6      2.8      3.7      (0.5)    (0.6)     1.6
                           -----     -----      -----    -----    -----    -----     -----    -----    -----
Income (loss) before in-
 come taxes.............    (1.1)     (2.8)      10.7     16.1      6.6      8.7      (2.7)    19.2     16.3
Income tax provision
 (benefit)..............    (0.3)     (1.1)       4.0      6.8      2.6      3.7       4.3      7.9      6.7
                           -----     -----      -----    -----    -----    -----     -----    -----    -----
Net income (loss).......    (0.8)%    (1.7)%      6.7%     9.3%     4.0%     5.0%     (7.0)%   11.3%     9.6%
                           =====     =====      =====    =====    =====    =====     =====    =====    =====
--------
(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 product and professional services offerings that address the year
2000 problem and acquiring R.D. Nickel. The revenue and profit improvements in
1997 from the first quarter to the second, third and fourth quarters may be
partially attributable to these changes, but there can be no assurance that
this trend will continue in future quarters. Due in part to these initiatives,
the Company expects that product development costs as a percentage of software
license fees will increase and that administrative and general expenses as a
percentage of total revenues will decrease.
 
  The Company's results of operations have historically fluctuated on a
quarterly basis and 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
 
                                      31
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.
 
  Although past results may not be indicative of future results, maintenance
fees generally have not fluctuated on a quarterly basis to the same degree as
software license fees due to the large percentage of maintenance fees
generated from renewals of annual maintenance contracts which are recognized
ratably over the contract period.
 
  Revenues from professional services are influenced by the number of
personnel providing such services, the utilization rates of such personnel and
the number of billable days in a quarter. Other factors being equal, a quarter
ending December 31 will generally reflect lower professional services fees
than other quarters due to the relatively large number of holidays falling in
that quarter. In addition, the completion or commencement of significant
professional services projects may affect the revenues from professional
services in a particular quarter.
 
  Software license costs have varied from period to period and can be expected
to fluctuate in the future primarily due to shifts in product mix since
royalty rates on third party products vary from 24% to 40%.
 
  Historically, sales and marketing expenses have varied from quarter to
quarter in absolute dollar terms and as a percentage of revenues, as a result
of the size and timing of marketing programs. A significant portion of
marketing program costs are variable in nature and subject to management
discretion as to their timing and amount.
 
  The Company's quarterly operating results may continue to fluctuate due to
numerous factors, including the demand for the Company's products and
services, the timing and cost of new product and service introductions and
product enhancements by the Company or its competitors, changes in the mix of
products and services sold by the Company and in the mix of sales by
distribution channels, commencement or conclusion of significant service
contracts, timing of any acquisitions and associated costs, the size, timing
and terms of customer orders, including delays in significant orders, changes
in pricing policies by the Company or its competitors, the timing of
collection of accounts receivable, changes in foreign currency exchange rates,
competitive conditions in the industry and general economic conditions. The
Company's expenses are generally fixed and do not vary significantly in the
short term with revenues. As a result, operating and net income in a given
quarter may be disproportionately affected by a reduction in revenues.
 
LIQUIDITY AND CAPITAL RESOURCES
 
  Since 1988, when the Company became a wholly owned subsidiary of SAG, the
Company has financed its operations principally through cash flow from
operating activities. In order to meet its short term cash needs and to pay
dividends to SAG, 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. Net cash
provided by operating activities was $1.4 million and $1.5 million (excluding
$8.9 million of proceeds from the sales of accounts receivable) for the three
months ended March 31, 1998 and 1997, respectively, and $13.3 million, $37.5
million and $29.6 million for the years ended December 31, 1997, 1996 and
1995, respectively.
 
  Investing activities used net cash of $1.5 million and $0.2 million for the
three months ended March 31, 1998 and 1997, respectively, primarily to fund
capital expenditures needed to support expansion of the Company's business.
Investing activities used net cash of $33.2 million, $4.3 million and $23.8
million for the years ended December 31, 1997, 1996 and 1995, respectively,
primarily to fund capital expenditures needed to support expansion of the
Company's business, to provide loans to SAG, as consideration for the
Cooperation Agreement from SAG and to fund the acquisition of R.D. Nickel.
 
  Financing activities used net cash of $0.1 million for the three months
ended March 31, 1998, primarily due to additional payments made for costs
incurred in connection with the IPO. There were no financing activities for
the three months ended March 31, 1997.
 
 
                                      32
Financing activities provided net cash of $44.6 million for the year ended
December 31, 1997, primarily from the proceeds from the sale of Common Stock
from the IPO. During 1996 and 1995, financing activities used net cash of $9.0
million and $4.8 million, respectively, primarily for the repayment of long
term obligations and the payment of dividends.
 
  The Company has no long term debt, and as of March 31, 1998 and December 31,
1997, had $50.3 million and $50.4 million in cash and cash equivalents,
respectively. The Company currently has relationships with two third parties
whereby the Company may sell long term receivable contracts. These
transactions are treated as sales by the Company as the economic interest in
the contract is transferred to the buyer. As of March 31, 1998 and December
31, 1997, the Company remained contingently liable under the recourse
provisions associated with these sales in the amount of $42.8 million and
$47.9 million, respectively. The Company's accounts receivable days sales
outstanding at December 31, 1997 was 62.
 
  The Company's international distributors report to and pay the Company 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
since that time. With the acquisition of R.D. Nickel, the Company began direct
sales in Canada effective October 1, 1997. Revenues from this source were
approximately 7% of total revenues since the acquisition. The Company,
therefore, has not to date engaged in foreign currency hedging transactions.
The Company may enter into hedging transactions in the future.
 
  The Company traditionally leases all major equipment, and has no investment
in inventory or facilities other than leasehold improvements.
 
  The Company believes that its existing cash balances, funds generated from
operations and funds received from the sale of receivables, if any, will be
sufficient to finance the Company's operations for at least the next twelve
months. Although operating activities may provide cash in certain periods, to
the extent the Company grows in the future, its operating and investing
activities may use such cash. There can be no assurances that any necessary
additional financing will be available to the Company on commercially
reasonable terms. The Company had no material capital commitments or planned
expenditures as of March 31, 1998.
 
                                      33
BUSINESS
 
  The Company is an enterprise solutions company that provides robust software
products and related professional services to large organizations with complex
computing requirements. The Company's products are used to build and enhance
mission-critical applications that require reliability, scalability and
security, such as customer billing systems, financial accounting systems and
inventory management systems. To complement its products, the Company has a
comprehensive professional services offering, including consulting, software
integration, systems implementation and large project management services. The
Company has over 24 years of experience in addressing the needs of
organizations with complex enterprise level computing environments.
 
  The Company provides enterprise development software products and related
professional services used by organizations to develop new mission-critical
applications and enterprise enablement software products and related
professional services used to extend and integrate business applications. 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 enterprise
enablement software products and professional services that allow
organizations to integrate their mission-critical applications with other
applications and extend them to the Internet and intranets. Products in this
area include ENTIRE, a family of enterprise application integration products
that facilitates the communication between application components across
heterogeneous computing environments; iXpress, a web application assembly and
deployment platform; and EntireX DCOM, a product that uses Microsoft's ActiveX
technology to integrate applications written in a variety of programming
languages. The Company also has a year 2000 program which offers an 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's professional services that complement
its products include application development and enhancement, application
reengineering, application porting, rightsizing and application integration.
 
  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,
scalability, 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.
 
 
                                      34
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 and integrate 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 addition, IT organizations are increasingly
seeking to eliminate "islands of automation" by integrating business
applications across the enterprise and with external business partners. In
many cases, IT organizations lack the resources and expertise required to
cost-effectively implement, integrate 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, scalability and interoperability of legacy systems while
leveraging the speed, cost effectiveness and flexibility of new technologies
in an integrated manner. 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, expand and integrate 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, integration and enhancement of mission-critical enterprise
applications. The Company's products are used to build, maintain and integrate
business applications that require reliability, scalability 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. The
Company's enterprise enablement products allow customers to integrate their
legacy systems, providing application-to-application interoperability and the
means to share information within and beyond the enterprise.
 
  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
 
                                      35
resides. For example, the Company's software products and professional
services expertise in building mission-critical applications enable its
customers to realize the benefits of enterprise class applications such as
customer billing systems, financial accounting systems and inventory
management systems. Moreover, the Company's enterprise enablement products
allow its customers to integrate new applications with existing applications
across the enterprise.
 
  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 and improved business process coordination. 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 scalability 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 and to provide enterprise level
application integration. The Company's extensive experience in enterprise
software and related professional services enables it to address customers'
mission-critical computing needs.
 
COMPANY STRATEGY
 
  The Company's strategy is to further leverage its current leadership
position in software solutions for the development and integration of
enterprise applications for large organizations by extending its product and
professional services offerings with a particular focus on the enterprise
application integration market. Key elements of the Company's strategy include
enhancing and extending product offerings with added features and
functionality, broadening its product offerings for the enterprise application
integration market, leveraging its customer base, expanding professional
service offerings and leveraging distribution channels.
 
  Enhance and Extend Product Offerings. The Company intends to enhance and
extend its product offerings with a primary focus on enterprise application
integration products. The Company believes that significant opportunity exists
for software solutions which enable the integration of mainframe legacy
applications with commercial Enterprise Resource Planning ("ERP") systems,
internally developed applications and other client/server and
Internet/intranet based applications. The Company will continue to extend
Microsoft's ActiveX and DCOM technologies into large enterprise computing
environments enabling its customers to achieve enterprise-wide application
integration. The Company intends to broaden its product offerings through
internal product development, additional licensed products from third parties
and through acquisitions.
 
  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 customer's IT budget substantially exceeds the annual amount that the
customer spends with the Company. The Company believes it can expand its share
of its customers' IT budgets through increased and improved product and
professional services offerings.
 
  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
 
                                      36
Company's strategy is to expand its key professional services offerings, which
are centered around application development and integration, 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.
 
  Leverage Distribution Channels. The Company directly and indirectly sells
its products in over 20 countries throughout the Territory through exclusive
distributors. Under its 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 and integrate business applications. Typically,
the Company's solutions focus either on building and deploying new mission-
critical applications or enhancing and extending existing business-critical
systems through enterprise application integration. 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.
 
 
                    [ENTERPRISE MARKET CHART APPEARS HERE] 
 

 
                                      37
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                          1997       3/98   WIN/NT
    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       2/98    UNIX
    ENTIRE BROKER SDK               1997       1/98   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
--------------------------------------------------------------
  Year 2000 Product
    INSIGHT 2000 Tool Kit           1997       2/98     WIN
--------------------------------------------------------------
--------
(1) CONSTRUCT, CONSTRUCT Spectrum, CONSTRUCT Spectrum SDK and INSIGHT 2000
    Tool Kit are products owned by the Company. iXpress is a product which the
    Company has the right to license pursuant to an agreement with a third
    party 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.
 
                                      38
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 application integration 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 product that links mainframe applications and components to
    ActiveX- and Java-enabled desktops; and ENTIRE SAF Gateway, a central
    security administration environment. The Company also offers ENTIRE
    BROKER APPC, a product that links Advanced Program-to-Program
    Communication and IBM's MQSeries-enabled mainframe applications to
    ActiveX- and Java-enabled desktops; ENTIRE BROKER SDK, a set of software
    products for building and deploying distributed applications; and EntireX
    DCOM, a product that allows applications or pieces of applications to
    work together transparently on Windows, UNIX and MVS/VSE mainframe
    platforms.
 
  . iXpress is an Internet-enablement technology that combines component
    technology, such as Java and ActiveX, with enterprise systems, allowing
    organizations to deliver and manage business-critical information
    solutions via the Web.
 
  . Integration Services. The Company offers its customers a variety of
    application integration professional services, such as integrating an
    organization's Internet site with an order entry system; integrating
    multiple sources of data, applications and services from multiple
    platforms; enabling secure access for suppliers to specific data and
    applications; and distributing application components across the network.
 
  . INSIGHT 2000 Tool Kit is a product that allows developers to analyze and
    remediate NATURAL code by providing a picture of how much code needs to
    be fixed and helping project managers break year 2000 projects into
    segments and develop a comprehensive work plan for executing remediation.
 
  . Year 2000 Services. The Company's year 2000 professional services
    offerings include analysis, remediation, testing and reimplementation to
    assist customers in resolving their year 2000 problem. These
 
                                      39
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 Colorado, New Jersey and 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, application integration and year
2000 projects.
 
  Technology Services. The Company also provides system engineering services,
supplementary database administration services and database application and
network performance and tuning services.
 
RESEARCH AND DEVELOPMENT
 
  Prior to the Recapitalization, the Company was a wholly owned subsidiary of
SAG and the Company's research and development efforts were directed by SAG.
The Company's research and development expenses were $900,000 and $1.4 million
in 1995 and 1996, respectively.
 
  Since the Recapitalization, the Company has begun building its internal
product development group. The first product resulting from the Company's
recent internal product development efforts is the INSIGHT 2000 Tool Kit,
which was released in September 1997. The Company intends to continue
expanding its product development group through additional acquisitions and
internal hiring. The Company's research and development expenses were $1.1
million in 1997.
 
  Since the Cooperation Agreement provides the Company with an exclusive and
perpetual right to license in the Territory products developed by SAG, the
Company also expects to continue to benefit from SAG's product development
efforts. SAG's product development costs were approximately $56.0 million for
both 1996 and 1997. In September 1997, SAG released EntireX DCOM, the first
product resulting from SAG's strategic relationship with Microsoft.
 
PRODUCT MAINTENANCE AND CUSTOMER SUPPORT
 
  The Company offers a wide range of product maintenance and customer support
services. The Company believes that its future success is dependent in part on
its ability to provide high levels of customer service in order to cultivate
advocacy by the Company's installed customer base. For the year ended December
31, 1997, approximately 95% of the Company's customers who were eligible
renewed at least one of their maintenance agreements.
 
  Customers may choose from three levels of service and support offerings:
basic, extended and custom, which are differentiated by service deliverables
and access to support persons. Some of these customer support services include
support during product proof-of-concept/trial, technical support 24 hours a
day, seven days a week, customized support offerings, onsite installation and
implementation, remote analysis automated customer assistance and web-based
electronic services.
 
CUSTOMERS AND MARKETS
 
  Over 1,500 customers in the Territory have licensed the Company's products
or purchased the Company's professional services since January 1996. These
customers consist primarily of major corporations, government agencies and
educational institutions.
 
                                      40
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 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.
 
                                      41
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                          Nomura Research Institute, Ltd.
Burlington Northern Santa Fe Corporation  Norfolk Southern Corporation
Cable and Wireless, PLC                   Ryerson Tull Rykoff-Sexton, Inc.
Centers for Disease Control               S.C. Johnson & Son Inc.
Central Hudson Gas & Electric Corporation Sabre Group
City of New York                          Sprint Corporation
City of Philadelphia                      State of California
Commonwealth of Virginia                  State of Hawaii
Credit Suisse First Boston                State of Nevada
Cutler-Hammer, Inc.                       State of New Jersey
Delta Air Lines, Inc.                     State of Texas
Duke Power Company                        State of Washington
Federal Aviation Administration           Union Electric Company
Federal Bureau of Investigation           University of Arkansas
Federal Express Corp.                     University of Hawaii
KN Energy, Inc.                           University of Texas
Lehman Brothers, Inc.                     University of Toronto
                                          US Airways Group, Inc.
Morgan Stanley, Dean Witter, Discover & Co.
Nabisco Inc.                              US Patent & Trademark Office
                                          USX Corporation
 
  In 1995, 1996 and 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 in North America, South America, Japan and Israel. In North America,
the Company sells and markets its products and services through a direct
channel, consisting of 19 offices as of December 31, 1997. The Company sells
its products in over 20 additional countries through six exclusive
distributorships in South America, Japan and Israel. In addition, the Company
has access to SAG's distribution channels for the Company's products (other
than those licensed from SAG) in over 50 countries outside North America,
South America, Japan and Israel.
 
  The Company's corporate marketing organization supports the Company's sales
and professional services channels through the efforts of professionals with
expertise in product marketing and marketing communications. The Company also
has strategic marketing relationships with certain vendors of computing
products and services, including IBM, Microsoft and BDM International, Inc., a
subsidiary of TRW, Inc.
 
COMPETITION
 
  The markets for the Company's software products and professional services
are highly competitive and characterized by continual change and improvement
in technology. The Company provides products and professional services to
several markets within the computer industry and encounters a variety of
competitors within each market. 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 there are no significant barriers to entry.
 
  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,
 
                                      42
the Company's 4GL applications programming language, NATURAL, competes with
offerings from both large and small companies, including Oracle, Microsoft,
IBM and Sterling Software, Inc. In the enterprise enablement market, the
Company's products compete in both the component/object and the message-
oriented segments of the middleware market, where its competitors include IBM
and Microsoft. In the market for year 2000 products and professional services,
the Company's competitors include Formal Systems, Inc., Viasoft, Inc. and
Electronic Data Systems Corporation. Few of the Company's competitors compete
in all of the same markets as the Company.
 
  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.
 
PROPRIETARY RIGHTS
 
  The products sold by the Company consist of products developed by SAG (e.g.,
ADABAS, NATURAL and ENTIRE), products owned by other third parties which are
distributed by the Company (e.g., iXpress) and products developed or acquired
by the Company (i.e., INSIGHT 2000 Tool Kit, CONSTRUCT, CONSTRUCT Spectrum and
CONSTRUCT Spectrum SDK). For all of these products, the Company, if not the
developer, is contractually obligated to provide appropriate security measures
to protect the proprietary materials of SAG and other third parties against
misappropriation and illegal copying.
 
  The Company treats all of the products that it distributes as proprietary
trade secrets and confidential information. It relies primarily upon a
combination of trade secret, copyright and trademark laws, its license
agreements with customers, and its internal security systems, confidentiality
procedures and employee agreements to maintain the security of its products.
The Company typically provides its products to users under nonexclusive,
nontransferable perpetual licenses which generally permit use of the licensed
software solely for internal operations on designated computers at specific
sites. Under certain circumstances, the Company makes available the source
code for its products under an escrow arrangement which restricts access to
and use of the source code. Although the Company takes steps to protect its
trade secrets and other proprietary rights, there can be no assurance that
misappropriation will not occur. In addition, the laws of some foreign
countries do not protect proprietary rights to the same extent as the laws of
the United States.
 
  The Company seeks to protect its software, documentation and other written
materials under copyright law, and to assert trademark rights in its product
names. The Company has not sought to protect its products under patent laws,
though SAG and some third parties have patented, in the United States, Japan
and/or the European Union, certain of the products which the Company
distributes.
 
  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 Rights."
 
EMPLOYEES
 
  As of March 31, 1998, the Company employed 894 people, with 408 in
professional services and consulting, 142 in sales and marketing, 183 in
customer support, 27 in research and development and 134 in general and
 
                                      43
administrative functions. As of March 31, 1998, the Company also utilized
approximately 112 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. See "Risk Factors--Dependence on Key Personnel; Need to
Hire Additional Personnel."
 
PROPERTIES
 
  The Company's executive offices, principal marketing and data center
facility are located in approximately 170,000 square feet of space in a three
building campus that the Company leases in Reston, Virginia. The Company's
Customer Service and Support Center is located in approximately 85,000 square
feet that the Company leases in Highlands Ranch, Colorado. The Company
currently sublets approximately 18,000 and 25,000 square feet of the Reston
and Highlands Ranch locations, respectively.
 
  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.
 
  The Company leases product sales and professional services branch offices in
Irvine and Sacramento, California, Atlanta, Georgia, Chicago, Illinois,
Braintree, Massachusetts, Bloomington, Minnesota, Fort Lee, New Jersey,
Plymouth Meeting, Pennsylvania, Dallas, Texas, Bellevue, Washington and
Reston, Virginia in the United States.
 
  The Company believes that its facilities are adequate for its current needs
and that suitable space will be available as needed to accommodate the
expansion of the Company's operations.
 
LEGAL PROCEEDINGS
 
  From time to time, the Company is involved in legal proceedings and
litigation arising in the ordinary course of business. 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.
 
 
                                      44
MANAGEMENT
 
EXECUTIVE OFFICERS AND DIRECTORS
 
  The executive officers and directors of the Company, and their respective
ages as of April 13, 1998, are as follows:
NAME                      AGE POSITION
----                      --- --------
Carl J. Rickertsen (1)..  38  Chairman of the Board
Daniel F. Gillis (2)....  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........  46  Vice President--Operations and Chief Information Officer
David S. Linthicum......  35  Vice President--Technology and Chief Technology Officer
Dr. Philip S. Dauber (1)
 (3)....................  57  Director
Dr. Erwin Konigs........  48  Director
Edward E. Lucente (3)...  58  Director
Dr. Paul G. Stern (1)...  59  Director
--------
(1) Member of the Compensation Committee.
(2) Member of the Employee Stock Option Committee.
(3) 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 ("TC
Equity Partners") and TC Management LLC ("TC Management"), which are,
respectively, the sole general partner and managing agent of Thayer Equity
Investors III, L.P. ("Thayer"). Thayer is a private equity fund based in
Washington, D.C. that targets investments in the information technology and
services industries and its investors include corporations, pension funds and
financial institutions. 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 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 AG Americas, Inc., a wholly owned subsidiary of the Company
("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 served as Executive Vice President at Falcon
Microsystems Inc., a computer products reseller and systems integrator.
 
  Harry K. McCreery has served as Vice President, Treasurer and Chief
Financial Officer of the Company since April 1997. He has also 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 as Vice President, Worldwide
Marketing & Sales for Iomega Corporation, a manufacturer of computer storage
products, from July 1994 through July 1997. 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 served as Director of
Marketing & Sales, Consumer Business Division, at Gates Energy Products, a
manufacturer of consumer and commercial rechargeable battery products.
 
 
                                      45
Derek M. Brigden has served as Vice President--Operations and Chief
Information Officer of the Company since April 1997. He has also served as
Vice President--Operations and Chief Information Officer of Software Americas
since December 1990.
 
  David S. Linthicum has served as Vice President--Technology and Chief
Technology Officer of the Company since December 1997. Prior to joining the
Company, Mr. Linthicum served as Senior Manager in the Center of Technology
Enablement for Ernst & Young LLP from June 1997 to December 1997. From April
1995 to June 1997, Mr. Linthicum served as Senior Manager, Systems Integration
Practice at AT&T Corporation. From December 1990 to April 1995, Mr. Linthicum
served as Technical Director, Treasury Department for Mobil Oil Corporation.
 
  Dr. Philip S. Dauber has served as a director of the Company since April
1997. Dr. Dauber is an independent consultant providing services to several
companies including IQI, Inc., a telemarketing firm, where he served as acting
President from February 1997 through August 1997. Before becoming an
independent consultant, 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 Konigs 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. Konigs 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. Konigs 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 January 1998, Mr. Lucente has served as President and Chief Executive
Officer of QMS, Inc., a manufacturer of laser printers. From May 1995 to
January 1998, Mr. Lucente 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 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 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 and TC Management, 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 Bylaws, as amended (the "Bylaws"), provide for the Company's
Board to be comprised of six directors. Pursuant to the Company's Certificate
of Incorporation, as amended (the "Certificate of Incorporation"), the Board
is divided into three classes, as nearly equal in number as reasonably
possible, with terms currently expiring at the annual meeting of stockholders
of the Company to be held on May 18, 1998 (Mr. Gillis and Dr. Dauber), the
annual meeting of stockholders to be held in 1999 (Dr. Konigs and Mr. Lucente)
and the annual meeting of stockholders to be held in 2000 (Mr. Rickertsen and
Dr. Stern). 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.
 
  Executive officers of the Company are elected by the Board on an annual
basis and serve until the first meeting of the Board following the next annual
meeting of stockholders following their election and until their
 
                                      46
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
 
  The committees of the Board are an Audit Committee, a Compensation Committee
and an Employee Stock Option Committee ("Stock Option Committee").
 
  Dr. Dauber and Mr. Lucente (Chairman) are presently the members of the Audit
Committee. The Audit Committee has certain duties relating to the year-end
audit, the Company's accounting methods and internal accounting controls and
the Company's relationship with its independent public accountants, including
making recommendations concerning the engagement of independent public
accountants, reviewing with the Company's independent public accountants the
plans and results of the audit engagement and approving professional services
provided by the Company's independent public accountants.
 
  Mr. Rickertsen (Chairman) and Drs. Stern and Dauber are presently the
members of the Compensation Committee. The Compensation Committee is
responsible for determining the compensation of the Company's Chief Executive
Officer and other executive officers and establishing policies and guidelines
regarding the compensation of other officers and employees of the Company and
its subsidiaries. The Compensation Committee is also authorized to administer
the Company's 1997 Employee Stock Option Plan ("Option Plan"), including the
power to grant stock options. The Compensation Committee will also be
authorized to administer the Company's Employee Stock Purchase Plan if the
stockholders approve such plan at the annual meeting to be held on May 18,
1998.
 
  In February 1998, the Board created the Stock Option Committee and appointed
Mr. Gillis as its sole member. The Stock Option Committee's function is to
grant stock options under the Option Plan to persons who are not (or who will
not be) at the time of such grant subject to the requirements of Section 16 of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), pursuant
to guidelines and limitations determined by the Board. The Stock Option
Committee is not authorized to grant any stock option under the Option Plan to
any person who reports directly to any member of the Stock Option Committee or
to grant any stock option under the Option Plan that covers more than 10,000
shares of Common Stock without the prior consent and approval of the
Compensation Committee. All grants of stock options made by the Stock Option
Committee will be reported to the Compensation Committee on a regular basis.
 
  The Company does not have a standing nominating committee or other committee
performing similar functions.
 
DIRECTOR COMPENSATION
 
  Except for grants of stock options under the Option Plan, the Company's
directors were not compensated during 1997 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. Except for grants of stock options that may be made under the
Option Plan, the Company has no present plans to pay such benefits or
compensation to directors. The Company reimburses directors for certain out-
of-pocket expenses incurred in connection with attendance at Board of
Directors and committee meetings.
 
  Both employee and non-employee directors are eligible to be granted stock
options pursuant to the Option Plan. Under the Option Plan, Dr. Dauber and Mr.
Lucente were each granted options on June 23, 1997 to purchase 54,450 shares
of Common Stock at an exercise price of $1.47 per share. The options vest in
equal annual installments of 25%, with the first installment vesting March 31,
1998, and each of the subsequent installments vesting on the first, second and
third anniversaries of March 31, 1998. The options will become immediately
exercisable in full upon a change in control of the Company and may be
partially accelerated in connection with the termination of the director's
service as a director of the Company. Mr. Gillis is the President and Chief
Executive Officer of the Company and is not separately compensated as a
director of
 
                                      47
the Company. In fiscal year 1997, Mr. Gillis was granted stock options under
the Option Plan. See "--Executive Compensation."
 
EXECUTIVE COMPENSATION
 
  The following table sets forth certain information concerning compensation
paid to the Company's Chief Executive Officer and each of the four other most
highly compensated executive officers of the Company whose annual salary and
bonus compensation (determined as of December 31, 1997) exceeded $100,000
(collectively, the "Named Executive Officers" and individually, the "Named
Executive Officer") for the fiscal years ended December 31, 1996 and 1997.
 
                          SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
                             ----------------------------------------------   SECURITIES
                                                           OTHER ANNUAL       UNDERLYING         ALL OTHER
NAME AND PRINCIPAL POSITION  YEAR SALARY ($) BONUS ($) COMPENSATION ($) (1) OPTIONS (#) (2) COMPENSATION ($) (3)
---------------------------  ---- ---------- --------- -------------------- --------------- --------------------
Daniel F. Gillis (4)....     1997  275,002    340,500            --            2,392,500          194,461
 President and Chief         1996  249,039    240,500         24,000                 --           179,671
 Executive Officer
Harry K. McCreery (5)...     1997  174,711    236,500            --            1,288,100          242,317
 Vice President,             1996  170,000    132,600            --                  --           235,933
 Treasurer and Chief
 Financial Officer
Derek M. Brigden (5)....     1997  153,969    100,100            --              114,125            7,500
 Vice President--            1996  150,000    101,346            --                  --             7,500
 Operations and Chief
 Information Officer
James H. Daly (5) (6)...     1997  149,938     97,500         30,000             114,125          169,427
 Vice President,             1996  142,000     92,300         20,208                 --           159,183
 Secretary and General
 Counsel
Thomas E. Gorley (5)         1997  149,808     97,500            --              114,125            7,500
 (7)....................     1996  105,769        --          63,461                 --             6,000
 Vice President--
 Professional
 Services
--------
(1) Consists of sales commissions paid to the Named Executive Officer. In
    accordance with the rules of 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 each of 1996 and
    1997.
(2) All figures in this column reflect shares of Common Stock subject to
    options granted under the Option Plan.
(3) Unless otherwise indicated, consists of (i) amounts of deferred
    compensation earned and credited to deferred compensation accounts of the
    Named Executive Officer and (ii) $7,500 of contributions paid by the
    Company on behalf of the Named Executive Officer under the Company's
    401(k) Plan. See "--Deferred Compensation Agreements." The Company does
    not have any long-term incentive plans.
(4) Mr. Gillis served as President and Chief Executive Officer of the Company
    from May 6, 1996.
(5) In 1996, these individuals served as executive officers of Software
    Americas and performed policy-making functions for both Software Americas
    and the Company.
(6) Mr. Daly's employment with the Company and Software Americas terminated
    effective April 10, 1998.
(7)  Mr. Gorley's employment with the Company and Software Americas terminated
    effective January 9, 1998.
 
                                      48
The following table sets forth information concerning the grant of stock
options to each of the Named Executive Officers in 1997:
 
                       OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
                         -----------------------------------------------------------------------
                                              PERCENT OF
                                             TOTAL OPTIONS
                              NUMBER OF       GRANTED TO
                             SECURITIES        EMPLOYEES   EXERCISE OR                GRANT
                             UNDERLYING        IN FISCAL   BASE PRICE  EXPIRATION  DATE PRESENT
                         OPTIONS GRANTED (1)   YEAR 1997     ($/SH)       DATE    VALUE ($) (11)
                         ------------------- ------------- ----------- ---------- --------------
Daniel F. Gillis........      1,430,000 (2)      28.2          1.47     06/23/04      832,541
                                357,500 (3)       7.0          9.60     08/08/04      930,860
                                605,000 (4)      11.9         12.00     09/24/04    3,235,353
Harry K. McCreery.......        770,000 (2)      15.2          1.47     06/23/04      448,291
                                192,500 (3)       3.8          9.60     08/08/04      501,232
                                325,600 (4)       6.4         12.00     09/24/04    1,741,208
James H. Daly...........         68,200 (5)       1.3          1.47     06/23/04       36,390
                                 17,050 (3)       0.3          9.60     08/08/04       67,027
                                 28,875 (6)       0.6         12.00     09/24/04      118,243
Derek M. Brigden........         68,200 (7)       1.3          1.47     06/23/04       36,390
                                 17,050 (3)       0.3          9.60     08/08/04       67,027
                                 28,875 (8)       0.6         12.00     09/24/04      118,243
Thomas E. Gorley........         68,200 (9)       1.3          1.47     06/23/04       36,390
                                 17,050 (3)       0.3          9.60     08/08/04       67,027
                                 28,875 (10)      0.6         12.00     09/24/04      118,243
--------
 (1) Options will become immediately exercisable if (i) 51% of the voting
     stock of the Company is beneficially owned, directly or indirectly, by
     any person or group of person(s) (as defined in Section 13(d) and 14(d)
     of the Exchange Act) together with its affiliates, excluding employee
     benefit plans of the Company, (ii) the stockholders of the Company
     approve a merger or consolidation of the Company and another entity
     unless the merger or consolidation results in the voting securities of
     the Company outstanding immediately prior thereto continuing to represent
     at least 50% of the combined voting securities of the surviving entity
     immediately after the 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. Options may be
     partially accelerated in connection with the Named Executive Officers
     termination of employment with the Company. Each option was granted under
     the Company's 1997 Stock Option Plan and has an exercise price equal to
     the fair market value of the Common Stock on the date of grant.
 (2) Each of the indicated options granted vests as to one-third ( 1/3) of the
     securities underlying the options granted on each of the first, second
     and third anniversaries of March 31, 1997.
 (3) Each of the indicated options granted vested on August 8, 1997.
 
                                      49
(4) Each of the indicated options granted vests as to one-third ( 1/3) of the
    securities underlying the options granted on each of the first, second and
    third anniversaries of September 24, 1997.
(5) Due to Mr. Daly's termination of employment with the Company, one-half (
    1/2) of the indicated options expired prior to vesting.
(6) Due to Mr. Daly's termination of employment with the Company, all of the
    indicated options expired prior to vesting.
(7) The indicated options granted vest as to one-fourth ( 1/4) of the
    securities underlying the options granted on each of the first, second and
    third anniversaries of June 23, 1997.
(8) The indicated options granted vest as to one-fourth ( 1/4) of the
    securities underlying the options granted on each of the first, second and
    third anniversaries of September 24, 1997.
(9) Due to Mr. Gorley's termination of employment with the Company, one-fourth
    ( 1/4) of the indicated options vested immediately prior to his
    termination on January 9, 1998 and the remaining indicated options expired
    prior to vesting.
(10) Due to Mr. Gorley's termination of employment with the Company, all of
     the indicated options expired prior to vesting.
(11) The fair market value of each option granted is estimated on the Grant
     Date using the Black-Scholes option pricing model. The Black-Scholes
     model used the following factors: risk-free rate of return of 6%;
     dividend yield of 0%; exercise term of 2 to 6 years; stock price
     volatility of 40%; and a forfeitures rate of 2.9%.
 
  No stock options were exercised during 1997. The following table sets forth
information with respect to outstanding unexercised options held by the Named
Executive Officers as of December 31, 1997:
 
                AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
                       AND FISCAL YEAR-END OPTION VALUES
SECURITIES UNDERLYING         VALUE OF UNEXERCISED
                                  OPTIONS AT               IN-THE-MONEY OPTIONS
                                FISCAL YEAR-END             AT FISCAL YEAR-END
                         ----------------------------- -----------------------------
NAME                     EXERCISABLE UNEXERCISABLE (#) EXERCISABLE UNEXERCISABLE ($)
----                     ----------- ----------------- ----------- -----------------
Daniel F. Gillis........   357,500       2,035,000      1,751,750     20,145,400
Harry K. McCreery.......   192,500       1,095,600        943,250     10,847,100
Derek M. Brigden........    17,050          97,075         83,545        960,834
James H. Daly (1).......    17,050          97,075         83,545        960,834
Thomas E. Gorley (2)....    17,050          97,075         83,545        960,834
--------
(1) Mr. Daly's employment with the Company terminated effective April 10,
    1998.
(2) Mr. Gorley's employment with the Company terminated effective January 9,
    1998.
 
DEFERRED COMPENSATION AGREEMENTS
 
  The Company has entered into deferred compensation agreements with Messrs.
Gillis, McCreery and Daly (the "Deferred Compensation Agreements"). Pursuant
to these agreements, each of Messrs. Gillis, McCreery and Daly annually
receive 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 60%
vested and will vest in full as of December 31, 1998. Except under certain
circumstances, upon termination of employment, each of Messrs. Gillis,
McCreery and Daly is entitled to receive from the Company payments totaling
the vested portion of his deferred compensation account.
 
                                      50
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, Gorley and Daly has entered into a
memorandum of understanding with the Company with respect to the termination
of his employment on terms and conditions substantially similar to Mr. Gillis'
memorandum of understanding with the Company, provided, however, that (i) the
severance benefit due each such executive officer upon termination under his
respective memorandum of understanding is equal to twelve months of his then-
current salary plus a pro-rated bonus payment, and (ii) no severance or other
benefits are due under these agreements if the executive officer resigns
within ninety days of a substantial reduction in his compensation and benefits
related to a Company wide reduction or a substantial reduction in his job
responsibilities that is deemed to be in the best business interests of the
Company.
 
  Mr. Gorley's employment terminated effective January 9, 1998. The payments
due Mr. Gorley from the Company totaled $159,500 (included a severance payment
of $150,000, a car allowance payment of $7,200 and vacation pay of $2,300).
Mr. Gorley received a net payment from the Company of $84,500 after repayment
of a note made by Mr. Gorley to the Company in the amount of $75,000 which was
deducted from the gross amount due Mr. Gorley. Mr. Gorley paid the interest
due on the note of approximately $2,300.
 
  Mr. Daly's employment with the Company terminated effective April 10, 1998.
The payments due Mr. Daly from the Company totaled $823,897 (included a
severance payment of $150,000, an incentive bonus payment of $21,875, a
deferred compensation payment of $639,777, a car allowance payment of $9,000
and vacation and regular pay of $3,245). Mr. Daly received a net payment from
the Company of $205,503 (net of taxes) after repayment of a note made by Mr.
Daly to the Company in the amount of $350,453 plus accrued interest of $23,554
which was deducted from the gross amount due Mr. Daly.
 
  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. 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.
 
                                      51
CERTAIN RELATIONSHIPS AND TRANSACTIONS
 
  On March 31, 1997, the senior management of the Company and 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 persons who constituted the senior managers of the Company
at that time: 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 then 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 DM57.0
million (US$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 then outstanding Common Stock. Dr. Erwin Konigs, 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 then outstanding Common
Stock. Dr. Stern and Mr. Rickertsen, directors of the Company, are members of
TC Equity Partners, 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.
 
  Certain Managers borrowed money from the Company to purchase the Company's
Common Stock in the Recapitalization and executed promissory notes to reflect
such borrowings. Messrs. Gillis, McCreery and Daly borrowed $250,000, $250,000
and $182,605, respectively, from the Company under individual promissory
notes, each of which is dated March 24, 1997, and Messrs. McCreery and Daly
borrowed $363,000 and $120,740, respectively, from the Company under
individual promissory notes, each of which is dated August 9, 1996. Each of
the promissory notes accrues interest at the rate of 6% per annum and is due
and payable upon termination of its maker's employment with the Company. None
of the promissory notes require periodic interest or principal payments. As of
December 31, 1997, the amount outstanding under each promissory note equaled
the entire amount borrowed plus accrued interest.
 
  In connection with the Recapitalization, on March 31, 1997, the Company
borrowed $5,000,000 from Thayer under a short-term note agreement for working
capital requirements. This note accrued interest at a simple rate equal to 10%
per annum and was repaid on April 11, 1997. In addition, the Company paid to
TC Management a financial advisory fee of $840,000 in consideration for
investment banking and advisory services provided by TC Management in
connection with the Recapitalization, and reimbursed TC Management for its
out-of-pocket expenses in connection with the Recapitalization. On April 1,
1997, the Company also agreed to pay on a quarterly basis an annual fee of
$300,000 to TC Management for management and consulting services to be
provided by TC Management to the Company in connection with the operation and
conduct of the Company's business. In fiscal year 1997, the Company paid a
total of $225,000 of such fees plus out-of-pocket expenses and as of March 20,
1998, the Company has paid $75,000 of such fees plus out-of-pocket expenses
for services in fiscal year 1998. TC Management is the managing agent of and
provides management services to Thayer. Dr. Stern and Mr. Rickertsen,
directors of the Company, are members of TC Management. In connection with the
Recapitalization, the Company also paid a one-time advisory fee of $250,000 to
MLC Group, Inc., a wholly owned operating subsidiary of MLC Holdings, Inc. Mr.
Rickertsen, a director of the Company, is a director of MLC Holdings, Inc.
 
  Prior to the Recapitalization, the Company licensed and serviced SAG
products pursuant to a license agreement entered into by SAG and the Company
on January 1, 1995 (the "License Agreement"). The License Agreement gave the
Company the exclusive right to license and service SAG products in North
America, South America, Japan and Israel (the "Territory"), and gave SAG the
exclusive right to license and service the Company's products in all other
areas. Immediately prior to the Recapitalization, the Company and SAG entered
into a cooperation agreement dated March 31, 1997 (the "Cooperation
Agreement"), which terminated and
 
                                      52
superseded the License Agreement. The Cooperation Agreement generally (i)
provides the Company the exclusive and perpetual right to license and service
in the Territory both existing and future products developed or acquired by
SAG and (ii) provides SAG the exclusive and perpetual right to license and
service outside the Territory both existing and future products developed or
acquired by the Company. Each of the Company and SAG must pay the other 24% of
the net revenues derived from such licenses. Except in certain circumstances,
the Company's minimum annual royalty payment to SAG through the year 2000 must
at least equal $21 million. This 24% royalty rate is fixed for 20 years. In
1995, 1996 and 1997, the Company's royalty payments to SAG were approximately
$23.9 million, $26.1 million and $29.3 million, respectively. In the same
periods, SAG's royalty payments to the Company were approximately $0.3
million, $0.3 million and $0.6 million, respectively. As consideration for the
Cooperation Agreement, the Company paid SAG DM38.0 million (approximately
US$22.6 million) on March 31, 1997.
 
  On December 5, 1993, the Company and SAG entered into a Products and
Research & Development Operations Transfer Agreement (the "R&D Agreement")
which required the Company to provide certain services relating to certain SAG
employees who utilized the Company's facilities. In connection with the
Recapitalization, on March 31, 1997, the Company entered into an
Administrative Services Agreement (the "ASA") with SAG, terminating the R&D
Agreement and requiring that the Company provide services similar to those
required under the R&D Agreement. SAG is required under the ASA to reimburse
the Company for its costs incurred in connection with the ASA and to pay the
Company $500,000 per year during the years 1997, 1998 and 1999 for the use of
certain machinery leased by the Company. In 1995, 1996 and 1997, the payments
to the Company under the R&D Agreement and the ASA were approximately $8.8
million, $15.9 million and $10.8 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. Except as described above, all of these transactions that were
material terminated in connection with the Recapitalization.
 
  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 "Subscription Agreement"). 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 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.
 
                                      53
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 April 13,
1998 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 TO BE       SHARES
                            BENEFICIALLY OWNED       SOLD IN    BENEFICIALLY OWNED
                          PRIOR TO OFFERING (2)    OFFERING (3) AFTER OFFERING (2)
                          ------------------------------------- ------------------
NAME AND ADDRESS (1)         NUMBER      PERCENT                  NUMBER   PERCENT
--------------------      ------------- -----------             ---------- -------
Thayer Equity Investors
 III, L.P...............     16,551,559     56.0%   5,000,000   11,511,559  38.6%
 1455 Pennsylvania
 Avenue, N.W.
 Washington, DC 20004
Software AG.............      2,750,000      9.3           --    2,750,000   9.2
 Uhlandstrasse 12, 64297
 Darmstadt, Germany
TC Co-Investors, LLC....         89,866       *        27,150       62,716    *
 1455 Pennsylvania
 Avenue, N.W.
 Washington, DC 20004
Daniel F. Gillis (4)....      1,048,317      3.5      200,000      848,317   2.8
Harry K. McCreery (5)...        653,217      2.2      150,000      503,217   1.7
James H. Daly (6).......        159,775       *            --      159,775    *
Derek M. Brigden (7)....        102,025       *        19,700       82,325    *
Thomas E. Gorley (7)....        136,125       *            --      136,125    *
Carl J. Rickertsen (8)..     16,649,425     56.4    5,027,150   11,622,275  38.8
Dr. Philip S. Dauber
 (9)....................         81,538       *            --       81,538    *
Dr. Erwin Konigs (10)...      2,852,025      9.7       25,000    2,827,025   9.4
Edward E. Lucente (11)..         13,613       *            --       13,613    *
Dr. Paul G. Stern (8)...     16,641,425     56.4    5,027,150   11,614,275  38.8
Gary Hayes (12).........        103,838       *        16,362       87,476    *
Volker Dawedeit (13)....         67,925       *        22,000       45,925    *
All directors and
 executive officers as a
 group (10 persons)
 (14)...................     21,538,210     69.8    5,421,850   16,116,360  52.2
--------
 *  Less than 1% of the outstanding Common Stock.
 (1) The business address for Messrs. Gillis, McCreery, Brigden and Hayes 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 Mr. Dawedeit and Dr. Konigs is c/o Software AG, Uhlandstrasse
     12, 64297 Darmstadt, Germany. The business address for Mr. Lucente is 1
     Magnum Pass, Mobile, Alabama 36618.
 (2) The number of shares of Common Stock outstanding prior to this offering
     includes (i) 29,531,391 shares of Common Stock outstanding as of April
     13, 1998 and (ii) with respect to each person, the shares of Common Stock
     issuable by the Company pursuant to options held by such persons which
     may be exercised within 60 days following April 13, 1998 ("Presently
     Exercisable Options"). The number of shares of
 
                                      54
Common Stock deemed outstanding after this offering includes an additional
    386,062 shares that are being offered for sale by certain Selling
    Stockholders pursuant to the exercise by such Selling Stockholders of
    Presently Exercisable Options prior to the consummation of 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
     819,031 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., 814,606 shares; and TC Co-Investors, LLC 4,425
     shares.
 (4) Includes 834,167 shares subject to Presently Exercisable Options.
 (5) Includes 449,167 shares subject to Presently Exercisable Options.
 (6) Includes 51,150 shares subject to Presently Exercisable Options.
 (7) Includes 34,100 shares subject to Presently Exercisable Options.
 (8) Includes 16,551,559 shares held of record by Thayer and 89,866 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, a Delaware limited liability company. 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. 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. Frederic V. Malek, Dr. Paul G. Stern and Carl
     J. Rickertsen are the members of TC Management and the principal members
     of TC Equity Partners. 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.
 (9) Includes (i) 67,925 shares held of record by PSERD Trust, of which Dr.
     Dauber is a trustee, and (ii) 13,613 shares subject to Presently
     Exercisable Options. 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.
(10) 2,750,000 of the reported shares are held of record by SAG. Dr. Konigs, 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. Konigs
     disclaims beneficial ownership of all shares held of record by SAG.
(11) Includes 13,613 shares subject to Presently Exercisable Options.
(12) Includes 16,362 shares subject to Presently Exercisable Options. Mr. Hayes
     has served as Controller and a Vice President of the Company since April
     1997 and as a Vice President and Controller of Software Americas since May
     1995.
(13) Mr. Dawedeit has served as the Chief Financial Officer and a director of
     SAG since January 1997.
(14) Includes (i) 16,551,559 shares held of record by Thayer, (ii) 2,750,000
     shares held of record by SAG, (iii) 89,866 shares held of record by TC Co-
     Investors, (iv) 67,925 shares held of record by PSERD Trust, and (v)
     1,344,660 shares subject to Presently Exercisable Options (369,700 of
     which are being offered for sale in this offering by Messrs. Gillis,
     McCreery and Brigden). See footnotes (2) through (13). Does not include
     102,025 shares beneficially owned by Mr. Gorley or 34,100 shares subject
     to Presently Exercisable Options granted to Mr. Gorley, whose employment
     with the Company terminated on January 9, 1998. Also does not include
     159,775 shares beneficially owned by Mr. Daly or 51,150 shares subject to
     Presently Exercisable Options granted to Mr. Daly, whose employment with
     the Company terminated effective April 10, 1998.
 
                                       55
DESCRIPTION OF CAPITAL STOCK
 
  The authorized capital stock of the Company consists of 75,000,000 shares of
Common Stock, $0.01 par value per share, and 25,000,000 shares of preferred
stock, $0.01 par value per share (the "Preferred Stock"). As of April 13,
1998, there were 29,531,391 shares of Common Stock outstanding held of record
by 42 stockholders and no shares of Preferred Stock outstanding.
 
  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
 
  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 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.
 
                                      56
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.
 
  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.
 
 
                                      57
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. Subject to applicable law, notice of
stockholder nominations for submission at, or stockholder proposals for
business to be conducted at, an annual meeting of stockholders must be
received by the Company not less than 120 days nor more than 150 days prior to
the date of the release of the Corporation's proxy statement to stockholders
in connection with the previous year's annual meeting of stockholders, or not
later than 10 days following the day on which notice of the date of a special
meeting was given if the notice or proposal 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.
 
                                      58
SHARES ELIGIBLE FOR FUTURE SALE
 
  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 the offering, the Company will have outstanding
29,917,453 shares of Common Stock. Assuming no exercise of the Underwriters'
over-allotment option, of these shares, 14,331,603 shares are freely tradable
in the public market without restriction or further registration under the
Securities Act of 1933, as amended (the "Securities Act"), except for any
shares held by "affiliates" of the Company, as that term is defined under the
Securities Act and the regulations promulgated thereunder (an "Affiliate").
The remaining 15,585,850 shares of Common Stock (the "Restricted Shares") held
by existing stockholders were sold by the Company in reliance on exemptions
from the registration requirements of the Securities Act and are "restricted
securities" within the meaning of Rule 144.
 
  Of the Restricted Shares, (i) 14,437,586 shares will be eligible for sale
beginning May 18, 1998 upon the expiration of the lockup agreements entered
into in connection with the IPO (11,636,574 of which will be subject to 90-day
lock-up agreements between certain stockholders and the Representatives of the
Underwriters), (ii) 375,141 shares will be eligible for sale beginning June
30, 1998 (185,666 of which will be subject to a 90-day lock-up agreement
between the holder thereof and the Representatives of the Underwriters), (iii)
137,500 shares will be eligible for sale beginning August 22, 1998 and (iv)
51,013 shares and 108,625 shares will be eligible for sale beginning January
10, 1999 and April 11, 1999, respectively.
 
  The holders of 12,298,225 Restricted Shares have agreed with the
Representatives that, until 90 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, one of the managing underwriters. BancAmerica Robertson Stephens
may, in its sole discretion and at any time without notice, release all or any
portion of the securities subject to the lockup-agreements.
 
  In general, under Rule 144 as currently in effect, 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 (approximately 299,174 shares)
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 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.
 
                                      59
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."
 
  On January 22, 1998, the Company filed a registration statement on Form S-8
under the Securities Act in order to register all 6,875,000 shares of Common
Stock reserved for issuance under the Company's Option Plan. In addition, on
April 2, 1998, the Company filed a registration statement on Form S-8 under
the Securities Act in order to register 1,500,000 shares of Common Stock for
issuance under the Company's Employee Stock Purchase 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.
 
                                      60
UNDERWRITING
 
  The Underwriters named below, acting through their representatives,
BancAmerica Robertson Stephens, Donaldson, Lufkin & Jenrette Securities
Corporation, Smith Barney Inc. and EVEREN Securities, Inc. (the
"Representatives"), have severally agreed, subject to the terms and conditions
of the Underwriting Agreement, to purchase from 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.
NUMBER
     UNDERWRITER                                                       OF SHARES
     -----------                                                       ---------
BancAmerica Robertson Stephens...................................
     Donaldson, Lufkin & Jenrette Securities Corporation..............
     Smith Barney Inc.................................................
     EVEREN Securities, Inc...........................................
 
 
 
                                                                       ---------
         Total........................................................ 5,460,212
                                                                       =========
The Selling Stockholders have been advised by the Representatives that the
Underwriters propose to offer the shares of Common Stock to the public at the
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
completion of this offering, the public offering price, concession and
reallowance to dealers may be reduced by the Representatives. No such
reduction shall change the amount of proceeds to be received by the Selling
Stockholders as set forth on the cover page of this Prospectus.
 
  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 819,031 shares of Common Stock at
the same price per share as the Selling Stockholders receive for the 5,460,212
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 5,460,212 shares offered
hereby. If purchased, such additional shares will be sold by the Underwriters
on the same terms as those on which the 5,460,212 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.
 
  Pursuant to the terms of lock-up agreements, assuming no exercise of the
Underwriters' over-allotment option, the holders of 12,310,825 shares of the
Company's Common Stock (including the Selling Stockholders and after giving
effect to the sale of shares by such holders in this offering), have agreed,
for a period of up to 90 days from the effective date of the Registration
Statement of which this Prospectus is a part, that, subject to certain
exceptions, they will not contract to sell or otherwise dispose of any shares
of Common Stock, any options or warrants to purchase shares of Common Stock or
any securities convertible into, or exchangeable for,
 
                                      61
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. However, BancAmerica Robertson Stephens may,
in its sole discretion, and at any time or from time to time, without notice,
release all or any portion of the securities subject to lock-up agreements.
All of the shares of Common Stock subject to the lock-up agreements will be
eligible for sale in the public market upon the expiration of the lock-up
agreements subject to Rule 144.
 
  In addition, the Company has agreed that, until 90 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
issuance of Common Stock upon the exercise of outstanding options or the
Company's grant of options and issuance of stock under the existing employee
stock option or stock purchase plans. See "Shares Eligible for Future Sale."
 
  The Representatives have advised 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.
 
                                      62
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, 1996 and 1997, and for each of the years in the three-year period
ended December 31, 1997 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.
 
                             AVAILABLE INFORMATION
 
  The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, and, in accordance therewith, files reports, proxy
statements and other information with the Securities and Exchange Commission
(the "Commission"). Such reports, proxy statements and other information can
be inspected and copied at the Public Reference Section maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and
the following regional offices of the Commission: 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor,
New York, New York 10048. Copies of such material also can be obtained by mail
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, upon receipt of the fees prescribed by the rules and
regulations of the Commission. Such material also may be accessed
electronically through of the Commission's Web site on the Internet at
"http://www.sec.gov". The Company's Common Stock is listed on the New York
Stock Exchange and reports, proxy statements and other information concerning
the Company can be inspected at the offices of the New York Stock Exchange, 20
Broad Street, New York, New York 10005.
 
  The Company has filed with the Commission a Registration Statement on Form
S-1 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act with respect to the shares
of Common Stock offered pursuant to this Prospectus. This Prospectus does not
contain all of the information, exhibits and undertakings contained in the
Registration Statement, to which reference is hereby made. For further
information concerning the Company and the shares of Common Stock offered
hereby, reference is made to the Registration Statement, which may be examined
without charge at, or copies obtained upon payment of prescribed fees from,
the Commission and its regional offices at the locations listed above. Any
statements contained herein concerning the provisions of any document are not
necessarily complete, and, in such instance, reference is made to the copy of
such document filed as an exhibit to the Registration Statement or otherwise
filed with the Commission. Each such statement is qualified in its entirety by
such reference.
 
                                      63
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997............. F-3
Consolidated Statements of Operations for each of the years in the two-
 year period ended December 31, 1996 and the three-month and nine-month
 periods ended March 31, 1997 and December 31, 1997, respectively........ F-5
Consolidated Statements of Stockholders' Equity for each of the years in
 the two-year period ended December 31, 1996 and the three-month and
 nine-month periods ended March 31, 1997 and December 31, 1997,
 respectively............................................................ F-6
Consolidated Statements of Cash Flows for each of the years in the two-
 year period ended December 31, 1996 and the three-month and nine-month
 periods ended March 31, 1997 and December 31, 1997, respectively........ F-7
Notes to Consolidated Financial Statements............................... F-8
Unaudited Condensed Consolidated Balance Sheet as of March 31, 1998...... F-23
Unaudited Condensed Consolidated Statements of Operations for the three-
 month periods ended March 31, 1997 and 1998............................. F-24
Unaudited Condensed Consolidated Statements of Cash Flows for the three-
 month periods ended March 31, 1997 and 1998............................. F-25
Notes to Unaudited Condensed Consolidated Financial Statements........... F-26
F-1
INDEPENDENT AUDITORS' REPORT
 
Board of Directors
Software AG Systems, Inc.:
 
  We have audited the accompanying consolidated balance sheets of Software AG
Systems, Inc. and subsidiaries (Successor) as of December 31, 1997, and of
Software AG Systems, Inc. and subsidiaries (a wholly owned subsidiary of
Software AG, a German software company) (Predecessor) as of December 31, 1996,
and the related consolidated statements of operations, stockholders' equity
and cash flows for the periods from April 1, 1997 to December 31, 1997
(Successor periods), and from January 1, 1997 to March 31, 1997 and for each
of the years in the two-year period ended December 31, 1996 (Predecessor
periods). 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 aforementioned Successor consolidated financial
statements present fairly, in all material respects, the financial position of
Software AG Systems, Inc. and subsidiaries as of December 31, 1997 and the
results of their operations and their cash flows for the Successor period, in
conformity with generally accepted accounting principles. Further, in our
opinion, the aforementioned Predecessor consolidated financial statements
present fairly, in all material respects, the financial position of Software
AG Systems, Inc. and subsidiaries (a wholly owned subsidiary of Software AG, a
German software company) as of December 31, 1996, and the results of their
operations and their cash flows for the Predecessor periods, in conformity
with generally accepted accounting principles.
 
  As discussed in Note 2 to the consolidated financial statements, effective
April 1, 1997, Software AG Systems, Inc. consummated a Recapitalization under
which a majority of the Company's common stock changed control. The change in
control of the Company's common stock was accounted for as a purchase business
combination. As a result of the Recapitalization, the consolidated financial
information for the periods after the Recapitalization is presented on a
different cost basis than that for the periods before the Recapitalization
and, therefore, is not comparable.
 
                                                      /s/ KPMG Peat Marwick LLP
 
Washington, D.C.
February 6, 1998
 
                                      F-2
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
PREDECESSOR SUCCESSOR
                                                          ----------- ---------
                                                           DEC. 31,   DEC. 31,
                                                             1996       1997
                                                          ----------- ---------
                                                             (IN THOUSANDS)
Assets
Current:
  Cash and cash equivalents.............................   $ 25,773   $ 50,429
  Accounts receivable:
    Invoiced and currently due..........................     35,369     40,212
    Advanced billings on maintenance....................     14,593     10,287
    Unbilled services...................................      6,029     10,384
    Installment.........................................     15,300     24,434
    Other...............................................      1,059      2,858
    Less: allowance for doubtful accounts...............     (4,980)    (9,301)
                                                           --------   --------
      Total accounts receivable.........................     67,370     78,874
  Notes receivable, SAG.................................     30,000        --
  Current portion of deferred income taxes..............      3,412      6,217
  Prepaid expenses......................................      3,298      1,371
  Other current assets..................................      2,686      2,663
                                                           --------   --------
      Total current assets..............................    132,539    139,554
Cooperation agreement, net of accumulated amortization..        --      21,737
Installment accounts receivable, net of current
 portion................................................     10,955      8,932
Property, equipment and leasehold improvements, net of
 accumulated depreciation and amortization..............      8,923     10,077
Goodwill, net of accumulated amortization...............        589     11,286
Deferred income taxes...................................      1,469      2,848
Other assets............................................      3,613      1,692
                                                           --------   --------
      Total assets......................................   $158,088   $196,126
                                                           ========   ========
See accompanying notes to consolidated financial statements.
 
                                      F-3
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
 
                    CONSOLIDATED BALANCE SHEETS--(CONTINUED)
PREDECESSOR SUCCESSOR
                                                          ----------- ---------
                                                           DEC. 31,   DEC. 31,
                                                             1996       1997
                                                          ----------- ---------
                                                             (IN THOUSANDS)
Liabilities and Stockholders' Equity
Current:
  Accounts payable.......................................  $  6,773   $  8,545
  Accrued payroll and employee benefits..................    10,792     10,170
  Payable to SAG.........................................    33,317     10,050
  Income taxes payable...................................     3,106      1,752
  Other current liabilities..............................     5,265      4,274
  Current portion of deferred revenues, net of deferred
   royalties of $7,923,000 in 1996 and $11,245,000 in
   1997..................................................    42,865     42,711
                                                           --------   --------
      Total current liabilities..........................   102,118     77,502
Deferred revenues, net of deferred royalties of
 $7,415,000 in 1996 and $8,880,000 in 1997...............    23,472     28,806
Deferred gain............................................     2,690        --
                                                           --------   --------
      Total liabilities..................................   128,280    106,308
 
Commitments and contingencies
Stockholders' equity:
  Common stock ($0.01 par value; 55,000,000 shares
   authorized, 27,500,000 shares issued and outstanding
   in 1996; and 75,000,000 shares authorized, 32,677,500
   shares issued in 1997)................................       275        327
  Additional paid-in capital.............................    11,877     84,185
  Retained earnings......................................    17,656      5,338
  Treasury stock, at cost-no shares in 1996 and 3,162,500
   shares in 1997........................................       --         (32)
                                                           --------   --------
    Total stockholders' equity...........................    29,808     89,818
                                                           --------   --------
      Total liabilities and stockholders' equity.........  $158,088   $196,126
                                                           ========   ========
See accompanying notes to consolidated financial statements.
 
                                      F-4
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
PREDECESSOR                    SUCCESSOR
                          ---------------------------------------- -------------
                             YEAR         YEAR       THREE MONTHS   NINE MONTHS
                            ENDED        ENDED          ENDED          ENDED
                           DEC. 31,     DEC. 31,       MAR. 31,      DEC. 31,
                             1995         1996           1997          1997
                          ------------ ------------ -------------- -------------
                           (IN THOUSANDS, EXCEPT PER SHARE DOLLAR AMOUNTS)
Revenues:
  Software license
   fees.................  $     52,061 $     52,163   $     7,341   $     56,796
  Maintenance fees......        65,307       69,702        17,352         55,337
  Professional services
   fees.................        35,194       34,975         9,948         34,450
                          ------------ ------------   -----------   ------------
    Total revenues......       152,562      156,840        34,641        146,583
                          ------------ ------------   -----------   ------------
Cost of revenues:
  Software license......        15,244       14,120         2,098         17,811
  Maintenance...........        23,488       25,885         6,205         22,559
  Professional
   services.............        32,591       32,966         9,211         28,356
                          ------------ ------------   -----------   ------------
    Total cost of
     revenues...........        71,323       72,971        17,514         68,726
                          ------------ ------------   -----------   ------------
Gross profit............        81,239       83,869        17,127         77,857
                          ------------ ------------   -----------   ------------
Operating expenses:
  Software product
   development..........           900        1,372           --           1,093
  Sales and marketing...        52,512       48,677         7,317         31,003
  Administrative and
   general..............        24,639       28,539         8,500         27,258
  Write-off of acquired
   in-process research
   and development
   costs................           --           --            --           6,051
                          ------------ ------------   -----------   ------------
    Total operating
     expenses...........        78,051       78,588        15,817         65,405
                          ------------ ------------   -----------   ------------
Income from operations..         3,188        5,281         1,310         12,452
Other income and ex-
 pense, net.............         2,449        5,230           978          1,017
                          ------------ ------------   -----------   ------------
Income before income
 taxes..................         5,637       10,511         2,288         13,469
Income tax provision....         2,311        4,302           915          8,131
                          ------------ ------------   -----------   ------------
Net income..............  $      3,326 $      6,209   $     1,373   $      5,338
                          ============ ============   ===========   ============
Dividends...............  $      1,700 $      9,000   $        --   $         --
                          ============ ============   ===========   ============
Net income per common
 share..................  $       0.12 $       0.23   $      0.06   $       0.21
                          ============ ============   ===========   ============
Net income per common
 share-assuming
 dilution...............  $       0.11 $       0.21   $      0.05   $       0.20
                          ============ ============   ===========   ============
Shares used in computing
 net income per common
 share:
  Net income per common
   share................        27,500       27,500        24,338         25,119
  Net income per common
   share-assuming
   dilution.............        29,056       29,056        25,894         26,685
See accompanying notes to consolidated financial statements.
 
                                      F-5
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK
                         $0.01 PAR VALUE  ADDITIONAL                        TOTAL
                         ----------------  PAID-IN-  RETAINED  TREASURY STOCKHOLDERS'
                         SHARES   AMOUNT   CAPITAL   EARNINGS   STOCK      EQUITY
                         -------- ------- ---------- --------  -------- -------------
                                               (IN THOUSANDS)
Predecessor:
  Balances at December
   31, 1994.............   27,500  $  275  $11,877   $18,821     $--       $30,973
  Net income............      --      --       --      3,326      --         3,326
  Cash dividends ($0.06
   per share)...........      --      --       --     (1,700)     --        (1,700)
                         --------  ------  -------   -------     ----      -------
  Balances at December
   31, 1995.............   27,500     275   11,877    20,447      --        32,599
  Net income............      --      --       --      6,209      --         6,209
  Cash dividends ($0.33
   per share)...........      --      --       --     (9,000)     --        (9,000)
                         --------  ------  -------   -------     ----      -------
  Balances at December
   31, 1996.............   27,500     275   11,877    17,656      --        29,808
  Net income............      --      --       --      1,373      --         1,373
                         --------  ------  -------   -------     ----      -------
  Balances at March 31,
   1997.................   27,500  $  275  $11,877   $19,029     $--       $31,181
                         ========  ======  =======   =======     ====      =======
-------------------------------------------------------------------------------------
Successor:
  Initial
   capitalization.......   27,500  $  275  $37,108   $   --      $(32)     $37,351
  Compensation expense
   on options granted...      --      --       323       --       --           323
  Net proceeds from
   initial public
   offering.............    5,178      52   46,754       --       --        46,806
  Net income............      --      --       --      5,338      --         5,338
                         --------  ------  -------   -------     ----      -------
  Balances at December
   31, 1997.............   32,678  $  327  $84,185   $ 5,338     $(32)     $89,818
                         ========  ======  =======   =======     ====      =======
See accompanying notes to consolidated financial statements.
 
                                      F-6
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
PREDECESSOR                  SUCCESSOR
                                                                      ----------------------------------------- -------------
                                                                          YEAR          YEAR      THREE MONTHS   NINE MONTHS
                                                                          ENDED         ENDED         ENDED         ENDED
                                                                      DEC. 31, 1995 DEC. 31, 1996 MAR. 31, 1997 DEC. 31, 1997
                                                                      ------------- ------------- ------------- -------------
                                                                                          (IN THOUSANDS)
Cash flows from operating activities:
 Net income..........................................................   $  3,326      $  6,209       $ 1,373      $  5,338
 Adjustments to reconcile net income to net cash provided by
  operating activities:
 Depreciation and amortization.......................................      3,921         3,660           941         6,205
 Loss (gain) on sales of property and equipment......................         67           156           --             (5)
 Deferred income taxes...............................................       (408)       (1,242)          --         (4,184)
 Deferred gain.......................................................        --           (140)          (36)          --
 Net proceeds from sales of accounts receivable......................     28,852        28,448           --         24,314
 Write-off of acquired in-process research and development costs.....        --            --            --          6,051
 Write-off of short-term investment..................................        --            --            --          1,529
 Compensation expense on options granted.............................        --            --            --            323
 Change in:
 Accounts receivable, excluding net proceeds from sales..............    (47,331)      (28,674)       10,996       (43,074)
 Prepaid expenses....................................................        348        (1,698)       (3,894)        4,313
 Other current assets................................................        225        (1,870)        3,083        (2,988)
 Accounts payable....................................................       (817)        3,472           673           779
 Accrued payroll and employee benefits...............................      3,181        (2,194)       (3,632)        2,059
 Payable to SAG......................................................      8,495        16,185         6,265        (1,336)
 Other current liabilities...........................................        646         1,571          (927)         (558)
 Income taxes payable................................................      1,678         1,285        (1,711)         (399)
 Deferred revenues, net..............................................     27,435        12,285        (2,705)        4,476
                                                                        --------      --------       -------      --------
   Net cash provided by operating activities.........................     29,618        37,453        10,426         2,843
                                                                        --------      --------       -------      --------
Cash flows from investing activities:
 Additions to property, equipment and leasehold improvements.........     (1,839)       (3,740)         (208)       (4,084)
 Proceeds from sales of property and equipment.......................        200         9,044           --              2
 Notes receivable, SAG...............................................    (20,000)      (10,000)          --            --
 Purchase of Cooperation Agreement...................................        --            --            --        (22,612)
 Change in other assets, net.........................................     (2,137)          443           --            --
 Acquisition, net of cash received...................................        --            --            --         (6,325)
                                                                        --------      --------       -------      --------
   Net cash used in investing activities.............................    (23,776)       (4,253)         (208)      (33,019)
                                                                        --------      --------       -------      --------
Cash flows from financing activities:
 Payment of long-term obligations....................................     (3,124)          --            --            --
 Dividends paid......................................................     (1,700)       (9,000)          --            --
 Net proceeds from issuance of common stock..........................        --            --            --         46,806
 Repurchase of common stock..........................................        --            --            --        (33,919)
 Issuance of common stock............................................        --            --            --         31,727
                                                                        --------      --------       -------      --------
   Net cash provided by (used in) financing activities...............     (4,824)       (9,000)          --         44,614
                                                                        --------      --------       -------      --------
Net increase in cash and cash equivalents............................      1,018        24,200        10,218        14,438
Cash and cash equivalents, beginning.................................        555         1,573        25,773        35,991
                                                                        --------      --------       -------      --------
Cash and cash equivalents, ending....................................   $  1,573      $ 25,773       $35,991      $ 50,429
                                                                        ========      ========       =======      ========
Non-cash investing and financing activity:
 Deferred gain on sale leaseback of customer support facility........   $    --       $  2,830       $   --       $    --
                                                                        ========      ========       =======      ========
Supplemental disclosures:
 Interest paid.......................................................   $    350      $    103       $   --       $     14
                                                                        ========      ========       =======      ========
 Income taxes paid, net of refunds...................................   $    387      $  3,481       $ 3,026      $  7,661
--------------------------------------------------
                                                                        ========      ========       =======      ========
See accompanying notes to consolidated financial statements.
 
                                      F-7
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
(1) DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Reporting Entity and Principles of Consolidation
 
  Prior to March 31, 1997, Software AG Systems, Inc. and subsidiaries (the
"Company") was a wholly owned subsidiary of Software AG, a German software
company ("SAG"). As is more fully described in Note 2, on March 31, 1997, the
Company consummated a recapitalization agreement under which the Company
repurchased from SAG 24,750,000 shares of common stock, and certain senior
management of the Company and Thayer Equity Investors III, L.P. ("Thayer")
acquired approximately 89% of the then outstanding common stock of the Company
(the "Recapitalization").
 
  The consolidated financial statements include the accounts of Software AG
Systems, Inc. and its wholly owned subsidiaries. All inter-company balances
and transactions between the Company and its wholly owned subsidiaries have
been eliminated.
 
 Description of Operations
 
  The Company provides software products and professional services utilized by
organizations to build and enhance enterprise-level applications. The
Company's products are used for mission-critical applications that require
reliability, scalability and security, such as customer billing systems,
financial accounting systems and inventory management. The Company's business
is focused on database management and applications development products. The
Company markets and sells its software products and services, as well as
third-party products, through direct and indirect channels in North America,
South America, Japan and Israel.
 
 Revenue Recognition
 
  The Company recognizes revenue in accordance with the provisions of the
American Institute of Certified Public Accountants Statement of Position No.
91-1, Software Revenue Recognition.
 
  Product license revenues are recognized when there is an executed license
agreement, the software and authorization code have been delivered,
collectibility from the customer is probable and there are no significant
remaining obligations to the customer.
 
  Maintenance revenues, which include unspecified when-and-if deliverable
software upgrades, user documentation and technical support for software
products, are deferred and recognized on a straight-line basis over the term
of the maintenance agreement, generally one year.
 
  Customer training revenues and revenues from time and material type
professional consulting and custom application contracts are recognized as the
services are provided and the work is performed. Revenues from long-term fixed
price professional consulting and custom application contracts are accounted
for under the percentage of completion method. When estimates of costs, on
long-term fixed price contracts, indicate a loss, such a loss is provided for
currently.
 
  Sales of enterprise license agreements, which generally bundle a combination
of products, technical services and professional consulting services, are
accounted for according to their component parts using the criteria described
above.
 
 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.
 
                                      F-8
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
 Property, Equipment and Leasehold Improvements
 
  Property, equipment and leasehold improvements are recorded at cost.
Depreciation of property and equipment is provided on a straight-line basis
over the estimated useful asset lives, generally 31.5 years for property and
three to five years for equipment. Leasehold improvements are amortized on a
straight-line basis over the lesser of the respective lease term or estimated
useful asset lives.
 
 Intangible Assets
 
  Goodwill, which represents the excess of purchase price over fair market
value of net assets acquired, and other intangible assets are amortized on a
straight-line basis over the expected periods to be benefited, generally 10
years. The Company assesses the recoverability of intangible assets by
determining whether the amortization of the assets over the remaining lives
can be recovered through undiscounted future operating cash flows. The amount
of impairment, if any, is measured based on projected discounted future
operating cash flows. The assessment of the recoverability of intangible
assets will be impacted if estimated future operating cash flows are not
achieved.
 
 Income Taxes
 
  The Company uses the asset and liability method to account for income taxes.
Under the asset and liability method, deferred income taxes are recognized for
the future tax consequences attributable to future years for differences
between the financial statement carrying amounts and the tax bases of existing
assets and liabilities. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The
effect on deferred taxes of a change in tax rates is recognized in income in
the period that includes the enactment date.
 
 Foreign Currency Translation
 
  The local currencies of the Company's foreign subsidiaries are the
functional currencies. The assets and liabilities of foreign subsidiaries are
translated into U.S. dollars at current exchange rates, and the resulting
translation gains and losses are included as an adjustment to stockholders'
equity. Revenue and expense accounts of these operations are translated at
average exchange rates prevailing during the year. Transaction gains and
losses relate to foreign currency denominated receivables recorded in the
financial statements of the Company's U.S. operations, and are reflected in
income. There were no material foreign currency adjustments.
 
                                      F-9
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
 Net Income per Common Share
 
  The Company reports earnings per share under Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128"). In
accordance with SFAS No. 128 requirements, the Company presents basic and
diluted earnings per share and has amended all previous earnings per share
calculations. Basic earnings per share is based on income available to common
stockholders divided by the weighted average number of common shares
outstanding. Diluted earnings per share is based on income available to common
stockholders divided by the sum of the weighted average number of common
shares outstanding and all potential common shares which are dilutive. The
following information is a reconciliation of the amounts used in these
calculations:
PREDECESSOR                  SUCCESSOR
                            ----------------------------------------- -------------
                                YEAR          YEAR      THREE MONTHS   NINE MONTHS
                                ENDED         ENDED         ENDED         ENDED
                            DEC. 31, 1995 DEC. 31, 1996 MAR. 31, 1997 DEC. 31, 1997
                            ------------- ------------- ------------- -------------
                              (IN THOUSANDS, EXCEPT FOR PER SHARE DOLLAR AMOUNTS)
Numerator:
    Net income.............    $3,326        $6,209        $1,373        $5,338
                               ======        ======        ======        ======
   Denominator:
    Basic:
     Weighted average
      shares outstanding...    27,500        27,500        24,338        25,119
    Effect of dilutive
     securities:
     Stock options.........     1,556         1,556         1,556         1,566
                               ------        ------        ------        ------
    Diluted:
     Weighted average
      shares outstanding--
      assuming dilution....    29,056        29,056        25,894        26,685
                               ======        ======        ======        ======
   EPS:
    Net income per common
     share.................    $ 0.12        $ 0.23        $ 0.06        $ 0.21
    Net income per common
     share--assuming
     dilution..............      0.11          0.21          0.05          0.20
Stock Option Plan
 
  The Company accounts for issuance of stock options in accordance with
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("SFAS No. 123"). SFAS No. 123 permits entities to
recognize as expense over the vesting period the fair value of all stock-based
awards on the date of grant. Alternatively, SFAS No. 123 also allows entities
to continue to apply the provisions of Accounting Principles Board Opinion No.
25 ("APB No. 25") and provide pro forma net income and pro forma earnings per
share disclosures for employee stock option grants made in 1997 and future
years as if the fair-value based method defined in SFAS No. 123 had been
applied. Under APB No. 25, compensation expense would be recorded on the date
of the grant only if the current market price of the underlying stock exceeded
the exercise price. The Company has elected to continue to apply the
provisions of APB No. 25 and provide the pro forma disclosure provisions of
SFAS No. 123.
 
 Financial Statement Presentation
 
  The historical financial information set forth in these consolidated
financial statements for the periods ended, or as of the dates prior to March
31, 1997 reflect the results of operations of the Company prior to the
Recapitalization when the Company was a wholly owned subsidiary of SAG and is
captioned as "Predecessor". The historical financial information subsequent to
March 31, 1997 reflects the consolidated financial position and results of
operations subsequent to the Recapitalization and is captioned as "Successor".
 
                                     F-10
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
 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.
 
 Reclassifications
 
  Certain amounts in 1996 and 1995 have been reclassified to conform to the
fiscal 1997 presentation.
 
(2) RECAPITALIZATION OF THE COMPANY
 
  On March 31, 1997, the Company consummated the Recapitalization under which
the Company repurchased from its former parent, SAG, 24,750,000 shares of
common stock and sold 21,450,000 shares of common stock to Thayer and certain
of the Company's senior managers. As a result of this change in control, the
acquisition by Thayer and such managers was accounted for as a purchase
business combination, and as such the fair value of the Company's assets and
liabilities was recorded as of April 1, 1997.
 
  Prior to the consummation of the Recapitalization, the Company entered into
a perpetual (unless otherwise terminated by the written agreement of the
parties) cooperation agreement ("Cooperation Agreement") with SAG that
terminated and superseded the license agreement dated January 1, 1995. As
consideration for the Cooperation Agreement, the Company paid SAG
approximately $22,600,000. Under the Cooperation Agreement, each of the
Company and SAG are required to pay the other royalties of 24% of net revenues
from sales of licenses of, and technical services on, each other's products
for the initial 20 years of the perpetual term of the agreement. For calendar
years 1997 through 2000, the Company is required to pay SAG minimum annual
royalties of $21,000,000, provided that SAG's worldwide product and technical
services revenues for each of those years are at least equal to SAG's 1996
worldwide revenues. In the event of a decrease in SAG's worldwide revenues,
the minimum annual royalty requirement will be reduced proportionately.
 
  Pursuant to the Recapitalization, Thayer and certain of the Company's senior
managers acquired approximately an 89% interest in the Company for
approximately $31,500,000. The determination of fair value allocated to the
identifiable assets and liabilities of the Company has been made by management
based on the nature of the assets and liabilities acquired, and general
economic factors. Based on this allocation, the fair value of the Company's
Cooperation Agreement has been recorded at $23,500,000, based on an
independent appraisal. The amortization period for the Cooperation Agreement
is ten years. The fair value of the Company's remaining assets and liabilities
has been presumed to be equal to the book value as of the date of the
acquisition. Based on allocation of the purchase price to the net assets and
liabilities, an excess of purchase price over net assets acquired (goodwill)
of $6,402,000 was recorded. Such goodwill is being amortized on a straight-
line basis over ten years. At December 31, 1997, accumulated amortization on
the Cooperation Agreement and the goodwill was $1,763,000 and $480,000,
respectively.
 
(3) INITIAL PUBLIC OFFERING
 
  In September 1997, the Company's Board of Directors authorized the Company
to file a Registration Statement on Form S-1 with the Securities and Exchange
Commission permitting the Company to sell shares of its common stock to the
public. The Company's Board of Directors also approved a 275-for-1 stock split
which became effective on November 17, 1997. Common share and per share data
in these consolidated financial statements have been retroactively adjusted to
reflect such stock split. Additionally, the Company's Certificate of
Incorporation was amended and restated to authorize an additional 20,000,000
shares of $0.01 par value common stock and an additional 11,250,000 shares of
$0.01 par value preferred stock, for a total of 75,000,000 authorized
 
                                     F-11
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
shares of common stock and 25,000,000 authorized shares of $0.01 par value
preferred stock. The Company had previously authorized 13,750,000 shares of
$0.01 par value preferred stock on March 14, 1997.
 
  On November 21, 1997, 7,700,000 shares of the Company's common stock was
sold to the public at $10 per share, of which 3,100,000 shares were sold by
certain stockholders of the Company, and 4,600,000 shares were sold by the
Company ("IPO"). On December 17, 1997, the Company and certain stockholders
combined sold 1,155,000 shares of common stock at $10 per share to cover the
over-allotment option exercised by the underwriters. The aggregate proceeds,
net of underwriting discounts and commissions, to the Company and certain
stockholders from these transactions were $48,151,000 and $34,201,000,
respectively.
 
(4) ACQUISITION
 
  On September 30, 1997, the Company acquired 100% of the issued and
outstanding shares of the common stock of R.D. Nickel and Associates, Inc.
("R.D. Nickel"). R.D. Nickel is a software company that has a family of
application development products and that has been the exclusive distributor
of SAG's products in Canada since 1973. The transaction was accounted for
using the purchase method of accounting for a business combination. The
aggregate purchase price of Cdn$14,000,000 (US$10,130,000) was funded through
a cash payment of Cdn$7,000,000 (US$5,065,000) and a note payable of
Cdn$7,000,000 (US$5,065,000). The note payable was paid in November 1997 with
the proceeds from the IPO.
 
  In connection with the transaction, the Company recorded a $6,051,000 non-
recurring charge against earnings for in-process research and development
costs. The remaining excess purchase price of $4,960,000 represents goodwill.
The related amortization period for the goodwill is ten years.
 
  As of October 1, 1997, the operating results of R.D. Nickel have been
consolidated with the Company's operating results.
 
  The R.D. Nickel acquisition was not determined to be significant to the
operations or financial position of the Company; accordingly, the pro forma
financial information has not been presented.
 
(5) CONCENTRATIONS OF CREDIT RISK AND FAIR VALUES OF FINANCIAL INSTRUMENTS
 
 Concentrations of Credit Risk
 
  Financial instruments that potentially subject the Company to credit risk
include accounts receivable, cash and cash equivalents. Management believes
that credit risk related to the Company's accounts receivable is limited due
to a large number of customers in differing industries and geographic areas.
The Company does not require collateral for accounts receivable. Historically,
the Company has not experienced significant losses on accounts receivable
except in isolated situations. The Company maintains depository relationships
with several banks. At times, the Company's cash deposits may exceed federally
insured limits. Periodically, the Company invests excess cash in low risk,
highly liquid repurchase agreements and other instruments through high credit
quality financial institutions. The Company has not experienced any losses in
its depository accounts or short-term investments and management believes that
the Company is not exposed to any significant credit risks.
 
 Fair Value of Financial Instruments
 
  The carrying amounts of cash, accounts receivable, accounts payable, payable
to SAG, and amounts included in other current assets and current liabilities
that meet the definition of a financial instrument, approximate fair value
because of the short-term nature of these amounts.
 
  The carrying amount of installment accounts receivable, net of related
deferred revenues approximates the fair value.
 
                                     F-12
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
(6) ACCOUNTS RECEIVABLE
 
  Total current and non-current accounts receivable (including installment)
consist of the following:
PREDECESSOR SUCCESSOR
                                                           ----------- ---------
                                                            DEC. 31,   DEC. 31,
                                                              1996       1997
                                                           ----------- ---------
                                                              (IN THOUSANDS)
Domestic...............................................   $73,924    $83,659
   International..........................................     9,381     13,448
   Less: allowance for doubtful accounts..................    (4,980)    (9,301)
                                                             -------    -------
                                                             $78,325    $87,806
                                                             =======    =======
Installment Accounts Receivable
 
  Installment accounts receivable represent unbilled receivables from
enterprise license agreements and other long-term and short-term contracts
with deferred invoicing terms.
 
  Installment accounts receivable include:
PREDECESSOR SUCCESSOR
                                                           ----------- ---------
                                                            DEC. 31,   DEC. 31,
                                                              1996       1997
                                                           ----------- ---------
                                                              (IN THOUSANDS)
Gross installment accounts receivable..................   $27,258    $35,172
   Less: unearned interest................................     1,003      1,806
                                                             -------    -------
                                                              26,255     33,366
   Less: current portion..................................    15,300     24,434
                                                             -------    -------
                                                             $10,955    $ 8,932
                                                             =======    =======
The effective interest rate on the installment accounts receivable, net of
related deferred revenues, at December 31, 1996 and 1997 was approximately 9%.
 
  At December 31, 1997, installment accounts receivable are scheduled to be
invoiced as follows:
YEARS ENDING DECEMBER 31,                                          AMOUNT
   -------------------------                                      --------------
                                                                  (IN THOUSANDS)
1998..........................................................    $25,894
   1999..........................................................      6,535
   2000..........................................................      1,558
   2001..........................................................      1,185
                                                                     -------
                                                                     $35,172
                                                                     =======
In 1996 and 1997, the Company sold installment accounts receivable relating
to certain enterprise license agreements and other long-term contracts to
unrelated financing companies, receiving net proceeds of $28,448,000 and
$24,314,000, respectively. The installment accounts receivable sold include
those relating to product and license fees, technical services, and
professional consulting services. Under the terms of the agreements with the
financing companies, the Company continues to service the receivables sold,
including invoicing and collection, and makes payments to the financing
companies under pre-determined amortization schedules based on the scheduled
invoicing dates of the receivables sold. The amortization schedules provide
rates of return to the financing companies ranging from 8.5% to 8.9%.
 
                                     F-13
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The agreements allow for substitution of contracts for early terminations
and require the Company to repurchase contracts that cease to meet eligibility
requirements, such as those contracts that become 90 days past due. At
December 31, 1996 and 1997, the Company remained contingently liable under the
recourse provisions for $44,801,000 and $47,927,000, respectively. The
Company's allowance for doubtful accounts is maintained at a level that
management believes is sufficient to cover potential losses under the recourse
provisions on receivables sold.
 
  Under the terms of the agreements, the Company is required to maintain
specified amounts of net worth and cash availability, and a debt to equity
ratio that does not exceed a specified amount. If the Company fails to
maintain these specified amounts, the financing companies may assume the
servicing rights on receivables sold.
 
 Unbilled Services
 
  Unbilled services relate primarily to long-term professional consulting
services and custom application contracts accounted for using the percentage
of completion method. Billings on these contracts generally are tied to
achieving specific milestones.
 
  Unbilled services include:
PREDECESSOR SUCCESSOR
                                                           ----------- ---------
                                                            DEC. 31,   DEC. 31,
                                                              1996       1997
                                                           ----------- ---------
                                                              (IN THOUSANDS)
Unbilled work in process...............................   $6,775     $ 9,524
   Retainage..............................................    1,474       1,761
                                                             ------     -------
                                                              8,249      11,285
   Less: advance billings and prepayments.................    2,220         901
                                                             ------     -------
                                                             $6,029     $10,384
                                                             ======     =======
(7) PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
PREDECESSOR SUCCESSOR
                                                           ----------- ---------
                                                            DEC. 31,   DEC. 31,
                                                              1996       1997
                                                           ----------- ---------
                                                              (IN THOUSANDS)
Computer equipment.....................................   $18,138    $22,524
   Leasehold improvements.................................     9,021      9,188
   Furniture and other equipment..........................     7,713      8,162
                                                             -------    -------
                                                              34,872     39,874
   Less: accumulated depreciation and amortization........    25,949     29,797
                                                             -------    -------
                                                             $ 8,923    $10,077
                                                             =======    =======
Depreciation and amortization for 1995, 1996, three months ended March 31,
1997 and nine months ended December 31, 1997, was $3,733,000, $3,473,000,
$896,000 and $2,952,000, respectively.
 
(8) SALE OF CUSTOMER SUPPORT FACILITY
 
  In 1996, the Company recorded a sale-leaseback transaction for its customer
support facility. In connection with the sale, the Company realized a gain of
$2,830,000, which was being recognized on a straight-line basis over the term
of the related operating lease. In connection with the Recapitalization of the
Company (Note 2) in March 1997, no value was recorded in the financial
statements for this deferred gain.
 
                                     F-14
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
(9) TRANSACTIONS WITH RELATED PARTY
 
 Royalties
 
  In 1994, the Company licensed and serviced SAG products under a pre-existing
license agreement pursuant to which the Company was required to make payments
to SAG based on a specified percentage of the net sales amount for licenses
of, and technical services on, SAG's products. Effective January 1, 1995, the
Company and SAG entered into a new license agreement whereby the Company was
required to pay royalties of 24% of such net sales amounts. For 1995, 1996 and
for the three months ended March 31, 1997, royalty expense related to SAG's
products was $23,887,000, $26,058,000 and $5,683,000, respectively.
 
  Under the license agreement, SAG pays royalties to the Company on sales of
the Company's products under the same terms. For 1995, 1996 and for the three
months ended March 31, 1997, royalty revenues related to the Company's
products were $295,000, $294,000 and $339,000, respectively.
 
  In connection with the Recapitalization (Note 2), the Company entered into
the Cooperation Agreement under which the Company paid $23,595,000 of
royalties to SAG and SAG paid royalties of $300,000 to the Company for the
nine months ended December 31, 1997.
 
 Cost Reimbursements
 
  As an accommodation to SAG, the Company houses certain of SAG's product
development and quality assurance personnel. SAG reimburses the Company for
the costs incurred related to such product development and quality assurance
activities. All intellectual property resulting from this work is the sole
property of SAG. The reimbursements from SAG are netted against costs incurred
and included in software product development costs in the statement of
operations. Reimbursements for 1995, 1996, for the three months ended March
31, 1997 and for the nine months ended December 31, 1997 were $8,767,000,
$15,931,000, $3,416,000 and $7,406,000, respectively.
 
 Notes Receivable/Payable
 
  In 1995, the Company loaned $20,000,000 to SAG, which originally was
scheduled to be repaid in 2000. In 1996, the Company loaned an additional
$10,000,000 to SAG, which originally was scheduled to be repaid in 2001.
Interest at 6.5% and 7%, respectively, was payable quarterly on the 1995 and
1996 loans. In March 1997, the Company and SAG agreed to offset the entire
balance of the notes receivable from SAG as of December 31, 1996 against the
payable to SAG. Interest earned for 1995, 1996 and for the three months ended
March 31, 1997 was $280,000, $1,590,000 and $333,000, respectively.
 
  The payable to SAG of $33,317,000 and $10,050,000 at December 31, 1996 and
1997, respectively, includes royalties due under the previous license
agreement and under the Cooperation Agreement on sales of both product
licenses and technical services, as well as net amounts due on other
transactions between the Company and SAG. These amounts are non-interest
bearing.
 
  In 1995, SAG loaned $2,500,000 to the Company, which was repaid during the
year. Interest expense on this note was $119,000, computed at 8%.
 
 Dividends
 
  In 1995 and 1996, the Company paid dividends of $1,700,000 and $9,000,000,
respectively, to SAG, which at the time owned 100% of the outstanding common
stock of the Company. No dividends were paid during 1997 to SAG, and there are
no plans for future dividend payments.
 
                                     F-15
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
(10) INCOME TAXES
 
  Income tax expense consisted of:
PREDECESSOR           SUCCESSOR
                                                                                         ---------------------------  ---------
                                                                                                             THREE      NINE
                                                                                           YEAR     YEAR     MONTHS    MONTHS
                                                                                          ENDED    ENDED     ENDED      ENDED
                                                                                         DEC. 31, DEC. 31,  MAR. 31,  DEC. 31,
                                                                                           1995     1996      1997      1997
                                                                                         -------- --------  --------  ---------
                                                                                                    (IN THOUSANDS)
Current expense:
     Federal............................................................................  $1,744  $ 4,167   $ 1,196    $ 6,226
     State..............................................................................     274      586       258      1,551
     Foreign............................................................................     701      791       604      3,395
                                                                                          ------  -------   -------    -------
                                                                                           2,719    5,544     2,058     11,172
                                                                                          ------  -------   -------    -------
   Deferred benefit:
     Federal............................................................................    (265)  (1,136)     (959)    (2,560)
     State..............................................................................    (143)    (106)     (184)      (481)
                                                                                          ------  -------   -------    -------
                                                                                            (408)  (1,242)   (1,143)    (3,041)
                                                                                          ------  -------   -------    -------
                                                                                          $2,311  $ 4,302   $   915    $ 8,131
                                                                                          ======  =======   =======    =======
Income tax expense for 1995, 1996, three months ended March 31, 1997 and
nine months ended December 31, 1997, differed from the amounts computed by
applying the U.S. federal income tax rate of 34%, 34%, 35% and 35%,
respectively, to pretax income as a result of the following:
PREDECESSOR         SUCCESSOR
                                                                                         -------------------------- ---------
                                                                                                            THREE     NINE
                                                                                           YEAR     YEAR    MONTHS   MONTHS
                                                                                          ENDED    ENDED    ENDED     ENDED
                                                                                         DEC. 31, DEC. 31, MAR. 31, DEC. 31,
                                                                                           1995     1996     1997     1997
                                                                                         -------- -------- -------- ---------
                                                                                                    (IN THOUSANDS)
Computed "expected" tax expense......................................................  $1,917   $3,573    $801    $4,714
   Increase (reduction) in income taxes resulting from:
     State income taxes, net of federal benefit.........................................      86      314      48       696
     Expenses, principally meals and entertainment, not deductible......................     277      224       6       209
     Amortization and write-off of intangibles..........................................     --       --       49     2,439
     Other, net.........................................................................      31      191      11        73
                                                                                          ------   ------    ----    ------
                                                                                          $2,311   $4,302    $915    $8,131
                                                                                          ======   ======    ====    ======
F-16
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The tax effects of temporary differences that give rise to significant
portions of deferred income tax assets and liabilities consist of:
PREDECESSOR SUCCESSOR
                                                          ----------- ---------
                                                           DEC. 31,   DEC. 31,
                                                             1996       1997
                                                          ----------- ---------
                                                             (IN THOUSANDS)
Deferred tax assets arising from deductible temporary
    differences:
     Accrued compensation costs and other expenses......    $1,533     $2,679
     Allowance for doubtful accounts....................     1,879      3,617
     Depreciation and amortization......................       917      1,473
     Deferred gain--installment method..................     1,022      1,000
     Investments........................................       --         642
                                                            ------     ------
                                                             5,351      9,411
   Deferred tax liabilities arising from taxable
    temporary differences:
     Leases of product licenses.........................       470        346
                                                            ------     ------
   Net deferred income taxes............................     4,881      9,065
   Less: current portion, deferred tax assets...........     3,412      6,217
                                                            ------     ------
   Non-current portion, deferred tax assets.............    $1,469     $2,848
                                                            ======     ======
In assessing the realization of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Based upon the
level of historical taxable income and projections for future taxable income
over the periods for which the deferred tax assets are deductible, management
believes that it is more likely than not that the Company will realize the
benefits of these deductible differences. The amount of the deferred tax asset
considered realizable, however, could be reduced in the near term if estimates
of future taxable income are reduced.
 
(11) RETIREMENT PLANS
 
  The Company has a retirement plan covering substantially all of its
employees. This plan meets the requirements of Section 401(k) of the Internal
Revenue Code. The Company matches employee contributions and may make
additional contributions based on the Company's profitability. For 1995, 1996,
three months ended March 31, 1997 and nine months ended December 31, 1997, the
Company's matching (and total) contributions were $1,789,000, $1,854,000,
$696,000 and $1,190,000, respectively.
 
  The Company also has entered into deferred compensation agreements with
certain key executives. Under these agreements, the executives are credited
with annual pre-determined amounts and amounts based on bonuses received, and
earn interest on the deferred amounts. Total deferrals, which are included in
accrued payroll and employee benefits, were $1,504,000 and $1,068,000 at
December 31, 1996 and 1997, respectively, net of loans of $558,000 and
$1,164,000, respectively. The expense for these agreements was $653,000,
$1,218,000, $150,000 and $160,000 for 1995, 1996, three months ended March 31,
1997 and nine months ended December 31, 1997, respectively. To assist in the
funding of these agreements the Company has purchased corporate-owned life
insurance on certain of these executives. The cash surrender value of these
policies, which is included in other assets, was $668,000 and $764,000 at
December 31, 1996 and 1997, respectively.
 
                                     F-17
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
(12) STOCK OPTION PLAN
 
  The Company adopted the Software AG Systems, Inc. 1997 Stock Option Plan
(the "Option Plan") on April 29, 1997. The Option Plan permits a maximum of
6,875,000 shares of common stock to be issued pursuant to grants of stock
options. Unless sooner terminated by the Company's Board of Directors, the
Option Plan will terminate on April 11, 2007. Pursuant to the Option Plan, the
exercise price per share shall not be less than the fair market value of each
share at the date of grant. All options issued generally have vesting periods
of zero to four years from the grant date and expire after the seventh
anniversary from the date of grant. At December 31, 1997, 1,831,775 shares
were available for grant under the Option Plan.
 
  Following is a summary of activity under the Option Plan for the year ended
December 31, 1997:
PRICE PER SHARE
                                                            --------------------
                                                                        WEIGHTED
                                                   SHARES      RANGE    AVERAGE
                                                  --------- ----------- --------
Granted....................................... 5,069,900 $1.47-12.00  $4.66
   Exercised.....................................       --          --     --
   Terminated/Forfeited..........................    26,675   1.47-9.60   2.90
                                                  --------- -----------  -----
   Balance, December 31, 1997.................... 5,043,225 $1.47-12.00  $5.02
                                                  ========= ===========  =====
The following table summarizes information about the Option Plan at December
31, 1997:
OPTIONS OUTSTANDING                    OPTIONS EXERCISABLE
         ------------------------------------------    ---------------------------
                          WEIGHTED-
                           AVERAGE       WEIGHTED-                     WEIGHTED-
                          REMAINING       AVERAGE                       AVERAGE
           NUMBER        CONTRACTUAL     EXERCISE        SHARES        EXERCISE
         OUTSTANDING     LIFE (YRS)        PRICE       EXERCISABLE       PRICE
         -----------     -----------     ---------     -----------     ---------
3,142,975         6.26          $ 1.47           1,100         $1.47
            744,975         6.61            9.60         592,625          9.60
            152,900         6.85           10.00             --            --
          1,002,375         6.73           12.00             --            --
          ---------         ----          ------         -------         -----
          5,043,225         6.42          $ 5.02         593,725         $9.58
          =========         ====          ======         =======         =====
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123") was issued. SFAS
No. 123 is effective for fiscal years beginning after December 15, 1995. SFAS
No. 123 encourages companies to adopt the fair value method for compensation
expenses recognition related to employee stock options. Existing accounting
requirements of Accounting Principles Board Opinion No. 25 ("APB No. 25") use
the intrinsic value method in determining compensation expense which
represents the excess of the market price of the stock over the exercise price
on the measurement date. The Company has elected to remain under APB No. 25
rules for stock options, under which no compensation cost has been recognized,
and is required to provide pro forma disclosure of the net income and earnings
per share that would have been had the Company adopted the new fair value
method for recognition purposes. The following information is presented as if
the Company had adopted SFAS No. 123 and restated its results for the nine
months ended December 31, 1997 (in thousands, except per share data):
Net income--as reported.............................................. $5,338
   Net income--pro forma................................................ $4,741
   Earnings per share--as reported...................................... $ 0.21
   Earnings per share (assuming dilution)--as reported.................. $ 0.20
   Earnings per share--pro forma........................................ $ 0.19
   Earnings per share (assuming dilution)--pro forma.................... $ 0.18
F-18
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  For the above information, the fair value of each option grant was estimated
on the date of grant using the Black-Scholes option pricing model with the
following assumptions used for grants in 1997: dividend yield of zero percent;
risk-free interest rate of 6%; expected volatility of 40%; expected lives
ranging from two to six years; and a forfeitures rate of 2.9%. The weighted
average fair value of options granted during the nine months ended December
31, 1997 was $1.97 per option.
 
  The full impact of calculating cost for stock options under SFAS No. 123 is
not reflected in the pro forma net income amounts presented above because
compensation cost is reflected over the options vesting period of four years.
 
(13) OPERATING LEASE COMMITMENTS
 
  The Company leases office space and equipment under operating lease
agreements that expire at various dates through 2015.
 
  Future minimum rent payments under operating leases, net of aggregate rents
of $5,116,000 expected to be received from subleasing of a portion of the
customer support facility and another facility, at December 31, 1997, are:
YEARS ENDING DECEMBER 31,                     FACILITIES EQUIPMENT  TOTAL
   -------------------------                     ---------- --------- -------
                                                        (IN THOUSANDS)
1998.........................................  $ 4,901    $2,002   $ 6,903
   1999.........................................    5,596     1,592     7,188
   2000.........................................    5,585       527     6,112
   2001.........................................    5,311        41     5,352
   2002.........................................    4,776        11     4,787
   Thereafter...................................   23,111       --     23,111
                                                  -------    ------   -------
                                                  $49,280    $4,173   $53,453
                                                  =======    ======   =======
Facility rent expense for 1995, 1996, three months ended March 31, 1997 and
nine months ended December 31, 1997, was $6,105,000, $7,002,000 $1,722,000 and
$5,179,000, respectively. Rent expense includes the current year effect of
determinable scheduled rent increases and initial rent abatement periods
contained in certain of the Company's facility lease agreements.
 
  Equipment lease expense for 1995, 1996, three months ended March 31, 1997
and nine months ended December 31, 1997, was $l,532,000, $1,678,000 $339,000
and $1,018,000, respectively.
 
  The Company's operating lease agreement for its customer support facility
requires the Company to maintain minimum amounts of net worth and retained
earnings. If the minimum amounts are not maintained, the Company will be
required to post a $500,000 irrevocable letter of credit for each $2,000,000
shortfall, to be applied by the lessor in the event of default under the
lease.
 
                                     F-19
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
(14) GEOGRAPHIC INFORMATION
 
  Net revenue, operating income, and identifiable assets by geographic area
were as follows:
PREDECESSOR         SUCCESSOR
                                                                                    -------------------------- ---------
                                                                                                       THREE     NINE
                                                                                      YEAR     YEAR    MONTHS   MONTHS
                                                                                     ENDED    ENDED    ENDED     ENDED
                                                                                    DEC. 31, DEC. 31, MAR. 31, DEC. 31,
                                                                                      1995     1996     1997     1997
                                                                                    -------- -------- -------- ---------
                                                                                                 (IN THOUSANDS)
Revenue
     U.S. operations............................................................... $130,997 $129,879 $ 30,424 $116,378
     Canadian operations...........................................................      --       --       --     3,861
     Mexican operations............................................................      --       --       --     4,507
     Other operations..............................................................   21,565   26,961    4,217   23,329
     Intercompany elimination......................................................      --       --       --    (1,492)
                                                                                    -------- -------- -------- --------
       Total revenue............................................................... $152,562 $156,840 $ 34,641 $146,583
                                                                                    ======== ======== ======== ========
   Income (loss) from operations
     U.S. operations............................................................... $  3,188 $  5,281 $  1,310 $ 18,732
     Canadian operations...........................................................      --       --       --    (5,129)
     Mexican operations............................................................      --       --       --    (1,151)
     Other operations..............................................................      --       --       --       --
                                                                                    -------- -------- -------- --------
       Total operating income...................................................... $  3,188 $  5,281 $  1,310 $ 12,452
                                                                                    ======== ======== ======== ========
   Identifiable assets
     U.S. operations............................................................... $125,612 $158,088 $127,749 $187,892
     Canadian operations...........................................................      --       --       --     9,143
     Mexican operations............................................................      --       --       --     1,538
     Other operations..............................................................      --       --       --       --
     Intercompany elimination......................................................      --       --       --    (2,447)
                                                                                    -------- -------- -------- --------
       Total identifiable assets................................................... $125,612 $158,088 $127,749 $196,126
                                                                                    ======== ======== ======== ========
Canadian operations include one subsidiary, R.D. Nickel, which was acquired
in September 1997. Mexican operations include one subsidiary located in
Mexico. The Company's Mexican operations commenced in 1996 and operated as a
branch office until it became a wholly owned subsidiary in May 1997. Other
operations include royalty revenue from international distributors.
 
  Royalty revenues from international distributors are as follows:
PREDECESSOR         SUCCESSOR
                                                                                         -------------------------- ---------
                                                                                                            THREE     NINE
                                                                                           YEAR     YEAR    MONTHS   MONTHS
                                                                                          ENDED    ENDED    ENDED     ENDED
                                                                                         DEC. 31, DEC. 31, MAR. 31, DEC. 31,
                                                                                           1995     1996     1997     1997
                                                                                         -------- -------- -------- ---------
                                                                                                    (IN THOUSANDS)
Japan................................................................................ $ 8,607  $ 9,207   $  971   $10,481
   Brazil...............................................................................   5,931    7,000    1,500     7,500
   Canada...............................................................................   3,981    4,640      805     2,026
   Other................................................................................   3,046    6,114      941     3,322
                                                                                         -------  -------   ------   -------
     Total royalty revenues from international distributors............................. $21,565  $26,961   $4,217   $23,329
                                                                                         =======  =======   ======   =======
F-20
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  Royalty revenues from international distributors included in software
license fees and maintenance fees on the consolidated statements of operations
were approximately $13,316,000 and $8,249,000, respectively, in 1995,
$16,982,000 and $9,979,000, respectively, in 1996, $2,331,000 and $1,886,000,
respectively, for the three months ended March 31, 1997, and $16,105,000 and
$7,224,000, respectively, for the nine months ended December 31, 1997.
Royalties from Canada includes royalties received from R.D. Nickel prior to
the acquisition in September 1997.
 
  Sales and transfers between geographic areas are accounted for at prices
which the Company believes are arm's length, and in accordance with the rules
and regulations of the respective governing tax authorities.
 
(15) OTHER INCOME AND EXPENSE, NET
 
  Other income and expense, net, on the consolidated statements of operations
primarily includes interest income of $1,406,000 in 1995; interest income of
$2,914,000 and gain on sale of other assets of $1,000,000 in 1996; interest
income of $779,000 for the three months ended March 31, 1997; and interest
income of $728,000 for the nine months ended December 31, 1997.
 
(16) CONTINGENCIES
 
  The Company is involved in various claims and legal proceedings of a nature
considered normal to its business, primarily relating to product and contract
performance issues, and employee termination matters. While it is not feasible
to predict or determine the final outcome of these proceedings, management
does not believe that they will have a material adverse effect on the
Company's financial position or results of operations.
 
(17) NEW ACCOUNTING STANDARDS
 
  In June 1997, the Financial Accounting Standard Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 130, "Reporting
Comprehensive Income," which is effective for annual and interim periods
beginning after December 15, 1997. This statement established standards for
the reporting and display of comprehensive income and its components in the
financial statements. Upon its adoption the Company will be required to
reclassify previously reported annual and interim financial statements.
 
  In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"), which is effective for
annual periods ending after December 15, 1997. SFAS No. 131 established
standards for the way public business enterprises are to report information
about operating segments in interim financial reports issued to stockholders.
It also establishes standards for related disclosures about products and
services, geographic areas and major customers.
 
  On October 27, 1997, the AICPA Accounting Standards Executive Committee
issued Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2")
which supersedes statement of Position 91-1, "Software Revenue Recognition".
SOP 97-2 focuses on when and in what amounts revenue should be recognized for
licensing, selling, leasing or otherwise marketing computer software, and is
effective for transactions entered into in fiscal years beginning after
December 15, 1997.
 
  The Company does not expect that the adoption of these new accounting
standards will have a material effect on the Company's financial position or
results of operation.
 
                                     F-21
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
(18) QUARTERLY FINANCIAL DATA (UNAUDITED)
 
  Summarized financial data by quarters is as follows:
PREDECESSOR
                                    --------------------------------------------
                                               THREE MONTHS ENDED
                                    --------------------------------------------
                                    MAR. 31,    JUNE 30,    SEPT. 30,  DEC. 31,
                                      1996        1996         1996      1996
                                    ---------   ---------   ---------- ---------
                                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
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..... $   (0.01)  $   (0.02)   $    0.10 $    0.16
   Net income (loss) per share-
    assuming dilution.............. $   (0.01)  $   (0.02)   $    0.09 $    0.15
PREDECESSOR          SUCCESSOR
                                       ----------- ---------------------------
                                                 THREE MONTHS ENDED
                                       ---------------------------------------
                                        MAR. 31,   JUNE 30, SEPT. 30, DEC. 31,
                                          1997       1997     1997      1997
                                       ----------- -------- --------- --------
                                        (IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue............................   $34,641   $42,947   $46,729  $56,907
   Gross profit.......................   $17,127   $22,845   $23,748  $31,264
   Net income (loss)..................   $ 1,373   $ 2,151   $(3,227) $ 6,414
   Net income (loss) per share........   $  0.06   $  0.09   $ (0.13) $  0.24
   Net income (loss) per share-
    assuming dilution.................   $  0.05   $  0.08   $ (0.13) $  0.23
(19) SUBSEQUENT EVENTS
 
  On February 19, 1998, the Company's Board of Directors approved a qualified
employee stock purchase plan ("ESPP") and authorized the issuance of 1,500,000
shares of common stock for purchase pursuant to the ESPP. The ESPP is to
commence on June 1, 1998. Under the terms of the ESPP, employees may
contribute, through payroll deduction, up to 15% of eligible compensation to
purchase stock with the limitation of $25,000 annually in fair market value of
the stock. Employees may elect to withdraw from the ESPP at any time during
the two six months offering periods which are December to May and June to
November and have their contribution for the period returned to them. Also,
employees may elect to change the rate of contribution only once during the
offering periods. The price at which employees may purchase shares is 85% of
the lower of the fair market value of the stock at the beginning or end of the
six months offering period. The ESPP is qualified under Section 423 of the
Internal Revenue Code of 1986, as amended. The ESPP is subject to stockholder
approval which will be voted at the annual stockholders' meeting to be held on
May 18, 1998.
 
                                     F-22
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
 
                 UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31,
                                                                     1998
                                                                --------------
                                                                (IN THOUSANDS)
Assets
Current:
  Cash and cash equivalents....................................    $ 50,276
  Accounts receivable:
    Invoiced and currently due.................................      27,816
    Advanced billings on maintenance...........................       7,281
    Unbilled services..........................................      13,894
    Installment................................................      33,574
    Other......................................................       5,466
    Less: allowance for doubtful accounts......................      (9,383)
                                                                   --------
      Total accounts receivable................................      78,648
  Current portion of deferred income taxes.....................       6,217
  Other current assets.........................................       6,022
                                                                   --------
      Total current assets.....................................     141,163
Cooperation agreement, net of accumulated amortization.........      21,150
Installment accounts receivable, net of current portion........      12,273
Property, equipment and leasehold improvements, net of
 accumulated depreciation and amortization.....................      10,415
Deferred income taxes..........................................       2,848
Goodwill, net of accumulated amortization......................      10,988
Other assets...................................................         763
                                                                   --------
      Total assets.............................................    $199,600
                                                                   ========
Liabilities and Stockholders' Equity
Current:
  Accounts payable.............................................    $  8,419
  Accrued payroll and employee benefits........................       7,234
  Payable to SAG...............................................       8,591
  Income taxes payable.........................................       3,337
  Other current liabilities....................................       5,219
  Current portion of deferred revenues, net of deferred
   royalties...................................................      42,934
                                                                   --------
      Total current liabilities................................      75,734
Deferred revenues, net of deferred royalties...................      28,623
                                                                   --------
      Total liabilities........................................     104,357
Stockholders' equity...........................................      95,243
                                                                   --------
      Total liabilities and stockholders' equity...............    $199,600
                                                                   ========
See accompanying notes to unaudited condensed consolidated financial
                                  statements.
 
                                      F-23
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
 
           UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
PREDECESSOR   SUCCESSOR
                              ------------ ------------
                              THREE MONTHS THREE MONTHS
                                 ENDED        ENDED
                               MARCH 31,    MARCH 31,
                                  1997         1998
                              ------------ ------------
                              (IN THOUSANDS, EXCEPT PER
                                SHARE DOLLAR AMOUNTS)
Revenues:
  Software license fees.....    $ 7,341      $21,649
  Maintenance fees..........     17,352       19,800
  Professional services
   fees.....................      9,948       14,414
                                -------      -------
    Total revenues..........     34,641       55,863
                                -------      -------
Cost of revenues:
  Software license..........      2,098        5,670
  Maintenance...............      6,205        7,057
  Professional services.....      9,211       11,501
                                -------      -------
    Total cost of revenues..     17,514       24,228
                                -------      -------
Gross profit................     17,127       31,635
                                -------      -------
Operating expenses:
  Software product
   development..............        --           755
  Sales and marketing.......      7,317       11,873
  Administrative and
   general..................      8,500       10,805
                                -------      -------
    Total operating
     expenses...............     15,817       23,433
                                -------      -------
Income from operations......      1,310        8,202
Other income and expense,
 net........................        978          906
                                -------      -------
Income before income taxes..      2,288        9,108
Income tax provision........        915        3,718
                                -------      -------
Net income..................    $ 1,373      $ 5,390
                                =======      =======
Net income per common
 share......................    $  0.06      $  0.18
                                =======      =======
Net income per common share-
 assuming dilution..........    $  0.05      $  0.17
                                =======      =======
Shares used in computing net
 income per common share:
  Net income per common
   share....................     24,338       29,517
  Net income per common
   share-assuming dilution..     25,894       31,491
See accompanying notes to unaudited condensed consolidated financial
                                  statements.
 
                                      F-24
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
 
           UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
PREDECESSOR   SUCCESSOR
                                                                                                      ------------ ------------
                                                                                                      THREE MONTHS THREE MONTHS
                                                                                                         ENDED        ENDED
                                                                                                       MARCH 31,    MARCH 31,
                                                                                                          1997         1998
                                                                                                      ------------ ------------
                                                                                                           (IN THOUSANDS)
Cash flows from operating activities:
  Net income ........................................................................................   $ 1,373      $ 5,390
  Adjustments to reconcile net income to net cash provided by operating activities:
    Depreciation and amortization....................................................................       941        2,070
    Gain on sales of property and equipment..........................................................       --           (22)
    Deferred gain....................................................................................       (36)         --
    Write-off of investment..........................................................................       --           848
    Compensation expense on options granted..........................................................       --           194
    Changes in operating accounts....................................................................     8,148       (7,044)
                                                                                                        -------      -------
      Net cash provided by operating activities......................................................    10,426        1,436
                                                                                                        -------      -------
Cash flows from investing activities:
  Additions to property, equipment and leasehold improvements........................................      (208)      (1,523)
  Proceeds from sales of property and equipment......................................................       --            22
                                                                                                        -------      -------
      Net cash used in investing activities..........................................................      (208)      (1,501)
                                                                                                        -------      -------
Cash flows from financing activities:
  Proceeds from stock options exercised..............................................................       --            12
  Adjustments to expenses relating to initial public offering........................................       --          (100)
                                                                                                        -------      -------
      Net cash used in financing activities..........................................................       --           (88)
                                                                                                        -------      -------
Net increase (decrease) in cash and cash equivalents.................................................    10,218         (153)
Cash and cash equivalents, beginning.................................................................    25,773       50,429
                                                                                                        -------      -------
Cash and cash equivalents, ending....................................................................   $35,991      $50,276
--------------------------------------------------
                                                                                                        =======      =======
See accompanying notes to unaudited condensed consolidated financial
                                  statements.
 
                                      F-25
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
 
         NOTES TO UNAUDITED CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS
 
(1) BASIS OF PRESENTATION
 
  The condensed consolidated financial statements included herein have been
prepared by management, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. These condensed consolidated financial
statements should be read in conjunction with the financial statements and
notes thereto for the year ended December 31, 1997 contained elsewhere in this
Prospectus.
 
  In the opinion of management, the accompanying balance sheets and related
statements of operations and cash flows include all adjustments (consisting
only of normal recurring items) necessary for their fair presentation in
conformity with generally accepted accounting principles. The results for the
three months ended March 31, 1998 are not necessarily indicative of the
results expected for the full year.
 
  Prior to March 31, 1997, Software AG Systems, Inc. and subsidiaries (the
"Company") was a wholly owned subsidiary of Software AG, a German software
company ("SAG"). On March 31, 1997, the Company consummated a recapitalization
agreement under which the Company repurchased from SAG 24,750,000 shares of
common stock, and certain senior management of the Company and Thayer Equity
Investors III, L.P. ("Thayer") acquired approximately 89% of the then
outstanding common stock of the Company (the "Recapitalization"). The
Company's results of operations for the three months ended March 31, 1997 are
based on operations which occurred prior to the Recapitalization and are not
comparable with the results of operations for the three months ended March 31,
1998.
 
(2) ACCOUNTING POLICIES
 
 Revenue Recognition
 
  On January 1, 1998, the Company adopted Statement of Position 97-2,
"Software Revenue Recognition" ("SOP 97-2") which superseded Statement of
Position 91-1, "Software Revenue Recognition." SOP 97-2 focuses on when and in
what amounts revenue should be recognized for licensing, selling, leasing, or
otherwise marketing computer software. The adoption of SOP 97-2 did not have a
material impact on the Company's revenue recognition policies.
 
  Software license revenues for an arrangement to deliver software that does
not require significant production, modification or customization of software
is recognized when there is an executed license agreement, the software and
authorization code have been delivered, the fee is fixed or determinable and
collectibility is probable.
 
  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, generally bundle a combination of
products, technical services and professional consulting services. In
accordance with SOP 97-2, these elements are unbundled for revenue recognition
purposes, and are accounted for according to their component parts using the
criteria described above.
 
                                     F-26
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
 
                         NOTES TO UNAUDITED CONDENSED
                CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
 Net Income per Common Share
 
  The Company reports earnings per share under Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128"). In
accordance with SFAS No. 128 requirements, the Company presents basic and
diluted earnings per share. Basic earnings per share is based on income
available to common stockholders divided by the weighted average number of
common shares outstanding. Diluted earnings per share is based on income
available to common stockholders divided by the sum of the weighted average
number of common shares outstanding and all potential common shares which are
dilutive. The following information is a reconciliation of the amounts used in
these calculations:
PREDECESSOR SUCCESSOR
                                                         ----------- ---------
                                                            THREE      THREE
                                                           MONTHS     MONTHS
                                                            ENDED      ENDED
                                                          MAR. 31,   MAR. 31,
                                                            1997       1998
                                                         ----------- ---------
                                                         (IN THOUSANDS, EXCEPT
                                                           PER SHARE DOLLAR
                                                               AMOUNTS)
Numerator:
     Net income.........................................   $1,373     $5,390
                                                           ======     ======
   Denominator:
    Basic:
     Weighted average shares outstanding................   24,338     29,517
    Effect of dilutive securities:
     Stock options......................................    1,556      1,974
                                                           ------     ------
    Diluted:
     Weighted average shares outstanding-assuming
      dilution..........................................   25,894     31,491
                                                           ======     ======
   EPS:
     Net income per common share........................   $ 0.06     $ 0.18
     Net income per common share-assuming dilution......     0.05       0.17
F-27
[OUTSIDE BACK COVER]
 
  Pictures of a woman talking on the telephone, a man standing atop a diving
tower, two men conversing, birds flying and a ferris wheel, with the following
text:
 
  SAGA--a leading enterprise solutions company invested in our customers'
success. We enable the linking of valuable information from the enterprise to
the Microsoft desktop, allowing people to make better informed business
decisions, respond more quickly to customers' needs and be more flexible to
changing market demands.
 
                          SAGA. FREE YOUR INFORMATION
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................................................ $50,830
   NASD filing fee..................................................... $17,730
   Blue Sky fees and expenses.......................................... $10,000
   Printing and engraving expenses.....................................       *
   Legal fees and expenses.............................................       *
   Accounting fees and expenses........................................       *
   Transfer agent and registrar fees...................................       *
   Miscellaneous.......................................................       *
                                                                        -------
     Total............................................................. $     *
                                                                        =======
--------
*  To be completed by amendment.
 
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 Third 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 SAG and on February 25, 1997, the Company became a direct wholly
owned subsidiary of SAG and SAG became the owner of the one then outstanding
share of the Company's common stock, par value $1.00 per share. On March 14,
1997, the Company issued a stock dividend to SAG resulting in 100,000
outstanding shares of common stock.
 
  On March 31, 1997, the senior management of the Company and Thayer acquired
approximately 89% of the then outstanding Common Stock of the Company in the
Recapitalization pursuant to an agreement among the Company, SAG, Thayer and
the following officers of the Company: Daniel F. Gillis, Harry K. McCreery,
 
                                     II-1
Gary Hayes, James H. Daly, Derek M. Brigden and Thomas E. Gorley
(collectively, such individuals are referred to as the "Managers"). In
connection therewith, (i) 24,750,000 shares of Common Stock were repurchased
by the Company from SAG for an aggregate purchase price of DM 57.0 million
(approximately US$33.9 million), (ii) 20,678,350 shares of Common Stock were
issued and sold to Thayer for an aggregate purchase price of approximately
$30.4 million and (iii) an aggregate of 771,650 shares of Common Stock were
issued and sold to the Managers for an aggregate purchase price of
approximately $1.1 million. Of the Common Stock purchased by the Managers,
Messrs. Gillis and McCreery each purchased 204,050 shares and Messrs. Hayes,
Daly, Brigden and Gorley purchased 84,975, 108,625, 67,925 and 102,025 shares,
respectively. In consideration for the shares, each of Messrs. Gillis,
McCreery and Daly gave the Company a promissory note in an amount sufficient
to cover the purchase price of the shares. In consideration for the shares,
each of Messrs. Hayes, Brigden and Gorley paid the Company approximately
$74,900, $51,000, and $75,000 in cash, respectively, and gave the Company a
promissory note in an amount sufficient to cover the balance of the purchase
price of the shares. In addition, on August 22, 1997 the Company entered into
a subscription agreement with Timothy L. Hill, the Company's Vice President--
Marketing, pursuant to which the Company issued and sold to Mr. Hill 137,500
shares of Common Stock for an aggregate purchase price of $202,095. As of
December 31, 1997, the Company has also granted options to purchase an
aggregate of 5,069,900 shares of Common Stock under the Company's 1997 Stock
Option Plan at a weighted average exercise price equal to $4.66 per share. All
such options and shares of Common Stock were issued in private placements
exempt from registration under Section 4(2) of the Securities Act, or Rule 701
thereunder. 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.
 
  Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (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 REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN RESTON, VIRGINIA ON APRIL 21, 1998.
 
                                          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 REGISTRATION
STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED
ON APRIL 21, 1998.
 
                                                   /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 KONIGS
                                                         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
ACCOUNTANTS' REPORT ON SCHEDULE
 
Board of Directors
Software AG Systems, Inc.
 
  The audits referred to in our report dated February 6, 1998, included the
related financial statement schedule for the periods from April 1, 1997 to
December 31, 1997, and from January 1, 1997 to March 31, 1997 and for each of
the years in the two-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, presents fairly in all
material respects the information set forth therein.
 
                                                      /s/ KPMG Peat Marwick llp
 
Washington, D.C.
February 6, 1998
 
                                      S-1
SCHEDULE II
 
                       VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS
                                   BALANCE AT CHARGED TO              BALANCE
                                   BEGINNING   COST AND  DEDUCTIONS    AT END
DESCRIPTION                        OF PERIOD   EXPENSES  WRITE-OFFS  OF PERIOD
-----------                        ---------- ---------- ----------  ----------
PREDECESSOR:
1/1/95-12/31/95
  Allowance for Doubtful Ac-
   counts......................... $4,069,591 $2,331,608 $1,635,681  $4,765,518
1/1/96-12/31/96
  Allowance for Doubtful Ac-
   counts.........................  4,765,518  1,298,361  1,083,575   4,980,304
1/1/97-3/31/97
  Allowance for Doubtful Ac-
   counts.........................  4,980,304    204,406   (138,274)  5,322,984
-------------------------------------------------------------------------------
SUCCESSOR:
4/1/97-12/31/97
  Allowance for Doubtful Ac-
   counts......................... $5,322,984 $4,964,967 $  987,355  $9,300,596
S-2
INDEX TO EXHIBITS
EXHIBIT
   NO.
 -------
****1 Form of Underwriting Agreement
    * 3.1 Second Amended and Restated Certificate of Incorporation of the
          Registrant
 **** 3.2 Third 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), as amended
   *10.15 Registration Rights Agreement between Software AG Systems, Inc. and
          Thayer Equity Investors III, L.P. (dated as of September 26, 1997)
   *10.16 Subscription Agreement between Timothy L. Hill and Software AG
          Systems, Inc. (dated as of August 22, 1997), as amended
   *10.17 Shareholders Agreement among Software AG Systems, Inc., Thayer Equity
          Investors III, L.P. and certain shareholders of Software AG Systems,
          Inc. (dated as of April 1, 1997)
   *10.18 Promissory Note made by Daniel F. Gillis (effective date March 24,
          1997)
   *10.19 Promissory Note made by Harry K. McCreery (effective date March 24,
          1997)
   *10.20 Promissory Note made by James H. Daly (effective date March 24, 1997)
   *10.21 Promissory Note made by Harry K. McCreery (effective date August 9,
          1996)
   *10.22 Promissory Note made by James H. Daly (effective date August 9, 1996)
   ****11 Computations of Earnings per Share
   ****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 Powers of Attorney
* Previously filed as an exhibit to the Company's Registration Statement
      on Form S-1 (File No. 333-36567) and incorporated herein by reference.
   ** Previously filed as an exhibit to the Company's Registration Statement
      on Form S-8 (File No. 333-44687) and incorporated herein by reference.
  *** To be filed by amendment.
 **** Filed herewith.